Agency

Question 1

When is an agency relationship created?

Important

Answer 1

An agency relationship is created when (i) a principal manifests assent to an agent; (ii) the agent acts on the principal’s behalf; (iii) the agent’s actions are subject to the principal’s control; and (iv) the agent manifests assent or otherwise consents.

Question 2

Getting your bearings: types of principals and types of agents

Answer 2

Principals: individuals, employers, entrepreneurs, corporations, or partnerships
Agents: individuals, employees, independent contractors, gratuitous agents, general and special agents, trustees, subagents

Key word to look for: CONTROL

Business owners (sole proprietors w/o partners) are frequently highlighted as principals in agency and partnership fact patterns

Question 3

General rule statement: principal liability

Answer 3

The principal will generally be bound by any contract created on the principal’s behalf, by an agent with the power to bind the principal, whether the power to bind is (i) expressed orally or in a writing; (ii) implied by a principal’s conduct; or (iii) misinterpreted by a third party.

Question 4

Capacity to be a principal

Answer 4

To become a principal and be bound by an agent’s actions, a person must have capacity both to consent to the agency relationship and to enter into the transaction to which the agent purports to bind the principal.

In contrast, virtually any person can serve as an agent.

Question 5

Express actual authority

Answer 5

A principal is subject to liability on a contract if the agent acted with actual or apparent authority. Express actual authority can be created by oral or written words, clear, direct, and definite language, or specific detailed terms and instructions. For express actual authority to exist, the principal’s manifestation must cause the agent to believe that the agent is doing what the principal wants, and the agent’s belief must be reasonable.

Question 6

Implied actual authority

Answer 6

Implied actual authority allows an agent to take whatever actions are properly necessary to achieve the principal’s objectives, based on the agent’s reasonable understanding of the manifestations and objectives of the principal.

The authority to make purchases on behalf of a principal may create implied authority in an agent to make payments for goods and services purchased, accept deliveries, and collect funds.

Question 7

Situations in which implied authority comes up

Answer 7

Customary implied authority: An agent has implied authority to act within accepted business customs or general trade usage within an industry. The agent must be aware of the normal business customs or usage before she acts.

Implied authority by position: A principal may manifest assent to the actions of his agent by placing the agent in a position that customarily has certain authority, such as vice president or treasurer.

Implied by acquiescence: Implied authority based upon acquiescence commonly results from (i) a principal’s acceptance of the agent’s acts as they occur; or (ii) the principal’s failure to object to the unauthorized actions of the agent that affirm the agent’s belief that those actions further the principal’s objections and support the agent’s perceived authority to act in the future.

Implied authority due to emergency: Agents have implied authority to take all reasonably necessary measures in cases of emergency, in the absence of the principal and/or specific instructions to act.

Question 8

Agent’s implied authority to delegate

Answer 8

In general, agents are prohibited from delegating either express or implied authority to a third person without the principal’s express authorization. However, an agent generally has the implied authority to hire a subagent to perform mechanical or ministerial acts, for a specific situation when it is required by law that an individual have a professional perform a specific task, per custom or usage, or when the agent cannot perform due to a variety of reasons.

Question 9

Difference between implied and apparent authority

Answer 9

Implied authority results when the principal’s words or actions cause an AGENT to reasonably believe in the agent’s authority to act.

Apparent authority results when the principal causes a THIRD PARTY to reasonably believe that the agent has authority to act.

Question 10

Apparent authority

Answer 10

Apparent authority derives from the reasonable reliance of a third party on that party’s perception of the level of authority granted to the agent by the principal. The perception is based on the principal’s behavior over a period of time.

For apparent authority to exist, a third party must believe that the agent acted with actual authority and that belief must be reasonable.

Question 11

Apparent authority: principal’s liability for agent’s tort

Answer 11

A principal is liable for a tort committed by an agent with apparent authority when the agent’s appearance of authority enables him to commit a tort or conceal its commission.

Question 12

Apparent authority: third party’s reasonable belief

Answer 12

To determine whether a third party’s belief is reasonable, courts will consider past dealings between the principal and agent of which the third party is aware, relevant industry standards, trade customs, the principal’s written statements of authority, transactions that do not benefit the principal, or extraordinary or novel transactions for the principal.

Information known by a third party that a person is an agent for an organization without knowledge of the person’s position in the organization is an insufficient basis to support a belief in the agent’s authority to act for the organization.

