Tuesday, October 18, 2016

Do Partners Have Actual Authority as a Matter of Status?

    Does a partner have actual authority, simply as a matter of his "partner" status, to bind the partnership to an ordinary business transaction?  On the one hand, RUPA § 401(j) states that "[a] difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners."  That suggests that a partner is not authorized to act absent a majority vote.  On the other hand, RUPA § 301(1) states that "[e]ach partner is an agent of the partnership," and comment 2 states that "[t]he effect of Section 301(1) is to characterize a partner as a general managerial agent having both actual and apparent authority co-extensive in scope with the firm's ordinary business" (emphasis added)).

    The comment to § 301 has always struck me as an odd place for discussing actual authority.  Actual authority is based on a partner's relationship to the other partners and the partnership.  Section 301, however, is in the Article dealing with a partner's relationship to non-partner outsiders.  Section 301(1) in particular is about apparent authority.  What supports the assertion in the comment, therefore, that a partner has ACTUAL authority co-extensive in scope with the firm's ordinary business?

 

    Some argue that support is found in RUPA § 401(f) -- "[e]ach partner has equal rights in the management and conduct of the partnership business."  If that language is meant to convey that each partner has actual authority as a matter of status, however, one would think the language would be a bit more explicit.  The RUPA comment, however, simply states the following:

Under subsection (f), each partner has equal rights in the management and conduct of the business.  It is based on UPA Section 18(e), which has been interpreted broadly to mean that, absent contrary agreement, each partner has a continuing right to participate in the management of the partnership and to be informed about the partnership business, even if his assent to partnership business decisions is not required.

At least to me, this comment makes it sound like § 401(f) is merely designed to guarantee a partner's right to be involved in partnership decisions -- not to establish that a partner has any status-based actual authority.

    In RUPA (2013), however, a new comment to § 401(h) (the analogous section to RUPA § 401(f)) was drafted.  The comment is much more explicit about establishing a partner's status-based actual authority and tying it to the "equal rights in the management" language of  § 401(h):

The subsection [RUPA (2013) § 401(h)] has important implications for a partner’s actual authority to act on behalf of the partnership.  The actual authority of a partner is a question of agency law and depends fundamentally on the contents of the partnership agreement.  If, however, the partnership agreement is silent on the issue, this subsection helps delineate that actual authority.  Acting individually, a partner:

▪     has no actual authority to commit the partnership to any matter for which this act requires the affirmative vote or consent of all partners;

▪     has the actual authority to commit the partnership to usual and customary matters, unless the partner has reason to know that: (i) other partners might disagree; or (ii) for some other reason consultation with fellow partners is appropriate; and

▪     has no actual authority to take unusual or non-customary actions that will have a substantial effect on the partnership.

The first point follows self-evidently from the language of this act. Where this act requires unanimity, no partner could reasonably believe to the contrary (unless the partnership agreement provided otherwise).

The second point follows because:

▪     Subsection (h) serves as the gap-filler manifestation from the partnership to its partners and does not require partners to act only in concert or after consultation.  To the contrary, subject to the partnership agreement, this subsection expressly provides that “each partner has equal rights in the management and conduct of the partnership’s business.”

▪     It would be impractical to require collective action on even the smallest of decisions.

▪     However, to the extent a partner has reason to know of a possible difference of opinion among the partner[s], Subsection (k) requires a decision by at least “a majority of the partners” and by unanimous consent if the matter is “outside the ordinary course of the business.”

The third point is a matter of common sense. The more serious the matter, the less likely it is that a partner has actual authority to act unilaterally. Cf. RESTATEMENT (THIRD) OF AGENCY § 3.03, cmt. c (2006) (noting the unreasonableness of believing, without more facts, that an individual has “an unusual degree of unilateral authority over a matter fraught with enduring consequences for the institution” and stating that “[t]he gravity of the matter from the standpoint of the organization is relevant to whether a third party could reasonably believe that the manager has authority to proceed unilaterally”).

