Agency Flashcards
Nature of Agency Relationships
- An agency relationship is a voluntary, fiduciary relationship between two parties: a principal and an agent.
- In an agency relationship, the principal has authorized the agent to act on the principal’s behalf, and the agent, acting within the scope of authority granted by the principal, binds the principal.
- The relationship can be based on a contract but does not have to be.
Types of Agency Relationships
Gratuitous agencies: The principal does not compensate the agent for the work the agent does on the principal’s behalf.
- Contractual agencies
a. Employer-employee (a.k.a., master-servant)
b. Employer-independent contractor
EXAM TIP: On the MEE, when agency law has been tested, it is most often tested within the context of an employer-employee or employer-independent contractor relationship.
“Agency” as an Equitable Doctrine
- The related concepts of “agency by estoppel” and “apparent authority” are equitable doctrines invoked to protect a third party from damage or loss.
- Parties may appeal to these equitable doctrines when there is in fact no actual agency and thus no agent acting within the scope of actual authority granted by a principal.
- When these related concepts are invoked by a court, often no actual agency has been created; instead, parties are treated as if an agency had existed and as if an agent had acted within the scope of authority granted by a principal.
- By this fiction, the ostensible agent is said to have “apparent authority” and the ostensible principal will be deemed to be liable or bound to a third party.
EXAM TIP: When the MEE tests agency law within the context of a partnership or a corporation, an issue to be addressed is whether a partner (in the case of a partnership) or a corporate officer (in the case of a corporation) acted as the business entity’s authorized or “apparent” agent.
Requirements for Creating an Agency Relationship
EXAM TIP: If the relevant parties have NOT been expressly identified in their capacities as a “principal” and an “agent,” begin your analysis with whether or not an agency relationship was created.
- General Requirements
a. To create an agency relationship there must be both manifestation of the principal’s intent and of the agent’s consent. In other words, there must be mutual assent by both parties—principal and agent—to the relationship.
Creating Agency Relationship
To create an agency relationship, there must first be a principal who manifests an intent to: grant authority to another 1) on the principals behalf and 2) subject to the principals control.
Additionally, there must be an agent who consents to: to these two elements.
To enter into an agency relationship, the would-be agent must have: at
at least minimum mental capacity
To enter into an agency relationship, the would-be principal must have:
the contractual capacity to effect transactions
Additional Requirement for Creating Powers of Attorney
Creating a power of attorney usually involves the additional requirement of a signed writing.
Distinguishing Employees from Independent Contractors
When a principal is an employer of the agent, the agent is either an employee or independent contractor.
EXAM TIP: Because an employer’s liability for the conduct of his agent will often depend on whether the agent is an employee or an independent contractor—and because liability concerns are very frequently tested on the MEE—knowing how to distinguish an agency relationship between an employer and employee from an agency relationship between an employer and an independent contractor is in all likelihood going to be a relevant and necessary part of your analysis.
An employer-employee relationship exists where the employer:
controls or has the right to control the agents performance, not only with respect to the results sought to be achieved but also the means and manner in which the results are to be achieved.
An employer-independent contractor relationship exists where the employer:
What services the agent is to perform but does not have the right to control how the agent performs these services on the principal’s behalf
EXAM TIP: The determination of whether an agent is an employee or an independent contractor is a fact-based inquiry. In an exam answer, weigh various factors and fully engage the available facts.
EXAM TIP: The key to the analysis is the degree to which the employer has the right to control the details of the agent’s work activity. Factors that can be considered include: (1) the extent to which the agent’s work is typically performed by specialists without supervision; (2) who sup-plies the agent with tools and a place for performing the work; (3) the length and exclusivity of the employment relationship; (4) whether the agent is paid by the job or at regularly timed inter-vals; and (5) whether the agent’s work is part of the regular business of the employer.
Agency by Ratification
The concept of “agency by ratification” refers to the post-hoc creation of an agency relationship.
- Only transactions entered into on behalf of another, or purportedly entered into on behalf by another, can be ratified.
- When a party, without authority, enters into a contract on behalf of another, and this other party thereafter affirms or ratifies this transaction on its behalf, an actual principal-agent relationship is retroactively created.
To grant authority retroactively to a purported agent who had entered into a contract on its behalf, the would-be principal must:
have knowledge at the time of the ratification of all material facts concerning the transaction entered into on its behalf
To ratify the actions of an agent or purported agent, the principal must manifest assent, by word or conduct, that:
the purported agent’s earlier unauthorized transaction entered into on the principal’s behalf is now binging on the principal so as to impact the principal’s legal relationship.
Updated Rule on Ratification
Please disregard the analysis of this hypothetical as provided in the video lecture and instead follow the analysis as provided below. The rule for ratification has been changed under the Restatement (Third) of Agency, which no longer requires that the would-be principal had capacity at the time of the agent’s actions as well as the time of ratification. Instead, under Restatement (Third) of Agency § 4.04(1), the would-be principal must have capacity at the time of ratifying the act only.