Question 13

Termination of authority

Answer 13

An agent’s actual authority may be terminated by: the principal’s revocation, the principal’s agreement with the agent, a change in circumstances, the passage of time, the principal’s death or suspension of powers, the agent’s death or suspension of powers, the principal’s loss of capacity, or a statutorily mandated termination.

Question 14

Termination of authority: changed circumstances

Answer 14

Agency relationships may end as a result of a change in the statute relating to the matter, insolvency of either party, a dramatic change in business conditions, the destruction of the subject matter of the agency relationship, or a disaster.

Question 15

Effect of death of the principal or agent

Answer 15

Death of principal:
The common-law rule is that the principal’s death terminates all power of the agent to act, including actual authority, regardless of whether the agent or third party has notice of the principal’s death. The modern trend holds that the principal’s death does not terminate an agent’s authority until the agent has notice of the principal’s death.

same trend with principal’s loss of capacity

Death of agent:
The death of the agent automatically terminates the agent’s actual authority.

Question 16

Effect of agent’s breach of fiduciary duty

Answer 16

The agent’s authority terminates when he breaches his fiduciary duty to the principal.

Question 17

Estoppel

Answer 17

A person who has not represented that an individual is authorized to act as an agent may be estopped from denying the existence of an agency relationship or an agent’s authority with respect to the transaction entered into by the agent. Estoppel applies when a third party is justifiably induced to make a detrimental change in position because that third party believed the transaction was entered into for the principal and either the principal (i) intentionally or carelessly caused the belief; or (ii) having notice of such belief, failed to take reasonable steps to notify the third party of the facts.

In short, a principal, or purported principal, is liable for the appearance of authority arising solely from the principal’s failure to take reasonable steps and use ordinary care.

Question 18

Ratification

Answer 18

Ratification occurs when a principal affirms a prior act that was done or purported to be done on the principal’s behalf. The principal’s affirmation may be either express or implied, and consideration is not required. The principal must (i) ratify the entire contract; (ii) have legal capacity to ratify the transaction; (iii) ratify in a timely manner (before the third party withdraws); and (iv) have knowledge of the material facts involved in the original act.

If the principal ratifies the agent’s action, then the principal is bound just as if the action had been authorized at the time it occurred, even if the agent acted without authority.

However, if the principal’s ratification occurs after such a material change that it would be unfair to enforce the transaction against the third party, the third party can avoid the transaction.

Question 19

Contractual liability of the principal

Answer 19

A principal is subject to liability on a contract that the agent enters into on the principal’s behalf if the agent has the power to bind the principal to the contract.

An agent has the power to bind the principal to a contract when (i) the agent has actual authority, express or implied; (ii) the agent has apparent authority; or (iii) the principal is estopped from denying the agent’s authority.

In addition, even if an agent acts with no power to bind the principal, the principal can become subject to liability on the contract if the principal ratifies the contract.

Question 20

Doctrine of vicarious liability

Answer 20

The doctrine of vicarious liability asserts that a principal is liable for the acts of an agent, even though the principal is innocent of fault and not directly guilty of any tort or crime.

Question 21

Respondeat superior

Answer 21

Under the doctrine of respondeat superior, a principal may be vicariously liable for a tort committed by an agent acting within the scope of his employment.

If the agent is not liable, the principal cannot be vicariously liable.

General rule:
A principal is vicariously liable to a third party harmed by the agent’s conduct when the agent is an employee and the agent commits a tort while acting under the scope of employment

Question 22

Employee defined (for respondeat superior)

Answer 22

An employee is an agent whose principal controls or has the right to control the manner and means of the agent’s performance of work. The key to determining employer liability is whether the employer has the right to control the employee’s conduct.

Question 23

Scope of employment defined (for respondeat superior)

Answer 23

An employee acts within the scope of employment when either performing work assigned by the employer or engaging in a course of conduct subject to the employer’s control.

When an employee acts independently of any intent to serve any purpose of the employer, the employer may escape liability.

Question 24

Respondeat superior for intentional torts of employee

Answer 24

Intentional torts are not automatically excluded from the scope of employment. They may fall within the scope of employment when (i) the conduct is within the space and time limits of the employment; (ii) the agent was motivated in part to act for the employer’s benefit; and (iii) the act was the kind of act that the employee was hired to perform.

Question 25

Work-related travel (for respondeat superior)

Answer 25

Generally, travel between work and home by an employee is not within the scope of employment, however, an exception exists when the employer provides the employee with a vehicle and asserts control over how the employee uses the vehicle.

