Agency Flashcards
What is agency?
Agency is 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. The agent must also act subject to the principal’s control. The degree of control does not need to be significant.
What is required for an agency relationship to exist?
(1) Principal must have contractual capacity, (2) agency must have at least minimal mental capacity, (3) consent of both parties, and (4) a writing if required under the Statute of Frauds (equal dignities rule).
What duties does the agent owe to the principal?
Duty of Care: An agent owes a duty to their principal to carry out their agency with reasonable care.
Duty of Loyalty: An agent owes a duty of undivided loyalty to the principal.
Duty of Obedience: An agent must obey all reasonable directions of their principal. If the agent disobeys a reasonable direction, the agent will be liable to the principal for any loss that the principal suffers.
What duties does the principal owe to the agent?
The principal owes the agent all of the duties imposed by their contract, cooperation, reasonable compensation, and indemnity/reimbursement for expenses.
What are the rules for actual authority?
Actual Authority: Actual authority is authority that the agent reasonably believes they possess based on the principal’s dealings with them. Actual authority may be express or implied. Express authority is authority contained within the four corners of the agency agreement. Implied authority is authority the agent reasonably believes they have as a result of the principal’s words or actions.
How may actual authority be revoked or terminated?
(1) The occurrence of an event in the agency agreement that will terminate the agent’s authority, (2) lapse of a reasonable time if a time for termination is not specified in the agreement, (3) a change in circumstances (e.g., destruction of the subject matter of the authority, 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, and (5) operation of law (e.g., death).
Note: When the principal dies, termination is only effective when the agent receives notice of the principal’s death.
What are the rules for apparent authority?
Apparent Authority: Apparent authority exists when the principal “holds out” another as possessing authority and based on this holding out, a third party is reasonably led to believe that authority exists.
Apparent authority arises when through prior acts authorized by the principal and known to the third-party and when an agent’s title or position creates a belief in a third-party that the agent was authorized to act in ways consistent with the title or position. Apparent authority can linger after actual authority ends and death or incompetency of the principal does not terminate the agent’s apparent authority.
However, apparent authority cannot be created by mere unilateral representations of the agent.
What are the rules for ratification?
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. For ratification to occur, the principal must (1) have knowledge of or have reason to know all material facts regarding the contract, (2) accept the entire transaction, and (3) have capacity.
Ratification may be express or implied. The most common form of express ratification is oral or written affirmation of a contract (for example, a company resolution). The most common form of implied ratification is when the “principal” accepts the benefits of the contract.
Generally, a “principal” may ratify anything unless: (1) performance was illegal at the time of ratification, (2) the third party has withdrawn, or (3) there has been a material change in circumstances.
What are the rules for liability to third-parties?
As a general rule, if the agent had actual authority or apparent authority to enter a contract for the principal, or if the principal ratified a previously unauthorized contract, the agent cannot be held personally liable on the contract. However, an exception applies (that is, the agent may be held personally liable) if the existence and identity of the principal are not disclosed. Additionally, if the agent did not have authority to enter into the contract (so the principal will not be liable) the agent can be held liable to the third party for damages for breaching an implied warranty that a principal with contractual capacity exists and that they, the agent, had authority to contract for the principal.
If the principal is unidentified or disclosed, either the principal or agent may sue the third-party. When the principal is disclosed, only the principal may sue the third-party. The principal may not enforce the contract if there has been an affirmative fraudulent misrepresentation of the principal’s identity or if there is an unforeseen increased burden to the third party due to the fact that performance is due to the principal and not the agent.
What are the rules regarding principal’s liability for agent’s torts?
Liability Theory 1 - Respondeat Superior: A principal can be liable for the torts of an agent under the doctrine of respondeat superior. Under this doctrine, an employer is liable for the torts of an employee committed within the scope of the employment. An act will be within the scope an an employee’s employment if (1) it was expressly authorized by the employer or (2) of the same general nature as the employee’s job and motivated by a desire to serve the employer. A principal generally is not liable for torts committed by an independent contractor. An independent contractor is a person contractually obligated to do work but is not controlled in how the work is done.
In determining whether the principal has the right to control, courts will consider: (1) the degree of skill required on the job, (2) whose tools and facilities are used, (3) the period of employment, (4) the basis of compensation, (5) the business purpose, (6) whether the person has a distinct business, (7) the characterization and understanding of the parties, and (8) the customs of the locality regarding supervision of work.
In determining whether the employee was acting within the scope of his employment, courts will consider: (1) whether the conduct was “of the kind” the agent was hired to perform, (2) whether the tort occurred “on the job,” and (3) whether the conduct benefited the principal. A detour or small deviation from the employer’s direction is within the scope of employment, while a frolic or major deviation requiring a substantial departure from employment is beyond the scope.
Intentional Torts: The general rule is that the employer is not liable for the intentional torts of an employee because they are not normally within the scope of employment. However, intentional torts will be viewed as within the scope of employment if the conduct is: (1) a natural incident of the employee’s duties (as where force is authorized or the nature of the work gives rise to hostilities); (2) where the employee is promoting the employer’s business or is motivated to serve the employer; or (3) specifically authorized or ratified by the employer.
Liability Theory 2 - Apparent Authority: A principal is vicariously liable where an agent appears to deal or communicate on behalf of the principal and the agent’s apparent authority enables the agent to (1) commit a tort or (2) conceal its commission.
Liability Theory 3 - Direct Liability: A principal may be directly liable for their own negligence in hiring, retaining, or supervising the agent. A principal may also be directly liable for an agent’s tort if they gave the agent actual authority to commit the tort or ratified the tort, or in other circumstances involving independent contractors. A principal will incur liability for the acts of an independent contractor where: (1) inherently dangerous activities (such as blasting) are involved, (2) nondelegable duties have been delegated, or (3) the principal knowingly selected an incompetent independent contractor.
