Chapter Seventeen | Employment Law, Regulation and Labor Law

History of Employment Law

For most of recorded history, employment law simply did not exist. There were no laws prohibiting discrimination or sexual harassment, no rules regulating the safety of the workplace, and no concept of unions. Traditionally, workers followed their parents into a profession or job, such as being merchants, tailors, bakers, farmers, and performed that job for their lifetime. Common law viewed the employment relationship as a private agreement between the employer and the employee. During the industrial revolution in the nineteenth and early twentieth centuries, workers left their agrarian lifestyle and migrated to cities to work in factories. Traditional bonds between landowner and worker broke down. Employees worked in grueling conditions in factory jobs for bosses who cared little for their workers well-being or safety. The muckraker Upton Sinclair portrayed these conditions vividly in “The Jungle.” Legislators, at the state and federal levels, responded to workplace abuses with a number of laws protecting workers rights. These acts are the foundation of current employment law, enacted to protect the physical, financial, and legal rights and expectations of workers in the United States.

The Employment Relationship

The employment relationship is a unique relationship that relies upon the skill, talents, and strengths of both the employer and the employee. The employment environment must be dynamic and responsive to changing social and legal developments. Employers and employees both need to be aware of social trends that affect the duties and obligations inherent to the employment relationship. Employees earn the necessities of life — food, clothing, and shelter — by working in productive employment and they rely upon their employers to supply a salary and contribute to work-related benefits, such as healthcare and retirement plans. Employers rely upon employees to achieve their business goals. An employee may believe that working long hours, performing well, behaving ethically, and remaining loyal to an employer will result in job security. In today’s employment environment, job security is often contingent on the type of employment. Employees are either hired by employers for a length of time as “contract employees” or are “at will” employees.

Contract Employment

Employment contracts set forth the start and end dates and the terms and conditions of employment. These agreements are typically drafted by the employer and are usually written in the employer’s favor. Contract employees do not automatically waive their statutory employment rights and protections. However, employees who enter into employment contracts should obtain review and advice before entering into any binding agreement, as many statutory rights can be waived in an agreement.

At Will Employment

The majority of employees in the United States are “at will” employees. The doctrine of employment at will provides that an employer can fire the employee at any time, for any or no reason, with no notice; at the same time, the employee can quit at any time, for any or no reason, with no notice. Workers can be terminated (or fired, discharged, laid off or let go) for economic reasons (including reductions in force), personality conflicts, lack of “fit” in the organization, lack of work, and unsatisfactory job performance. Workers may also be terminated for a myriad of additional reasons including those provided in an employee handbook, an employee code of conduct, and for violations of local, state and federal laws. An employee who has been terminated may seek contractual and statutory damages and equitable remedies if the termination is later found to be illegal. As the following case shows, a review of policies and procedures prior to taking actions affecting the employment relationship can greatly reduce an employer’s risk of liability.


Case Study

Metcalf v. Intermountain Gas Co.

778 P.2d 744 (Idaho)

Procedural Posture

Plaintiff, a former employee, filed an action against defendant corporation after the former employee’s hours were significantly reduced following her extensive use of accrued sick leave. The trial court granted summary judgment in favor of the corporation on the claims for breach of employment contract and breach of an implied covenant of good faith and fair dealing. The former employee appealed.


The former employee made extensive use of her accrued sick leave but never exhausted all of the time available to her. She was forced to quit to find better employment when her hours were reduced to two hours a day. The court found that summary judgment on the issue breach of employment contract was not appropriate because a material issue of fact existed regarding whether, by providing for accumulated sick leave benefits, the corporation impliedly agreed with the former employee that the employment relationship would not be terminated or the former employee penalized for using the sick leave benefits which had accrued. The court also found that summary judgment on the claim for breach an implied covenant of good faith and fair dealing was not appropriate. The court for the first time recognized an implied-in-law covenant of good faith and fair dealing in employment contracts. The covenant that the court adopted was grounded in contract, not tort, thus limiting recovery to contractual damages, and was violated by any action by either party that violated, nullified or significantly impaired any benefit of the employment contract.


The court reversed the trial court’s grant of summary judgment in favor of the corporation on the former employee’s claims for breach of employment contract and breach of an implied covenant of good faith and fair dealing and remanded to the trial court for further proceedings.

Exceptions to Discharge At Will

Employees who are not subject to at will termination include the following:

  • Contract employees (as per the employment contract);
  • Implied contract employees (usually a long-term, high level employee, wherein promises were made to the employee, or are found in an employment manual or handbook that prohibit termination without cause);
  • Union employees (the terms of the collective bargaining agreement between the employer and the union will govern discharge); Public employees working for local, state and federal agencies and governments. Typically, public employees must be discharged for cause, which is defined in civil service rules and regulations.

Public policy exceptions to at will termination protect employees when society deems the action so unfair or unreasonable that statutory law or common law specifically prohibits them. Situations where employees are not subject to at will termination due to public policy considerations include:

  • An employer may not terminate an employee for refusing to participate in an illegal activity, e.g., illegal dumping of hazardous material or committing perjury.
  • An employer may not discharge an employee for performing an important public obligation, such as jury duty.
  • An employer may not fire an employee for exercising a legal right (ex: voting) or interest (ex: legally filing a worker’s compensation claim).
  • An employer may not terminate an employee if prohibited by state or federal statute from doing so (ex: discrimination) or for exposing legal wrongdoing in the employee’s company (ex: whistleblowing).
  • Pursuant to an implied covenant of good faith and fair dealing, an employer may not dismiss an employee for performing an act that public policy would encourage or refusing to perform something that public policy would condemn, when the discharge is linked with a showing of bad faith, malice or retaliation.

Employers can avoid potential employee litigation and liability for wrongful termination by being aware of what has been promised to an employee during the hiring process and what may be contained in an employee handbook, or in any oral statements or promises made by an employer; educating supervisors; reviewing performance evaluations of employees; reviewing hiring and firing policies and procedures including those that relate to warnings and suspensions; and having an attorney review any terminations prior to taking effect.


Case Study

Cocchiara v. Lithia Motors, Inc.

297 P.3d 1277 (Or. 2013)

Procedural Posture

Petitioner, an employee, challenged a decision from the Court of Appeals (Oregon), which affirmed the trial court’s summary judgment in favor of respondent, the employer, based on the employee’s promissory estoppel and fraudulent misrepresentation claims.


The employee, who worked as a salesperson for the employer, told his manager that he was leaving to work for another company. He alleged in his complaint that his manager told him a new position was available and, after calling the employer’s corporate offices, the manager told the employee that he definitely had been given the position. In reliance on that information, the employee turned down the job with the other company. The employer did not hire him for the new position. The court held that the at-will nature of the new position did not preclude the employee from pursuing his claims of promissory estoppel and fraudulent misrepresentation. The parties’ lengthy employment relationship might have made it reasonable for the employee to rely on the promise of employment, even though the new position was terminable at will. Moreover, the at-will nature of the new position did not create a conclusive presumption that the employee could not prove damages consisting of future lost wages. He could attempt to show the likely duration of employment. Pleading only damages associated with the loss of the new position, and not damages associated with turning down the other job, did not defeat the fraud claim.
In Oregon, the general rule is that an employer may discharge an employee at any time and for any reason, absent a contractual, statutory, or constitutional requirement to the contrary. The focus of the at-will employment doctrine is on termination: Both the employer and the employee have a right to terminate the employment relationship for any reason or for no reason without liability. As a result, when employment is at will, typically, neither party can expect the employment to continue for any specified period of time. Perhaps because the at-will employment doctrine focuses on termination, courts have disagreed regarding the significance of the at-will nature of employment before employment begins. In particular, courts have disagreed whether it is reasonable to rely on an offer of at-will employment, which in turn affects whether an employer’s termination of an at-will employment agreement before the employee begins working is actionable under a theory of promissory estoppel or fraudulent misrepresentation. **** A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. The requirement that enforcement be necessary to avoid injustice may depend on the reasonableness of the promisee’s reliance, and on its definite and substantial character in relation to the remedy sought, among other things.

The at-will nature of an underlying promise of employment does not bar a claim based on promissory estoppel, even if it might limit the nature of the damages available in some cases. An employer’s legal right to fire an employee at any time and for any reason absent contrary contractual, statutory, or constitutional requirements does not carry with it a conclusive presumption that the employer will exercise that right. Absent that presumption, it may be reasonable for an employee to rely on a promise of employment, because the employee may have reason to believe that the employer’s right to terminate at will not be exercised before the employee begins work. Particularly where the employee has had a lengthy employment relationship with his employer, and the employer asserts the employee’s value to the company, it may be reasonable for the employee to rely on the promise of employment, even though the job is terminable at will. However, reasonableness is an issue for the jury, considering all the relevant circumstances.


The court reversed the lower courts’ decisions and remanded to the circuit court for further proceedings.

Employment Regulations and Protections

In addition to common law protections of their rights, employees enjoy certain statutory protections at the federal, state, and local levels regarding what have been termed “financial expectations” and “physical well-being expectations.”

Financial Protections

Social Security Act (SSA) of 1935

The Social Security Act established retirement, disability, and survivor benefits for workers, their spouses, and their dependent children. Employers and independent contractors who do not comply with the requirements of this act face financial penalties in the form of fines and interest on unpaid taxes. The Social Security Administration administers this act.

Federal Unemployment Tax Act (FUTA) of 1935

Unemployment compensation, or unemployment insurance, is a benefit paid to private sector workers terminated without cause or through no fault of their own. Unemployment compensation is state-specific and funded by federal and state employment taxes on employers. During times of economic upheaval, the federal government has authorized extended periods of benefits. Federal, state, and railroad employees are subject to similar statues.

Fair Labor Standards Act (FLSA) of 1938

The FLSA specifies the minimum wages to be paid covered workers, when overtime payments are due, and places restrictions on child labor. Employers engaged in interstate commerce must comply with this act or face fines and penalties. The Wage and Hour division of the Department of Labor administers this act.

Equal Pay Act of 1963

The Equal Pay Act requires that men and women receive equal pay for jobs requiring equal skill, effort, responsibility, and working conditions. Under this act, an employee may not be paid a lesser rate than employees of the opposite sex for the same work. The Equal Employment Opportunity Commission (EEOC) administers the law. Unless the pay difference can be justified by such factors as merit, seniority, productivity, or some other “non-gender” factor, the employer will be held responsible if unequal pay exists between genders under an analysis called the “Kress Test.” Under the act, wages can include more than hourly or annual pay, and may involve payments for insurance, employee benefits, and other perquisites. A violation of the Equal Pay Act may also be a violation of Title VII of the Civil Rights Act of 1964.

Today, women are still not paid equal wages with men for equal work, and many maintain that the Equal Pay Act has not done enough to guard against pay inequities. Some argue that the doctrine of comparable worth should apply – equal pay for work of comparable value. However, this concept can create problems as to what to reference in order to define “worth.” Society? The employer? Some other point of reference? What happens when jobs are not equal, but have “equal” or “comparable worth” to society? Which job adds more value to society? Moreover, if the two jobs add “comparable value” to society, shouldn’t the two occupations be similarly compensated?

In Corning Glass Works v. Brennan, the U.S. Supreme Court addressed the Equal Pay Act in light of pay differentials for men and women on different work shifts.


Case Study

Corning Glass Works v. Brennan

417 U.S. 188 (1974)

Procedural Posture

The Secretary of Labor instituted two actions, one in New York and one in Pennsylvania, to enjoin the employer from violating the [Equal Pay] Act by the practices stated above and to collect back wages allegedly due female employees because of past violations. The District Court rendered judgment for the Secretary and the United States Court of Appeals for the Second Circuit, modifying some provisions of the injunction not relevant in the instant review proceedings, affirmed the District Court’s judgment as modified, the District Court rendered judgment for the employer and the Court of Appeals for the Third Circuit affirmed (480 F2d 1254).


Corning Glass Works, which operates plants both in New York and in Pennsylvania, paid its night inspectors, who were all male, significantly higher wages than its day inspectors, who were all female and performed the same tasks. The employer continued this practice after the effective date (June 11, 1964) of the Equal Pay Act of 1963 (29 USCS 206(d)(1)), which prohibits sex discrimination by an employer in the payment of wages for equal work. Beginning in June 1966, the employer started to open up jobs on the night shift to women. Previously separate male and female seniority lists were consolidated and women became eligible to exercise their seniority, on the same basis as men, to bid for the higher paid night inspection jobs as vacancies occurred.

On January 20, 1969, a new collective bargaining agreement went into effect, establishing a new “job evaluation” system for setting wage rates; the agreement abolished for the future the separate base wages for day and night shift inspectors and imposed a uniform base wage for inspectors exceeding the wage rate for the night shift previously in effect. All inspectors hired after January 20, 1969 were to receive the same base wage, whatever their sex or shift. The collective bargaining agreement further provided for a higher “red circle” rate for employees hired prior to the date of the agreement, when working as inspectors on the night shift; this “red circle” rate served essentially to perpetuate the differential in base wages between day and night inspectors.

The Supreme Court held the Equal Pay Act of 1963, 29 U.S.C.S. § 206 et seq. is “…violated by an employer’s paying a lower base wage to female day inspectors than to night shift inspectors, where the female inspectors performed the same tasks as their male counterparts and the higher wage was paid in addition to a separate night shift differential paid to all employees for night work.” The Court noted, “the purpose of the Equal Pay Act of 1963 (29 USCS 206(d)(1)), requiring that equal work be rewarded by equal wages irrespective of sex, is to remedy what was perceived to be a serious and endemic problem of employment discrimination in private industry, that is, the fact that the wage structure of many segments of American industry was based on an ancient but outmoded belief that a man, because of his role in society, should be paid more than a woman, even though his duties are the same.”

The [Equal Pay] Act establishes four exceptions — three specific and one a general catchall provision — where different payment to employees of opposite sexes is made pursuant to (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor other than sex. Under the Equal Pay Act, once the Secretary of Labor has carried his burden of showing that the employer pays workers of one sex more than workers of the opposite sex for equal work, the burden shifts to the employer to show that the differential is justified under one of the Equal Pay Act’s four exceptions.

On writs of certiorari, the United States Supreme Court affirmed the judgment of the Second Circuit Court of Appeals and reversed the judgment of the Third Circuit Court of Appeals, remanding the case to that court.

The Court held that (1) the employer violated the Act by paying a lower base wage to female day shift inspectors than to male night shift inspectors; and (2) the employer did not cure its violations of the Act by permitting, in 1966, women to work as night shift inspectors nor by equalizing, in 1969, day and night inspector wage rates but establishing higher “red circle” rates for existing employees working on the night shift.


The Court affirmed the Second Circuit ruling and reversed the Third Circuit ruling.

Civil Rights Act of 1964

Civil Rights Acts enacted in 1866 and 1870 prohibited intentional discrimination based upon race, color, national origin, or ethnicity. However, it was not until the enactment of the Civil Rights Act of 1964 that workers received legal protection from workplace discrimination based upon race, sex, color, religion, and national origin. The Civil Rights Act of 1964 represents one of the most important developments in the twentieth century in employment law and is discussed more in-depth in the chapter on employment discrimination. It should be noted that not all forms of employment discrimination, for example, that based on an employee’s sexual orientation is address by the act, and are not illegal unless there is a special state law providing protection for a worker.

Employee Retirement Income Security Act (ERISA) of 1974

ERISA applies to private sector employers who establish a pension benefit or other employee benefit plans (health, disability, death, legal services, etc.) for their employees. The act specifies how persons become vested in pension plans, how employers fund such plans, how pension funds are to be invested, and how employees may file an appeal in a case where retirement benefits are improperly denied them.

The Department of Labor, Employee Benefits Security Administration (EBSA) (formerly the Pension and Welfare Benefits Administration – PWBA) and the Internal Revenue Service administer the act. The Pension Benefit Guaranty Corporation (PBGC), created by ERISA, also serves to protect the retirement income of American workers when companies cease to exist, and is funded by employer insurance payments. The passage of ERISA was greatly influenced by the collapse of the Studebaker Corporation in the 1960s which resulted in the loss of pension and health benefits for its employees.

Worker Adjustment and Retraining Notification (WARN) Act of 1988

The Worker Adjustment and Retraining Notification (WARN) Act requires employers of more than 100 workers to give advance notice – up to 60 calendar days – of plant closings or mass layoffs.

Physical Protections

Occupational Safety and Health Administration Act (OSHA) of 1970

OSHA creates a general duty for employers to provide work environments that do not harm their employees. Employers must comply with minimum safety and health standards in the workplace. Employees, labor representatives, or the government itself has the authority to inspect work sites if there is a reason to believe a violation of OSHA has occurred. OSHA violations leave employers vulnerable to fines, penalties, corrective action, administrative oversight, and potential criminal sanctions. The Occupational Safety and Health Administration agency administers this federal act.

Many states have enacted their own equivalent of OSHA, so employers need to be aware of both federal and state requirements. Some states have also enacted their own “Right- to–Know” laws that guarantee individual workers and local communities the right to know what, if any, hazardous chemicals are present in the workplace. This information is also required under the federal statute.

Workers Compensation Statutes and Disability Statutes

Workers compensation statutes provide for wage replacement, medical treatment, vocational training, compensation for permanent disability from workplace injury or illness, and other benefits for employees who suffer injury or illness either at the workplace, or on a job site. The Department of Labor, Office of Workers Compensation Programs administers benefits to injured federal employees. States have created their own administrative agencies to run state programs and require employers to fund state programs by paying for workers compensation insurance. Laws vary from state to state.

An employee who is injured or suffers illness on the job or at a workplace, is not required to apply for workers compensation; but if he or she does, then the employee must comply with the state workers compensation insurance requirements for treatment. If the employee believes that he or she is receiving unfair treatment, or the employer believes there might be some type of fraud, a claim may be filed with the workers compensation court or board. An administrative law judge oversees these types of cases until the case has been closed. All expenses, including medical expenses, are a lien against any potential judgment an employee may win in a civil suit brought against the employer and/or responsible third parties.

Employee disability that occurs outside the workplace is governed by several federal and state laws, including the Social Security Act, the Americans With Disabilities Act, and state short-term or long-term disability statutes. Both employers and employees pay taxes to fund state disability programs. Statutes govern the definition and determination of various types of disabilities. Employers must be aware of the impact of these laws on employee accommodations and the workplace environment.

Consolidated Omnibus Budget Reconciliation Act (COBRA) 1985

The Consolidated Omnibus Budget Reconciliation Act (COBRA) 1985, amended ERISA to allow qualified employees to maintain group health, dental, and vision benefits upon termination. This act applies to employers with twenty or more employees that offers a group health plan. The terminated employee has sixty (60) days to elect this continuing coverage and must pay the entire premium, plus an administrative fee.

Health Insurance Portability and Accountability Act (HIPPA) of 1996

The Health Insurance Portability and Accountability Act (HIPPA) of 1996 amended ERISA to provide for improved portability and continuity of health insurance coverage for employees belonging to a group health plan at their work place. HIPPA also gives employees additional protections relating to coverage exclusions or denial of coverage due to preexisting conditions, and enrollment rights, and also prohibits discrimination based on a variety of health and non-health status-related factors. HIPPA’s extensive privacy rules protect individual employee’s expectations of privacy regarding their medical records and other information. The U.S. Department of Health and Human Services Office for Civil Rights enforces HIPPA’s privacy rule.

Amendments to ERISA that protect employee health include the Newborns’ and Mothers’ Health Protection Act of 1996, which requires employer group plans that offer maternity coverage to pay for at least a 48 hour hospital stay following childbirth (96 hours if a cesarean section), and by the Women’s Health and Cancer Rights Act of 1998, which extends protection to employee-patients who elect breast reconstruction in connection with a mastectomy. Additional protections for employee medical records is provided in the Americans With Disabilities Act and in various state statutes.

