Commercial Law

AGENT WARRANTS HIS AUTHORITY.—An agent is liable in one other case to the third person with whom he deals. If the agent did not have authority to do what he purported to do, the third person can sue him, though the third person could not sue the principal in this case, since the agent was exceeding his authority. An agent is said to warrant his authority to third persons with whom he does business.

AGENT CANNOT DELEGATE AUTHORITY.—An important rule in agency is that an agent cannot delegate his authority. If A is appointed to do certain work, A must do it himself, and cannot empower B to do it if it proves inconvenient to do it himself. There are three exceptions to this rule. The first is that if he is given express permission to delegate his authority, he may do so, and, of course, if the principal should ratify an unpermitted delegation of authority, the ratification would here, as always, serve as well as original authority. The second case is where the usage of business is such that the principal must be presumed to have understood that there was to be a delegation, or partial delegation, of authority, and in such a case, though the principal has not expressly authorized delegation, he will be treated as if he had authorized it by virtue of business usage. The third case where delegation is authorized is in regard to what are called ministerial or mechanical acts, that is, acts which involve no exercise of judgment or skill. The principal is entitled to the agent's judgment and skill, but if there are parts of the work that do not require skill and that, from their nature, any ordinary clerical assistant can do, then such acts may be delegated.

TERMINATION OF AGENCY BY ACT OF PARTIES.—The parties may have agreed in their contract that it should terminate at a certain time or on the happening of a certain event. The arrival of that time or the happening of the event would of course end the relation as between them. It would not so operate as between principal and third parties, however, unless the third parties were informed. So, performance of the purpose for which the relation was created terminates the relation as between principal and agent. The parties may make a subsequent agreement to terminate the relation, and such an agreement would be good, the abandonment of the rights of each party created by the original contract being a sufficient consideration for the promise of each to surrender his own rights.

REVOCATION.—Except in the case of irrevocable agency noted below, the principal may revoke at any time the agent's authority as to matters not already executed. Any other rule would enslave the principal to his agent by forcing him, at the agent's will, and against his own consent, into contracts with third parties. But, while the principal has this right, the exercise of it may subject him to liability to his agent. If the contract of employment is for a definite time, and the principal, without cause, revokes the agent's authority before that time arrives, the principal is liable to the agent for breach of contract; if no time is fixed for the termination of the agency, it is an agency at will, and the principal, with or without cause, may revoke at any time without incurring liability to his agent. The acts which will amount to a revocation by the principal are various. For instance, if an agent has exclusive authority to represent the principal, the appointment of another agent would amount to a revocation. As to making the revocation effective, a revocation operates on the agent from the time he has notice of it. It is effective as to third parties only when notice is given to those who have dealt with the agent that the agent's authority is revoked. Without such notice the principal does not escape liability to third persons by reason of further acts on his agent's part. Where an agent is appointed in a particular business, parties dealing with him in that business have a right to rely upon the continuance of his authority until in some way informed of its revocation. This notice must be actual to those who have dealt with the agent, and general, as by publication in newspapers, where persons have not before dealt with the agent.

RENUNCIATION.—The agent may renounce his employment at any time, but if he contracted to serve for a certain time, and renounce before that time arrives, he is liable to the principal for breach of contract, unless he has ground for renunciation, such as the principal's breach of faith with him. The sickness of the agent is a ground for renouncing the relation, even though the sickness be caused by his own negligence or wrong. The principal should inform third persons of the agent's renunciation if he would fully protect himself against further acts of the agent.

TERMINATION OF AGENCY BY OPERATION OF LAW.—As in the case of ordinary contracts, a contract of agency may be terminated by the rules of law upon the happening of certain events. Thus, the destruction of the subject-matter of the agency terminates the relation, if the parties contemplated the continued existence of the subject-matter as the foundation for what was to be done. A change in the law, as the enactment of a statute declaring illegal agencies of a certain nature, that previously had been legal, terminates the relation. So also certain changes affecting the parties to the relation—i. e., the principal or the agent—effect a termination. The death of the principal brings the relation to an end, and this is so although the agent had no notice of it and subsequently dealt on behalf of his principal with third persons; such contracts do not bind the principal's estate. The death of the agent necessarily ends the relation. The occurrence of the principal's insanity terminates the relation, and a judicial finding of insanity is notice to all; but without notice of the insanity third persons who deal with the agent in good faith are protected. The bankruptcy of the principal terminates the relation as to all matters affected by the bankruptcy. Impossibility to continue the relation brought about by restraint of law terminates the relation.

IRREVOCABLE AGENCIES.—An agency to do an act touching a thing in which the agent has an interest, or in which he is subject to an obligation, cannot be terminated by act of the principal alone. The principal cannot terminate the relation so as to leave the agent under obligations to third persons, thereby shifting his obligations upon the agent; nor can he do so when the agent has an interest in the subject-matter of the agency. It is difficult to state concisely what will constitute such an interest that the principal cannot terminate the relation, but it may be said to be some ownership or right in the matter dealt with, such that the agent may deal with it in his own name, and not a mere benefit to be obtained from the performance of the contract of agency, as a commission to be realized from sales. Possession of personal property with the right to sell, with authority to apply the proceeds to a debt due from the principal to the agent, is sometimes held to constitute an agency coupled with an interest such that the principal may not revoke it; on the other hand, an interest arising from commissions or the proceeds of a transaction, is not an interest which will prevent revocation. The courts carefully examine agencies claimed to be irrevocable because coupled with an interest, and are inclined to rule against them.

