112/4212 VOCABULARY AUTHORITY OF AGENTS AND PRINCIPALS

Question 1

Agency

Answer 1

Agency is a consensual fiduciary relationship in which one party (the agent) agrees to act for and under the control of another (the principal). This relationship may be one of employment (master-servant) or of authority (principal-nonservant/agent, e.g., bank manager); independent contractors (e.g., CPAs and lawyers) do not act in an agent capacity (due to lack of control by the principal over the contractor).

“Control” relates to control of the physical conduct of the agent and includes the RIGHT or ability to control, as well as actual control or supervision.

Types of agency:

• Express agency: created by written contract or oral appointment, e.g., power of attorney;
• Implied agency: created by acts or deduced from circumstances showing the intention to create the relationship;
• Agency by ratification: approval after the fact of an unauthorized act done by the agent;
• Agency by estoppel: created by operation of law; prevents denial of the existence of agency by the principal when a third party relies on circumstances which reasonably lead to the conclusion that an agency exists;
• Apparent agency: based on manifestations by the principal to third parties (reliance is not necessary).

Question 2

Agent

Answer 2

An agent has general or specific authority, as determined by the principal, to bind the principal as regards third parties (i.e., an agent works for and under the control of another (the principal) and has the power to impose liability to third parties on the principal). However, a “general agent” is not an independent contractor, trustee, or employee (servant).

Duties of an agent include acting with loyalty and good faith (“fiduciary” relationship); obedience; necessary skill, care, and diligence; not to make delegation or substitution; and duty to account.

An agent is generally not personally liable to third parties unless the agent does any of the following:

• Acts for a nonexistent, incompetent, or undisclosed principal
• Signs a negotiable instrument in his own name
• Misrepresents his authority
• Personally guarantees certain acts
  Agents are liable for their own torts.

Question 3

Agreement

Answer 3

An agreement is an element of a contract. It is an offer by the offeror followed by an acceptance by the offeree. An agreement must be reasonably definite as to what each party is to do and must manifest genuine intent by both parties to agree and be legally bound. An agreement is a mutual understanding, an objective “meeting of the minds.”

Question 4

Apparent Authority

Answer 4

Apparent authority is the appearance of authority, derived from the words or actions of the principal, that leads a third party reasonably to believe and to act upon the belief that actual authority exists in the purported agent when in fact it does not. Apparent authority is judged from the viewpoint of the third party, and would probably evoke the estoppel doctrine.

Question 5

Contract

Answer 5

A contract is an agreement between two or more persons that establishes an enforceable legal relationship between the parties. The essential elements of a contract are:

• an agreement (offer and acceptance),
• consideration,
• valid subject matter, and
• legal capacity.

A void contract never had any legal status.

A voidable contract is valid only until one party exercises a right to void the contract.

An unenforceable contract is valid when made but is made unenforceable by some later event, such as the statute of limitations, discharge of the contract in bankruptcy, or involuntary destruction of the subject matter.

Question 6

Customary authority

Answer 6

comes from the customs of that type of business, not implied authority.

Question 7

Duress

Answer 7

Duress is a wrongful act that compels contractual agreement through fear. It is the actual or threatened causing of an action or inaction, e.g., threat of bodily harm, property damage, or criminal prosecution, which forces the other party to enter into the contract against his free will and judgment. A contract made under duress is voidable at the option of the victim due to invalid consent. It is based on fact and circumstance, and is subjective (what the injured party thinks). Factors to be considered include the age, sex, experience, intelligence, and relation of the parties.

Question 8

Estoppel

Answer 8

Estoppel is a legal doctrine that protects a party from harm if that party acted upon an induced expectation of another. For example, if a renter was told by the landlord that the monthly rental would be reduced due to damage caused by a leaky roof and the renter relied on this expectation, the landlord would be estopped from collecting the original rental amount.

Question 9

Independent Contractor

Answer 9

An independent contractor is a party who is not subject to control and supervision by the party who employs the contractor. The employer seeks results only—the contractor controls the methods. No agency relationship exists and the employer is not liable for the torts of the contractor. Control is the key element. Attorneys and CPAs are usually independent contractors. The IRS also uses a 20-factor test to help determine whether an individual is an employee or an independent contractor. An independent contractor’s earnings are subject to self-employment tax.

Question 10

Notice

Answer 10

Notice is to have or give actual knowledge of, or to have received or given a printed or written statement (to inform) of intention, or to have or give reason to know that such intention exists. Notice is often a condition of liability or release from liability (as in a partner leaving a partnership).