The Family Medical Leave Act (FMLA) of 1993

The Family Medical Leave Act (FMLA) was enacted in response to growing concerns about balancing work and home life in the event of family medical emergencies and conditions. This federal act applies to employers who have 50 or more full-time employees within a 75 mile range and allows eligible employees to take up to 12 work weeks unpaid, job protected leave. Eligible employees must have worked for a covered employer for at least 12 months (can be nonconsecutive months) and have at least 1,250 hours of service for the employer during the 12 month period immediately preceding the leave.

Leave may be taken for the birth, adoption, or foster care of a child; to care for a spouse, child, or parent who has a serious health condition; for an employee’s own serious health condition that makes the employee unable to perform the essential functions of his or her job; or for any qualifying exigency arising out of the fact that a spouse, child, or parent is a military member on covered active duty or called to covered active duty status. Leave may be taken for the full 12 workweeks, or any amount of that time, continuously or on an intermittent basis (up to 26 weeks when caring for a service member that is a parent, spouse, son or daughter, or the employee is the next of kin of the service member). Employers may require the employee to use paid leave time prior to or concurrent with FMLA time. Employers may request proof of the medical reason for the leave request. Employees must comply with the employer’s leave request policies whenever possible.

Protections afforded to employees under the act include restoring an employee to his or her original job, or to an equivalent job with equivalent pay, benefits, and other terms and conditions of employment; FMLA leave cannot be counted against the employee under a “no-fault” attendance policy; and continuation of group health insurance coverage for an employee on FMLA leave under the same terms and conditions as if the employee had not taken leave. Restoration of benefits other than health insurance, are determined based on the employer’s policies. Employees who may be denied restoration are those deemed to be a “key” employee – among the highest-paid 10 percent of all of the employer’s employees within 75 miles – if the employer proves substantial and grievous economic harm, gives notice to the employee, and gives the employee the opportunity to return to work. The Department of Labor, Wage and Hour Division administers this act.

Patient Protection and Affordable Care Act (PPACA) of 2010

The 2010 enactment of the Patient Protection and Affordable Care Act (PPACA), affects employers and employees across the country. Also known as the “Affordable Care Act” (ACA) or “Obamacare,” this act, together with the Health Care and Education Reconciliation Act of 2010, creates a mandate that employers with 50 or more employees who do not offer health insurance to their full-time employees must pay a tax penalty. These acts also extends coverage and privacy protections for patients. The employer mandate went into effect in 2015. The tax penalty may also apply to an individual who does not possess health insurance. This controversial law remains in the forefront of political discourse and debate.

Whistleblowing Protections

Federal and state protections are available to employees, called “whistleblowers,” who report illegal, prohibited, or unethical actions of their employers. Often these employees are subject to retaliation from their employers, including termination, demotions, and withheld bonuses and benefits. Whistleblowing statutes are grounded in public policy initiatives that seek to protect those workers who report actions that might harm society. Deadlines for an employee to file a claim vary from thirty days to one hundred eighty days at the federal level and in some states may be filed up to one year after the retaliatory action. Employees may seek monetary damages and equitable remedies which include reinstatement, back pay, and bonuses, other fringe benefits, seniority status, and costs and attorney fees. An employee may also seek an injunction to prevent future retaliatory actions by the employer.

At the federal level, employee protections from retaliation as a result of reporting illegal or harmful employer actions may be found in several statutes. The False Claims Act (31 U.S.C. §§3729-3733, imposes liability on persons and companies contracted with the federal government who defraud governmental programs. Those who report the illegal action are entitled to a percentage of the fines and penalties. Federal employee whistleblowers are protected by the Civil Service Reform Act and the Whistleblower Protection Act of 1989 (WPA). The Whistleblower Protection Enhancement Act of 2012 protects federal employees who disclose evidence of waste, fraud, or abuse.

OSHA provides whistleblowing protections for private sector employees who report activity that is dangerous to workplace health or safety in ten different statutes related to workplace safety and over eight statutes related to transportation safety.

Employees of private sector organizations that provide consumer goods and services or investment vehicles and services receive whistleblowing protection under federal statues such as the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Affordable Care Act, the Consumer Financial Protection Act (CFPA), the Consumer Product Safety Improvement Act (CPSIA), and the FDA Food Safety Modernization Act (FSMA). Many of these statutes can be found at

Many states also offer whistleblowing protection to public and private sector employees. For example, New Jersey has the Conscientious Employee Protection Act (CEPA) (N.J.S. Stat. § 34:19-1 (2007). This law prohibits a public or private employer from taking retaliatory action against an employee who discloses or threatens to disclose to a supervisor or public body an activity, policy, or practice that the employee reasonably believes is in violation of a law or rule; or provides information or testimony to a public body investigating a violation; or objects to or refuses to participate in an activity, policy or practice that the employee reasonably believes is a violation of law, is fraudulent or criminal, or is incompatible with a clear mandate of public policy related to health, safety, welfare or protection of the environment. The protection does not apply unless the employee has given written notice of the violation to a supervisor and has given reasonable time for correction, except if the employee is reasonably certain the supervisor already knows about the violation or if the employee reasonably fears physical harm and the situation is an emergency.

Whistleblowing protection at the federal and state level upholds public policy initiatives, protects employees, encourages employers to deal fairly with their employees, and discourages illegal, prohibited and dangerous activities and practices in business.

Employee Privacy And The Workplace

The right to privacy is often thought of as the “right to be left alone” and the right to be free from intrusion from others. A full-time employee spends between thirty to sixty or more hours per week at their place of employment creating many interpersonal relationships. Employers adopt workplace manuals and codes of conduct in order to set standards of behavior, to manage employee expectations, and to protect the employer’s business interests. Even so, employee understanding and expectation of privacy in the workplace can be quite different from employer handbooks or federal and state laws.

A variety of federal and state laws relate to privacy, including federal and state constitutions, statutes, common law, as well as some administrative agency rules and regulations. The common law relating to privacy takes various forms. There are at least four separate torts related to privacy. They are: (i) unreasonable intrusion upon the seclusion of another; (ii) misappropriation of another’s name or likeness; (iii) unreasonable publicity given to another’s private life; and (iv) publicity that unreasonably places another in a false light before the public. These torts identify individual “zones of freedom,” which provide privacy expectations and protection to the individual. How these expectations and protections apply to the workplace is ongoing and evolving in response to social development and technology innovations.

The integration of a variety of new technologies into the workplace, particularly those related to social media and information technology, has created a new view of employee privacy rights wherein the employer owns the means of data collection, communication, observation or other forms of employee monitoring. Issues of employee privacy and the right of an employer to monitor the employees’ actions and use of employer owned systems have increased. The fastest growing and most pervasive of new information technologies in the workplace are “Big Data” analytic tools and social media platforms. In the age of “Big Data,” employers have access to almost unlimited information. Employer use of that data, and employer oversight of employee’s social media use, whether private or at the workplace, has provoked considerable controversy.

While federal statutory protections of employee privacy are limited, federal agencies such as the FTC, EEOC and the NLRB have stepped into the void and enacted several rules and regulations protecting employee privacy rights. States, on the other hand, have passed a variety of laws on diverse aspects of employee privacy in the workplace and have come to the forefront in identifying employer and employee rights. Privacy issues in the workplace require a balancing of employee and employer rights and prerogatives to protect their legitimate interests and to address their legitimate concerns. In order for employers to enforce company policies and avoid liability, clear communication of policies and procedures in either an employee handbook or manual must occur.

Employee Surveillance and Searches

Employers use a variety of methods to monitor employee performance for effectiveness and productivity, including “real time” monitoring; visual and audio recording; counting key strokes on computers; inspecting computer files; listening to telephone conversations and messages — both landline and mobile; monitoring instant messages (IMs), blogs, Twitter and social media platforms, such as Facebook; GPS tracking; identification card tracking; and reading emails. Employers monitor employee performance for many reasons including to show compliance with regulations, promote corporate security, protect business reputation, protect trade secrets/proprietary information, reduce product loss, increase employee productivity, and to limit legal liability for improper or illegal acts by their employees.

Electronic Communications Privacy Act (ECPA) of 1986

The FCPA amended the Federal Wiretapping Act, and permits employers to monitor work email and phone calls if (1) the employee consents in advance, (2) monitoring occurs in the ordinary course of business, or (3) in the case of email, if the employer provides the email system.

USA Patriot Act

In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 amended the ECPA to allow the government to compel disclosure of data and information and to provide for employer voluntary disclosure. Prior to monitoring employee communications, employers should first identify the goals of the organization (quality control, training), clearly communicate any electronic monitoring policies to employees, obtain employee consent prior to instituting any monitoring programs and avoid monitoring private employee communications.

Workplace Searches

In addition to monitoring employee communications, employers may also conduct searches of the workplace. Employees have limited protections from employer searches in the workplace, including searches of offices, lockers, company issued vehicles, computers, mobile devices including tablets and telephones, electronic files and email. In O’Connor v. Ortega, 480 U.S. 709 (1987) the U.S. Supreme Court held that an employee did not have any expectation of privacy to their office where the employer retained a key to the office. The court held that in determining an employee’s privacy expectations in the workplace, the “operational realities” should be considered and courts should examine if the employee was provided an exclusive working space, the nature of the employment and whether the employee was on notice that parts of the workplace were subject to employer intrusions. The balance between the employee’s expectation of privacy and the employer’s notice to the employee of policies, practices and procedures frames the issues in the following case in which an employee claimed that employer access and review of his text messages on an employer issued mobile pager, was a violation of his right to privacy.


Case Study

City of Ontario v. Quon

560 U.S. 746 (2010)

Procedural Posture

Respondents, an employee and others, filed an action against petitioners, a city and others, alleging, inter alia [among others], that petitioners violated their Fourth Amendment rights by obtaining and reviewing the transcript of the employee’s pager messages. A district court held that petitioners did not violate the Fourth Amendment. The U.S. Court of Appeals for the Ninth Circuit reversed in part. The U.S. Supreme Court granted a petition for certiorari.


The petition for certiorari challenged the court of appeals’ holding that petitioners violated the Fourth Amendment. The Supreme Court assumed that the employee had a reasonable expectation of privacy in the text messages sent on the pager provided to him by the city. The search was justified at its inception because there were reasonable grounds for suspecting that the search was necessary for a non-investigatory work-related purpose because the search was done in order to determine whether the character limit on the city’s contract was sufficient to meet the city’s needs. Also, the city and a police department had a legitimate interest in ensuring that employees were not being forced to pay out of their own pockets for work-related expenses, or on the other hand that the city was not paying for extensive personal communications. The search was permissible in its scope because reviewing the transcripts was reasonable because it was an efficient and expedient way to determine whether the employee’s overages were the result of work-related messaging or personal use. The search was reasonable. Petitioners did not violate respondents’ Fourth Amendment rights.


The judgment of the court of appeals was reversed. The case was remanded for further proceedings.

Employee Speech

Individual’s protected right to free speech under the First Amendment of the U.S. Constitution protects individuals from governmental action. When applied to the workplace, public sector employees are protected, but not private sector employees. However, the type of employee speech, whether political or connected to workplace terms and conditions, may be protected. In Heffernan v. City of Paterson, 136 S. Ct. 1412 (2016) the U.S. Supreme Court held that “when an employer demotes an employee out of a desire to prevent the employee from engaging in political activity that the First Amendment protects, the employee is entitled to challenge that unlawful action under the First Amendment and 42 U.S.C.S. § 1983, even if the employer makes a factual mistake about the employee’s behavior.” Some states have enacted legislation that extends protection to employee speech in connection with political activity outside of the workplace.

Private sector employees’ speech rights may be protected under state law or administrative agency rules and regulations if made in connection with terms and conditions of employment. In 2012, in Hispanics United of Buffalo, Inc. and Carlos Ortiz (Case 03–CA–027872, 2012), the NLRB held that the termination of five co-workers who posted on commentary on Facebook about the workplace and a co-worker was in violation of the National Labor Relations Act, Section 7 regarding “concerted activities.” Comments by workers discussing workplace issues such as “terms and conditions” of employment, such as workload, job performance, wages, and staffing levels are protected speech. But, no protections are afforded to employee speech that violates employers privacy policies, damages the company’s reputation, disparages the employer or other employees, or the employer’s product/service, is rude or profane, is unrelated to workplace terms and conditions, or may be seen clearly as a “rant.”

Drug and Alcohol Testing

Employee testing for drugs and alcohol began in 1986 when President Reagan approved testing of federal employees and was extended in 1988 to federal contracts requiring drug free work environments. The private sector thereafter embraced employee drug testing as a pre-condition to hiring and as an ongoing condition to maintaining employment. Employers adopt drug and alcohol testing policies to maintain a safe working environment, increase productivity, and to ensure quality control of goods and services. Courts have upheld regular and random employer drug testing as a reasonable exercise of an employer’s rights provided the employer has communicated its policy on drug testing to the employees. State statutes, which vary from state to state, govern private sector employees’ privacy rights in drug testing. Employers who choose to drug and alcohol test employees must be aware of state constraints and of protections afforded to employees from disciple or termination under the Americans with Disabilities Act. Employers must also be aware of state protections afforded to employees who use certain drugs under medical prescription.

Recent state statutes legalizing the sale and recreational use of marijuana have direct impact on the workplace. Employees must recognize that although recreational use of marijuana may be legal in some states, it is not legal in all states, and is classified as a federal Schedule I drug. Use and possession of marijuana may subject an employee to state and federal criminal charges and discipline and/or termination under employment policies adopted by employers.

The Employee Polygraph Protection Act of 1988

The Employee Polygraph Protection Act generally prohibits private sector employers engaged in interstate commerce from using or requiring lie detector tests during pre-employment screening or during employment or from using the results of any lie detector tests to discharge, discipline, discriminate against, or to deny promotion or employment to any employee or prospective employee who refuses, declines, or fails to take a lie detector test.

Exemptions include federal employees and contractors, prospective employees of private sector employers in security service businesses, employees of any employer authorized to manufacture, distribute, or dispense a controlled substance as identified in federal law. Private sector employers requesting employees to submit to a polygraph test the employer must show:

  • The test was administered in connection with an ongoing investigation involving economic loss and/or injury to the employer’s business, e.g., theft, embezzlement, misappropriation, industrial espionage or sabotage;
  • The employee had access to the property that is the subject of the investigation; and
  • The employer has a reasonable suspicion that the employee was involved in the incident or activity under investigation.

Additional exemptions are also provided in various state statutes.

Genetic Testing and Health Screening in the Workplace

In 2008, the Genetic Information and Nondiscrimination Act (GINA) was enacted to protect individuals from discrimination in healthcare insurance and employment. GINA specifically prohibits employers from discriminating against prospective and current employees in the hiring, firing, compensation, benefits or others terms and conditions or opportunities because of an individual’s genetic information or genetic profile. Employers are also prohibited from requesting, requiring, or purchasing genetic information of an employee or his or her family member(s) except in limited circumstances such as consent or where the information is used in connection with services offered by an employer wellness program.

Additionally, many states have passed laws prohibiting discrimination against employees on the basis of their genetic information. Employees may have a right of action against their employer for genetic discrimination under the Fourth Amendment, the Americans With Disabilities Act, common law for invasion of privacy, and Title VII of the Civil Rights Act of 1964 (discussed in the chapter on Employment Discrimination).

Employee Assistance Programs (EAPs)

Employee Assistance Programs are employer funded programs to assist employees with personal problems and issues that might affect their performance at work. These programs seek to help employees address financial, medical, emotional, family, and substance abuse issues to name a few. Inherent in many of these programs are issues relating to privacy. Employers must be aware of federal and state laws that apply to the administration of these programs, retention of information and data, and potential liability for employment actions taken, such as discipline and termination, based upon information obtained from employees participating in EAPs.

Personnel Records

During the course of pre-hiring screening and subsequent employment, employers gather extensive private information on individuals often referred to as personnel records. The maintenance, accuracy and security of these records are privacy concerns for individuals. The federal Privacy Act of 1974 and subsequent amendments applied to personnel records of federal employees. However, there is no federal law that provides private sector employees the right to access, review, contest or correct private information contained in the personnel file maintained by their employer. Private sector employees must rely upon state law and employer policies and procedures governing access to these records. Whether a public or private sector employee, individuals must look to federal, state, and common law for remedies for wrongful disclosure or false or defamatory information.

“Off Duty” Employee Actions and Lifestyle Laws

There is a growing trend for employers to prohibit certain employee activities while not at the workplace, or “off duty,” for reasons such as protecting business reputation or company security, or for economic reasons such as to decrease losses in productivity, or to reduce costs of employer offered healthcare. Employers have attempted to prohibit activities such as certain international travel, high-risk sporting activities (motorcycle riding skydiving, helicopter skiing), gun possession, political activity, health related practices (weight maintenance, smoking, alcohol and dietary consumption), and social media communications. Many states have enacted laws that prohibit employer regulation of employee off-duty acts, while other states permit any lawful activity while off-duty. Some administrative agencies such as the NLRB and the EEOC have begun to address concerns of employees that employer control of actions and activities may violate employee’s federal and state privacy rights.

Today, there is often conflict in the workplace between an employer’s right to monitor employee performance and an employee’s expectation of privacy. Issues related to privacy rights, not just those related to the workplace, are a reflection of how society balances the need for individuals to feel secure in their persons with public access to private information. Clearly, as new methods of communication and of collecting, storing, and disseminating information become available, tensions arising from balancing the privacy expectations of employers and employees will continue to grow. Technological, mechanical, and social changes continue to create legal, social and ethical issues in the employment relationship.

Labor Law and Management Relations

Introduction To Labor Law

In order to study the development of labor unions in the United States, one must also study the development of labor legislation – the two are inextricably entwined. Judicial rulings and subsequent legislation have continually tried to strike a balance between the private property rights of employers and employee freedom to associate in organizations for their own mutual benefit.

Early Legal Developments

Early legal developments came as the result of judicial interpretations of laws (both statutory and common) that were not originally drafted to deal specifically with labor relations but were clearly designed to favor the property class. The Cordwainers Case (1806) established the “criminal conspiracy” doctrine as it applied to labor organizations. Workers seeking to better their working conditions could not do so in a concerted manner. If workers joined in collective activities, they could be considered “criminals” and jailed for such behavior. It may be surprising to note that this was not the unanimous view of the legal system—even at this early stage of the development of our capitalist market. The ruling in Commonwealth of Massachusetts v. Hunt (1842) established that labor organizations in and of themselves were not automatically criminal conspiracies. While the ruling in Commonwealth of Massachusetts was not a ruling of the United States Supreme Court, judicial rulings from Massachusetts were highly regarded in other jurisdictions for their precedential value. Thus, while unions were not automatically considered criminal conspiracies, they could nonetheless be liable for civil damages, under the “civil conspiracy” doctrine. Contract law was relied upon to enforce “yellow dog contracts” in which employers demanded assurances that job applicants were not members of unions, nor would they ever consider joining a union, if employed.

Loewe v. Lawler (Danbury Hatters case) (1908) applied the Sherman Antitrust Act of 1890 to labor organizations. Labor organizations were considered “in restraint of trade” when the Hatters union organized a nationwide boycott in conjunction with the AFL-CIO to protest Loewe’s use of nonunion labor to make hats. Clearly, with the exception of Commonwealth of Massachusetts v. Hunt, the pendulum swung in the direction of protecting managerial rights and prerogatives in the workplace.