MASTER AND SERVANT.—As we have said, the function of the servant is to perform ministerial or mechanical acts for the master. The chief subject-matter under the law of principal and agent is contracts, while the chief subject-matter of the law of master and servant is tort. The servant, in performing acts for his master, may, inadvertently or wilfully, cause injury to a third person or to the property of a third person. The question arises: What is the master's responsibility? We shall consider this from two standpoints; the relationship of the master and servant, inter se (between themselves), and the relationship of the master and servant as to the outside world. For example: the driver of a delivery truck, operated by Lord & Taylor, negligently runs over a pedestrian. The truck was going at the rate of twenty-five miles an hour, although the instructions issued by Lord & Taylor to all their servants is not to run cars more than fifteen miles per hour in the congested parts of New York City. Is Lord & Taylor liable to the pedestrian? This question involves the relationship of master and servant as to outside parties. The same servant, while operating the delivery truck for Lord & Taylor is run into, negligently, by a delivery truck operated by R. H. Macy & Co. Is the master, Lord & Taylor, responsible to its servant for the injury which he suffers as the result of the collision? This question involves the relationship of master and servant inter se. We shall consider this latter relationship first.

THE COMMON LAW GOVERNING THE RELATIONSHIP OF MASTER AND SERVANT INTER SE.—What is the liability of the master towards the servant if the servant is injured? We shall see in the chapter on torts that a tort is defined to be a breach of duty imposed by law for which a suit for damages may be maintained. Hence it follows that the master's liability in tort flows from a breach of duty owed by him to his servant. If there is no legal duty, correspondingly there is no legal liability. These legal duties which the common law developed over a long period of years may be summed up as follows: (1) To provide a reasonably safe place for the servant to work. (2) To provide reasonably safe, suitable, and sufficient tools and appliances with which the servant is to perform his work. (3) To provide reasonably careful and competent fellow workmen and in sufficient number for the work in hand. (4) To warn the servant of any unusual dangers connected with the work. (5) Generally so to conduct the work as not to expose the servant to dangers which could be avoided by the exercise of reasonable diligence. From the servant's standpoint, it was said that he assumed the ordinary risks inherent to the kind of business in which he was employed. These rules of the common law were the outgrowth of conditions surrounding the small shop and involving the use of simple or no machinery. Under modern industrial conditions they have proved wholly inadequate. We have been unduly conservative in recognizing this. Strangely enough the Workmen's Compensation Acts, with which we are now so familiar, had their origin in Germany in 1884. Nearly all the countries of continental Europe recognized the situation about thirty years ago, and England in 1897, and the United States within the last few years.

THE OBJECTION OF THE COMMON LAW THEORY.—Under the old theory, if the master had observed the duties which we have mentioned, he had performed his whole obligation to his own servant; thus, if two fellow workmen were working on the twentieth story of a new steel skyscraper being erected by the Institute Construction Co., and through the carelessness of servant A, servant B was precipitated to the street and killed, there would be no recovery on the part of the estate of the deceased servant, although he may have left a wife and several children dependent wholly upon him for support. Even admitting that the Institute Construction Co. had exercised due care in selecting competent fellow servants for the deceased to work with, and had, therefore, performed all of its obligations on this score, nevertheless, it is better, from the standpoint of society, that the wife and children of servant B should receive fair compensation rather than be thrown upon the mercy of the public. The great object of the Workmen's Compensation Act is to shift the burden of such economic waste from the employer to the industry, in order that it may ultimately be borne by the consumer as a part of the necessary cost of construction and production. Thus we are asking the master to assume a greater financial responsibility for injuries to his servant under this new theory than he has assumed heretofore. This can be taken care of by the increased price he charges for his work and this in turn will ultimately pass the added burden to the community at large.

ILLUSTRATION.—Again, even if the servant did have a cause of action against his master, because of the master's failure to observe the common law requirements we have mentioned, nevertheless, the expense of litigation and the interminable delays connected with it, amounting at times to two or three years before the case was finally disposed of by the court of last resort, all tended to make litigation for the servant all but impossible. He would ordinarily have no money with which to begin this long litigation, and would be obliged to retain the services of a lawyer, who would take the case on a contingent fee basis, and often take from the workman, should the decision finally be in his favor, a third, a half, or even a greater portion of the amount that he recovers. Perhaps this was no greater compensation than the lawyer was entitled to because of the labor involved and the prospect of no pay if he lost the case, but regardless of this it was hard on the client. The Supreme Court of Washington, in the case of Stertz v. The Industrial Insurance Commission, 91 Wash. 588, has summed up the objections against the whole system as follows: "Both had suffered under the old system, the employers by heavy judgments of which half was opposing lawyers' booty, the workmen through the old defenses or exhaustion in wasteful litigation. Both wanted peace. The master in exchange for limited liability was willing to pay on some claims in future where in the past there had been no liability at all. The servant was willing not only to give up trial by jury but to accept far less than he had often won in court, provided he was sure to get the small sum without having to fight for it.... To win only after litigation, to collect only after the employment of lawyers, to receive the sum only after months or years of delay, was to the comparatively indigent claimant little better than to get nothing. The workmen wanted a system entirely new. It is but fair to admit that they had become impatient with the courts of law. They knew, and both economists and progressive jurists were pointing out, what is now generally conceded, that two generations ought never to have suffered from the baleful judgments of Abinger and Shaw."

WORKMEN'S COMPENSATION ACT.—To meet the objections we have just mentioned, the workmen's compensation act principle was developed on the continent of Europe. Practically all of continental Europe had placed laws of this character on its statute books before the end of the nineteenth century; in 1906 England passed similar legislation, and within the last few years, we have adopted the same principles. With the exception of a few Southern States, every State and territory of the United States has a Workmen's Compensation Act. We cannot consider these acts in detail. The principle underlying them is the same throughout the country. They are designed to compensate servants for "accidents" "arising out of," and "during the course of" their employment, and this, regardless of whether the servant was at fault or not. The whole theory of the common law had been that the master must be at fault in order that the servant may recover. The new theory is that the community at large can better stand the loss suffered by a servant than the individual servant. For example: a steel girder falls upon a workman engaged in structural steel work, through no fault on his part and also through no fault on the part of his employer. Under the common law, he would have to stand the loss himself. Under the Workmen's Compensation Act, such an event is an "accident"; it "arose out of" and "in the course of" his employment. Therefore, he is entitled to a fixed compensation, and he secures it almost immediately through a workmen's compensation bureau, or whatever body the act of the particular State creates for the purpose of settling such matters. This is a burden on the employer, it is true; he was in no way to blame. Neither was the workman. The employer may protect himself against the claims of his workmen by insurance under a plan provided by the State law, or if the State law does not provide for it, by arrangements with private companies the same as any other accident insurance is obtained, and by figuring his cost upon the particular job, he can charge as a part of his operating expense, the cost of his insurance and include that in his charge for work. The loss suffered by the individual workmen is then passed to the community at large. From an economical and sociological standpoint, this situation is undoubtedly better than that existing under the theory of the common law.

