Who’s the Agent Here? Partners’ Ability to Act for the Partnership

It is not unusual that a dispute between the owners of a closely held business also involves a dispute about the authority of one of the owners to act as agent for the entity.  We had a recent case, for example, in which a central issue was whether the manager of a limited liability company exercised his business discretion in a way that was in the best interests of the business.

Once that dispute was on the table, we had to look at whether the manager had express or implied authority to act — in this case to hire a third party — and whether that exercise of authority was within the scope of the generally delegated authority provided to the manager by the operating agreement, or required an affirmative vote of the owners.

Professor Douglas Moll, writing on the law professors blog, parses the issues nicely under the most recent iteration of the Uniform Partnership Act, which has been widely adopted by state legislatures.  For Professor Moll, the question of authority turns on the extent to which an ordinary business transaction is involved.

Acting individually, a partner:

  • has no actual authority to commit the partnership to any matter for which this act requires the affirmative vote or consent of all partners;
  • has the actual authority to commit the partnership to usual and customary matters, unless the partner has reason to know that: (i) other partners might disagree; or (ii) for some other reason consultation with fellow partners is appropriate; and
  • has no actual authority to take unusual or non-customary actions that will have a substantial effect on the partnership.

Does a partner have actual authority, simply as a matter of his “partner” status, to bind the partnership to an ordinary business transaction? On the one hand, RUPA § 401(j) states that “[a] difference arising as to a matter in the ordinary course of business of a partnership may […]