Specific Labor Legislation

Following these early legal developments, Congress passed legislation specifically aimed at regulating labor in a more balanced fashion. The Clayton Act of 1914 removed unions from the umbrella of the Sherman Antitrust Act. The Clayton Act was initially hailed by organized labor, while in reality it had made it easier for employers to obtain an injunction against threatened or actual concerted labor activities (such as strikes, boycotts, and picketing). These injunctions were not difficult to obtain and were regularly granted by courts in the decade of the 1920’s.

As the Great Depression riddled America with massive unemployment and sometimes violent labor disputes, the Norris-LaGuardia Act (1932) was one of many pieces of progressive (later “New Deal”) legislation enacted to improve the ability of workers to engage in joint activities in support of their right to join a union. Norris-LaGuardia made the “yellow dog” contract unenforceable in courts and limited federal courts’ ability to issue injunctions in labor disputes. However, the law established no enforcement mechanism of the act’s provisions, so many of the law’s guarantees were “on paper only.”

The Wagner Act of 1935 (officially called the National Labor Relations Act), the true “Magna Carta” for the union movement in the United States, guaranteed the rights of individuals to form labor organizations and specifically outlined “unfair labor practices” of employers. The Wagner Act established an administrative agency, the National Labor Relations Board (NLRB) to enforce the act. Congress passed this legislation under its constitutional authority to regulate “interstate commerce.”

Finding that industrial strife impeded the flow of commerce, Congress gave workers the right to form and join unions in hopes that this right would minimize industrial strife. The Wagner Act was ruled constitutional in Jones and Laughlin Steel v. National Labor Relations Board, 301 U.S. 1 (1937). Unions were widely successful in organizing some of the major industries in the United States in the decade of the 1930’s but to many, unions had begun to act irresponsibly in the period immediately following the end of World War II.

Overriding President Truman’s veto, the Taft-Hartley Act of 1947 amended the National Labor Relations Act. Congress, believing that unions had gained too much power, amended the Wagner Act with more “pro-management” provisions. Individuals now not only had the right to join unions, but also to refrain from joining a union as well. Taft-Hartley specifically established unfair labor practices on the part of unions, which had been non-existent before passage of this legislation. Taft-Hartley increased the size of the NLRB from three to five members. The “closed shop”,in which an employer was restricted to hiring union members only, was ruled illegal. A “union shop,” in which an employee was required either to join a union or pay the union dues within a specified time period was still permitted. Taft-Hartley authorized states to adopt “right to work” laws, giving the employee the right to either join or not join a union.. A provision relating to disputes that involved a “national emergency” was established, giving the President the right to intervene in labor disputes that could create a national emergency or “imperil the national health and safety.” In this case, an 80 day “cooling off” period may be required during which the parties are required to return to the bargaining table. The act also established the Federal Mediation and Conciliation Service to help management and unions avoid industrial conflict.

The Landrum-Griffin Act was adopted in 1959. Officially called the Labor Management Reporting and Disclosure Act (LMRDA), the focus of Landrum-Griffin was not to regulate union-management relations but to regulate union-member relations. The act aimed to correct and prevent union corruption (mainly by the Teamsters) and abuses of the power of unions toward their members. It required the reporting of financial statements, mandated the creation of union constitutions, and required that unions meet in membership conventions minimally once every five years. While many unions felt that some abuses needed correction, they objected to Congress interfering in the internal affairs of unions. Landrum-Griffin passed despite the objections of the American union movement.


Section 7 of the NLRA recognizes the rights of employees to form a union. Management is prohibited from interfering with any employee right guaranteed by Section 7 relative to organizing and maintaining a union. Employees can petition the NLRB for the right to conduct a representational election in an appropriate “bargaining unit” of the workforce. If the union is successful, it will be the exclusive bargaining agent for the workers in the unit. The bargaining unit elects representatives who will negotiate an agreement (the collective bargaining agreement) with management. Management and labor are required by the act to bargain “in good faith” in relation to the mandatory subjects of bargaining which include “wages, hours, and working conditions.” Issues relating to pay, wages, bonuses, hours of employment, seniority, pensions, group insurance, safety practices, grievance procedures, discipline, procedures for discharge, layoff, recall, and union security are often the specific topic of these negotiations. Management is prohibited from threatening, questioning or spying on workers, threatening to close the business or stop giving wage increases, or committing any other action that would serve to threaten or undermine union organizing activities, The failure of the parties to come to an agreement on a contract through collective bargaining may result in a strike called by the union or a lockout imposed by management.

The Functions of the National Labor Relations Board (NLRB)

The NLRB is an administrative agency with two primary functions: 1) the oversight of union organizing activities and representational elections; and 2) the investigation and adjudication of unfair labor practice charge. The NLRB operates within the Executive Branch of the federal government as an independent agency.

Unions can be recognized in the workplace in three ways: voluntary recognition, election, and pursuant to a bargaining order issued by the NLRB. Voluntary recognition occurs where the union gets a majority of the individuals in a given workplace to sign an “authorization card” indicating that they want the union to represent them. In this instance, the employer concedes to the workers’ desires without conducting a representational election.

If the employer decides not to voluntarily recognize the union, the union will file a Representation Petition with the Regional Office of the NLRB. In this petition, the union will ask for an election. The NLRB will first verify that the union has a “showing of interest,” which is defined as at least 30% of the workers in a bargaining unit signing an authorization card seeking to have the union represent them. The NLRB will first verify that the workers who are seeking representation constitute an “appropriate bargaining unit.” Employers tend to seek larger, heterogeneous bargaining units; unions seek to carve out bargaining units that will most quickly result in recognition of their representation rights. The NLRB utilizes the “Globe Principle” where it will rely heavily on the “desires of the employees” as a controlling factor in determining if a unit is appropriate. The NLRB will screen for “ineligibles’ — independent contractors, supervisors, or professionals who opt not to be combined with non-professional employees in a unit. The union is entitled to the “name and address” list of those in the appropriate bargaining unit under the Excelsior Underwear rule.

The NLRA has been modified over the years to determine what is permissible and impermissible election conduct for both union and management during the course of the election campaign. The NLRB will oversee the election. A “simple majority rule” prevails which requires 50% plus 1 of those who voted in the election (not all the workers in the unit) to vote in favor of a union. If the union wins, it is certified as the exclusive bargaining agent for everyone in the appropriate bargaining unit regardless of the individual’s decision to join the union. If the union loses, another election is barred for one year. A union can also be decertified following that same rules for certification (an NLRB election — 30% showing of interest and simple majority voting in favor of decertifying a union). If the employer’s conduct has been so egregious that the NLRB feels that it would be impossible for employees to vote in an election without fear of reprisal, the NLRB will certify the union, absent an election, as the exclusive bargaining agent. This bargaining order will only occur if the union can show that it had, at one point, a simple majority showing of interest (instead of the 30%) via authorization cards.

The NLRB has jurisdiction of any act or practice that is “arguably an unfair labor practice” or ULP, under the “Garmon Rule.” Parties are forbidden to litigate such issues in any forum other than the NLRB. A ULP filed by a union includes any actions, practices, or statements made by an employer that interfere with, restrains, discriminates against, or coerces employees in their exercise of the right to organize and choose their representatives, and to engage in collective bargaining or engage in protected, concerted activities. Such interference, restraint, or coercion can arise through threats, promises, or impermissible offers to employees. An unfair labor practice also can arise when an employer contributes financial or any other support to a labor organization. (In the case where there are multiple unions competing for the right to represent workers in a representational election, an employer must remain neutral between competing unions.) It is also an unfair labor practice for an employer to dominate, create, or interfere with the formation or administration of any labor organization. Employers are also prohibited from retaliating against an employee for filing a charge with, or giving testimony to, the NLRB, or refusing to engage in good-faith collective bargaining.

A union may commit an unfair labor practice when it causes, or attempts to cause, an employer to hire, discharge, or discriminate against an employee for the purpose of encouraging or discouraging union activity. The same is true when a union restrains or coerces employees in the exercise of their rights not to join a union. The refusal of a labor organization to bargain collectively “in good faith” or to refuse to execute a collective bargaining agreement with an employer are examples of potential unfair labor practices on the part of a union.

Individuals (whether or not a member of a union), unions (acting on their own or on behalf of individuals) and employers may file unfair labor practices (ULPs) charges with the Regional Office of the NLRB, having first attempted to resolve the dispute at the workforce level. The Regional Office will investigate the allegation and may settle the case informally or file a complaint against the party alleged to have committed a violation of the NLRA. If not settled informally, a hearing before an Administrative Law Judge (ALJ) will take place. The NLRB’s remedial powers are solely confined to “restoring the status quo” by ordering back pay, the return of individuals to the payroll, and good faith bargaining. The NLRB is not permitted to assess “punitive damages” for violations of the act.

Parties can appeal the decision of the ALJ to the full NLRB. The NLRB, consisting of five members, will hear the case anew in a de novo proceeding. A party can appeal the Board’s decision to the Circuit Court of Appeals. Appeals from the Circuit Court of Appeal can be made to the United States Supreme Court.

As discussed previously in this chapter, recent NLRB decisions continue to address employee use of information technology and social media both at the workplace and outside of the workplace. Other issues with which the NLRB has recently become involved include unionization of student athletes and graduate student RAs and GAs, the future application of the “Yeshiva Principle” to church-related colleges and universities, joint-employer status, successor employer status, the effect of arbitration agreements, class action waivers, and the use of audio and video recording in the workplace. The role of the NLRB in protecting employee rights and balancing employer concerns will no doubt continue to underscore its importance in resolving issues emerging in the employment relationship.


Ethical Considerations

Social Media

Is it fair for an employer to monitor the social media choices of an employee or a prospective employee? Should an employer be able to base a decision to hire or fire a prospective employee or an actual employee based on the information gathered from social media?

Critique: “Since its the employer’s property, the employer should be allowed to hire or fire whomever they choose.”

Is it fair to require workers who do not wish to join a union to nevertheless pay union dues in states that are “union shop” states?

Should the government require employers to provide family leave to their employees?



  1. In light of company and personal pension plans, is there a need for social security retirement benefits? Explain why or why not.
  2. Would self-imposed, industry-wide standards protecting the safety and health of a particular industry’s employees be an improvement over OSHA? Substantiate your answer with fact-based reasons.
  3. How did New Deal legislation improve circumstances under which employees worked?
  4. What effect did the Taft-Hartley Act have on the relationship between labor and management?
  5. How does the National Labor Relations Board prevent unfair labor practices?
  6. A company required all of its employees to authorize deductions from their pay to the United Way, a community charity. The employer terminated an employee when she refused to sign the payroll authorization. Was the employee wrongfully discharged? See Ball v. United Parcel Serv., Inc., 602 A.2d 1176 (Md. 1992)
  7. An employer discharged an otherwise exemplary employee because the employee had a continuing relationship with a co-worker during off duty hours. The employer simply objected to the employee’s immoral lifestyle. The employee claimed discrimination. The employer claimed the defense of the employment at will doctrine. Outcome? See Patton v. J.C. Penney Co., 719 P.2d 854 (Or. 1986)
  8. An employee was discharged when her employer learned that she performed volunteer work at an AIDS center. The employer admitted an irrational fear that the employee’s work at the center would place himself, his family, and his employees at risk. Was this an employer’s overcautious or irrational fears a breach of the implied covenant of good faith? See Brunner v. Al Attar, 786 S.W.2d 784 (Tex. App. 1990)

Chapter Twelve | Performance And Discharge

Most contractual relations will be terminated or ended according to the provisions or terms of the agreement, i.e., by performance of the parties. However, some contracts will be terminated or ended by certain acts of the parties, by operation of law, by impossibility of performance (an issue discussed previously in the chapter on consideration), mutual rescission or agreement of the parties, or through some legally recognized excuse. When payment of money is called for in a contract, the contract will be completed by the payment of money. If a check is tendered by a debtor or by a purchaser, the payment by the check is a conditional payment and the underlying obligation is not discharged until the check is actually “paid” or honored by the bank. Unless the agreement stipulates otherwise, a creditor can refuse to accept a check because technically a check is not legal tender. Rather, a check is a substitute for money. [See UCC §2 511.]  If payment is only to be accepted in cash or in some other form (for example, a barter transaction), this should be clearly stated in the contract. A tender is defined as an “unconditional offer of a debtor to pay to the creditor the exact amount due on the date due.” If a creditor refuses to accept a tender by the debtor, the debt is not discharged, but the refusal to accept the tender stops the running of any interest charges, may lift any liens filed against property held by the debtor, and may also prevent charging court costs and attorney’s fees to the debtor in the event a suit is filed.

Time For Performance

Where a time of performance is stated in the contract and the time is clear and unambiguous, performance must be made on or before that date. When no time is specified in the contract, a party has a reasonable time to perform. Where the nature of the contract is such that time is not an important factor, reasonable delay may be permitted by a court. Where a clause in a contract expressly states “time is of the essence” or the nature of the contract itself is such that time is obviously an important factor (construction contracts or contracts for purchase or sale of perishable goods), the failure to perform on time may be actionable as a breach and may under certain circumstances permit a party to rescind a contract, cancel a contract, seek a substitute performance, seek the remedy of cover or resale, or seek monetary damages.

The Doctrines Of Material Breach And Substantial Performance

When a party fails to perform a promise according to its terms, it is important to determine if the breach is material. If the breach is material, the aggrieved party may sue for “total breach” and the aggrieved party may have the power to cancel the contract. If the breach is not material, the aggrieved party may sue for “partial breach,” but may not cancel the contract. While the rules may seem clear, there is no simple test to determine whether the breach is material. Materiality is ordinarily a question of fact for a jury. Among the factors to be considered are:

  1. To what extent, if any, the contract has been performed at the time of the breach. “A breach which occurs at the very beginning [of a contract] is more likely to be deemed material even if it is relatively small.” (Note, 21 Colum. L. Rev. 358 (1921)).
  2. A willful breach is more likely to be considered as material than a breach caused by negligence or other circumstances.
  3. A quantitatively serious breach is more likely to be considered material.

It is recognized that full performance is required in most cases to discharge a contractual obligation. It is also recognized that some agreements (for example, certain construction contracts) are quite complex. In such cases, a court may apply the doctrine of substantial performance to determine if a breach has occurred. This doctrine permits recovery where there has been substantial performance, subject to an offset (deduction) for a nominal, trifling, or technical breach, or a departure from the strict letter of the contract. In order to apply the substantial performance doctrine, the part of the contract that is unperformed must not destroy the value or the purpose of the contract and the doctrine does not apply where the breach is willful or intentional. 

Performance Subject To The Standard Of Satisfaction

When one party to an agreement contracts to “personally satisfy” the promisee, courts will apply one of two tests, depending on the nature of the contract: When a contract involves personal taste, skill or fancy, the promisee has, in effect, the final word and may reject a performance, even if it is alleged that such a rejection is subjectively arbitrary or capricious. However, most courts will require at least a “good faith” standard in the rejection; that is, a court will require an “honest or good faith reason” for the rejection. The interesting case of former Secretary of State Henry Kissinger and his rejection of an official portrait on ground that he “just didn’t like it” provides an application of this rule.  Where the subject matter of the contract concerns matters that are not purely personal in nature, the courts will apply an objective standard; that is, if a reasonable person would be satisfied with the performance, the promisor may be permitted to recover under the terms of the contract. This issue would be one for a jury to determine.


A manufacturer of pre-fabricated housing offers the following statement:  “All windows, doors, and other parts of the home all made to your satisfaction.”

In this case, most courts would apply the objective or reasonable person standard to judge a rejection of the items described in the contract.Contracts may also contain a provision that completion of the contract “depends upon the satisfaction of a third party” (an architect, a building inspector, an appraiser, etc.). In such a case, the court would apply an objective test and might permit recovery of amounts due under the contract if the court determines that the certificate of approval is unnecessary, or was withheld due to “bad faith,” fraud, mistake, or gross error on the part of the third party. Read the Plante case. What standard did the court apply?  Note especially the measure of damages.  

Case Study

Plante v. Jacobs

Supreme Court Of Wisconsin, 10 WIS. 2D 567, 103 N.W. 2D 296 (1960)


The Jacobs’ entered into a written contract with the plaintiff, Plante, to furnish the materials and to construct a house on their lot, in accordance with plans and specifications, for a sum of $26,756. During the course of construction, the plaintiff was paid $20,000. Disputes arose between the parties concerning the work being done. The Jacobs refused to continue paying. The plaintiff did not complete the house. The trial court found that the contract was substantially performed. The Jacobs were told to pay $4,152.90 plus interest and court costs.


The appellate court upheld the trial court’s judgment. Although there were some twenty items of incomplete or faulty performance by the builder, none of these was made the essence of the contract. Therefore the court held that substantial performance was evident. The court held, however, that the correct rule for determining damages due to faulty construction amounting to incomplete performance “is the difference between the value of the house as it stands with faulty and incomplete construction, and the value of the house if it had been constructed in strict accordance with the plans and specifications. This is the diminished value rule.”

What standard did the court apply in the Plante case? Note especially the measure of damages.

Discharge By Acts Of The Parties (Conditions)

The legal distinction between a covenant and a condition is very important. A covenant is a promise and determines what must be performed in order to discharge a contractual duty. Conditions determine when and if a duty must be performed at peril of breach of contract. The failure of a promisor to perform a covenant may be a breach of contract. If circumstances arise which leave a condition unsatisfied, the legal consequence is that the dependent promise does not become a matter of any contractual duty. Failure to satisfy a condition, on the other hand, is never a breach of contract.  Many contracts contain conditions, either express or implied, that control performance. A condition is traditionally defined as an act or an event, other than a lapse of time, which affects a duty to render a promised performance. These conditions are termed concurrent, precedent, or subsequent. Concurrent conditions are those conditions that require that the performance of both parties take place at the same time. Thus, neither party can demand that the other party perform first. Most bilateral contracts contain concurrent conditions (i.e., the sale of goods, which requires both payment and delivery to occur simultaneously; or a real estate transaction where the buyer tenders the money and the seller tenders the deed). A condition precedent is an act, an event, circumstance, or contingency that must occur according to the express or implied terms of the agreement or be satisfied or excused before a duty of performance is required under a contract. A non-technical formulation of a condition precedent might be: “I am not liable to perform this promise unless _______________.”  In the case of a unilateral contract, Smith’s performance is a condition precedent to Jones’ duty of payment. As an example, an insurance policy may require that an insured driver must give notice of a loss within a certain specified period after the occurrence of the loss. Failure to provide the insurance carrier with the required notice may permit the insurer to deny liability or coverage. A second example occurs in many real estate contracts: “This contract is contingent upon the buyer securing a suitable mortgage….” A condition subsequent is any fact, the existence or occurrence of which by agreement of the parties, operates to discharge or terminate an existing duty of performance. For example, a contract may provide that a party will be released from “any and all obligations” upon the happening of a certain event  (for example, “if interest rates rise to 10% or more by June 1, 2012, the borrower may withdraw from this transaction”). A simple example can be found in the following: “I am liable to perform this promise until or unless __________ [a factual circumstance will be inserted].” Parties to a contract may mutually agree to terminate or rescind an agreement and place each other in their original positions. The surrender of rights under the original agreement by each party is the consideration for the mutual agreement of rescission. It should be noted that the mutual rescission of a contract to sell or buy land would be required to be in writing under the Statute of Frauds.

Other Acts Of Termination


The abandoning of a prior contract and substituting a new contract in its place is termed a novation. A novation is accomplished by an agreement to discharge a previous contractual duty or to release the party who was originally bound to a contract and substitute a new party who agrees to undertake performance and to be bound by the contract. A novation may never be presumed (even from the passage of a significant amount of time) and must always be affirmatively proven by the party who is claiming a release from a prior contract. If the original contract was required to be in writing under the Statute of Frauds, so too must the novation be in writing. This is sometimes called the “equal dignity” doctrine. 