THE INTERPRETATION OF WORKMEN'S COMPENSATION ACTS.—Although these acts are comparatively new in this country, there has been a great amount of litigation, and it is not practical to enter into a discussion of all the close questions which are raised in interpreting such acts. A vast amount of the litigation has been concerned with the interpretation of the three expressions, common to almost all the acts, "accident" "arising out of" and "during the course of." While the courts have shown a broad-minded spirit in interpreting these expressions, it is undoubtedly true that some decisions will suggest further legislation in order to correct certain evils which exist at the present time. For example, in defining the term "accident," the leading English case said: "The expression 'accident' is used in the public and ordinary sense of the word, as denoting an unlooked-for event which is not expected or designed." And Judge Siebecker of Wisconsin says "accidental" contemplates "an event not within one's foresight and expectation, resulting in a mishap causing injury to the employee," and Mr. Justice Pound of New York says that the statute contemplates injuries "not expected or designed by the workman himself." To illustrate: A window-dresser is decorating the window in Woolworth's. He swallows a pin. This is an "accident" within the contemplation of the act, and entitles him to recovery. Again, a workman is employed in a white-lead factory. During his six months period of service in the factory, he contracts tuberculosis. This is not an "accident" because you must be able to put your finger upon a definite time when the unlooked-for event happened. This leads us to the general statement that Workmen's Compensation Acts in this country, as at present drawn, do not generally cover occupational diseases. Separate legislation is undoubtedly desirable to extend the principle in such cases, for if it is sound that the window-dresser in Woolworth's should recover, it should be equally sound that the workman who contracted tuberculosis should recover. Again, the other two expressions "arising out of," and "during the course of" have caused much litigation. Perhaps the most satisfactory statement about these expressions is in the leading Massachusetts case, In re McNicol, 215 Mass. 497. Here the court says: "The injury must both arise 'out of' and also be received 'in the course of' the employment. Neither alone is enough. It is not easy * * * to give a comprehensive definition of these words. * * * An injury is received 'in the course of' the employment when it comes while the workman is doing the duty which he is employed to perform. It 'arises out of' the employment, when there is * * * a causal connection between the conditions under which the work is required to be performed and the resulting injury. * * * If the injury can be seen * * * to have been contemplated by a reasonable person familiar with the whole situation, * * * then it arises 'out of' the employment. * * * The causative danger must be peculiar to the work and not common to the neighborhood. * * * It need not have been foreseen or expected, but after the event it must appear to have had its origin in a risk connected with the employment, and to have flowed from that source as a rational consequence." An illustration will show how these phrases are applied. The janitor of a building is alone in the building. An old enemy who has not seen him for years, learns his whereabouts, comes into the building, shoots him in the leg, causing him to have it amputated. Is the master liable? It is an "accident," and clearly it arose "during the course of" employment, but did it arise "out of" his employment? Manifestly not. The guilty party would have shot the man had he met him in Central Park, or any other place. It was purely personal vengeance on his part which caused the act. The night watchman in a bank is shot by a robber at night in the bank, while on duty. May he recover from his master? Clearly he can. It is an "accident." It arose "during the course of" his employment, it arose "out of" his employment also, because the robber would not have shot him were he not in the bank as a watchman, standing between the robber and the accomplishment of his purpose, the securing of money from the bank.

THE RELATIONSHIP OF MASTER AND SERVANT AS RELATING TO OUTSIDE PARTIES.—If the relationship of master and servant exists, the question arises, is the master responsible for the torts committed by his servant, resulting in injury to third parties? It is, of course, essential that the wrongdoer must be the defendant's servant. It does not follow that a wrongdoer is the defendant's servant simply because of a certain relationship, as that of parent and child, husband and wife, or employer and employee. Within the last few years, a great number of automobile cases have been decided by the courts, and they are commonly spoken of as the "family automobile cases." To illustrate: I own a car which is used by the various members of my family. My son, while running the car, for his own pleasure, negligently runs over some one. Am I responsible? Granting the relationship of parent and child, that would not constitute, per se (of itself), the relationship of master and servant. The injured man would have to show more than I have indicated in order to entitle him to recover for my son's negligence. Were members of my family in the car, being taken out for a ride by my son, I would be liable. Again, my wife, in discharging a servant, assaults her. Should the mere fact of the relationship of husband and wife make me liable on the theory of master and servant? Clearly not. Again, I employ John Smith as my chauffeur. I never operate my car on Sunday. John Smith, who lives in the town adjoining mine, is moving, and asks if he may borrow my car over Sunday to assist in the moving operations. While using the car for that purpose, he negligently runs over some one. Am I liable? Clearly not, for, although the relationship of master and servant exists between me and my servant at the time he did the injury, he was not acting for me as a servant. What is the rule to be applied to answer such questions?

THE SERVANT MUST BE ENGAGED IN HIS MASTER'S BUSINESS.—It is clear from the foregoing that, in order to make the master liable, the servant must be engaged in his master's business, and he must be acting within the scope of his employment. The New York case of Rounds v. The Delaware, etc., Railroad, 64 N. Y. 129, states the general rule: "For the acts of the servant, within the general scope of his employment, while engaged in his master's business, and done with a view to the furtherance of that business and the master's interest, the master will be responsible whether the act be done negligently, wantonly, or even wilfully." The Court of Errors and Appeals of New Jersey recently said in Holler v. Sanford Ross, 68 N. J. Law, 324: "The Supreme Court of Connecticut states the rule applicable to this class of cases about as clearly as it can be done, when it says: 'For all acts done by a servant in obedience to the express orders or direction of the master, or in the execution of the master's business, within the scope of his employment, and for acts in any sense warranted by the express or implied authority conferred upon him, considering the nature of the service required, the instructions given and the circumstances under which the act is done, the master is responsible; for acts which are not within these conditions, the servant alone is responsible.'"