Ratification requires that the would-be principal have requisite capacity to authorize the agent’s actions at the time of ratification.
Agents owe their principals a duty of care. Pursuant to this duty of care, an agent must:
follow the principal’s instructions; perform any service or task within the scope of the agency with reasonable care; and
indemnify the principal against loss caused by: the agent’s failure to act with reasonable care (when that failure occurs within the scope of the agency).
Agents owe their principals a duty of loyalty. Pursuant to this duty of loyalty, an agent acting on the principal’s behalf must:
(a) Prefer the interest of the principal over those of the agent or others
(b) avoid self-dealing; and
(c) neither compete with the principal nor usurp business opportunities belonging to the principal.
Other Duties of Agent
a. Agents have a duty to account for:
money or property received on behalf of a principal
b. Agents have a duty to keep separate the principal’s assets from their own assets.
c. Agents have a duty of candor, which requires them to:
fully disclose any facts relevant to a transaction that a principal might now.
Duty of Compensation
RULE: Even if the agency agreement does not specifically provide for compensation for the agent, the principal has a quasi contract duty to:
pay the agent the reasonable value of services rendered, unless the parties have agreed otherwise. A principals failure to meet this obligation allows the agent to seek restitutionary damages
Duty of Reimbursement
RULE: The principal is obligated to reimburse the agent for:
all reasonable expenses incurred in the scope of agency
EXAM TIP: The final three sub-topics of this chapter are the “heart and soul” of issues concern-ing the relationship between an agent and principal. These sub-topics concern: (1) the agent’s power to bind the principal; (2) the principal’s power to ratify acts of a purported agent; and (3) an employee’s scope of employment.
The Power to Bind
EXAM TIP: When agency law is tested in the context of an MEE essay, the agent’s power to bind is usually implicated and should be analyzed.
EXAM TIP: To fully analyze a “power to bind” problem, you probably will need to use some combination of the rules discussed here. Moreover, the three or four rules in this discussion of an agent’s power to bind are all interrelated. Think of them as a family of rules that works together. When you use these several rules in a coordinated fashion, you position yourself to optimize your score on the essay.
Binding Principal
RULE: When the agent acts within the scope of his authorized powers, he has the power to bind the principal to contracts he enters into on the principals behalf.
Types of authority
a) express or b) implied
Actual express authority is the authority of the agent to:
do those things that the principal has—in an express oral or written communication—directly authorized the agent to do.
Actual implied authority includes the authority of the agent to:
conduct transactions that are reasonably necessary to fulfilling the broader responsibilities given him by the principal; including things incidental to the main business at hand.
cant bind
An agent has no power to bind the principal beyond the actual authority—express and implied—granted the agent by the agency relationship.
Ratifying unauthorized conduct
By ratifying a transaction entered into on its behalf, a principal retroactively grants the agent the authority to act on the principal’s behalf and effectively agrees to be bound to the contract.
Provided that the principal has knowledge of all material facts, a principal ratifies the otherwise unauthorized transaction entered into by its agent by either:
(a) manifesting assent that the transaction shall affect the principal’s legal relations; or
(b) performing some conduct that is justifiable only on the assumption that the principal consents to be bound.
Employer-Employee Relationships and the “Scope of Employment”
EXAM TIP: In the context of employer-employee relationships, the “scope of employment” con-cept distinguishes between those actions of the employee/agent that are acts authorized by the employer/principal and those acts that are not so authorized. The distinction is important be-cause questions concerning a principal’s potential liability to third parties will often turn on whether the agent’s actions were or were not authorized by the principal.
An employee acts within the scope of employment when the employee:
performs tasks authorized by the employer or any acts incidental to the conduct authorized
Acts that are incidental to the conduct authorized—and so, within the scope of employment—are acts that:
might ordinarily accompany the authorized conduct and that, even if disobedient, serve the purpose of the employer
EXAM TIP: The determination of whether an employee’s actions are within the “scope of em-ployment” is a fact-based inquiry. Before reaching its legal conclusion, a successful exam an-swer will fully engage the relevant facts. Remember, with analyses that are intensively fact-driven, the specific conclusion reached will not be as important as your ability to account for the relevant facts—both those that readily lend their support to your conclusion and those that do not. The key to maximizing your points is to generate a legal conclusion that coherently follows from the argument that you have framed, an argument that emphasizes “useful” facts and miti-gates “inconvenient” ones.
EXAM TIP: In determining whether an employee’s conduct is within the scope of employment, some factors to be considered include: (1) the extent to which the conduct is the kind of work the employee was hired to perform; (2) the extent to which the conduct occurred substantially within the time and space authorized by the employer; and (3) the extent to which the conduct was intended to serve the interests of the employer.