Accord And Satisfaction

An accord is an agreement to substitute performance in satisfaction of an original debt or obligation. When the agreement is executed and satisfaction has been made, it is called an accord and satisfaction (discussed earlier in the case of A. G. King Tree Surgeons v. Deeb).

Anticipatory Breach

At common law, a breach of contract could not occur until the time for performance had arrived. However, since the English case of Hochester v. DeLaTour (1853), courts have recognized that a total breach of a contract may occur if a party unequivocally repudiates the contract—even prior to the date stipulated in the contract. A repudiation is a “positive statement to the promisee or other person having a right under the contract, indicating that the promisor will not or cannot substantially perform his contractual duties.”  (Martin v. Kavanewsky, 157 Conn. 514 (1969)). The facts of Hochester v. DeLaTour (118 Eng. Rep. 922 (1853)) are illuminating. In April of 1852, the plaintiff and defendant entered into a contract under which the plaintiff was to work for a fixed period of time commencing on June 1, 1852. On May 11, 1852, the defendant stated he would not perform. The plaintiff filed suit for breach of contract. The defendant contended that no breach could occur until the time for performance (June 1, 1852) had arrived. The court disagreed and in so doing created the doctrine of anticipatory breach. Under the common law, when an anticipatory breach occurs, the aggrieved party has the right to elect between two remedies. An aggrieved party may:

  • Wait until the time for performance and sue for the actual breach; or 
  • Treat the repudiation as an anticipatory breach and sue immediately.

The UCC incorporated the common law rule concerning anticipatory repudiation in UCC §2-610. The UCC notes that the aggrieved party may “for a commercially reasonable time await performance by the repudiating party” or “may immediately resort to any remedy for breach.”  As we will see in the discussion on sales, the Code also provides that when reasonable grounds for insecurity arise, a party may demand “adequate assurances of performance,” and in the interim, may suspend his performance until he receives such assurances. (UCC §2-609). The Code further provides that 

“After receipt of a justified demand, failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.”  Grounds for insecurity will be judged according to “reasonable commercial standards” of “good faith” and “honesty in fact.”

Operation Of Law

A contract may be discharged by operation of law when a statute has made the subject matter of the agreement unlawful, where the contract is judged to be in a violation of public policy, or where a statute may excuse performance. Chapter 12 discusses the area of the legality of the subject matter of a contract. For example, a discharge in bankruptcy is the result of a proceeding in which the debtor is released from an obligation to pay a debt. By law, the discharge, properly granted, terminates the obligation to pay the debt.


Review the materials presented earlier on the termination of offers relating to objective and subjective impossibility. Here is another “dance lesson” case. It is far less dramatic than the Vokes case!   

Case Summary

Parker v. Arthur Murray, Inc.

Appellate Court Of Illinois, 2D Div., 1St Dis.

10 Ill. App. 3D 1000, 295 N.E. 2D  487 (1973)

BACKGROUND AND FACTS Plaintiff Parker, a thirty seven year old college educated bachelor who lived alone, contracted over two years for a total of 2,734 hours of dance lessons for which he had paid $24,812.80. Each contract, and each extension, contained the same boldface words, “NON CANCELABLE CONTRACT,” and some included a statement that no refunds would be made. Parker was seriously injured in an automobile accident and rendered incapable of continuing his dance lessons. Parker sued Arthur Murray to recover money paid for unused lessons. DECISION AND RATIONALE The trial court’s ruling that impossibility of performance was grounds for rescission was upheld, and despite the contract provisions Parker was allowed to recover the prepaid sums of money for unused lessons. The appellate court held that the plaintiff never contemplated waiving the right to invoke the doctrine of impossibility of performance. “Although neither party to a contract should be relieved from performance on the ground that good business judgment was lacking, a court will not place upon language a ridiculous construction. We conclude that plaintiff did not waive his right to assert the doctrine of impossibility.” The modern doctrine of impossibility can be traced to the 1863 case of Taylor v. Caldwell (122 Eng. Rep. 309 (K.B. 1863). In this case, the defendant had promised to allow the plaintiff to use his music hall for giving concerts. Prior to the time of performance, a fire destroyed the music hall. The English court held that the defendant was excused from performance and that his failure to perform did not constitute a breach of contract. Since this case, American courts have held that objective impossibility is an excuse for non-performance of a contract where there has been a destruction, material deterioration, or unavailability of the subject matter or means of performance of the contract through no fault of a party seeking the excuse. In some cases, a court will require the parties to have contemplated a particular source of supply or the condition when the parties entered into an agreement. It is interesting to note that the principle of impossibility is well illustrated by a number of cases involving the closing of the Suez Canal in 1956 and in 1967. (See 23 Rutgers L. Rev. 41 (1969). Because a substitute route around Africa was available, the court held that canal closings neither excused performance nor were grounds for the recovery of additional compensation under the theory of unforeseen difficulties.  Finally, the Restatement, Section 281, basically mirrors Section 2-615 of the Uniform Commercial Code and has introduced the concept of “commercial impracticability” into the discussion. It suggests that increases in costs “well beyond the normal range” that create “extreme and unreasonable difficulty” or “expense” could trigger the application of the doctrine of commercial impracticability, thus excusing performance or permitting a party to seek additional consideration.


Ethical Considerations

Time Is Of The Essence
Contracts frequently contain a “time is of the essence” clause. Are there any circumstances where a court should ignore such a clause and refuse to enforce it?
Debt Discharge
Sonny owes his Dad $10,000. One night, Sonny offers his Dad $5,000 to completely settle the debt and Dad accepts this offer. Later, Dad brings suit against Sonny for the remaining $5,000. Should Dad’s acceptance of the $5,000 discharge Sonny’s debt?


  1. Explain the doctrine of substantial performance.
  2. How do courts address performance subject to the satisfaction of one of the parties?
  3. Many contracts contain conditions. Explain conditions concurrent, precedent, or subsequent.
  4. What are the requirements for the creation of a novation?
  5. What is required to create an accord and satisfaction (refer to A.G. King Tree Surgeons v. Deeb)?
  6. In the case of anticipatory breach of contract, an aggrieved party may select from which two options?
  7. Explain how the doctrine of impossibility was applied in Parker v. Arthur Murray, Inc.


Copyright © 2017 Hunter | Shannon | Amoroso | O’Sullivan-Gavin

Chapter Fourteen | Agency


Agency is an important area of the law that involves a special relationship between two parties: a principal and the person, who represents the principal, termed the agent.  In the Restatement (Third) of Agency, agency is defined as a “fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.”  In essence, the agent “steps into the shoes” of the principal in a business transaction.
The principal hires an agent to act on his or her behalf who is subject to the principal’s instructions and control.  The agent is the individual authorized to act for and on behalf of a principal.  This legal arrangement creates a fiduciary relationship (a relationship of trust and confidence) in which the agent has the duty to act primarily for the principal’s benefit.  For example, a fiduciary relationship exists between the client (the principal) and an attorney (the agent); or the owner of a piece of property (the principal) and a rental or sales agent (the agent).
Each state enacts its own laws concerning agency, many of which are similar in scope and import.   However, some differences do exist.  The application of agency law is especially important for U.S. interests doing business in other countries.  Numerous American businesses are entering international markets through joint ventures or foreign direct investment activities.  To avoid problems that arise from language differences and unfamiliarity with foreign laws and customs, many U.S. companies hire agents who are knowledgeable in these matters resulting in smoother operation of the business in the foreign market.

Creating The Agency Relationship

The extent of the authority in an agency relationship may be governed by an express agreement between the parties or may be implied from the circumstances of the agency.  Like any contractual relationship, an agency relationship can only be created for a legal purpose. Further, the formation of an agency must meet two requirements: The principal must not be a minor or be incompetent; likewise, the agent cannot be a minor or be incompetent.  If these basic requirements are met, an agency relationship may be created in any of four ways: 1) by agreement; 2) by implied authority; 3) by estoppel (called apparent agency) or 4) by ratification. The agency contract is not required to be found in writing, unless a provision of the Statute of Frauds stipulates that the contract must be written—for example, a real estate broker’s contract to sell real property. The contract need not follow any special format, or even involve payment to the agent.

Agency By Agreement

The relationship that is created pursuant to a written or oral contract is termed an agency by agreement or an express agency, under which the principal gives the agent the authority to act on his or her behalf.  If the principal does not hire an additional party to carry out the same or similar duties, the principal and agent have formed an exclusive agency contract.
A specific legal document, called a power of attorney, gives an agent the power to sign legal documents on behalf of the principal.  A power of attorney creates an agency relationship.  A power of attorney may be general or special.  A general power of attorney is very broad in the authority it gives to the agent.  A special power of attorney gives an agent limited powers to act in specific ways for specific purposes or for a specified period of time as enumerated in the document creating the agency relationship.  The agent is called an attorney-in-fact, although the agent does not have to be an attorney.
A special type of a power of attorney, called a “medical power of attorney” or “advance directive,” is commonly used in relation to health care matters.  If the principal is unable to make health-related decisions, the agent will have the legal power to act on his or her behalf.

Agency By Implied Authority

An agency relationship can also be created by the conduct of the parties, similar to the creation of an implied-in-fact contract.  The specific circumstances surrounding the relationship determine the extent to which an agent may conduct business on behalf of the principal.  In general, an agency by implied authority may not conflict with an agency by agreement.  Courts will permit an agent to receive payments owed to the principal, hire and discharge employees, buy equipment and supplies, and enter into contracts.  Case law demonstrates how far various courts will allow implied authority to stretch.  If the express agency does not provide sufficient details to cover the many contingencies that might arise during the course of the agency relationship, the agent is said to possess certain implied authority to act on behalf of the principal.  This implied authority is referred to as incidental authority.  In addition, under certain circumstances where the agent is unable to contact the principal for specific instructions, the agent has implied emergency authority to take “all reasonable actions to protect the principal’s property and rights.”

Case Study

Helene A. Gordon Et Al, v. Andrew Tobias

Supreme Court Of Connecticut, 262 CONN. 844; 817 A.2D 683 (2003)

Plaintiff landowners filed an action to quiet title on the subject property in their favor. The Superior Court in the Judicial District of New Haven (Connecticut) entered judgment for the landowners after finding that payments made to the original mortgagee on the property constituted payment to defendant assignee, and consequently discharged the landowners’ obligation under the mortgage. The assignee appealed.
The landowners purchased a condominium subject to a mortgage in favor of the original mortgagee. The mortgage was later assigned, but the landowners continued to make payments to the original mortgagee. The original mortgagee received full payment from the landowners but continued to make periodic payments to the assignee until the original mortgagee’s president died, after which the assignee refused to release the mortgage. On appeal, the assignee claimed that there was insufficient evidence in the record to support the trial court’s finding that the original mortgagee was an agent of the assignee for the purposes of collecting payments on the mortgage that he held on the subject property. The supreme court held that the trial court properly found that the mortgagee had apparent authority to collect the mortgage payment due on the mortgage held by the assignee. The assignee collected payments for more than two years knowing that the loan had matured, yet he neither objected to nor demanded full payment on the amount due. Rather, the assignee requested invocation of a higher interest rate to provide the landowners incentive to pay off the loan.

The trial court’s judgment was affirmed.
Regarding whether the agency relationship that was created was an implied agency, the court stated, “Implied authority is actual authority circumstantially proved. It is the authority which the principal intended his agent to possess. . . Implied authority is a fact to be proven by deductions or inferences from the manifestations of consent of the principal and from the acts of the principal and [the] agent.” Connecticut National Bank v. Giacomi, 242 Conn. 17, 70, 699 A.2d 101 (1997). The court found that the defendant had authorized Mutual to collect monthly payments on the note secured by the mortgage on the plaintiffs’ property and remit those payments to him. The court stated, “Apparent authority is that semblance of authority which a principal, through his own acts or inadvertences, causes or allows third persons to believe his agent possesses. . . Consequently, apparent authority is to be determined, not by the agent’s own acts, but by the acts of the agent’s principal. . . The issue of apparent authority is one of fact to be determined based on two criteria. . . First, it must appear from the principal’s conduct that the principal held the agent out as possessing sufficient authority to embrace the act in question, or knowingly permitted [the agent] to act as having such authority. . . Second, the party dealing with the agent must have, acting in good faith, reasonably believed, under all the circumstances, that the agent had the necessary authority to bind the principal to the agent’s action”  Tomlinson v. Board of Education, 226 Conn. 704, 734-35, 629 A.2d 333 (1993).

Agency By Estoppel (Apparent Agency)

Agency by estoppel or apparent agency arises when the principal creates the “appearance of an agency” that in actuality does not exist in fact.  When an apparent agency is created, the principal will be estopped from denying the existence of the agency relationship and will be bound to any contracts entered by the apparent agent while acting within the scope of the apparent agency.

Case Study

Robert M. Bailey v. Richard Worton D/B/A Worton Asphalt & Paving

752 SO.2D 470 (2000)

Procedural Posture:
Appellant developer appealed from ruling of the DeSoto County (Mississippi) Chancery Court deeming appellee’s construction lien enforceable against appellant on grounds appellant’s agent had the apparent authority to act for appellant in dealings with appellee.
Appellant developer, Bailey, hired general contractor Ray and Associates to build and sell a house on appellant’s property (with the proceeds divided between them); in the course of building the house, the contractor hired appellee, Worton – an asphalt company – to pave the driveway. When financial problems resulted in the contractor being unable to pay appellee for services rendered, appellee (Worton) sought and was granted a construction lien on appellant’s property. Appellant objected, arguing he had not entered into any agreement with appellee, but to no avail in trial court. On appeal, the state intermediate appellate court affirmed; the court reasoned that application of three-prong test for an agent’s apparent authority – acts or conduct of the principal indicating the agent’s authority, reliance thereon by a third person, and a change of position by the third person to his detriment – showed that contractor, Ray Associates, appeared to be acting on appellant’s behalf, and thus his (Ray’s) contract with appellee bound appellant.

Judgment affirmed; application of three-prong test governing apparent authority by an agent established that appellant was bound by agent’s agreement with appellee, and thus was liable for payment.
The court noted, looking at the facts in a light most favorable to the decision of the court below, it is not unreasonable to conclude that Worton relied on Ray and no one else because of her apparent authority. So far as third persons are concerned, the apparent powers of an agent are his real powers. The power of an agent to bind his principal is not limited to the authority actually conferred upon the agent, but the principal is bound if the conduct of the principal is such that persons of reasonable prudence, ordinarily familiar with business practices, dealing with the agent might rightfully believe the agent to have the power he assumes to have. The agent’s authority as to those with whom he deals is what it reasonably appears to be. Where the relationship of principal and agent exists, if the principal places his agent in a position where he appears, with reasonable certainty, to be acting for the principal, and his acts are within the apparent scope of his authority, such acts bind the principal. On principles of estoppel, a principal, having clothed an agent with semblance of authority, will not be permitted, after others have been led to act in reliance on appearances thus produce, to deny, to the prejudice of such others, what he has theretofore tacitly affirmed as to the agent’s powers. Where an agent, with the knowledge and consent of his principal, holds himself out as having certain powers and transacts business with a third person, the principal is estopped from denying the authority of the agent. Under Mississippi agency law, a principal is bound by the actions of its agent within the scope of that agent’s real or apparent authority. Finding no error, we affirm the judgment of the chancellor.

Agency By Ratification

In a case where a person misrepresents him or herself to be an agent when in fact he or she is not, and the purported principal later accepts the benefits of or ratifies the unauthorized acts, the principal is said to have ratified the agency relationship.  The ratification is tantamount to the principal authorizing the agent’s acts on the principal’s behalf in the first instance.  In order for ratification to occur, the principal must have complete knowledge of the agent’s action.  In addition, at the time the agent’s unauthorized acts occur, the third party with whom the agent dealt must know of the existence of the principal.

Duties Created by the Agency Relationship

Extensive case law on the subject and the Restatement 3rd of Agency recognize that an agency relationship creates duties, or legal obligations, on the part of both the principal and the agent.  If either the principal or the agent breaches the agency agreement, the non-breaching party can sue to enforce these duties, seek monetary damages for breach of the agreement, or seek suitable remedies in a Court of Equity.

Duties Of An Agent To A Principal

An agent owes certain duties to the principal.  The duties of the agent to the principal may be set forth in the agency agreement itself or may be implied by law.  On the most basic level, the agent has a duty to notify the principal of information that the agent learns from a third party or from another source that will help effect the purposes of the relationship.  This is known as the duty of notification.
An agent owes the principal certain duties of performance in which the agent must meet the standards of “reasonable care, skill, competence, and diligence.”  An agent who does not perform his or her express duties, or who fails to exercise the standard of care, diligence, and skill, or who acts in a negligent or intentional manner will be liable to the principal for breach of the agency contract.
The primary duty the agent owes the principal arises from the agent’s fiduciary duty to act loyally for the principal’s benefit in all matters connected to the agency relationship and not to act adversely to the interests of the principal.
An agent might breach this duty of loyalty by acting in the following ways:
  • Undisclosed self-dealing;
  • Usurping an obligation that belongs to the principal;
  • Competing with the principal without the consent of the principal during the course of the agency relationship;
  • Improperly disclosing or misusing confidential information;
  • Engaging in a dual agency relationship without consent of all parties.
In normal circumstances, the agent owes a duty to the principal to maintain a complete and accurate record of all transactions undertaken on behalf of the principal.  This is referred to as the duty of accountability, which encompasses the following:
  • Keeping records of all property and money received and expended during the course of the agency relationship;
  • Maintaining a separate account (no commingling) for the principal; and
  • Using the property of the principal is a manner authorized by the agency contract.
If an agent breaches the agency agreement, the principal may seek monetary damages, including asking a court to impose a constructive trust on any profits the agent earned as a breach of the duty of loyalty.  A principal may also seek to rescind a transaction entered into with third parties because of the breach of loyalty by an agent.