Travel required to perform work, such as travel from an employer’s office to a job site or between job sites, is generally within the scope of employment

Question 26

Frolic & detour (for respondeat superior)

Answer 26

When an employee’s personal errand involves a significant deviation from the path that otherwise would have been taken for the purposes of performing work, that errand is a frolic. Frolics are outside the scope of an employee’s employment until he resumes performance of his assigned work.

Travel by an employee during the workday that involves a personal errand may be within the scope of employment when the errand is merely a detour (a de minimus departure from an assigned route).

Question 27

Tort liability: agent’s apparent authority

Answer 27

A principal is vicariously liabile for a tort committed by an agent with apparent authority when the agent’s appearance of authority enables him to commit a tort or conceal its commission.

Such torts include fraudulent and negligent misrepresentation, defamation, tortious institution of legal proceedings, and conversion of property.

Review: For apparent authority to exist, a third person must believe that the agent acted with actual authority, and such belief must be reasonable and be traceable to a manifestation by the principal.

NOTE: The fact that an agent’s conduct is not beneficial to the principal does not protect the principal from liability for such conduct.

Question 28

Principal’s DIRECT liability to third parties

Answer 28

A principal is directly liabile to a third person harmed by an agent’s conduct if (i) the principal authorizes or ratifies the agent’s conduct; (ii) the principal is negligent in selecting, supervising, or otherwise controlling the agent; or (iii) the principal delegates to an agent performance of a non-delegable duty to use care to protect other persons or their property, and the agent breaches that duty.

If the agent’s conduct is not tortious, the principal may still be liable if the same conduct by the principal would have rendered the principal liable.

Question 29

General rule: agent’s liability as a party to a contract

Answer 29

When an agent enters into a contract on the principal’s behalf and binds the principal to the contract, the agent might also become a party to (and laible on) the contract. Whether the agent becomes a party depends on the terms of the contract and the degree to which the agent discloses to the third party the existence and identity of the principal.

Question 30

Agent’s liability: disclosed principal

Answer 30

A principal is a disclosed principal if the third party has notice of both the existence and identity of the principal. Unless the agent and third party agree otherwise, an agent who enters into a contract on behalf of a disclosed principal does not become a party to the contract.

To avoid becoming a party to the contract, the agent must (i) enter into the contract on behalf of the disclosed principal; (ii) affirmatively disclose to the third party both the existence and identity of the principal; and (iii) not agree to become a party to the contract.

Question 31

Agent’s liability: partially disclosed principal

Answer 31

A principal is a partially disclosed principal if the third party has notice of the principal’s existence but not the principal’s identity. Unless the agent and third party agree otherwise, an agent who enters into a contract on behalf of a partially disclosed principal becomes a party to the contract.

If the agent binds the principal to the contract, or if the principal ratifies the contract, then both the principal and agent are parties to the contract with the third party.

Question 32

Agent’s liability: undisclosed principal

Answer 32

A principal is an undisclosed principal if the third party has no notice of the principal’s existence. An agent who enters into a contract on behalf of an undisclosed principal becomes a party to the contract. Thus, when the agent does not inform a third party of the identity or the existence of the principal, the agent becomes liable to the third party on the contract.

Question 33

Election of remedies doctrine

Answer 33

If the agent binds the undisclosed principal to a contract, then both the principal and the agent are parties to the contract with the third person. Once the third party discovers the existence of the principal, however, the election of remedies doctrine requires the third party to choose to hold liable either the principal or the agent. If the third party obtains a judgment against one of them, then the third party is precluded from seeking to hold the other party liable on the K.

Question 34

Third party liability to an undisclosed principle

Answer 34

Generally, a third party is liable to an undisclosed principal on a contract made with an agent on behalf of the principal unless (i) the principal or undisclosed principals are excluded by the form or terms of the contract; or (ii) the principal’s existence is fraudulently concealed, i.e., the agent falsely represents to the third party that the agent does not act on behalf of the principal.

Question 35

Undisclosed principal liability to a third party

Answer 35

Generally, an undisclosed principal is liable to a third party if (i) the third party is induced to make a detrimental change in position by an agent without actual authority; (ii) the principal knew of the agent’s conduct and that it might induce others to change positions; and (iii) the principal did not take reasonable steps to notify the third party of the facts.

This comes up when the agent’s actions were unauthorized by the principal.

Question 36

Implied warranty of authority

Answer 36

An agent purporting to be acting for a principal gives an implied warranty of authority to the third party. If the agent lacks the power to bind the principal, then a breach of the implied warranty had occurred, and the agent is liable to the third party.