LIABILITY OF A PUBLIC AGENCY FOR THE NEGLIGENT ACTS OF ITS AGENTS.—It is an old saying that "the King can do no wrong." This principle of the English common law we have applied in this country, and the Federal Government cannot be sued unless it gives its consent. While the Court of Claims has been established, Congress has generally provided that suits may be brought against the Federal Government only in contract actions, and not in tort actions, so that ordinarily, if a person is injured through the negligence of an employee of the Federal Government, he may not recover against that Government. Thus, my only remedy in case of an injury, received through the negligent operation of an elevator in a post-office building owned by the Government, would be the passing of special legislation by Congress compensating me. I would have no right to sue the United States for such injury. The same general principles are applied to the State governments. In regard to cities, the rule may be generally stated to be that a municipality is not liable for the negligence of its servants in those departments operated by the municipality in its governmental activities, as distinguished from its administrative activities, in which case it is liable. Thus, a city is not responsible for the negligence of its policemen or its firemen, although injury results from their negligence, these departments being examples of governmental activities of a municipality, while the city would be liable, generally, for the negligence of the employees of its water department, this being an illustration of its administrative activities. It is also generally held that public charities, such as hospitals, and the like, are not liable for torts committed by their servants, provided they have used reasonable care in the selection of their servants.

INDEPENDENT CONTRACTORS.—A distinction must be made between one whom we call an independent contractor and a master. When A desires a particular piece of work done, he has two options as to doing it. He may either hire a workman to do it, retaining control of the workman, and telling him how he shall do it, or he may let the work by contract, simply stipulating that it shall be done in accordance with plans and specifications which his architect has drawn up. He retains no control over the contractor or over his method of work. His sole interest here is to have the piece of work turned over to him in its completed state. In the first case, we call the workman a servant; in the second case, he is an independent contractor. One who employs an independent contractor is not liable for the negligent acts of the contractor or his servants, except in a few special cases. In Berg v. Parsons, 156 N. Y. 109, the majority of the court states: "There are certain exceptional cases where a person employing a contractor is liable, which, briefly stated, are: Where the employer personally interferes with the work, and the acts performed by him occasion the injury; where the thing contracted to be done is unlawful; where the acts performed create a public nuisance; and where an employer is bound by a statute to do a thing efficiently and an injury results from its inefficiency." A few, but not many courts, add to this list one further fact, that the employer must use due care in the selection of a competent independent contractor, otherwise he is liable. This would seem eminently sound.

CHAPTER V
Partnership

THE IMPORTANCE OF PARTNERSHIP LAW.—There is a very common impression that partnership law is not as important now as formerly. This undoubtedly is true, as more and more large business enterprises are being conducted in the corporation form; but there is still a large amount of business done in the partnership form. What is most important, however, is the very informality of the type of business conducted under the partnership arrangement. Whether, in a given case, a partnership exists, becomes a vital question. Two friends, A and B, in an informal way, go into a business venture. The enterprise fails and A and B owe many debts. A has some property of his own; B has nothing. You are a creditor, but all your dealings have been with B. One simple point will show you whether your claim is worthless. If A and B were partners, you may hold A. If they were not partners, your claim probably never will be worth anything to you. The question, then, whether or not a certain relationship constitutes a partnership is a most important one, in the field of commercial law.

PARTNERSHIP DEFINED.—We shall have occasion, in the chapters on bills and notes, and personal property, to refer to the movement to codify certain branches of the law. This movement was begun by the Commissioners on Uniform Laws proposing the Uniform Negotiable Instruments Act, which has now been adopted in all of the States except Georgia. One of the most recent codifications is the Uniform Partnership Act which has been adopted in a number of the States, and which will undoubtedly follow the same course as the other acts drawn by the same Commissioners. We shall make frequent reference to the Uniform Partnership Act in this chapter. Although some of the writers on the law of partnership state that no satisfactory definition of the term partnership can be given, the Uniform Act defines it as follows: "A partnership is an association of two or more persons to carry on as co-owners a business for profit." It is undoubtedly true that even with this definition, a considerable amount of further explanation will be necessary to determine with any degree of certainty, just what is meant by partnership.

THE DIFFERENCE BETWEEN A PARTNERSHIP AND A CORPORATION.—While we may be anticipating our chapter on corporations, it is well, at the very outset, to understand the fundamental differences between a partnership and a corporation. We may mention six differences:

(1) When a partner dies, the partnership is automatically dissolved. If a partner sells or transfers his interest in the business, this works a dissolution of the firm. On the other hand, the situation is precisely the opposite in the case of a corporation. The death of a shareholder has no effect upon the corporation. In fact, if all of the shareholders of the United States Steel Corporation should die at once, the corporation would still exist. So also the transfer of stock from one owner to another has no effect upon the corporation's existence. Many thousand shares are dealt with on the exchange each day without the slightest effect upon any corporation.

(2) The doctrine of individual liability for the debts of a firm is a fundamental characteristic of partnership law. Each member of the firm is absolutely liable for all the debts of the firm. Thus, if the firm consists of A, B, and C, and the firm goes into bankruptcy and owes $50,000, and B and C are both individually worthless, and A has his own private fortune, A will be obliged to pay all of the debts, although, according to the arrangements that the partners made when forming the partnership, each was to share the profits and losses equally. Theoretically, A has the right to contribution from his fellow partners, and should they later acquire property, he will be able to enforce this right in a court of equity. In a corporation, a shareholder is liable only for the value of his share. If he subscribes to a share of stock, par value $100, and has paid only $50 on his subscription, and the corporation goes into bankruptcy, its receiver can compel him to pay the balance of his subscription, $50, but that would be the extent of his loss. If I buy a share of United States Steel Common, at $79, on the exchange, and the company goes into bankruptcy, my loss will be only $79. I would not be obliged to make up to the receiver the other twenty-one dollars. The only noteworthy exception to this rule as to the liability of a stockholder is in the case of a shareholder in a National bank, (this is true of some of the State banking laws also), where a shareholder is liable to an extra assessment equal to the par value of the stock he owns.