Case Summary

Carl Shen v. Leo A. Daly Company

222 F.3D 472 (2000)
Carl Shen, was a former employee and designated agent of Leo A. Daly Company’s (Daly) Republic of China (Taiwan) office. When Daly refused to pay taxes assessed by the Taiwanese government, the government restricted Shen’s travel, forbidding him from leaving the country. Shen then sued Daly on multiple theories of liability for damages and injunctive relief. Shen prevailed in part in the district court. Both he and Daly appeal the judgment. We affirm in part and reverse in part.
Shen, a United States citizen with dual Taiwanese citizenship moved to Taiwan in 1989 to become managing director of Daly’s operation there. To conduct business in Taiwan, Daly was required to designate a “responsible person,” or legal representative in the country, and Shen was so designated. In November 1992, Daly decided to withdraw from Taiwan because of business setbacks. As a result, Daly terminated Shen, but Shen chose to remain in Taiwan. Daly, however, failed to remove Shen as its responsible person and failed to inform Shen that he was still registered as the company agent.
In December 1993, Shen received a notice from the Taiwan Tax Authority that it wanted to audit Daly’s 1992 Taiwan tax returns. Shen, in turn, notified Daly’s accounting firm in Taiwan and informed them he was concerned he could be held responsible for any deficiency because his “chop,” the Taiwanese equivalent of a signature, was affixed to the returns. Daly responded that it was “inconceivable” any tax could be owed because Daly had suffered large losses in Taiwan. In January 1994 through mid-October 1995, Shen requested Daly to indemnify him should the Taiwan Tax Authority impose the tax liability on him directly, to resolve the tax dispute and remove him as the responsible person. In May 1994, the Taiwan Tax Authority assessed a tax liability of approximately $80,000 against Daly for 1991 and 1992. Daly did not appeal the assessment, and it became final in June 1995. In October 1995, the Taiwan Ministry of Finance and the Bureau of Entry and Exit forbid Shen from leaving the country until resolution of the Daly tax issue. Daly’s attempt to extricate Shen through diplomatic channels failed. Shen sued for a declaratory judgment in Taiwan to remove himself as Daly’s responsible person. Although the court recognized Shen was no longer an employee of Daly, it denied relief because Daly had not replaced him as the responsible person. The Ministry of Finance also denied an appeal by Shen.
In 1997, Shen sued Daly in the United States District Court for the District of Nebraska. He requested a preliminary injunction to force Daly to pay the taxes. The district court entered such an injunction on December 31, 1997. We assume Daly then paid the taxes because Taiwan lifted the travel restriction. The district court held a bench trial in February 1999 on the issue of a permanent injunction and damages. The district court found a violation of the implied covenant of good faith and fair dealing and granted a permanent injunction. Shen was also awarded attorney’s fees and $4,760 in damages on his contractual claims. Both sides now appeal and we affirm in part and reverse in part.
The district court held that Daly breached the implied covenant of good faith and fair dealing based on the agency relationship between Daly and Shen. We agree. Under Nebraska law, whether a person is an agent is a question of fact. The existence of an agency relationship does not depend on the terminology the parties use to characterize their relationship, but depends on the facts underlying the relationship. An agency relationship can be implied from words, conduct or circumstances that evidence an intent to create on. For example, under agency principles, an agent can be given apparent or ostensible authority to act if the “alleged principal affirmatively, intentionally, or by lack of ordinary care causes third persons to act upon the apparent authority.” That is what happened in this case. After Daly terminated Shen in December 1992, Daly did not remove Shen as its responsible person. 
A principal and an agent are in a fiduciary relationship. Because of the fiduciary relationship, the principal owes the agent a duty of good faith and fair dealing in the incidents of their relationship. Moreover, “‘[c]orrelative with the duties of the agent to serve loyally and obediently are the principal’s duties of compensation, indemnity, and protection.’ ” Daly breached its duty as a fiduciary in the following ways:  (1) Daly did not pay the tax when it was assessed; (2) it chose not to appeal the assessment through proper channels; and (3) Daly did not find a replacement for Shen as responsible person.

Duties Of A Principal To An Agent

The principal likewise owes duties to an agent arising either from the agency contract or which are implied by law.  These duties include:
  • A duty to cooperate and to deal with the agent fairly and in good faith;
  • A duty to provide the agent with information about risks of physical harm or pecuniary loss that the principal knows, has reason to know, or should know are present in the agent’s work, but which are unknown to the agent.
  • A duty to compensate the agent for services provided either according to the terms of the agency contract or, in the absence of an express agreement, a customary fee ordinarily paid, reflecting the reasonable value of the agent’s services based on a theory of quantum meruit;
  • A duty to reimburse the agent for all expenses, provided they were authorized by the principal, were incurred “within the scope of the agency relationship,” and were necessary to carry out the purpose of the agency relationship;
  • A duty to indemnify the agent for any losses the agent might suffer because of the actions of the principal.

Principal And Agent – Liability To Third Parties

Liability For Contracts

A major purpose of the agency relationship is to provide a principal with the means to conduct or perhaps expand their business dealings.  An agent is authorized to contact third parties on behalf of their principal, enter into contracts on behalf of the principal with third parties, and figuratively put the principal in several places at one time.
While generally a principal who authorizes an agent to enter into a contract with a third party is liable on the contract, the agent may be held liable on the contract under certain circumstances, depending upon whether the agency is classified as fully disclosed, partially disclosed, or undisclosed.  The status of the principal will determine the extent of any liability.
A disclosed principal is one whose identity a third party knows at the time he or she enters into an agreement; i.e., the third party knows the agent with whom he or she is dealing is acting on behalf of a known principal.  A disclosed principal operates in a fully disclosed agency.  In a fully disclosed agency, the contract is between the principal and the third party; thus, the fully disclosed principal and not the agent is liable on the contract unless the agent has guaranteed that the principal will perform on the contract in what is sometimes known as a suretyship.
A partially disclosed principal is an individual whose identity is unknown to the third party at the time an agreement is reached; however, the third party does know the agent is representing some principal.  A partially disclosed principal operates in a partially disclosed agency.  Under Section 321 of the Restatement (Second) of Agency, in a partially disclosed agency, both the principal and the agent are liable on third-party contracts.  In this case, the third party is relying on the reputation, integrity and credit of the agent because the principal is unidentified.  If an agent is required to “pay on the contract,” the agent can seek indemnification from the principal.
An undisclosed principal operates in an agency relationship when a third party is unaware of either the existence of the agency or the identity of the principal.  An undisclosed principal operates in an undisclosed agency.  In an undisclosed agency, both the principal and the agent are liable on the contract with a third party.  In essence, by not divulging that he or she is acting as an agent, the agent has become a principal to the contract.  The third party is essentially relying exclusively on the reputation and credit of the agent in entering into the contract.  However, should an agent be held liable and be required to “pay on the contract,” the agent can seek indemnification from the principal.

Tort Liability

In general, the principal and the agent are each personally liable for their own tortuous conduct.  However, a principal may be held liable for the negligent or intentional acts their agent if the actions of the agent are committed within the scope of the agent’s employment under a doctrine known as Respondeat Superior, providing for what is termed as vicarious liability.
The following are factors a court will employ in order to determine whether an agent’s conduct occurred “within the scope of employment”:
  • Was the act specifically requested or authorized by the principal?
  • Was the act the kind of act that the agent was employed to perform?
  • Did the act occur substantially within the time period of employment authorized by the principal?
  • Did the act take place substantially within the location of employment authorized by the principal?
  • Was the agent “advancing the principal’s purpose” when the act took place?
In analyzing these factors, Restatement Third of Agency Sec. 7.07 provides the following practical guidelines:
“the extent of control that the agent and the principal have agreed the principal may exercise over details of the work; whether the agent is engaged in a distinct occupation or business; whether the type of work done by the agent is customarily done under a principal’s direction or without supervision; the skill required in the agent’s occupation; whether the agent or the principal supplies the tools and other instrumentalities required for the work and the place in which to perform it; the length of time during which the agent is engaged by a principal; whether the agent is paid by the job or by the time worked; whether the agent’s work is part of the principal’s regular business; whether the principal and the agent believe that they are creating an employment relationship; and whether the principal is or is not in business.  Also relevant is the extent of control that the principal has exercised in practice over the details of the agent’s work.”
Joe, a mechanic for ABC Transmissions, owned by Mr. Carville, goes to Bob’s house on behalf of Mr. Carville to pick up Bob’s car and return it to the shop.  On the way back to the shop, Joe stops at a bar, has two drinks and then hits another car parked legally in the bar’s parking lot.  Bob sues ABC Transmissions and Joe for damages to his car.  Are either or both ABC Transmissions and Bob liable?
Joe, while on a sales trip to South Dakota for his employer, ABC Transmission, gets into a car accident when he stops at Mount Rushmore to sightsee.   Might either or both ABC Transmissions liable under these circumstances?  Might a court apply what is known as the “frolic and detour” doctrine to determine liability?  

Criminal Liability

A principal is not generally liable for the criminal conduct of an agent for such crimes as murder, robbery, bribery, etc.  It may be too difficult or even impossible to prove the requisite intent (“mens rea”) on the part of a principal.  Several exceptions exist.  If a principal participates directly in an agent’s crime, or if a principal knows or has reason to know his agent or employee is violating a law, the principal may incur criminal liability as an abettor to the criminal activity.  Several environmental statutes or actions under the Foreign Corrupt Practices Act have provided for the criminal responsibility of “responsible parties” under limited circumstances as a matter of public policy.

Termination Of An Agency Relationship

The agency relationship may end in two ways, by agreement or by operation of law.

Termination by Agreement

Either a principal or an agent may terminate the agency relationship. Termination may occur mutually by agreement; upon notice by either the principal or the agent to the other party; upon expiration (lapse) of the time period stated in the agency agreement time; or upon completion of the purpose of the agency relationship.  When the relationship is terminated, the principal should provide actual notice to all third parties who dealt with the agent that the termination has occurred.  Constructive notice may be provided to other parties by placing appropriate advertisements in publications located where the agency relationship operated; or otherwise providing notice to “the world” that the agency relationship was terminated by appropriate means.

Termination By Operation Of Law

An agency relationship may also be terminated by operation of law.  Circumstances include the death of either the principal or agent; insanity of either the principal or the agent; bankruptcy of the principal; impossibility of performance of the agency relationship (such as through a change in the law; absence of qualification through a failure to obtain a regulatory-type license required to perform duties or the revocation of a required regulatory license; or the loss or destruction of the subject matter of the relationship); and the outbreak of war, where the principal or agent is located in a nation at war and where the agent’s country terminates the agency relationship between the parties.
Certain types of agency relationships created for the benefit of an agent are termed “an agency coupled with an interest.”  An “agency coupled with an interest” typically occurs in a security interest to secure a loan.  The principal may not legally terminate the agency relationship during the term of the agency relationship without the consent of the agent if the agent has provided the security (funding) to effectuate the loan.  Should the principal terminate the agency unlawfully, the principal may be required to pay damages to an agent that has been wrongfully terminated.

Ethical Considerations

Limiting Compensation
In the arena of sports, agents are often limited in their compensation to an amount determined by the League’s collective bargaining agreement. At the same time, a lawyer’s compensation may be four to five times higher. Should a collective bargaining agreement between players and their sports league have the ability to limit the compensation of a sports agent who is not a party to that agreement?
Maria Aripova runs a dance studio and frequently acts as an agent for booking recitals in the field of modern dance. She has two “up-and-coming” dancers in her studio. Should Maria be permitted to represent both dancers at the same time even though their interest may be quite different and even adverse on occasion? Upon what showing?


  1. How is an agency relationship created?
  2. Explain the legal principle of agency by estoppel.
  3. What are the duties of a principal to an agent? An agent to a principal?
  4. Under what circumstances might an agent be liable to a third party?
  5. What is the difference between a disclosed and undisclosed principal?
  6. Describe how an agency relationship may terminate or be terminated?
  7. Give an example of an “agency coupled with an interest.”
  8. Research Questions
  9. What is an independent contractor?
  10. What is CERCLA?
  11. What are the two most important aspects of the Foreign Corrupt Practices Act?

Chapter Fifteen | Sole Proprietorships and Partnerships


When deciding to create a business, the founder(s) must consider the purpose of the business and its short-term and long-term goals. Immediate issues for consideration when analyzing the different types of business organizations include ease of formation, management control, taxation, legal liability, ability to raise capital, governmental rules, transferability of ownership, and termination. Understanding the goals of the business will help the founder(s) determine which type of business organization to choose. Business organization choices in the United States include sole proprietorships, general partnerships, limited partnerships, limited liability partnerships, C-corporations, Sub-S corporations, and limited liability companies. Understanding and analyzing the advantages and disadvantages of each type of organization will help the business organizers to determine which type of organization is the best for their business.

Sole Proprietorships

The simplest form of business organization is a sole proprietorship. A sole proprietorship is the oldest and most traditional means to create a business in the United States. As its name implies, individuals, or sole proprietors, who wish to own and run a business by themselves will select this form of business organization. The sole proprietorship is merely an extension of its owner. No one else owns any part of the business. The sole proprietor has complete managerial authority and may employ as many individuals as are needed to run the business. Businesses that commonly choose this form of organization are retail establishments, service businesses, and those businesses involved in agriculture. In most states, a husband and wife may operate a sole proprietorship together, but will be considered as a single owner for legal and accounting purposes.


A sole proprietorship is not a separate business entity, but rather, it is an extension of its owner. Few legal requirements exist to establish a sole proprietorship, and those that do exist are not complicated. However, in most states if an individual is “doing business as” or “d/b/a” (ex: Edward Barnes d/b/a Ed’s Auto Body Shop), in a name other than his own (called a trade name), he or she must file a disclosure form with the proper state authority to identify that party as the owner of the business. For example, if a creditor sues Ed’s Auto Body Shop, owned by Edward Barnes, the creditor addresses the complaint to “Edward Barnes, d/b/a Ed’s Auto Body Shop.” Further, certain types of businesses and businesses hiring employees may be required to obtain special licenses or follow other legal or regulatory requirements. For example, a delicatessen must obtain a special operating license and adhere to strict health code laws. If a sole proprietorship hires employees, the Internal Revenue Service will issue an employer identification (EIN) number in order to have the income and social security taxes withheld from the employees’ wages properly credited. The owner will also be required to follow state laws regarding workers’ compensation and unemployment insurance. These general requirements are not specific to sole proprietorships alone; they apply to other business entities as well.


A sole proprietorship accounts for business income and expenses on Federal Schedule C, the individual’s federal tax return (the 1040), and on the appropriate state income tax return. In addition, the sole proprietor is required to file Federal Schedule SE (self-employment tax) if the proprietorship makes a profit over the threshold amount.


A proprietorship will be terminated when the proprietor closes the business, sells the business, or upon the death, insanity, or bankruptcy of the proprietor.


The creation of a sole proprietorship is a simple and inexpensive process. A sole proprietor normally will not have to pay any large fees for organizing his or her business as a sole proprietorship. The owner (proprietor) makes all the decisions and retains all profits accruing to the business. The net earnings are taxable as personal income and not subject to the corporate income tax. A sole proprietor may freely sell the business—including inventory and the good will of the business—to another individual. However, because a sole proprietorship is merely an extension of the individual owner, the sole proprietorship itself cannot be transferred from one person to another. The buyer must create his or her own form of business in order to conduct the business that has been transferred.


As a sole proprietorship is not a separate legal entity from the proprietor, it cannot sue or be sued in its own name. As such, the primary negative aspect of a sole proprietorship is the liability assumed by the owner. Liability is complete and unlimited. The proprietor is personally liable for all of the obligations and debts of the business. If the assets of the business are not sufficient to pay the claims of creditors, creditors may seek payment directly from the owner’s personal assets. Therefore, the sole proprietor risks insolvency and may be exposed to personal bankruptcy. On the other hand, the proprietor must sue those who have caused damage to the proprietorship or who are debtors of the proprietorship in his or her own name.

The sole proprietor may be limited with regard to raising capital to run his or her business. Without any partners or the ability to sell ownership interests in the business, the sole proprietor’s capital is limited to available cash and assets, and the ability to obtain a business loan based upon the sole proprietor’s credit worthiness.

The sole proprietor who hires employees may be responsible for the torts or other wrongful acts of employees committed in the course of their employment. The proprietor is also liable for contracts entered into by an employee who has the authority to do so. The rules of agency apply in these situations. The legal theory termed Respondeat superior is used to determine the legal liability of a sole proprietor for the torts of an employee committed “within the scope of employment.”

A proprietor may argue that the tortuous act should not be imputed to him or her because the employee is an independent contractor. An independent contractor controls his or her own “methods and means” of work and does not work under the control of the proprietor. The employer may also claim that the employee was pursuing his or her own business or personal interests, under the “independent frolic” doctrine. Even if a court agrees that the employee was an independent contractor, the proprietor may still be held liable in his or her own right under a separate theory of “negligent selection” or “negligent hiring,” as where the employer fails to check employment records, or because the duty was “non-delegable.”


The Uniform Partnership Act (UPA) or the Revised Uniform Partnership Act of 1997 (RUPA) defines a partnership as “the association of two or more persons to carry on as co-owners of a business for profit.” The UPA and RUPA have been adopted by the majority of states and provide the basic law applicable to partnerships. The RUPA is composed of a set of rules that will apply to a partnership unless the partnership agreement states a provision contrary to that stated in the Act.

Essentially, a partnership requires that individuals will pool capital resources or professional talents in order to obtain a profit. For this purpose, a “person” may include a natural person, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision, agency, instrumentality, or any other legal or commercial entity.

Law, architectural, engineering, and accounting firms, as well as medical associations, will frequently operate as partnerships; however, a trend is emerging for such businesses to incorporate as professional corporations or to become limited liability partnerships, or limited liability companies. Retail and service businesses may use the partnership form, as well as many individuals who intend to hold and manage real property together. When discussing partnerships, it is important to differentiate among various types of partnerships: the general partnership, the limited partnership and the limited liability partnership. Partnerships may be “at-will,” established for an indefinite period of time; but if a partnership is established for a definite period of time or for a particular undertaking, there must be clear evidence of the intent of the partners to limit the time period or purpose of the partnership

Attributes of a General Partnership

The UPA defines a partnership as an “association.” Implicit in this concept is the voluntary nature of this business form. Therefore, a partnership is created by consent of the parties and is usually formed by executing a contract called the partnership agreement or “Articles of Partnership.” In some states, the partnership is treated as a distinct entity; for others, the partners are treated as individuals. In the former case, a partnership may buy, sell, and own property in the partnership’s name and the partnership will file a federal income tax return (the 1065) for informational purposes in its own name to account for the income generated. At common law, a suit could never be brought by or against a partnership in its own name; each partner had to sue or be sued. However, while this principle is still generally true, many states now provide that a partnership can be treated as an entity for purposes of suing others or for being sued or for filing bankruptcy. State law must be consulted on this important matter.

A basic element of the partnership form requires partners to carry on as co-owners of the business. This is demonstrated by sharing profits, joint ownership of property, making contributions of capital to the business, and joint participation in management decision-making. Each partner is also an agent of the partnership. Finally, the partnership must be formed for the purpose of making a profit. Therefore, businesses formed for religious, charitable, or fraternal purposes may not be a partnership. The RUPA also establishes broader protective measures for limited liability partners. Limited partnerships are not governed by the RUPA; rather, the provisions of the Revised Uniform Limited Partnership Act (RULPA) ally to these entities. Limited partnerships are discussed later in this chapter.

Formation of a Partnership

A partnership may be formed by the voluntary actions or agreement of the parties or implied by the conduct of the parties. The establishment of a partnership by voluntary means is usually most desirable because the rights and liabilities of each partner are best protected by specific agreement of the parties, found in the Articles of Partnership.  


Case Summary

Reilly v. Meffe

6 F. Supp. 3d 760 (S.D. Ohio 2014)


The Plaintiff, Brian Reilly, is a principal in the company Transact Partners International LLC (Transact). *** The Defendants, Domenick Meffe and Richard Hoffman, are principals in the company Wellington Resources LLC (Wellington). On January 31, 2011, Wellington and Transact, non-parties in the present suit, executed a co-brokerage agreement that promised Transact 2% of the total transaction price of the sale of Beck Energy Corporation assets if Transact identified and presented a successful buyer of those assets. Transact successfully procured a buyer for the Beck Energy assets.

Following the success of this transaction, the business relationship between Reilly, Meffe, and Hoffman (the parties) developed through the exchange of industry information and contacts. On May 31, 2011, the parties discussed creating a more formal partnership in which they would split profits from any transaction equally between the three members. The parties allegedly confirmed the partnership agreement through an exchange of e-mails.

After May 2011, the alleged partnership executed a number of business transactions involving the sale of oil and gas rights throughout Ohio. The Plaintiff worked to market the partnership deals among his industry contacts. During the course of 2011, the Plaintiff marketed twelve deals on behalf of the alleged partnership. Meanwhile, the Defendants solicited oil and gas leases from leaseholders and executed the sale of oil and gas leases owned by the alleged partnership. From May through November 2011, Defendant Meffe and the Plaintiff were in contact on a daily basis. All three members of the alleged partnership met in person or held conference calls at least twice a week to discuss partnership business and to calculate prospective profits that would be distributed to each member of the alleged partnership.