Agent’s Tort Liability to Third Parties
a. Agents will be liable to third parties for harm caused by their negligence or by their intentionally tortious conduct: whether or not they are acting as an agent
Agent’s Contractual Liability: Principals Fully Disclosed and Not Fully Disclosed
a. RULE: In general, if an agent enters into a contract on behalf of a principal that is fully disclosed:
not personally liable on the contract
b. RULE: In general, if an agent enters into a contract on behalf of a principal that is not fully disclosed, either partially disclosed (existence but not identity) or undisclosed: the agent will be personally liable on the contract with the principal
Principal’s Tort Liability: Liability for Principal’s Own Negligence
RULE: A principal is liable to a third party for harm caused by the principals negligence in selecting, training, retaining, supervising, or otherwise controlling the agent.
Principal’s Tort Liability: Vicarious Liability for Agent’s Conduct
EXAM TIP: The key set of rules to know in the area of principal’s liability to third parties is under this sub-heading. Indeed, this is one of the more important set of rules to know in the entire subject of agency. In an essay testing the rules of agency, the bar examiners almost always test “liability to third parties” and regularly do so in the context of a principal’s vicarious liability for an agent’s conduct.
EXAM TIP: The rules discussed under this sub-heading are interrelated. An analysis of a principal’s vicarious liability to third parties may require the use of some combination of these rules. Know them all, and think of them as a family of rules that, when used in a coordinated fashion, can score you lots of points.
Under the doctrine of respondeat superior, vicarious liability generally attaches where:
The principal has the right to control the agent and the agents acts are within the scope of agency. it is a strict liability doctrine.
Vicarious liability in the context of an employer-employee relationship
(1) Employee’s negligence
(a) The liability of an employer for its employee’s negligence is limited to actions that occur within the employee’s scope of employment.
NOTE: For a reminder/review of the “scope of employment” concept, consult the lecture segment on “Principals and Agents” and its discussion of employer-employee relationships.
(2) Employee’s intentional tort
Intentional acts of employees
RULE: In general, employers will not be liable for the intentional torts of an employee
Employers will be held liable for the intentional tort of an employee if the em-ployee’s intentional tort is accomplished:
a) in the course of doing the employer’s work; and
b) for the purpose of accomplishing such work.
It is generally no defense to the employer that it had previously instructed the employee not to use force n the performance of duties.
Vicarious liability in the context of an employer-independent contractor relationship
RULE: Principal is not liable for the tortious conduct of an independent contractor
NOTE: The rationale for not making principals vicariously liable for the tortious conduct of independent contractors hired by them is that independent contractors are not under the principal’s control to the extent that employees are.
NOTE: There are some rarely tested exceptions to this rule. For example, vicariously liability might be imposed on a principal for tortious conduct of an independent contractor when the independent contractor is hired to engage in activity that is inherently dangerous. For more on this and other exceptions, please consult the outline.
Contractual Liability Arising from an Agent’s Actual Authority
- Contractual Liability Arising from an Agent’s Actual Authority
EXAM TIP: Contractual liability from agent’s actual authority is the main implication of an agent’s power to bind a principal.
a. Principals will be liable on contracts with third parties when their agents, acting with actual authority (express or implied), enter into those contracts on their behalf.
b. Principals will similarly be liable on contracts entered into on their behalf even when the agent’s authority to do so was only retroactively granted, that is, even when the agency is created by ratification.
c. Principals will even be liable on a contract when an authorized agent enters into a contract on the principal’s behalf without disclosing the principal. In this circumstance, the principal’s liability comes into play if, subsequent to the transaction, the third party discovers the identity of the undisclosed principal.
Contractual Liability Arising from an Agent’s Apparent Authority
EXAM TIP: When the MEE tests third-party liability issues in an agency context, the doctrine of “apparent authority” is the most frequently tested concern; in an MEE agency essay, it appears almost always.
a. When no agency relationship has been created by the mutual consent of an agent and principal or where an agent acts beyond the scope of his actual authority, a court may use the doctrine of “apparent authority” to hold a person liable to a third party for the acts of another as if this person were a principal to an agent who acted with actual authority.
A party will be bound as if it were a principal to an agent who acted with actual authority, when:
that parties or words, actions, or failure to act causes a third party to reasonably but mistakenly believe that another acts as its authorized agent.
The “apparent authority” of an agent is created by:
the supposed principal’s conduct – not the conduct or representations of the supposed agent alone.
EXAM TIP: Because “apparent authority” requires the injured third party to have a reasonable basis for his belief that a party acted as the authorized agent AND this basis to be derived from actions or omissions of the purported principal, this doctrine cannot be applied when the princi-pal is undisclosed. In other words, undisclosed principals cannot grant apparent authority. Be aware of the fact that there is a form of authority called “liability of an undisclosed principal,” which is rarely tested. Please consult your outline for more details.
EXAM TIP: The doctrine of apparent authority is applicable to disputes involving contractual lia-bility but not to disputes involving tort liability. The court imposition of apparent authority re-quires that the injured third party reasonably believed that the purported agent had actual authority to act on behalf of a principal. In the tort context, the injured party is not relying on the tortfeasor’s actual authority to act as a principal’s agent.