(3) In a partnership each member of the firm is a general agent for the partnership, and his acts bind the firm. In the case of a corporation, a shareholder, by virtue of the fact that he is a shareholder, has no power to bind the corporation. The position of a shareholder is very similar to that of a voter. The corporation is run by its board of directors. They are elected by the shareholders just as we elect a governor or president. If we are dissatisfied with the conduct of a governor or president, all we can do is to vote him out of office at the next election, except in unusual cases where a governor or president might be impeached. The same is true in the case of a board of directors.

(4) A partnership may be created by a formal contract, or a simple contract, in writing or by word of mouth; in fact it may be created in almost any way. A corporation, in order to do business, must comply with the corporation laws of the State in which it is incorporated. A regular formality must be observed. A certificate of incorporation must be filed, generally with the Secretary of State, and with the county clerk of the county in which the corporation's principal place of business is located in the State.

(5) A partnership may do anything that is legal and which the members decide to do. A corporation exists by virtue of a charter, granted by the State. The sum total of the powers given in that charter gives the total of all of the activities the corporation may undertake. Engagement in activities not authorized in the charter may result in the forfeiture of the charter by the State.

(6) In legal theory, a corporation is looked upon as a separate entity. Most States require at least three persons to incorporate. A, B and C form a corporation under the laws of the State of New York. There are then four legal persons in existence: A, B, and C, and this separate person, or legal entity, the Green Corporation, if that is the name given the company. In the case of a partnership, the law does not, as a rule, consider the partnership as an entity distinct and separate from the members who make up the firm. Of course, the business man does, in a way, look upon the partnership as a separate commercial entity. The very fact that the members of the firm are all general agents for the firm, and that the members are individually liable for all of the debts of the firm, shows that the law does not carry the entity theory into practice in partnerships as it does in corporations.

DIFFERENT KINDS OF PARTNERSHIP.—What we have said applies to the ordinary partnership. There are certain forms of partnership which we can only mention. One of them is the limited partnership. Limited partnerships are created under the law of the State in which the business is to be conducted and in a general way, these limited partnerships are a combination of the principles underlying ordinary partnerships and corporations. The members may limit their liability to a certain amount, and in that sense, the limited partnership is like a corporation. On the other hand, the general principles of partnership, as we shall discuss them, apply with almost equal force to the acts of a limited partnership. A person should not undertake to give an opinion as to a legal problem relating to a limited partnership until the law of the State in which the limited partnership is organized has been consulted.

JOINT STOCK COMPANIES.—Occasionally we meet with organizations—joint stock companies—which occupy a sort of "No-man's land" between partnerships and corporations. The joint stock company issues shares of stock the same as a corporation. These shares are listed on the stock exchange, as for example, the Adams Express Company. The joint stock company, however, carries with it the individual liability of the shareholders for the debts of the company, which is technically a partnership attribute. The New York Court of Appeals in People ex rel. Winchester v. Coleman, 133 N. Y. 279, has put it this way: "More or less, they crowd upon and overlap each other, but without losing their identity, and so, while we cannot say that a joint stock company is a corporation, we can say * * * that the joint stock company is a partnership with some of the powers of a corporation."

HOW TO DETERMINE WHETHER A PARTNERSHIP EXISTS.—In a case, not tried in court, the facts were: A Gloucester cod-fishing vessel made an unsuccessful fishing voyage. The sailors were to secure a certain portion of the profits of the voyage as their wages. When the ship returned to port, an attempt was made to collect bills incurred on the trip and to hold the seamen liable along with the owners of the vessel, as partners. It was contended that sharing in the profits made them partners. While this is true generally, this particular custom, whereby a laborer receives a certain portion of the profits of an undertaking as his wages, does not of itself constitute him a partner with the person operating the vessel. This point has been decided several times. Such questions as these arise and cause great difficulty in determining whether a partnership exists. At times it is very important, as in the case of the seamen, to know whether or not they can be made to assume the obligations pertaining to the partnership relations. While we cannot go into these relations in detail, the framers of the Uniform Partnership Act have laid down, with the utmost care, the rules which are to be used in determining whether a partnership exists or not. But, you say, why cannot the parties avoid all this difficulty by making a written agreement clearing up the entire matter? They could. It is the simplest matter in the world. But the trouble comes because a partnership arrangement is so easy to enter into, and requires so little formality, that it is taken for granted that it will come out satisfactorily, and the precautions which should be taken are sometimes forgotten. Hence, we have to have rules of interpretation to help us when the parties themselves have not taken the necessary precautions to make matters clear. These rules of interpretation are very clearly and very definitely laid down in the Uniform Partnership Act, in the following language:

(1) Except as provided by Section 16, persons who are not partners as to each other are not partners as to third persons.

(2) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not of itself establish a partnership, whether such co-owners do or do not share any profits made by the use of the property.

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.

(4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:

(a) As a debt by installments or otherwise,

(b) As wages of an employee or rent to a landlord,

(c) As an annuity to a widow or representative of a deceased partner,

(d) As interest on a loan, though the amount of payment vary with the profits of the business,

(e) As the consideration for the sale of the good-will of a business or other property by installments or otherwise.

Section 16.—(Partner by estoppel.)—(1) When a person by words spoken or written or by conduct, represents himself, or consents to another representing him to any one, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner, he is liable to such person, whether the representation has or has not been made or communicated to such person * * *.