The alleged partnership’s first transaction involved the transfer of oil and gas rights for land in the City of Girard, Ohio. On November 26, 2011, the net proceeds from the transaction were split three ways between the parties. In the fall of 2011, the Defendants purchased oil and gas rights to approximately 4,400 acres of land in Monroe County, Ohio (the Massey Assets) from an Ohio limited liability company. The Plaintiff then marketed the Massey Assets and a number of smaller leases in Belmont County (the Belmont Assets) to a variety of oil and gas companies.

On December 19, 2011, the Defendants conveyed the Massey Assets to XTO/EXXON without notice to the Plaintiff. The sale of the Monroe County leases resulted in a profit of $7,321,107.00 for the alleged partnership. Also in late 2011, the Defendants sold the Belmont Assets without notice to the Plaintiff. The sale of the Belmont Assets resulted in a profit in excess of $600,000.00 for the alleged partnership. The Defendants did not split the profits from the sale of the Massey Assets or the Belmont Assets with the Plaintiff. After learning of the closing of the Massey Assets in January 2012, the Plaintiff confronted the Defendants regarding the distribution of the alleged partnership’s profits. Defendant Meffe informed the Plaintiff that he would not be paid a partnership share, which Defendant Meffe’s counsel subsequently confirmed after discussions with the Plaintiff.

On July 29, 2013, the Plaintiff filed a six count Complaint (doc. 2) against the Defendants alleging: (1) Breach of Contract; (2) Breach of Fiduciary Duty; (3) Conversion; (4) Intentional and/or Fraudulent Nondisclosure; (5) Unjust Enrichment; and (6) Accounting. In lieu of an Answer, the Defendants have filed multiple Motions to Dismiss. The Defendants move to dismiss the Complaint, arguing that: (1) the Plaintiff’s Complaint fails to state a viable partnership claim against the Defendants; (2) in the alternative, the present lawsuit is covered by a private arbitration agreement; and (3) in the alternative, the Southern District of Ohio is an improper venue for the present action.


The Defendants argue that the Plaintiff’s allegations are insufficient to establish a viable partnership claim under Ohio law. According to the Defendants, the Plaintiff has no written partnership agreement with them. In their view, the e-mails attached to the Plaintiff’s Complaint demonstrate “something far short of a ‘formal partnership’ document and only underscore *** the absence of any meeting of the minds on the essential terms of the alleged partnership agreement.”

The Defendants also maintain that the parties’ course of conduct demonstrates the lack of a partnership agreement—the parties did not share profits, did not have mutuality of agency, did not have joint ownership of property, and were not treated as a partnership for tax purposes. Therefore, the Defendants conclude that the Plaintiff has failed to state a claim upon which relief may be granted.

In response, the Plaintiff asserts that the Defendants misrepresent Ohio partnership law. The Plaintiff cites the parties’ e-mails as evidence demonstrating the intent of the parties to form the alleged partnership. According to the Plaintiff, after the May 31, 2011 e-mail exchange, the parties “actively worked together on over a dozen deals for the next six months, never questioning the terms of the partnership up to and after the first consummated deal.”

The Court is not persuaded by the Defendants’ arguments. Under Ohio law, a partnership is “an association of two or more persons to carry on as co-owners a business for-profit formed under section 1776.22 of the Revised Code, a predecessor law, or a comparable law of another jurisdiction.” Section 1776.22 provides “any association of two or more persons to carry on as co-owners a business for-profit forms a partnership, whether or not the persons intend to form a partnership.” A partnership agreement is “[an] agreement among the partners concerning the partnership, whether written, oral, or implied.”

Courts consider a number of factors in determining the existence of a partnership, including: the sharing of profits, “the existence of a written or oral partnership agreement; the joint ownership and control of property; the ability of members to bind the business entity; and the nature of the tax returns filed by the business entity.” *** However, “‘[s]ince every business relationship is unique, no single fact or circumstance can operate as a conclusive test for the existence of a partnership,’ particularly when the parties have dealt casually with each other.”

Although the Defendants emphasize that there is no written partnership agreement in this instance, under Ohio law, a partnership agreement is not required to be in writing. *** (defining a partnership agreement as “[an] agreement among the partners concerning the partnership, whether written, oral, or implied.”).

The Defendants’ better argument is that the Plaintiff has failed to allege sufficient facts demonstrating a “meeting of the minds” and that therefore no partnership was formed between the parties. According to the Defendants, the Plaintiff’s Complaint and the e-mails attached as exhibits to the Complaint demonstrate the vague nature of any alleged partnership discussions between the parties. The Defendants point out that the parties “‘discussed forming a more formal partnership’—suggesting some future action to be performed in the future, which would be formalized.” *** Although the Plaintiff alleges that the parties confirmed their oral agreement through the exchange of written e-mails, the Defendants maintain that these e-mails “underscore *** the absence of any meetings of the minds on the essential terms of the alleged partnership agreement.” The Defendants note that Defendant Meffe’s e-mail referred to an agreement “between [the parties’] respective companies.” In contrast, the Defendants observe, the Plaintiff’s response referred to an agreement concerning a single transaction related to the Jefferson County leases and purportedly between the parties as individuals, rather than their companies. Based on this comparison, the Defendants contend that the parties did not agree to the essential terms of the alleged partnership agreement.

If the Plaintiff’s Complaint only included allegations of the May 31, 2011 phone call and e-mails, the Court would be inclined to agree with the Defendants’ conclusion. The Plaintiff alleges that on May 31, 2011, the Defendants called him and proposed forming a partnership and splitting the profits from that partnership equally. Although the splitting of profits is indicative of a partnership, ***, from the Plaintiff’s account of the phone call it does not appear that the parties agreed to other essential terms of the alleged partnership agreement.

The e-mails between the parties are similarly ambiguous. Shortly after the phone conversation on May 31, Defendant Meffe e-mailed the Plaintiff, stating, “Bryan [the Plaintiff], list of names which you will need to understand the map. Should we have an agreement between our respective companies?” Exhibit C at 2, doc. 18-3. The Plaintiff responded, “Dom, Rick [the Defendants]: This e-mail is to confirm our understanding that we intend to split the profits on this transaction (Jefferson County leases) equally 3 ways between us — Thanks — Brian.” While Defendant Meffe referred to an agreement between the parties’ companies (Wellington and Transact), the Plaintiff’s response purported to confirm an agreement to work together as individuals to complete a single transaction (the sale of Jefferson County leases) and split the profits equally. In short, the Plaintiff’s allegations concerning the May 31 phone call and the e-mail suggest a general intent to have an agreement between the parties, but the essential terms of that agreement are unclear based on the May 31, 2011 telephone call and e-mails.***

*** Nonetheless, as alleged by the Plaintiff, the parties’ course of conduct following May 31, 2011 is sufficient to demonstrate a “meeting of the minds” between the parties and to support the existence of an implied partnership agreement. *** (“A court may find an implied partnership from the totality of attendant facts and circumstances”). Under Ohio law, “‘[a] court can properly find a partnership exists from evidence that there has been a sharing of net profits from a continuing business operated by two or more persons, where each is capable of binding the business entity.'” *** Here, the Plaintiff explicitly alleges that, after six months of working together to buy, market, and sell oil and gas leases throughout Eastern Ohio, the parties split the profits from the City of Girard transaction. Significantly, “[a] person who receives a share of the profits of a business is presumed to be a partner in the business[.]”***

***Further, as alleged by the Plaintiff, the totality of facts and circumstances support a finding that the Plaintiff was a co-owner of a continuing business with the Defendants. Construing the Complaint in the light most favorable to the Plaintiff and accepting all well-pleaded material allegations in the Complaint as true as the Court must *** the parties worked together from June through December 2011 to buy, market, and sell oil and gas rights in Eastern Ohio. The parties communicated with one another on a daily basis to discuss potential business deals and to calculate prospective profits from those deals. While the Defendants bought and sold the actual oil and gas leases, the Plaintiff (1) marketed at least twelve oil and gas deals to various energy companies, (2) secured buyers for approximately eight of those deals, and (3) obtained multiple letters of intent from buyers on behalf of the alleged partnership. Most significantly, as the Plaintiff became more active in the alleged partnership, “[the Defendants] had very little or no direct contact with the leaseholders as [the Plaintiff] increasingly handled both sides of the transactions directly.” Drawing all reasonable inferences in favor of the Plaintiff, the Plaintiff’s conduct as described above, particularly handling both sides of various transactions, was consistent with that of a co-owner of a business.

The Court concludes that the Plaintiff has alleged sufficient facts to support his partnership claims. As alleged by the Plaintiff, the parties worked together on numerous oil and gas transactions and split the profits from the City of Girard transaction which creates the presumption under Ohio law that the Plaintiff was a partner in business with the Defendants. The totality of the facts and circumstances in this case buttress this presumption as the Plaintiff’s behavior was consistent with that of a co-owner. Consequently, the Court will deny the Defendants’ Motion to Dismiss for Failure to State a Claim. Outcome Defendants’ motions to dismiss denied; plaintiff’s motions to strike denied.

Management And Control

If, at the outset of a partnership, there is no written partnership agreement, partners determine their capital contributions and decide upon the duties each will perform. Without a written agreement, the default provisions of RUPA control and all partners will share equally in all partnership profits and losses. Therefore, without a partnership agreement, if the partnership consists of two partners and one does 70% of the work and the other only does 30%, or one partner provides 70% of the capital, and the other 30%, each partner will nonetheless receive 50% of the profits according to the RUPA, no matter what the two partners may have otherwise intended.

In order to avoid this and numerous other problems relating to management responsibilities, profit distribution, borrowing authority, etc., a comprehensive partnership agreement should be drawn up specifying each partner’s rights, obligations, and responsibilities. This agreement, called Articles of Partnership, fixes the expectations of the individuals by an express agreement between the parties.

Specific issues to consider in the creation of the partnership agreement run from the basic to the more complex: the name and address of the partnership, its purpose, the amount and type of investment each partner will contribute, managerial and voting power, dispute resolution, partner insurance (“key man” insurance), bookkeeping methods, banking responsibilities, borrowing rights, and employee issues.

A partnership can also be created involuntarily, i.e., when no express agreement exists and where the parties may not even call themselves partners. This is called a partnership by estoppel. In certain situations, a court may infer that a partnership exists despite the fact that the persons involved deny it. Courts will look beyond the form to the substance of the activities in making a determination and will refer to these persons as “purported partners.” Section 308 of the RUPA provides:

“If a person, by words or conduct, purports to be a partner, or consents to being represented by another as a partner, in a partnership or with one or more persons not partners, the purported partner is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership.” The purpose of finding a partnership by estoppel is to protect a third party that relied to their detriment upon the representations or actions of a purported partner.

Section 308 of the RUPA also deals with a partnership by estoppel from the standpoint of profit sharing. The fact that two or more parties share the profits of a business gives rise to the rebuttable presumption that a partnership exists. This presumption may be overcome by evidence that the receipt of profits was for the purpose of repaying debts, repayment of interest or other charges on loans, paying wages or rent, paying a widow or personal representative of an estate, or paying for business goodwill—and not as the result of any partnership relationship.


Case Study

In Re Ranch

492 B.R. 545 (Bankr. D. Or. 2013)

Procedural Posture

A creditor filed a motion to dismiss a Chapter 12 case on the grounds that it was not properly authorized because under Oregon general partnership law, Or. Rev. Stat. §§ 67.005-67.365, unanimous consent of the partners was required to authorize a bankruptcy filing on behalf of the partnership.


The bankruptcy petition was signed by one partner. Initially, the court determined that the partnership was a general partnership despite the fact that the partnership agreement identified certain partners as limited partners because no certificate of limited partnership was filed as required under Or. Rev. Stat. § 70.075. Pursuant to Or. Rev. Stat. § 67.140(11), the general rule was that actions outside the ordinary course of partnership business could only be undertaken on behalf of the partnership with the consent of all partners. Filing a voluntary bankruptcy case was a paradigm action outside the ordinary course of partnership business. However, pursuant to Or. Rev. Stat. § 67.015(1), partners could provide in a partnership agreement that decisions outside the ordinary course of business could be made with less than unanimous consent of the partners. No provision in the debtor’s partnership agreement generally authorized the partners to make decisions outside the ordinary course of partnership business by majority vote, and there was no specific provision authorizing the partners to approve a voluntary bankruptcy filing by majority vote.


The court granted the motion to dismiss the Chapter 12 case.


Relationship of The Partners

The RUPA states that each partner has a fiduciary relationship to the partnership itself and to each other. Usually each partner has one vote with respect to the management of a general partnership. Routine decisions are commonly made by a majority vote. Major decisions, such as whether to dissolve a partnership, dissociate a partner, merge with another business, or change the form of organization, may require a unanimous vote of all of the partners. The following rights and duties of partners should be specifically addressed in a partnership agreement:

  1. The right to be repaid the partner’s contribution and to share equally in the partnership profits after partnership debts are paid;
  2. The duty to contribute toward partnership losses (capital or other), generally according to the partner’s share in the profits;
  3. The right to be indemnified respecting any personal liability reasonably incurred by a partner in the ordinary and proper conduct or preservation of the partnership business or property;
  4. The right to be repaid, with interest, any payment or advance beyond the amount of capital contribution;
  5. The right to manage the partnership along with the other partners;
  6. The right to use partnership property;
  7. The duty to keep partnership books and the right to inspect and copy such books;
  8. The duty to render information to co-partners regarding all matters affecting the partnership;
  9. The fiduciary duty to co-partners of the duty of loyalty and the duty of care (much the same as that owed by an agent to a principal) in good faith and fair dealing; and
  10. The right to a formal accounting of partnership affairs if a partner is wrongfully excluded from the partnership business or possession of its property by the co-partners; or if the right to an accounting is provided in the partnership agreement; or any other circumstances rendering an accounting just and reasonable.

Partnership Property and Partner Interests

Every partner has a right to possess partnership property in furtherance of the partnership. Each partner also has an equal right to the use or possession of the property in order to advance the partnership business. Therefore, each partner’s right in partnership property is not divisible; each has a full right in the whole.

Capital contributions are the initial funds (or property) invested by the partners and comprise the partnership property. Additional property acquired during the existence of the partnership is also partnership property. The intent of the parties determines if a partner owns an item personally or if the property is owned by the partnership. According to RUPA, “property acquired by a partnership is property of the partnership and not of the partners individually.” RUPA provides two rebuttable presumptions regarding property that property purchased with partnership funds is presumed to be partnership property regardless of title; and property acquired in the name of a partner or partners without the use of partnership funds is presumed to be the individual’s property, even if used for partnership purposes.

A partner’s interest in the partnership must be differentiated from partnership property. The partner’s interest is a personal property interest that is owned by the partner. It may be sold or pledged as collateral to a creditor. Personal creditors may attach a partner’s interest in order to collect debts.

The transfer of a partner’s interest affects the partnership in several ways. Such a transfer, however, does not cause the transferee to become a new partner in the business because all existing partners must agree to the addition of a new partner. Also, the transfer does not exempt the transferring partner from personal liability. Nor will a transfer of an interest eliminate individual liability to the partnership’s existing creditors.

The partnership agreement may state limitations and restrictions on transfers of property. The partnership may have a “right of first refusal” if a partner wishes to transfer his or her interest in the business to an outside party.

Sharing Of Profits

Unless otherwise stated in the partnership agreement, partners share profits and losses equally. This may be modified by agreement of the partners where, for example, partners may share profits in proportion to the individual capital contributions made to the partnership. The same principle may be applied to the losses incurred, if any; losses are normally shared in the same proportion as are profits, but the partnership agreement will control in this situation.

Normally, partners do not receive a “salary” unless the partnership agreement specifies the contrary. This holds even if one partner performs most or even all of the work in running the business. A partner who is responsible for winding up (ending) the partnership is entitled to reasonable compensation for performing these services.


Case Study

Sriraman v. Patel

761 F. Supp. 2d 7 (E.D.N.Y. 2011)

Procedural Posture

Plaintiff asked for an accounting. Defendant claimed income from a chief of medicine contract at FH-ICU was not partnership property because defendant never considered the income to be partnership property, defendant retained the contract as his own property, and plaintiff had not proved he had any intent or reasonable expectation to the contrary. Both parties intended that the revenue from two other contracts would be a partnership asset, and plaintiff rendered services under them. Plaintiff claimed he did not receive his full share of profits and sought an accounting upon the dissolution of the partnership. Under N.Y. P’ship Law §74, the claim accrued as of the date of dissolution and was timely.


In the instant case, there can be no dispute that plaintiff, as a partner, became entitled to an accounting upon his withdrawal from the partnership and its dissolution thereupon as a matter of law. *** (“New York law provides that partners are entitled to an accounting of a partnership following its dissolution.”). The first step is therefore satisfied. The remaining issue for this Court is to reconcile the individual partners’ accounts to make sure that each receives the distribution to which he is entitled. *** The question whether or not personal property owned or acquired by a partner has been contributed by him or her to the firm so as to become partnership property depends on the intention of the parties as revealed by their conduct; by the provisions of the partnership agreement or agreement preliminary thereto; by the terms of written instruments relative to the transfer of the property to or for use of the firm; by entries in the firm books; and by the use of the property in the firm business, although the mere fact that property is used in the firm business will not of itself show that it is firm property. *** Where there is no oral or written partnership agreement, the partnership’s profits are split equally and all the partnership property is considered an asset. *** (“[i]n settling accounts between the partners after dissolution … subject to any agreement to the contrary … [t]he assets of the partnership” include the “partnership property”). This includes any secret profits a partner earned over the course of the partnership.

[The] FH-ICU Contract was, in fact, originally drafted so that all of the partners at that time — Chadha, Silverman, defendant, and plaintiff — were supposed to be signatories, and that was only changed because Silverman and Chadha left the group. Indeed, even though defendant was the only signatory to the final agreement on the doctors’ side, the short-hand reference to him was “the Group,” just as it had referred to the partnership in the initial draft. The agreement itself clearly contemplated its performance by more than one physician; it expressly required 24/7 coverage in the ICU, which could only be performed by more than one doctor. Plaintiff, in fact, did render services under that agreement, unlike the Chief of Medicine Contract. The objective indicia of intent thus indicate that both parties regarded it as a partnership asset, and I therefore find that both parties intended the revenue from that contract to be partnership income.


Clerk directed to enter judgment in favor of plaintiff in the amount of $222,300.


Disassociation of Partners

A partner can leave or withdraw from a partnership in three different ways: voluntarily; disassociation according to the terms of the partnership agreement; or involuntarily. Involuntary withdrawal may be accomplished through expulsion upon the vote by the other partners or pursuant to a judicial decree; personal bankruptcy; executing an assignment for the benefit of creditors; a partner’s incapacity or death; the termination of a partner that is in the form of a trust, estate, or other business entity (such as a partner that is corporation that loses its corporate charter).


The partnership as a separate entity does not pay income taxes. Instead, the income or losses incurred by it are “passed through” the partnership to the partners. Therefore, partnerships are called “pass-through” entities. Each partner is responsible for paying his or her portion of the taxes due on the profits received or may take deductions on his or her portion of losses incurred. An individual partner will receive a document called a “K 1” reflecting their individual share of partnership income or loss based on the partnership agreement.


RUPA states that the partnership is liable for

“(a) the for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership. (b) If, in the course of the partnership’s business or while acting with authority of the partnership, a partner receives or causes the partnership to receive money or property of a person not a partner, and the money or property is misapplied by a partner, the partnership is liable for the loss.”

