Agency

Question 1

Agency

Answer 1

A fiduciary relationship that arises when one person (“the principal”) appoints another (“the agent”) to act on the principal’s behalf and the agent consents to act under principal’s control.

ExamTip: Both parties must consent and consent can be inferred from written statements, oral statements, or conduct.

Question 2

Control by Principal

Answer 2

The requisite control in an agency relationship is set by the principal. Principal must specify the task that the agent should perform.

Question 3

Capacity to Create an Agency Relationship

Answer 3

Principal must have contractual capacity.

An agent does NOT need to have contractual capacity, but cannot lack all mental capacity.

ExamTip: A child can be the agent, but not the principal.

Question 4

Rule of “Equal Dignities”

Answer 4

Generally, agency law does not require a writing in creation of an agency relationship. However, agency agreements must be in writing when the agent is to enter into land sale contracts or when the agency itself would fall within the Statute of Frauds.

Question 5

Agent’s Duties to Principal

Answer 5

1. Duty of Care: Carry out agency with reasonable care (“sliding scale” – unpaid agent will put less effort)
2. Duty of Loyalty: Undivided loyalty to the principal (i.e., do not self-deal!)
3. Duty of Obedience: Obey all reasonable directions given by the principal.

Question 6

Duty of Loyalty

Answer 6

The agent must:

1. Not use position as agent to profit
2. Act solely for principal’s benefit
3. Refrain from dealing with principal as adverse party
4. Refrain from acting on behalf of adverse party
5. Not compete with the principal
6. Not use the principal’s property for his own purposes or a third-party’s benefit.

ExamTip: If an agent profits in violation of his duty of loyalty, the principal’s remedy is DISGORGEMENT of profits.

Question 7

Subagents

Answer 7

A subagent is a person appointed by the agent to perform tasks for the principal.

An agent has ABSOLUTE liability to the principal for breached by a subagent.

If subagent is appointed by the principal, then there is a fiduciary relationship between them.

If the subagent’s appointment was not authorized by the principal, the subagent only owes duties to the agent.

Question 8

Principal’s Duties to Agent

Answer 8

Principals do NOT owe fiduciary duties to agents.

Principals must (1) fulfill contractual duties; (2) provide reasonable compensation; (3) indemnify the agent for principal’s losses; (4) cooperate with the agent; and (5) not unreasonable interfere with the agent’s performance.

Question 9

Actual Authority

Answer 9

Actual authority is the authority that the agent reasonably believes they possess based on the principal’s dealings with them.

ExamTip: Authority is an all-or-nothing issue. Agent is either authorized or not.

Question 10

Express (Actual) Authority

Answer 10

Express authority is that which is actually contained in the agency agreement. This authority is conveyed by the principal in words, orally or written.

ExamTip: Express authority is binding even if granted mistakenly or due to misrepresentation.

Question 11

Implied (Actual) Authority

Answer 11

Implied authority is authority the agent reasonably believes they have as a result of the principal’s words or actions.

Authority may be implied by (1) custom; (2) emergency situation; (3) prior acquiescence by principal; (4) duty of a prudent investor to manage investments… etc.

ExamTip: Title or position may be used to infer implied actual authority (e.g., “purchasing director”)

Question 12

Termination of Actual Authority

Answer 12

1. Happening of a “termination event”
2. Lapse of a reasonable time if a termination is not specified in contract
3. A change in circumstances, such as destruction of the subject matter, insolvency of the agent or principal, and a change in the law or business conditions.
4. Agent’s breach of fiduciary duty
5. Either party’s unilateral termination
6. Operation of law (e.g., death or loss of capacity or either party)

ExamTip: Principal’s death will terminate an agency relationship ONLY IF the agent has notice.

Question 13

Irrevocable Agencies

Answer 13

An agency coupled with an interest or power given as security may not be unilaterally terminated by the principal if the agency was given to protect the agent’s (or third-party) rights AND it is supported by consideration.