FOR WHAT PURPOSES MAY A PARTNERSHIP BE CREATED.—A partnership may be created to carry on any lawful business, and whatever the individuals may do lawfully as such, two or more may do together in a group as a partnership. Professional occupations may be carried on in the partnership form advantageously. This is one case where a partnership has an advantage over a corporation. A group of lawyers may form a partnership and do business under a partnership name. But a group of lawyers seldom or never form corporations to practice law. The reason for this is that the corporation is a separate entity, and the corporation as such cannot pass a bar examination and be admitted to the bar. In fact, in a few States, there are statutes prohibiting a corporation from practicing law. There is, therefore, very little advantage in creating a corporation which cannot itself do the thing for which it was created.

ILLEGAL OBJECT.—A partnership which is formed to carry on any illegal purpose is, of course, not recognized by law. Thus, if A, B, and C form a partnership to engage in the gambling business and they elect C as treasurer and have a successful business so that they have a large amount of money on hand, A and B may not be able to reap the profits of the venture. C has the money. The agreement was that all were to share equally, but C insists on keeping it all. The law will allow him to do so, because it is beneath the dignity of the court to order an accounting in a transaction where all parties are equally guilty. The maxim is "in pari delicto, condicio defendentis potior est", that is, where the parties are in equal fault, the position of the defendant is the stronger. C, the guilty party, has the money; he is the defendant, therefore, he keeps it.

WHO MAY BE PARTNERS.—At common law, a married woman was incapable of becoming a member of a partnership because of her general incapacity to enter a contract. Statutes removing the disability of married women have been passed in practically all the States, and a married woman is generally free to become a partner, except, and this is true in many States still, husband and wife may not become partners. An infant may be a member of a firm on the same general principles as applied to ordinary infant's contracts. His entering the partnership agreement is not void, but voidable. When he becomes of age, if he affirms the contract of partnership, he will be liable the same as an adult. He has, however, the right to disaffirm his partnership agreement within a reasonable time after becoming of age, and if he does so, he will be absolved from all personal liability for the debts of the firm. It is very generally held that a corporation may not enter into a copartnership with another corporation or an individual. The reason for this is a general rule of public policy that in a partnership the corporation would be bound by the acts of persons who are not its duly appointed agents and officers. There may be any number of members in a firm, such matters being left to the choice and wisdom of those operating the business.

DELECTUS PERSONARUM.—While the foregoing is true, one must not reach the conclusion that an objectionable person may be forced into a firm. I am a member of a firm of three persons. I decide to withdraw, and tell my two fellow partners that I have transferred all my interest in the firm to John Jones. He will take my place. My two fellow partners believe Jones to be a crook, and do not wish to be in partnership with him. They would not be obliged to accept him. In other words, the doctrine of delectus personarum, or the choice of the person, is strictly applied in partnership, because a partnership relation is a very confidential relationship. Ordinarily the business cannot be conducted satisfactorily unless all of the partners have the confidence of each other. It is for this reason, that we have the rule, heretofore referred to, that the sale by a partner of his interest in the business works a dissolution of the partnership. John Jones, who purchased my rights in the firm, could not compel the other members to take him in, but the firm would have to be wound up and he would simply be able to recover what my share of the assets was. It is true that Section 27 of the Act does read that a sale by a partner of his interest does not of itself work a dissolution, but the doctrine of delectus personarum is fully preserved. That section reads: (1) A conveyance by a partner of his interest in the partnership does not of itself dissolve the partnership, nor, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled.

(2) In case of a dissolution of the partnership, the assignee is entitled to receive his assignor's interest and may require an account from the date only of the last account agreed to by all the partners.

ARTICLES OF PARTNERSHIP.—We have learned that parties need not expressly declare themselves partners, or enter into an express contract, in order to become partners. So the framing of written partnership articles—a written contract of partnership—is not essential, though it is the ordinary and advisable course. We may note here a few rules governing the use and construction of such articles where they have been adopted. They should, of course, provide for as many contingencies as can be foreseen, such as the nature, name and place of business, when the relation is to commence and when to terminate, what capital shall be contributed by each, what the share of each in the profits and losses shall be, what the powers of the partners as between themselves shall be, whether the business shall be continued after the death of one or more of the partners and how it shall be wound up. But the important thing to note is, that if provision be not made, the general law, and particularly that part governing the powers and duties of partners to each other and to third persons, applies. In other words, the partners may, by their contract, determine what their rights as between themselves shall be; but if they do not, the rules of law will determine them. Thus they may determine that of two partners one shall have two-thirds and the other one-third of the profits; in the absence of such a clause the law determines the profits shall be divided equally. When articles have been once adopted they can be changed only by the consent of all the partners; this consent need not be formally expressed in words, but it may be implied from a long-continued course of conduct. The law provides no means to force a partner to live up to his contract except in a very few cases; the most it gives is a right of action for the breach caused by his failure to do as agreed.

FIRM NAME.—The adoption of a firm name is not an essential to a partnership, but is customary and advisable. The names of the partners may be combined, or a single name used, or a fictitious name, or any name, so long as the rights of other persons are not violated. In some States, notably New York, the use of the name of a person not a partner is forbidden, as is also the use of the expression "& Co.," unless a partner is represented by it. Ordinarily, contracts may be made in the firm name and by one partner, but contracts under seal should be made in the names of the partners "doing business as," etc., and cannot be made by one partner without authority from the others. Conveyances of real property should be made to or by the individual partners "doing business as," etc., for the law does not generally recognize the firm as a separate person or entity sufficiently to enable it as such to take or give a conveyance. If the deed ran to "John Doe & Co.," the title would be in John Doe only, though he would be said to hold it in trust for the firm, for if the partnership name is given as the grantee, the title goes only to those whose names appear, and if the partnership were doing business under a fictitious name, the deed would convey to no one. Whether land, the title to which is in the name of one partner, is held in trust by him as partnership property, is a question of intention, and that question is determined by asking with what money was the land bought, what use has it been put to, has it been carried on the books of the firm, with what money have the taxes, insurance, and other charges been paid, etc. If found to have been treated as partnership property, the fact that the title is in one person counts for little, as he will be said to hold it in trust for the firm; but the careful business man will avoid trouble by having the property conveyed to the firm in the manner indicated, if it is actually partnership property.