An agent may give an express warranty of authority to induce a third party to deal with the agent.

ONLY for when principal is disclosed or partially disclosed–NOT undisclosed

Question 37

Agent’s liability for torts

Answer 37

An agent is subject to liability to a third party harmed by the agent’s tortious conduct. An agent’s individual tort liability extends to negligent acts and omissions as well as intentional conduct. An agent is not liable for torts committed by the principal.

Question 38

Rights of principals: control of the agent

Answer 38

A principal has the right to control the acts of an agent working on the principal’s behalf, including third-party negotiations. However, a principal cannot require agents to perform illegal acts or acts against public policy.

Question 39

Rights of principals: an agent’s duty of care

Answer 39

Principals have the right to expect an agent to follow instructions and to perform duties, tasks, and transactions with reasonable care, diligence, and judgment. Uncompensated agents are expected to perform in an acceptable manner and are subject to the same standard of care as a compensated agent.

Question 40

Rights of principals: agent’s duties of loyalty & obedience

Answer 40

Agency is a special relationship that gives rise to fiduciary duties on the part of the agent. A principal has the right to expect good faith, loyalty, and obedience from her agent. A fiduciary duty owed to the agent to the principal implies that the agent will not breach the trust imposed by the agency relationship.

An agent may be liable to a principal for breach under either contract or tort law.

Question 41

Rights of principals: notification

Answer 41

The principal is entitled to notice from the agent of all issues relevant to the subject matter of the agency relationship. A core tenet of agency law is that knowledge of or notice to the agent is notice to the principal.

Question 42

Rights of principals: accounting

Answer 42

The principal has the right to receive an accounting from the agent of all property and funds received or paid on behalf of the principal. The agent is obligated to maintain the principal’s funds separate from his personal funds.

Question 43

Duties of principals: deal fairly and in good faith

Answer 43

A principal is obligated to treat the agent fairly and in good faith and to provide the agent with information concerning risks of physical or financial harm or loss that the principal knows or should know are present in the agent’s work but that are unknown to the agent.

In addition, although a principal does not owe an agent a duty of loyalty, a principal has a duty to refrain from conduct likely to injure an agent’s business reputation or reasonable self-respect.

Question 44

Duties of principals: contractual duties

Answer 44

A principal has a duty to act in good faith in accordance with the terms of the contract between the agent and principal.

Question 45

Duties of principals: duty to pay compensation

Answer 45

If a principal has promised to pay compensation, then the agent can maintain an action for damages if the principal fails to pay.

Question 46

Duties of principals: duty to indemnify

Answer 46

Subject to an agreement to the contrary, a principal has a duty to indemnify the agent against pecuniary loss suffered in connection with the agency relationship and within the scope of the agent’s actual authority. The principal’s duty to indemnify includes expenses and other losses incurred by an agent, such as attorney’s fees, in defending an action brought by a third party.

Question 47

A principa’s remedies for breach by agent

Answer 47

A principal has the right to recover for a breach of the agent’s fiduciary obligation, as well as for the agent’s breach of contract and for actions of the agent that exceed the scope of employment, and for which tort law provides a remedy.

Question 48

Rights of an agent

Answer 48

In general, an agent has a right to be compensated, allowed to work without interference, reimbursed for losses, provided with a safe work environment, and indemnified for working on behalf of a principal.

Question 49

Remedies available to an agent for principal’s breach

Answer 49

An agent might have a claim against the principal founded in contract or tort law. However, the agent is required to choose the remedy sought and to mitigate his damages prior to and during the period that the agent seeks relief.

To sue for breach of K, an agent must establish that a right to compensation exists i.e., there must have been consideration to support the agency relationship.

Question 50

Duties of an agent

Answer 50

An agent has two types of duties to a principal: a duty of loyalty, which includes a fiduciary duty, and a performance-based duty, which includes the duty of care.

Duty of Loyalty
The agent’s general duty of loyalty includes the duty not to deal with the principal as an adverse party, the duty to refrain from acquiring a material benefit, the duty not to usurp a business opportunity, the duty not to complete, the duty to disclose multiple principals, and the duty not to use the principal’s confidential information.

Duty of Care
An agent owes performance-based duties to the principal, including a duty of care to perform with reasonable diligence and skill, a duty of obedience, a duty to provide information to the principal, a duty to keep and render accounts, and a duty to act in accordance with the contract between the parties.