Question 11

Power of Attorney

Answer 11

Power of attorney is a legal instrument that authorizes one party to act for (as the agent of) another. It is a form of express agency. Under such an instrument, the principal cannot delegate to another (the agent) that which the principal is not legally permitted to do. (The principal may delegate that which the principal is not physically able to do, such as in the case of a principal who is a handicapped individual.)

To have someone else represent the taxpayer before the IRS in connection with a federal tax matter, the taxpayer can file IRS Form 2848, Power of Attorney and Declaration of Representative, with the IRS office where the taxpayer is appearing.

Question 12

Principal

Answer 12

A principal is one with the legal capacity to contract who agrees with another (the agent) that the agent should act on the principal’s behalf. A principal is the person with control over an agent in an agency relationship. A principal may be an individual, corporation, or partnership.

The principal is liable for torts of the agent committed within the scope of employment or authority and during the course of duties (see the rule of respondeat superior—a form of strict liability).

The duties of principal to agent include to compensate, reimburse, and indemnify.

A principal may be “disclosed” (i.e., identity is known to the third party) or “undisclosed.”

Question 13

Ratification

Answer 13

Ratification is the act of approving a formal document such as a labor agreement. In private contract law, ratification is a principal’s approval of an act by its agent’s lack of authority to legally bind the principal.

Question 14

Ratify

Answer 14

To ratify is to affirm or sanction a contract (1) by accepting the benefit of the act retroactively, with full knowledge of the facts and the right to avoid the contract (express ratification) or (2) by failure to repudiate or disaffirm the contract (by silence or by retention of goods received; implied ratification). Ratify is the opposite of repudiate.

Question 15

Respondeat Superior

Answer 15

Respondeat superior is the legal doctrine under which a principal can be held liable for the acts of the agent (or servant-employee) when the tort is committed by the agent within the scope of employment or authority and during the course of duties, even though the principal did not authorize, have knowledge of, or have any fault regarding the tort. This rule is a form of strict liability for the principal: the principal is liable even though not at fault or negligent.

Question 16

Scope of Authority

Answer 16

The scope of authority is determined and conferred on an agent by consent of the principal. Authorities have the legal power to act, commit, or change the legal status of another. It may be express (stated in words), implied (unstated, as is customary or usual in the circumstance to fill the gaps in express authority needed to conduct the purpose of the agency), actual (express plus implied authority), or apparent (the appearance of authority).

Question 17

Statute of Frauds

Answer 17

The statute of frauds is found in Article 2 of the Uniform Commercial Code (UCC). It specifies that certain contracts must be in writing and signed by the party to be charged in order to be enforceable. The writing need not be formal; a signed memo or several writings (e.g., letters) may be sufficient.

The writing must contain the subject matter, the names of the parties, the consideration, the terms of the contract (must state at the very least the quantity of goods sold), and the signature of the party to be charged.

The statute applies only to the following:

• The sale of goods having a value in excess of $500
• A contract that will not be performed within one year of the signing
• The sale of real property or of securities
• The promise to answer for the debt of another

Question 18

Trust

Answer 18

A trust is a fiduciary relationship in which one person holds legal title to property subject to an equitable obligation to safeguard or use the property for the benefit of another. A trust represents a separation of legal and equitable title and may be either inter vivos or testamentary. A trust may have different types, such as accumulation, charitable, Clifford, complex, constructive, irrevocable, living, private, or revocable.

Elements required for creation of a trust include the following:

• Intent of the settlor or grantor
• Appointment of a trustee
• Identification and segregation of trust property
• Specification of a trust or beneficial purpose
• Naming of a beneficiary
• Specification of duration, i.e., cannot be in perpetuity (in most states)
  Receipts and expenses must be allocated between principal and income.

Question 19

Will

Answer 19

A will is a legal declaration of an individual’s intent as to the disposition of property after death. A person who dies with a will is said to die testate; a person who dies without a will is said to die intestate. A will becomes effective only upon the death of the individual (maker). It is ambulatory (i.e., may be changed by completely rewriting or by codicil or revoked by the maker during his lifetime). A will does not affect the rights of joint tenants (right of survivorship). A will may specify a general (“I leave to (named charity) the sum of $10,000”) or specific (“I leave to my brother our father’s gold watch”) legacy (disposition of property under a will). The will is used to “devise” the testator’s property (i.e., stipulate the recipient of property by will).