THE POWERS OF A PARTNER.—As a general agent, a partner has almost unlimited authority to bind the firm. Because of this, we have here one reason for not recommending the partnership form of doing business unless all the members of the firm have the utmost confidence in each other. These powers of the partners are so general that it is impossible for us to go into them in any detail. They are summarized in the most compact form in the Uniform Partnership Act. Sections 9 to 17 of that act are as follows:

9. (1) Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member, binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.

(2) An act of a partner, which is not apparently for the carrying on of the business of the partnership in the usual way, does not bind the partnership unless authorized by the other partners.

(3) Unless authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to:

(a) Assign the partnership property in trust for creditors or on the assignee's promise to pay the debts of the partnership,

(b) Dispose of the good-will of the business,

(c) Do any other act which would make it impossible to carry on the ordinary business of the partnership,

(d) Confess a judgment,

(e) Submit a partnership claim or liability to arbitration or reference.

(4) No act of a partner in contravention of a restriction on his authority shall bind the partnership to persons having knowledge of the restriction.

10. (1) Where title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name; but the partnership may recover such property unless the partner's act binds the partnership under the provisions of paragraph (1) of Section 9, or unless such property has been conveyed by the grantee, or a person claiming through such grantee to a holder for value without knowledge that the partner, in making the conveyance, has exceeded his authority.

(2) Where title to real property is in the name of the partnership, a conveyance executed by a partner, in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of paragraph (1) of Section 9.

(3) Where title to real property is in the name of one or more but not all the partners, and the record does not disclose the right of the partnership, the partners in whose name the title stands may convey title to such property, but the partnership may recover such property if the partners' act does not bind the partnership under the provisions of paragraph (1) of Section 9, unless the purchaser or his assignee, is a holder for value, without knowledge.

(4) Where the title to real property is in the name of one or more or all the partners, or in a third person in trust for the partnership, a conveyance executed by a partner in the partnership name, or in his own name, passes the equitable interest of the partnership, provided the act is one within the authority of the partner under the provisions of paragraph (1) of Section 9.

(5) Where the title to real property is in the names of all the partners, a conveyance executed by all the partners passes all their rights in such property.

11. An admission or representation made by any partner concerning partnership affairs within the scope of his authority as conferred by this act is evidence against the partnership.

12. Notice to any partner of any matter relating to partnership affairs, and the knowledge of the partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner, operate as notice to or knowledge of the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner.

13. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership, or with the authority of his co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act.

14. The partnership is bound to make good the loss:

(a) Where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it; and

(b) Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership.

15. All partners are liable

(a) Jointly and severally for everything chargeable to the partnership under Sections 13 and 14.

(b) Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract.

16. (1) When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to any one, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner, he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made.

(a) When a partnership liability results, he is liable as though he were an actual member of the partnership.

(b) When no partnership liability results, he is liable jointly with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately.

(2) When a person has been thus represented to be a partner in an existing partnership, or with one or more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to the same extent and in the same manner as though he were a partner in fact, with respect to persons who rely upon the representation. Where all the members of the existing partnership consent to the representation, a partnership act or obligation results; but in all other cases it is the joint act or obligation of the person acting and the person consenting to the representation.

17. A person admitted as a partner into an existing partnership is liable for all the obligations of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except that this liability shall be satisfied only out of partnership property.

POWERS OF A MAJORITY OF PARTNERS.—If partners disagree, then a majority of them have power to decide what shall be done; but there are limits even to the power of a majority. They can only carry on the business of the firm, and any vote of the majority, or action of the majority, to change the character of the business for which the firm was organized, or to make any fundamental change in the original articles of the partnership, would be invalid.

RELATION OF PARTNERS TO ONE ANOTHER.—The rules determining the rights and duties of partners in relation to the partnership are concisely but fully set forth in the Act as follows:

18. The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules:

(a) Each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied; and must contribute towards the losses, whether of capital or otherwise, sustained by the partnership according to his share in the profits.

(b) The partnership must indemnify every partner in respect of payment made and personal liabilities reasonably incurred by him in the ordinary and proper conduct of its business, or for the preservation of its business or property.

(c) A partner who, in aid of the partnership, makes any payment or advance beyond the amount of capital which he agreed to contribute, shall be paid interest from the date of the payment or advance.

(d) A partner shall receive interest on the capital contributed by him only from the date when repayment should be made.

(e) All partners have equal rights in the management and conduct of the partnership business.

(f) No partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs.

(g) No person can become a member of a partnership without the consent of all the partners.

(h) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of any agreement between the partners may be done rightly without the consent of all the partners.

19. The partnership books shall be kept, subject to any agreement between the partners, at the principal place of business of the partnership, and every partner shall at all times have access to and may inspect and copy any of them.

20. Partners shall render on demand true and full information of all things affecting the partnership to any partner or the legal representative of any deceased partner or partner under legal disability.

21. (1) Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.

(2) This section applies also to the representatives of a deceased partner engaged in the liquidation of the affairs of the partnership as the personal representatives of the last surviving partner.

22. Any partner shall have the right to a formal account as to partnership affairs:

(a) If he is wrongfully excluded from the partnership business or possession of its property by his co-partners.

(b) If the right exists under the terms of any agreement.

(c) As provided by Section 21.

(d) Whenever other circumstances renders it just and reasonable.

TERMINATION OF THE PARTNERSHIP.—A partnership is terminated either by act of the partners, or by law. Under the first heading, we may mention such things as the partnership being terminated by the accomplishment of the object for which the same was formed, or by the termination of the time during which the partnership was to exist, or by mutual consent of all parties concerned. Under the head of termination by operation of law, we have such topics as the death of a partner, the insanity of a partner, or the bankruptcy of a partner, and a dissolution by a court, as for example, where it is absolutely certain, in the opinion of the court, that the business cannot be successfully continued longer. In such a case, although some of the partners may not wish to wind up the affairs of the business, the court may order it done in the interest of all parties concerned.