    So there you have it.  According to the RUPA (2013) comment, a partner does have status-based actual authority and can bind the partnership to an ordinary business transaction -- without a majority vote of the partners in some instances.  While one might debate whether this point is important enough to appear in the text (rather than the comments), the explicitness of the discussion, and its grounding in the actual authority provisions, is very helpful.  Cf. RUPA (2013) § 301 cmt. (“This paragraph retains the basic principles reflected in UPA (1914) § 9(1) and in effect characterizes a partner as a general managerial agent.  Such agents have both actual and apparent authority, and this section delineates the apparent authority.  For a discussion of the scope of actual authority, see Section 401(h), comment.”).

http://lawprofessors.typepad.com/business_law/2016/10/does-a-partner-have-actual-authority-to-bind-the-partnership-to-an-ordinary-business-transaction-on-the-one-hand-rupa-401.html

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Comments

I find the language on this in RUPA to be less helpful than it might be. It seems to me that the question is whether a partner has actual POWER to bind the partnership, even when his or her partners disagree. The answer to that seems to be (and IMO should be) yes. People who deal with partnerships shouldn't have to worry about their own internal decision-making. Whether the partners have approved or not simply goes to whether they've got some claim against the partner who exceeded his "authority."

BTW, I really enjoy your takes on all these topics!

Posted by: Frank Snyder | Oct 18, 2016 8:59:07 AM

This post (as is true with others you have written) was music to my ears. I have silently grappled with this issue every August when I teach this topic in Business Associations. I have come to the same conclusions (if it's any comfort to you), and yet seeing your reasoning fleshed out here is inordinately helpful. This should be assigned reading for all business associations students and instructors! :>)

Posted by: joanheminway | Oct 18, 2016 10:05:16 AM

Doesn't the comment simply explain that the partner has implied actual authority?

Posted by: Steve Diamond | Oct 18, 2016 11:22:59 AM

Is this not "implied" actual authority?

Posted by: Steve Diamond | Oct 19, 2016 10:53:59 AM

I’ve taught BA for a few years now, and I’ve never had a great answer to this question. What I have told students is that RUPA 301(1) creates actual authority in each partner, but in the event there is “a difference arising as to a matter in the ordinary course of business of a partnership” then RUPA 401(j) governs. Stated differently, (i) RUPA 301(1) creates actual authority for ordinary course business where there is no difference among the partners, but (ii) where a difference among partners exists, there is no actual authority in any partner unless the difference has been resolved by a majority of the partners.

I think my explanation is basically the same as the interpretation set forth in the comment to RUPA (2013) 401(h) that you mention, except for two things. First, the comment adds the additional (and rather vague) wrinkle that no actual authority exists if “the partner has reason to know that … for some other reason consultation with fellow partners is appropriate.” What the heck does that mean?!? And where is the support for that commentary assertion in the statutory text, which speaks only to “a difference arising as to a matter in the ordinary course of business of a partnership”?

Second, the comment is to RUPA 401(h), rather than RUPA 301, indicating that RUPA 401(h) is the source of a partner’s actual authority. I have always pointed to RUPA 301 as the source of actual authority, and RUPA 401(j) as a limitation to it.

In any case, this is the first time the new commentary language in RUPA (2013) has been brought to my attention, so thanks for highlighting it!

Posted by: Mohsen Manesh | Oct 19, 2016 2:11:29 PM

Sorry for the delay in getting back to this. Thanks to all of you for your comments and kind words. Steve -- I do think that implied actual authority is a way of thinking about this. My objection is that it seems out of place in RUPA 301 which is about a partner's relationship to outsiders. I think it makes more sense as a gloss on RUPA 401. I suppose I would say the same to Mohsen. I like your analysis, but I would quibble with you on 301 being the source for actual authority. Other than the comment saying as much, the text of 301 doesn't seem to me to create any actual authority. At any rate, thanks to all of you for your comments!

Posted by: Douglas Moll | Oct 23, 2016 5:26:27 PM

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