All partners are jointly and severally liable for all obligations of the partnership. This means that a creditor may sue all of the partners together in case of an unpaid debt or may choose one partner (“tag you’re it!!!!) as a defendant. It would then be up to that partner to implead his or her other partners under a doctrine called the “right of contribution.” Partners are not liable for any obligations that arose prior to becoming a partner. General partnerships may provide for the liability of partners for partnership debt in the partnership agreement, but all such provisions must be clearly stated. Judgments obtained against the partnership are not effective against individual partners’ assets unless the judgment is also against the individual partners.

Dissolution and Termination of the Partnership

A partnership does not exist in perpetuity, as may a corporation. A partnership can terminate as the result of voluntary or involuntary actions. A partnership will dissolve on the withdrawal of a partner in a partnership at will; the conclusion of a period of time in a fixed term partnership; the achievement of the purpose for which the partnership was specifically created; the occurrence of an event agreed upon in the partnership agreement; or the occurrence of an event that makes it illegal to continue the partnership.

The Revised Uniform Partnership Act (RUPA), however, provides that a partnership does not automatically dissolve if a partner dies or if a partner leaves (disassociates from) the business. The structure of the partnership changes, but this may or may not affect the business itself. The partnership may reorganize and continue without the exiting partner. RUPA also specifies fiduciary duties of the partners during the dissolution; and establishes a formula by which partnership interests may be valued in a buyout or dissolution. Also, if a partnership is created for a fixed term (two years, for example), and the partnership continues beyond the term without any express agreement, the UPA declares that the rights and duties of the partners remain the same as before the expiration of the stated term.

The process of terminating a partnership is called dissolution and winding up. Dissolution begins the process of winding up and precludes the commencement of new business. Winding up ends all business activity, resulting in the payment of outstanding debts and the liquidation of assets; the remaining amounts, if any, are distributed to partners to reimburse capital contributions followed by the distribution of any profits and assets that remain.

Dissolution by Agreement

The partnership agreement may include a limitation on the duration of the partnership. At the end of the time period, the partnership is dissolved. Without such a limitation, or if no partnership agreement exists, the partners can unanimously consent to dissolve the partnership. In international business, parties frequently enter into relationships, termed “joint ventures,” which are organized for a set time period and for a limited, specified purpose. At the end of that period or at the attainment of the purpose for which the joint venture was formed, the joint venture may be terminated.

Dissolution by Operation of Law

Certain events may occur that cause dissolution. As noted, the death of one partner no longer automatically dissolves a partnership. The partnership buys out the deceased partner’s interest with an amount paid to the estate of the deceased partner. Bankruptcy of the partnership will dissolve the partnership, but the bankruptcy of an individual partner does not. Laws on partnership dissolution vary from state to state and should be consulted concerning these issues. “Buy-sell” agreements, sometimes funded by the purchase of so-called “Key Man” insurance, are often concerned with the dissolution of the partnership.


Case Study

Laplace v. Laplace

Civil Action No. 03-4291 (JAG), 2006

U.S. Dist. LEXIS 768 (D.N.J. Jan. 11, 2006)

Procedural Posture

Plaintiffs, the wife and daughter of a deceased partner, sued defendant, the only remaining partner in a family partnership, claiming that the deceased partner’s estate was entitled to a larger share of the partnership than a $100,000 share that was stated in the partnership agreement for buyout after death of a partner. The remaining partner filed a motion for summary judgment.


This case involved whether to enforce the buyout provisions of a partnership agreement, and how those provisions should be interpreted. The agreement, first signed in 1959, provided for a $100,000 buyout at the time of death of any partner. The wife and daughter [claiming that the buyout was worth $3.5 million] however, contended that the buyout provision was unenforceable due to the provisions of the New Jersey Uniform Partnership Act (RUPA), ***. The court held that the partnership agreement clearly showed that the partners contemplated and provided for the eventuality of a partner’s death and therefore, pursuant to N.J. Stat. Ann. § 42:1A-4(a), the agreement terms governed. The court further held that there was insufficient evidence that the partners had adopted a course of conduct that waived the agreement’s buyout terms. While the estates of certain partners in the past received more than $100,000, the provisions were made pursuant to a decision of the remaining partners, as provided for in the agreement. Finally, there was no basis for the argument that the buyout provision’s reference to “partnership business” did not include the partnership’s real estate assets.


The court granted the motion for summary judgment filed by the remaining partner.

Dissolution by Judicial Decree

If members of the partnership are no longer able to work together, they may petition a court for dissolution in the interest of preserving their investment and the property of the partnership.

Limited Liability Partnerships

Depending on the jurisdiction, a limited liability partnership (LLP) is a partnership in which some or all partners have limited liability. A partnership must file a certificate of limited liability partnership with the Secretary of State. Rules and regulations on limited liability partnerships vary from state to state. As a hybrid vehicle, an LLP exhibits characteristics of both a partnership and a corporation. In a standard LLP, one partner is not responsible or liable for another partner’s misconduct or negligence. In an LLP, some of the partners enjoy a form of limited liability similar to that of the shareholders of a corporation. Unlike corporate shareholders or limited partners, LLP partners have the right to manage the business directly. An LLP will also be taxed as a pass-through entity, generally under rules established for partnership vehicles—thus avoiding double taxation. The LLP is well suited for businesses where all investors are professionals and who may wish to take an active role in management. LLPs are discussed further in the Chapter on Corporations.

Limited Partnerships

The primary law governing limited partnerships (LPs) is contained in the revised Uniform Limited Partnership Act 2001 (ULPA), adopted by almost every state, either in total or revised format. Limited partnerships (LPs) may be created for any lawful profit-making purpose. According to the Commission on Uniform Laws, limited partnerships “targets two types of enterprises that seem largely beyond the scope of LLPs and LLCs:

  • sophisticated, manager-entrenched commercial deals whose participants commit for the long term, and
  • estate planning arrangements (family limited partnerships).”

The ULPA assumes that, more often than not, people utilizing this form will desire:

  • “strong centralized management which is strongly entrenched in the business, and
  • passive investors with little control over or right to exit the entity.”

LPs are created when partners in a general partnership accept investments from one or more parties, called limited partner(s), and file a certificate of limited partnership with the appropriate Secretary of State.

As with the general partnership, the partnership agreement controls the legal relationship among the partners, and between the partners and the partnership. Unlike the general partnership, it is characteristic of the LP to have two classes of partners and to have at least two partners. An LP must have a least one general partner and one or more limited partners. In addition, the words “limited” or “L.P.” or “LP” must be spelled out or abbreviated in the partnership’s name. The partnership name may also contain the name of any partner.

The general partner(s) manages the partnership and assumes responsibility – unlimited liability- for the debts of the partnership. The limited partner(s) contributes cash or other property and owns an interest in the business, but does not participate in its management. Limited partners are essentially passive investors who do not incur unlimited liability in the partnership: they are not personally liable for the debts of the partnership beyond any amount invested—termed their ca[pital contribution. Some family owned businesses are created as family limited partnerships (FLPs) in order to keep the business within the family or to manage a family investment asset. For some families, FLPs are often used for estate planning purposes.

With the exception of the treatment of limited partners and the need for adherence to state law in the formation of limited partnerships, general and limited partnerships function in much the same way.

Creating a Limited Partnership

Forming a limited partnership requires a formal and public proceeding and adherence to the legal requirements of a specific statute. Its existence requires state approval. The partners must sign a certificate of limited partnership that includes information similar to that found in a corporate charter. The certificate is then filed with the appropriate state official, usually with the Secretary of State. The certificate is public information, subject to open inspection. The certificate must contain the following information:

  • The name of the limited partnership, which must include the words “limited partnership” or “limited” or “L.P.” or “LP” without any abbreviations;
  • The address of the limited partnership’s principal office;
  • The name and address of a statutory agent of the partnership;
  • The business address of the general partner; and
  • The latest date for dissolution of the partnership.

Limited Partners: Liability

General partners are personally liable to the partnership’s creditors for partnership debt. Limited partners are not. For this reason, at least one general partner is necessary to form a limited partnership. The limited liability protection afforded to limited partners may be forfeited if a limited partner engages in the “management and control” of the business. Each state provides definitions of “management and control” and safe harbors defining when limited partners are not considered to be participating in the management and control of the business. The fact that limited partners avoid personal liability for the debts of the business provides the main advantage of a limited partnership over that of a partnership. Note that the 2001 revision to the ULPA, if adopted by states, eliminates this “management and control” analysis and provides full limited liability to limited partners.

Today, many companies address issues surrounding the unlimited liability of a general partner by creating an LLC or a corporation to serve as the general partner. As the LLC or corporation has limited liability because of the rules of incorporation, no one in the limited partnership would have personal liability, unless state law provides to the contrary. However, this creates additional expense. In response, currently half of the states in the U.S. have adopted laws that create a business entity called a limited liability limited partnership (LLLP) which gives all partners—both limited and general — the protection of limited liability. LLLPs are currently used most often in real estate and the entertainment and communications industries. Cable News Network, LP, LLLP (CNN) is an example. The revised Uniform Limited Partnership Act (2001) also recognizes LLLPs. Whereas the advantage of limited liability protection in the LLLP for general and limited partners is obvious, business owners should also be aware of the disadvantages. These include increased complication in creating this format, increased cost in filing fees, and the potential for incurring unplanned tax consequences such as state taxes and federal taxes (relating to passive income vs. earned income).

Limited Partners: Rights and Liabilities

The rights of limited partners are very much the same as those of general partners. Limited partners have a right to review the books of the partnership and to an accounting of the partnership business. Upon dissolution, limited partners have a right to the return of their capital contributions in accordance with the partnership certificate. Limited partners may assign their interest, subject to specific provisions in the certificate.

In some jurisdictions, courts have recognized the absolute right of limited partners to sue, individually or on behalf of the firm, for economic injury to the firm caused by the general partners or outsiders. In order to protect the limited liability of the limited partners, there are several additional requirements, in addition to the creation of the entity discussed above. Some states may require a specific dollar amount to establish an LP. The limited partners cannot take part in the management of the firm. The limited partners cannot use their individual names in the name of the partnership, otherwise giving the wrong impression to outsiders and resulting in the possibility of creating a general partnership by estoppel.

The RULPA has eliminated the limited liability that attaches to limited partners when a limited partner performs duties ascribed generally by general partners. Under such circumstances, the liability of a limited partner would extend to those persons who are led to believe that, by the conduct of the limited partner, he or she is in fact a general partner.

However, a limited partner may perform the following duties and activities without losing the protection of limited liability:

  • They may be employees of the general partnership;
  • They may consult with or advise the general partner;
  • They may act as a surety or guarantor for the limited partnership; and/or
  • They may vote on amendments, dissolution, sales of property, or assumption of debt.

Limited partners who follow these rules and who do not engage in the “management and control of a business” will be liable up to the amount of capital contributed to the limited partnership. A pledge to pay a certain amount as capital over a time period causes a limited partner to be liable for the full amount pledged.


Case Summary

Bartlett v. Pickford

Civil Action No. ELH-13-3919, 2014

U.S. Dist. LEXIS 178682 (D. Md. Dec. 31, 2014)


This intra-family dispute pits siblings against each other with respect to valuable real estate located in Talbot County, Maryland. Christy Pickford Bartlett, as General and Limited Partner of Pickwick Farm Limited Partnership, Trustee of the Patricia Pickford Revocable Trust, and Co-Trustee of the Stephen Pickford and April Pickford Trust; Barbara “Bobbe” P. Mundt; and Judith “Gigi” Pickford Barse, plaintiffs, filed suit against defendant Cecile E. Pickford, as General Partner of Pickwick Farm Limited Partnership. At the center of the controversy is a 76-acre farm (“Farm”) located in Maryland, owned by the Pickwick Farm Limited Partnership (“Pickwick Farm LP”).

From its inception, Pickwick Farm LP has been managed by its two general partners, Bartlett and Pickford. Barse and Mundt, as limited partners of Pickwick Farm LP, do not have responsibility for the management or operation of the entity’s business. With respect to any sale of the Farm, such a transaction requires, inter alia, joint consent of Pickwick Farm LP’s two general partners. ***

In May 2013, the Pickwick Farm LP “received an offer” of $2.7 million for the purchase of the Farm. Despite the desire of Bartlett, Barse, and Mundt to pursue the sale, Pickford withheld her consent and effectively blocked the transaction.

Because of Ms. Pickford’s unwillingness to sell the Farm and the failure of Pickwick Farm LP to operate with a profit, plaintiffs filed suit against defendant. The Complaint contains four counts: Count I, “Specific Performance”; Count II, “Declaratory Judgment – Injunctive Relief”/”Sale of the Farm”; Count III, “Declaratory Judgment – Injunctive Relief”/”Removal of Cecile as a General Partner”; and Count IV, “Judicial Dissolution [of Pickwick Farm LP],” as an “alternative to the relief sought in Counts I and II.”

Currently before the Court is plaintiffs’ pre-discovery Motion for Summary Judgment. In support of the Motion, plaintiffs submitted a Memorandum (collectively, “Motion”), and five exhibits. Defendant filed an opposition to the Motion and appended the Affidavit of Ms. Pickford as well as a copy of the LP Agreement. Plaintiffs Bartlett and Barse filed a Reply, along with a Supplemental Affidavit of Christy Pickford Bartlett.


Plaintiffs rely, inter alia, on Section 10-802 of the Corporations and Associations Article (“Corps.”) of the Md. Code ***. *** In plaintiffs’ view, dissolution is appropriate because of the deadlock as to whether to sell the Farm. Similarly, they argue *** that removal of Ms. Pickford as a partner is an appropriate remedy under Corps. § 9A-601(5), which states, inter alia, that “expulsion” of a partner by judicial determination may be appropriate “[o]n application by the partnership or another partner,” if the partner to be expelled “engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with the partner.”

In her Opposition, Ms. Pickford contends, among other things, that summary judgment is inappropriate, because she has not had an opportunity to complete discovery. According to Ms. Pickford, when plaintiffs filed the Motion, “the parties served, but had not yet responded to, written discovery and the parties had not yet taken any depositions.” Therefore, she maintains that the record is incomplete, and insists that a “full record” must be developed.

Based on the record before the Court, it does not seem that the Court can yet make a determination as to whether dissolution of the partnership or expulsion of Ms. Pickford is appropriate. In particular, it remains unclear if it is no longer “reasonably practicable to carry on the business in conformity with the partnership agreement” as required by Corps. §10-802. The LP Agreement describes the purpose of the partnership as “managing, operating, developing, and otherwise dealing with the [Farm] for the production of profit.” *** And, according to Ms. Pickford, the parties “vigorously dispute[ ]” whether the Farm is able to produce a profit. ***

Summary judgment is ordinarily inappropriate “where the parties have not had an opportunity for reasonable discovery.” *** The Fourth Circuit has explained that “[s]ummary judgment before discovery forces the non-moving party into a fencing match without a sword or mask.” *** However, “the party opposing summary judgment ‘cannot complain that summary judgment was granted without discovery unless that party had made an attempt to oppose the motion on the grounds that more time was needed for discovery.'” ***


The Motion has been fully briefed and no hearing is necessary to resolve it. *** For the reasons that follow, I will deny the Motion as premature.


Taxation of Limited Partnerships

The same tax rules apply to limited partnerships as to general partnerships: both are pass-through entities — profits and losses pass through to the individual partners. Limited partnerships will file informational returns with the federal and state governments, and the individual partners report the income and losses on their individual income tax returns and pay their proportional share of taxes, based on the partnership agreement.

Termination of Limited Partnerships

Termination of a limited partnership can happen upon the following: the occurrence of an event in the LP agreement; the consent of all general partners and of limited partners owning a majority of the rights to receive distributions as limited partners at the time the consent is to be effective; the dissociation of a person as a general partner; administrative dissolution (the signing and filing of a declaration of dissolution by the Secretary of State); or judicial dissolution (obtaining a court decree upon the application of a partner).

Dissolution of the limited partnership does not occur if a limited partner dies or assigns his or her interest to another. Bankruptcy of a limited partner will not dissolve the partnership unless it results in the firm itself becoming bankrupt. The death, mental incompetence, illegality, expulsion, or bankruptcy of a general partner does not cause the dissolution of the partnership if the business has one or more general partners or there is a unanimous vote to carry on the business. If a general partner retires or dissociates, dissolution does not automatically occur. The partnership agreement usually provides for such eventuality and, if not, the law provides for the remaining general partners to continue with the business.

Upon termination of the limited partnership, the partners go through the process of winding up and liquidation of all the assets. The RULPA provides that money from the sale of the assets be disbursed as follow: creditors (including partners, but not with respect to distributions), partners and former partners for distributions owed to them, and for return of capital contributions; and the balance divided according to the partnership agreement. Thereafter, the general partner must file a certificate of termination with the Secretary of State.


Ethical Considerations

Liability for Debts
In a sole proprietorship, the proprietor is liable for all debts of that “business.” What are the ethical implications in the law requiring a sole proprietor to continue to be liable for debt when a member of a limited liability company can simply “walk away” from a similar obligation? Does this make sense?

Joint and Several Liability
In applying the rule of “joint and several liability,” a partner who owns just a small percentage of a partnership may nonetheless be requited to shoulder the entire amount a a partnership debt. Is that “fair” to that individual partner? How might this be alleviated?



  1. Identify the factors that a business owner must take into consideration when determining what type of business organization to choose.
  2. What is the purpose of a sole proprietorship?
  3. Explain some advantages / disadvantages of this form of business entity.
  4. Explain the concept of “respondeat superior.”
  5. What is an independent contractor?
  6. Is the proprietorship an entity for legal purposes?
  7. Describe how a partnership is created.
  8. Discuss the rights and duties of partners in relation to the partnership and to other partners.
  9. What impact does the transfer of a partner’s interest have on the partnership?
  10. Explain how a partnership may be dissolved.
  11. Differentiate between a general partnership and a limited partnership.
  12. Explain the taxation of a general partnership and a limited partnership.
  13. How is a limited partnership created?
  14. How can a limited partner engage in the “management and control” of a firm?

Chapter Six | The Agreement

A contract is an agreement that consists of an offer and acceptance.

The Offer

An offer will be judged on the basis of three criteria:

  1. There must be serious intent on the part of the offeror to be bound by the terms of the offer;
  2. The terms of the offer must be definite or reasonably certain; and
  3. The offer must be communicated to the offeree.

Intention is measured by what is termed the “objective” or “reasonable man” test, which is exemplified in the classic English common law case, Carlill v. Carbolic Smoke Ball (holding that
an advertisement was considered as an offer for a unilateral contract that could be accepted by anyone who performed its terms). The objective test states that an offer will be judged by the objective or reasonable meaning of the words used—whether a “reasonable man would conclude that an offer had been made.” Under this criteria, the subjective intention of the parties is ordinarily irrelevant. However, an offer that is made in obvious anger, jest, or as the result of excitement will not generally meet the requirement of a serious offer. Likewise, an offer must be distinguished from mere statements of intention to be bound at a later date, preliminary negotiations or discussions, inquiries, or invitations (solicitations) to make an offer.
Let us consider a classic case that deals with the application of the “objective test.”


Case Summary

Lucy v. Zehmer

196 Va. 493 (1954)

BUCHANAN, Justice.

* * * The instrument sought to be enforced was written by A. H. Zehmer on December 20, 1952, in these words: “We hereby agree to sell to W. O. Lucy the Ferguson Farm complete for $50,000.00, title satisfactory to buyer,” and signed by the defendants, A. H. Zehmer and Ida S. Zehmer.