OWNERSHIP OF FIRM PROPERTY AND CREDITORS' RIGHTS.—The firm property is owned by all the partners jointly, but the interest of each individual partner is not an interest in each piece of firm property, but a right to have an accounting and to receive on the accounting such share of the assets as belong to him when all debts due from him to the firm and all liabilities to the outside world are settled. Consequently, a creditor of an individual partner cannot seize or attach or levy on firm property, because that firm property does not belong, nor does any part of it belong, to his debtor. The creditor must file a bill in equity asking that the partner's share be determined, and that on an accounting so much as is found due to the debtor partner be applied to discharge that partner's indebtedness.

THE DIVISION OF ASSETS.—Upon final dissolution, the question of division of assets comes up, and the Uniform Partnership Act gives us the general rule as to how the firm's assets are divided. Section 40 of the Act reads:

In settling accounts between the parties after dissolution, the following rules shall be observed, subject to any agreement to the contrary:

(a) The assets of the partnership are:

I. The partnership property,

II. The contributions of the partners necessary for the payment of all the liabilities specified in clause (b) of this paragraph.

(b) The liabilities of the partnership shall rank in order of payment, as follows:

I. Those owing to creditors other than partners,

II. Those owing to partners other than for capital and profits,

III. Those owing to partners in respect of capital,

IV. Those owing to partners in respect of profits.

(c) The assets shall be applied in the order of their declaration in clause (a) of this paragraph to the satisfaction of the liabilities.

(d) The partners shall contribute, as provided by Section 18 (a) the amount necessary to satisfy the liabilities; but if any, but not all, of the partners are insolvent, or, not being subject to process, refuse to contribute, the other partners shall contribute their share of the liabilities, and, in the relative proportions in which they share the profits, the additional amount necessary to pay the liabilities.

(e) An assignee for the benefit of creditors or any person appointed by the court shall have the right to enforce the contributions specified in clause (d) of this paragraph.

(f) Any partner or his legal representative shall have the right to enforce the contributions specified in clause (d) of this paragraph, to the extent of the amount which he has paid in excess of his share of the liability.

(g) The individual property of a deceased partner shall be liable for the contributions specified in clause (d) of this paragraph.

(h) When partnership property and the individual properties of the partners are in the possession of a court for distribution, partnership creditors shall have priority on partnership property, and separate creditors on individual property, saving the rights of lien or secured creditors as heretofore.

(i) Where a partner has become bankrupt or his estate is insolvent, the claims against his separate property shall rank in the following order:

I. Those owing to separate creditors,

II. Those owing to partnership creditors,

III. Those owing to partners by way of contribution.

LIQUIDATION OF PARTNERSHIP.—When a partnership is dissolved, it is common for the business to require liquidation, and frequently one or more of the partners are what are called liquidating partners. If a partnership is dissolved by death, for instance, the surviving partners have a right to be liquidating partners and liquidate the business. That means they may carry on existing contracts; they may dispose of the stock on hand to the best advantage. If this requires incidental purchases of new goods, they may be made, but in general, new business cannot be undertaken. The function of a liquidating partner is to satisfy existing contracts, reduce the property of the firm to cash, and then distribute it to those who are entitled to receive it.

LIMITED PARTNERSHIP.—Statutes, as we have learned, in many States permit the formation of limited partnerships, the object of which is to enable one or more partners to avoid unlimited liability for debts. Partners in a general partnership are each liable, individually, for the full amount of the firm's indebtedness. If one partner is thus compelled to pay more than his share, he may seek redress by demanding contribution from his fellow partners, and if they are not solvent, he will not be able to secure reimbursement. If there is one solvent partner, for instance, and two other partners, both of whom become insolvent, the result will be that the first partner will have to pay the debts of the firm and will have no redress except such as he may be able to get from the insolvent estates of his two partners. Now, in a limited partnership a limited partner does not stand to lose any more than the amount of money he actually puts in the firm. In order to create a limited partnership it is necessary to sign a certificate prepared for the purpose and stating the facts, file it in the office of the Secretary of State or other official, and also publish it so that the public may be informed of the circumstances and credit may not be given by the world at large to the firm on the assumption that the limited partner is a general partner. He puts a specified amount of money in the firm and that money may be reached by creditors of the firm, but they cannot hold him further liable. A good definition of a limited partnership follows: A limited partnership is one which consists of one or more persons called general partners and also one or more persons called special partners. Every general partner is an agent for the partnership in the transaction of its business and has authority to do whatever is necessary to carry on such business in the ordinary manner. Every general partner is liable to third persons, jointly and severally, with his general co-partners for all of the obligations of the partnership. A special partner may only advise as to the management of the partnership and he is liable for the obligations of the partnership only to the amount of capital invested by him therein.

SILENT PARTNERS.—A silent partner must not be confused with a member of a limited partnership. A silent partner is a general partner who takes no part in the active management of the business and frequently is a secret partner. A member of a limited partnership can never be a secret partner, since the terms of a limited partnership must be published. A member of a limited partnership should take no part in the management of the business, or he may render himself liable as a general partner. The limited partnership law requires, moreover, that he must have exactly complied with the law by making out, filing and publishing a certificate. The statutes of the State should be consulted on this point and closely adhered to.

LIMITED.—We often see also in print, so and so "Ltd." This does not mean a limited partnership. The word "limited" is used in the name of an English or Canadian company organized under the English or Canadian statutes, but such companies are rather analogous to corporations than to limited partnerships. The liability in such companies is limited altogether to the assets in the company's hands. There are no general partners. The liability of all stockholders is limited. The English and Canadian law requires that the word Limited be added to the name, so that the public may not be deceived into believing that the company is a partnership.