Question 14

Apparent Authority

Answer 14

Apparent authority exists when the principal “holds out” another as possessing authority and a third-party is reasonably led to believe that authority exists.

ExamTip: Apparent authority can exist even in the absence of actual authority. Guiding question is what transpired between the principal and third-party.

Question 15

Types of Apparent Authority

Answer 15

1. Prior Act: Agent previously exceeded their actual authority, the principal permitted it, and the third-party knows about it.
2. Power of Position: Third-party reasonably believes that the title or position of an agent, given to them by the principal, gave them authority to act.

ExamTip: Apparent Authority is based on principal’s manifestations to a third-party. An agent or another actor cannot create apparent authority on their own.

Question 16

Lingering Apparent Authority

Answer 16

Apparent authority can continue to exist even after the termination of actual authority if third-parties are not given notice.

ExamTip: Actual or constructive notice to third-parties will destroy apparent authority.

Question 17

Ratification

Answer 17

An agency relationship is created by ratification when an agent purports to act on behalf of a “principal” without any authority at all, but the principal subsequently validates the act and becomes bound.

ExamTip: Ratification can be express (i.e., principal affirms orally or in writing) or implied (i.e., principal accepts benefit of K).

Question 18

Requirements of Ratification

Answer 18

Principal must:

1. Have knowledge of all material facts regarding the K
2. Accept the entire transaction; AND
3. Have capacity (competent and of legal age).

ExamTip: Ratification must validate the entirety of a transaction. A contract cannot be partially ratified by the principal.

Question 19

Rights of Intervening Parties (Ratification)

Answer 19

Ratification that would interfere with rights of intervening parties is invalid.

E.g., Agent sells car to A. Principal sells to B. Principal cannot later ratify the sale to A because B’s rights are at stake.

Question 20

Liability of the Principal

Answer 20

A principal can be held liable by a third-party who entered into an agreement with an agent ONLY IF the agent had actual authority, apparent authority, or by ratification.

Question 21

Liability of the Agent

Answer 21

An agent who had authority (actual, apparent, or by ratification) CANNOT be held personally liable by the third-party on a contract.

Question 22

Undisclosed or Unidentified Principal

Answer 22

If the principal is unidentified (third-party knows an agency relationship exists, but not the principal’s identity) or undisclosed (agent doesn’t reveal the agency at all), either the principal or the agent can be held liable on the K if the agent had authority to enter the K.

Question 23

Liability of the Third-Party

Answer 23

Bound to principal if valid authority existed;

Bound to agent if principal unidentified or undisclosed and agent enforces contract, but principal entitled to contract benefits.

Question 24

Doctrine of Respondeat Superior

Answer 24

Under respondeat superior, an employer is liable for the torts of an employee committed within the scope of the employment.

ExamTip: Employers are generally NOT liable for torts by independent contractors.

Question 25

Independent Contractor

Answer 25

The difference between an employee and independent contractor is the level of control retained by the employer. If the principal does not have the right to tell the agent how to achieve results sought, the agent is an independent contractor.

ExamTip: Employers are vicariously liable for independent contractor’s torts if the activity involved is (1) inherently dangerous; (2) the duty is nondelegable; or (3) the principal knowingly selected an incompetent contractor.

Question 26

Employee vs. Independent Contractor Factors

Answer 26

Right to Control Factors:

1. Degree of skill required (greater skill, more likely to find independence)
2. Whose tools and facilities are used
3. Period of employment (short and definite, more likely to be contractor)
4. Basis of compensation (if per project, independent. If per time, employee)
5. Person has their distinct business.

Question 27

The Scope of Employment Test

Answer 27

For vicarious liability to attach, employee’s conduct must be (1) of the kind that the employee was hired to perform; (2) the employee committed the tort while on the job; and (3) conduct was intended to further the principal’s business.

ExamTip: Employee is NOT on the job if he is on a “frolic” (a major deviation). A minor deviation is simply a detour.