A. H. Zehmer admitted that * * * W. O. Lucy offered him $50,000 cash for the farm, but that he, Zehmer, considered that the offer was made in jest; that so thinking, and both he and Lucy having had several drinks, he wrote out “the memorandum” quoted above and induced his wife to sign it; that he did not deliver the memorandum to Lucy, but that Lucy picked it up, read it, put it in his pocket, attempted to offer Zehmer $5 to bind the bargain, which Zehmer refused to accept, and realizing for the first time that Lucy was serious, Zehmer assured him that he had no intention of selling the farm and that the whole matter was a joke. Lucy left the premises insisting that he had purchased the farm.
The discussion leading to the signing of the agreement, said Lucy, lasted thirty or forty minutes, during which Zehmer seemed to doubt that Lucy could raise $50,000. Lucy suggested the provision for having the title examined and Zehmer made the suggestion that he would sell it “complete, everything there,” and stated that all he had on the farm was three beefers.

Lucy took a partly filled bottle of whiskey into the restaurant with him for the purpose of giving Zehmer a drink if he wanted it. Zehmer did, and he and Lucy had one or two drinks together. Lucy said that while he felt the drinks he took he was not intoxicated, and from the way Zehmer handled the transaction he did not think he was either.
The defendants insist that * * * the writing sought to be enforced was prepared as a bluff or dare to force Lucy to admit that he did not have $50,000; that the whole matter was a joke; that the writing was not delivered to Lucy and no binding contract was ever made between the parties.

It is an unusual, if not bizarre, defense. * * *

In his testimony, Zehmer claimed that he “was high as a Georgia pine,” and that the transaction “was just a bunch of two doggoned drunks bluffing to see who could talk the biggest and say the most.” That claim is inconsistent with his attempt to testify in great detail as to what was said and what was done. * * * The record is convincing that Zehmer was not intoxicated to the extent of being unable to comprehend the nature and consequences of the instrument he executed, and hence that instrument is not to be invalidated on that ground. * * *

The appearance of the contract, the fact that it was under discussion for forty minutes or more before it was signed; Lucy’sobjectiontothefirstdraftbecauseit was written in the singular, and he wanted Mrs. Zehmer to sign it also; the rewriting to meet that objection and the signing by Mrs. Zehmer; the discussion of what was to be included in the sale, the provision for the examination of the title, the complete- ness of the instrument that was executed, the taking possession of it by Lucy with no request or suggestion by either of the defendants that he give it back, are facts which furnish persuasive evidence that the execution of the contract was a serious business transaction rather than a casual, jesting matter as defendants now contend.

Not only did Lucy actually believe, but the evidence shows he was warranted in believing, that the contract represented a serious business transaction and good faith sale and purchase of the farm.

In the field of contracts, as generally elsewhere, “We must look to the outward expression of a person as manifesting his intention rather than to his secret and unexpressed intention. (Emphasis added.) The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts.”

Whether the writing signed by the defendants and now sought to be enforced by the complainants was the result of a serious offer by Lucy and a serious acceptance by the defendants, or was a serious offer by Lucy and an acceptance in secret jest by the defendants, in either event it constituted a binding contract of sale between the parties.


The Supreme Court of Virginia determined that the writing was an enforceable contract and reversed the decision of the lower court.

Mr. and Mrs. Zehmer were required by court order to carry through with the sale of the Ferguson Farm to W.O. Lucy. What remedy do you think would be appropriate in this case? Why?

Definiteness requires that the terms of an offer must be clear enough so that the offeree is able to make a decision whether to accept or reject the offer. In addition, if the terms of an agreement are indefinite, a court will not be able to enforce the contract or to determine what would be an appropriate remedy for its breach.

Generally, the common law required that an agreement should contain the following terms: (1) identification of the parties; (2) identification of the subject matter of the contract; (3) a quantity; (4) the consideration to be paid; and (5) the time for performance.

Media Offers And Advertisements

At common law, an advertisement, a circular or flier, or a radio or TV spot were not considered as offers; rather, these forms of communications were considered as statements of an intention to sell or a preliminary proposal inviting an offer to buy. Although most advertisements and the like were treated as invitations to negotiate and not offers, this does not mean that an advertisement could never be considered as an offer, binding a seller to a contract.

In the following case, the court had to decide whether a newspaper advertisement announcing a “special sale” in a department store should be construed as an offer, the acceptance of
which would complete a contract. Take special note of the test enunciated in Lefkowitz v. Great Minneapolis Surplus Store, Inc. It can be applied more broadly to decide if a party has truly made an offer to sell or buy. This test is also used to determine if a party has made an acceptance of an offer. It is an important formulation of the objective test.


Case Summary

Lefkowitz v. Great Minneapolis Surplus Store, Inc.

251 Minn. 188, 86 N.W. 2d 689 (1957)

Background and Facts

Plaintiff Lefkowitz read a newspaper advertisement offering certain items of merchandise for sale on a first come first served basis. Plaintiff went to the store twice and was the first person to demand the merchandise and indicate a readiness to pay the sale price. On both occasions, the defendant department store refused to sell the merchandise to the plaintiff, saying that the offer was intended for women only, even though the advertisement was directed to the general public. The plaintiff sued the store for breach of contract, and the trial court awarded him damages.

MURPHY, Justice

This case grows out of the alleged refusal of the defendant to sell to the plaintiff a certain fur piece which it had offered for sale in a newspaper advertisement. It appears from the record that on April 6, 1956, the defendant published the following advertisement in a Minneapolis newspaper:

On April 13, the defendant again published an advertisement in the same newspaper as follows:

The record supports the findings of the court that on each of the Saturdays following the publication of the above described ads the plaintiff was the first to present himself at the appropriate counter in the defendant’s store and on each occasion demanded the coat and the stole so advertised and indicated his readiness to pay the sale price of $1. On both occasions, the defendant refused to sell the merchandise to the plaintiff, stating on the first occasion that by a “house rule” the offer was intended for women only and sales would not be made to men, and on the second visit that plaintiff knew defendant’s house rules.

* * * The defendant contends that a newspaper advertisement offering items of merchandise for sale at a named price is a “unilateral offer” which may be withdrawn without notice. He relies upon authorities which hold that, where an advertiser publishes in a newspaper that he has a certain quantity or quality of goods which he wants to dispose of at certain prices and on certain terms, such advertisements are not offers which become contracts as soon as any person to whose notice they may come signifies his acceptance by notifying the other that he will take a certain quantity of them. Such advertisements have been construed as an invitation for an offer of sale on the terms stated, which offer, when received, may be accepted or rejected and which therefore does not become a contract of sale until accepted by the seller; and until a contract has been so made, the seller may modify or revoke such prices or terms.

*** [However] *** there are numerous authorities which hold that a particular advertisementinanewspaperorcircularletter relating to a sale of articles may be construed by the court as constituting an offer, accep- tance of which would complete a contract.

The test of whether a binding obligation may originate in advertisements addressed to the general public is “whether the facts show that some performance was promised in positive terms in return for something requested.”

The authorities above cited emphasize that, where the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract. * * *

Whether in any individual instance a newspaper advertisement is an offer rather than an invitation to make an offer depends on the legal intention of the parties and the surrounding circumstances. We are of the view on the facts before us that the offer by the defendant of the sale of the Lapin fur was clear, definite, and explicit, and left nothing open for negotiation. The plaintiff successfully managed to be the first one to appear at the seller’s place of business to be served, as requested by thebadvertisement, and having offered the stated purchase price of the article, he was entitled to performance on the part of the defendant. We think the trial court was correct in holding that there was in the conduct of the parties a sufficient mutuality of obligation to constitute a contract of sale.

The defendant contends that the offer was modified by a “house rule” to the effect that only women were qualified to receive the bargains advertised. The advertisement contained no such restriction. This objection may be disposed of briefly by stating that, while an advertiser has the right at any time before acceptance to modify his offer, he does not have the right, after acceptance, to impose new or arbitrary conditions not contained in the published offer.


The Supreme Court affirmed the trial court’s judgment, awarding the plaintiff the sum of $138.50 ($139.50 for the Lapin stole less the $1 purchase price) in damages for breach of contract against the defendant department store.

Even under the common law, courts began to relax rigid standards relating to indefiniteness and would imply or insert reasonable terms in a contract wherever possible, especially where both parties had manifested a clear intention to enter into a contract.

Uniform Commercial Code

Under UCC §2-204, for example, a contract will not fail for indefiniteness if the parties clearly intend to enter into a contract and if a “reasonably certain basis” exists for granting an appropriate remedy by a court. What are some of the terms a court will imply in a contract?

Open price: If nothing is said as to price, or the price is left to be agreed by the parties and they fail to agree, or the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and is not so set or recorded, “the price is a reasonable price at the time for delivery” [§2-305].
If no place of delivery is specified, then delivery is to occur at the seller’s place of business [§2- 308(a)], thus obligating the buyer to pay for freight, insurance, and delivery charges.
If the time for shipment or delivery is not stated, then the time shall be a reasonable time after the contract is formed [§2-309].
If the time for payment is not specified, then payment is due at the time and place of delivery [§2-310 (a)] and no credit arrangements are implied. Payment of a reasonable charge for interest may be implied.

While these terms may be found in the UCC, and thus apply to contracts involving the sale of goods (“movable and tangible” items), their application is equally important in many other types of contracts.

In addition, terms that are omitted or unclear may be supplied by custom and usage of trade or by prior or contemporaneous dealings between the parties, subject to the parol evidence which will be discussed in the materials on the “writing and form” of contracts.

Under the third criteria, the offer must be communicated to the offeree so that the offeree knows of the terms of the offer. An offer cannot be accepted by an offeree who is unaware of the offer or who has not become apprised of it.

Termination Of An Offer

It should be recognized that an offer creates a power or right in the offeree to transform the offer into a binding contract through an acceptance. However, an offer will not remain in existence indefinitely. The offer can be terminated through the operation of law, actions of the parties, the occurrence of a stated condition, or by its own terms, normally through the lapse of a period of time stipulated in the contract.

Lapse Of Time

Where the time specified in the contract for an acceptance to be made has passed or an event or condition stipulated in the contract which would terminate an offer has occurred, the offer is terminated. For example, Freddy agrees to sell his stamp collection to Franky if Franky accepts by a certain date. Franky must accept this offer within the period stated. If he does not do so, the offer will have lapsed.

Should no time be specified in the offer itself, the offer will terminate at the end of a reasonable time, determined by such factors as the subject matter of the contract (an offer to buy or sell perishable goods would involve a relatively short period of time) and other relevant market and business conditions and circumstances.

Operation Of Law

An offer may also be terminated through operation of law. For example, the destruction of the subject matter of the contract through no fault of the party will terminate an offer.

The death or incompetency of the offeror or offeree in a personal service contract also terminates an offer. Since an offer is considered personal to both the offeror and the offeree, an offer will be automatically terminated if the offeror or offeree dies, becomes incapacitated, or is ruled incompetent by a court of law.

Where a statute or court decision makes an offer illegal, the offer will be terminated. These circumstances—destruction of the subject matter of the contract, death or incompetency of a contracting party, or the operation of a statute—are sometimes viewed under the doctrine of “objective impossibility” and may also be used as a defense to a claim of breach of contract or as an excuse for non-performance on the part of a party.

Action Of The Parties

An offer may also be terminated by actions of the parties.

Revocation of the offer by the offeror is a withdrawal of the offer by the offeror before the offeree accepts the offer. A revocation is not generally effective until it is actually received by the offeree or by the offeree’s agent. Generally speaking, an offer made to the general public or to a number of persons whose specific identity is unknown to the offeror (for example, an offer made in newspaper advertisement or in a TV or radio ad), may be revoked only by using the same medium or at least by using “the best means of notice reasonably available under the circumstances” that would give equal publicity to the communication of the revocation as the communication of the original offer. Certain types of offers, called “firm offers,” may not be revoked by the offeror under certain circumstances – one of these circumstances being where the offeree has paid consideration for an option or where the promise has been made in a “signed writing” under UCC §2-204 (the “Firm Offer Rule”).

An offer is terminated if the offeree rejects it or if the offeree makes a counter offer.


Suppose that Berra offers to sell his new speedboat to Rizzuto for $10,000. Rizzuto responds, “$10,000 is too high; I’ll give you $8,500.” What is the legal effect of Rizzuto’s com- munication? First, it is clearly not an acceptance. Secondly, it is a rejec- tion of Berra’s offer to sell the boat for $10,000 and a counteroffer by Rizzu- to to buy the boat for $8,500. Now, if Berra agrees on $8,500, a contract will be formed based on this agreement. However, what happens if Berra re- jects the offer to purchase the boat at $8,500 and the price of such speed- boats skyrockets to $15,000? Can Rizzuto compel Berra to sell the boat to him at the original $10,000 price?

The answer is “no” because Rizzuto’s counteroffer legally termi- nated the original offer. Berra’s offer is no longer “on the table.”

Rejection by the offeree terminates an offer. There may be a very fine line between a rejection of an offer and an inquiry about trading on different terms than those contained in the original offer. Suppose that Freddy were to respond to a friend’s offer to buy his antique car: “That seems a bit low; I’ll just bet that you can do a lot better than that.” Is this communication a rejection of his friend’s offer or a mere inquiry which will not terminate (destroy) his friend’s offer?

A counteroffer by the offeree also terminates the original offer. Generally, a counteroffer is a rejection of the original offer and the making of a new offer by the offeree.

The Acceptance

An acceptance is an unconditional assent by either words or conduct by an offeree that manifests agreement to the terms of the offer. The acceptance is usually made in the manner requested in the offer where the offeror has stipulated an express, authorized means of acceptance. The acceptance must be unequivocal—that is, it may not impose or add new terms or conditions or tamper with the terms of the offer or (as we have seen) a court might conclude that a rejection and a counter offer has taken place. A unilateral contract can only be accepted by the offeree’s performance of the required act. A bilateral contract can be accepted by an offeree who promises to perform the act or the actual performance of the requested act.


Igor Wells joins the “fruit of the month club.” Because he is on vacation during the month of May, Igor neglects to return the card for May’s fruit—the guava. Igor must now pay for the (spoiled) guava because his failure to return the card (silence) amounted to an acceptance of the offer to ship based on the express terms of the membership agreement.

A second circumstance where silence may amount to an acceptance occurs where prior dealings between the parties give the reasonable expectation of a reply.

Generally speaking, silence is not considered as acceptance of an offer even if the offeror has stated “your silence indicates your acceptance of this offer.” There are, however, circumstances where an offeree’s silence may constitute acceptance of an offer. Such situations arise where there is an affirmative “duty to speak” on the part of the offeree. A court might impose a duty to speak where a duty arises out of a contract itself (i.e., record or book club contracts frequently require that a member send back a card with a rejection of the month’s selection or the selection will be automatically shipped and an obligation to pay will arise).


Berman, a retailer, has ordered snowshoes from Trotsky, the manufacturer, on numerous occasions and paid for them when they arrived. Out of convenience, Trotsky then began to ship snowshoes on a recurring basis, simply sending Berman a “confirmatory invoice,” noting that the snowshoes would be shipped on the eighth of each month. Whenever Berman received a shipment of the goods from Trotsky, he would simply sell them at retail and send a check to Trotsky for the amount due. Trotsky would only hear from Berman if Berman did not wish to place an order for that month. The last shipment of snowshoes (of course) is the subject of controversy as Berman now refuses to pay for them, claiming that his “silence” on the matter cannot create a contract. Because of the prior dealings between the parties, Berman’s silence (failure to notify Trotsky) will be construed as an acceptance of Trotsky’s offer to ship. Berman will be bound by contract and must pay for the last shipment of snowshoes.

Acceptance-Upon-Dispatch Rule

Read Morrison v. Thoelke and notice the application of the deposited acceptance or “mail box” rule which states that an acceptance is effective when it is dispatched (mailed) even if it is lost in transmission.

The problem of a “lost transmission” can be minimized by the parties by expressly altering the mailbox rule by stating that an acceptance is effective only upon actual receipt of the acceptance.


Case Summary

Morrison v. Thoelke

155 So. 2d 889 (Fla. 1963)


Defendants (Morrison) made an offer to buy real property owned by the plaintiffs, Thoelkes. They executed a contract for sale and purchase and mailed it to the plaintiffs for their acceptance and signature. The latter signed the contract and mailed it to the defendants. Before it was received by the defendants, the plaintiffs repudiated the contract by telephone. Nonetheless, when defendants received the contract they recorded it, thereby establishing their interest in the property as a matter of public record. Claiming that no contract existed, plaintiffs brought this suit to “quiet title” to the property – to remove the defendants’ claim of an interest in it from the record. Defendants counterclaimed, seeking specific performance of the contract. The lower court entered a summary decree for the plaintiffs and defendants appealed.

Allen, J.

* * * The question is whether the contract is complete and binding when a letter of acceptance is mailed, thus barring repudiation prior to delivery to the offeror, or when the letter of acceptance is received, thus permitting repudiation prior to receipt. Appellants argue that posting the acceptance creates the contract; appellees contend that only receipt of the acceptance bars repudiation.

* * * In short, both advocates and critics muster persuasive arguments. As indicated, there must be a choice made (by the legal system) and such choice may, by the nature of things, seem unjust in some cases. Weighing arguments with reference not to specific cases but toward a rule of general application and recognizing the general and traditional acceptance of the rule as well as the modern changes in effective long- distance communication, it would seem that the balance tips towards accepting the notion that this case is controlled by the general rule that insofar as the mail is an acceptable medium of communication, a contract is complete and binding upon posting of the letter of acceptance.

The rule that a contract is complete upon mailing or the deposit of the acceptance in the mails, hereinbefore referred to as the “deposited acceptance rule.” * * * This rule, although not entirely compatible with ordered, consistent and sometime artificial principles of contract advanced by some theorists, is in our view, in accord with the practical considerations and essential concepts of contract law. Outmoded precedents may on occasion be discarded and the function of law should not be the perpetuation of error, but by the same token, traditional rules and concepts should not be abandoned save on compelling ground.

* * * We are constrained by factors hereinbefore discussed to hold that an acceptance is effective upon mailing and not upon receipt. Necessarily, this decision
is limited to circumstances involving the mails and does not purport to determine the rule possibly applicable to cases involving other modern means of communication.

* * * However, adopting the view that the acceptance was effective when the letter of acceptance was deposited in the mails, the repudiation was equally invalid…

Summary decree is reversed and the case remanded for further proceedings.


Ethical Considerations

Warren Boat Works v. Weaver

Fritz Weaver entered into a verbal contract with the Warren Boat Works whereby Fritz would assume the payments on a boat lease that had originally been entered into by Fritz’s neighbor, Jackson Limus with Warren. Unfortunately, the Boat Works burns down and Fritz’s boat is destroyed. To his surprise, Fritz is now being sued because he has now refused to continue to make the monthly payment on the boat which had been destroyed. Should Fritz be required to continue to make the payments under these circumstances?



Lucy v. Zehmer

  1. What remedy was Lucy seeking? Why?
  2. What was the defense raised by the defendants? Was it credible?
  3. When might the defense of intoxication be valid?
  4. What test did the court apply? Why couldn’t this court, or for that matter any court, apply the subjective test to contracts?
  5. Explain the objective test. Which test do you support? Why?

Lefkowitz v. Great Minneapolis Surplus Store

  1. What test did the court apply here to this “media offer?”
  2. How did the facts fit this test?
  3. What about the defendant’s “house rule?” What was the legal effect of the “house rule?”

Morrison v. Thoelke

  1. What is recording? What is the effect of recording?
  2. What is the purpose of a suit to “quiet title?”
  3. What remedy did the plaintiffs seek? Why?
  4. What rule did the court cite?
  5. According to the court, what is the role of precedents? When can or should a prece- dent be changed?
  6. What is a summary decree?
  7. What case did the court cite in support of its decision?
  8. What is the basis for holding that an acceptance is valid once it has been posted even if it has been lost in the mail?


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