Agency

Question 1

T/F - On the bar exam, agency can be tested in both partnership essay questions and corporation essays, as well as some other areas.

Answer 1

True

Question 2

What is an agency?

Answer 2

When a person, the agent, acts ON BEHALF OF and SUBJECT TO THE CONTROL of another person, the principle.

It is the fiduciary relationship in which:

1) One party is entrusted with the assets and wealth of another;
2) The agent is the fiduciary of the principle;
3) The agent has a special obligation or duty owed to the principle; and
4) The agency fiduciary relationship results from three elements.

Question 3

What are the three elements required to have an agency (fiduciary relationship)?

Answer 3

1) Mutual Consent;
2) One person acting on behalf of another; AND
3) Subject to the other’s control

THE PRINCIPAL MUST HAVE THE RIGHT TO CONTROL MERELY THE RESULT OR ULTIMATE OBJECTIVES OF THE AGENT’S WORK.

Question 4

What is the difference between employees and independent contractors.

Answer 4

A servant (employee) is an agent with respect to whom the principal has the right to control the physical conduct.

An agent who is NOT a servant or an employee is an independent contractor.

The distinction between a servant (employee) and an independent contractor matters because a principal can be vicariously liable for the torts or other misconduct of a servant or employee, but generally is NOT vicariously liable for the torts or other misconduct of an independent contractor.

Question 5

Do parties have to intend to form an agency relationship in order to form one?

Answer 5

No! An agency relationship can be formed UNINTENTIONALLY.

Question 6

Does a person have to be compensated in order to be considered an agent?

Answer 6

No! An agent who does not receive compensation is a GRATUITOUS AGENT.

Question 7

T/F - As a general rule, there must be a written agreement or written communication between the parties to create an agency relationship.

Answer 7

False.

Question 8

What is the Equal Dignity Rule?

Answer 8

A principle’s authorization of an agent must be in WRITING WHEN a state statute requires that the principle’s authorization be in writing.

Example: Paul asks Andrew to sell some goods on Paul’s behalf. The goods are in an amount that subjects it to the Statute of Frauds. Thus, the underlying transaction (the agency creation) must be in writing.

Question 9

What capacity is required by the principle?

Answer 9

To become a principle and be bound by an agent’s actions, a principle must have capacity:

1) To consent to the agency relationship; AND
2) To enter into the transaction that the agent enters into on behalf of the principle.

Question 10

A person can serve as an agent as long as they have ______________.

Answer 10

The PHYSICAL AND MENTAL CAPABILITY to do what they have been appointed to do.

Question 11

Describe the contract liability of the principle?

Answer 11

If two persons form an agency relationship, the principle is subject to liability on contracts the agent enters into on the principle’s behalf if the agent has POWER to bind the principle to the contract, OR if the principle RATIFIES the contract.

Question 12

When does an agent have the power to bind the principle?

Answer 12

WHEN:

1) Agent has the actual authority, express or implied, to do so;
2) Agent has apparent authority; OR
3) The principle is estopped from denying the agent’s authority.

Question 13

What is actual authority?

Answer 13

Created by a MANIFESTATION of the principle that causes the AGENT to reasonably believe that the agent is authorized. The two types are EXPRESS and IMPLIED actual authority.

Common manifestations by the principle that create implied actual authority include: Putting the agent in a position that customarily has certain authority and the agent acquiesces in unauthorized conduct.

Question 14

When does an agent’s actual authority end?

Answer 14

Terminates as a result of any of the following:

1) Principle revokes the agent’s authority;
2) Changed circumstances;
3) Death of the principle or agent; OR
4) Principle’s loss of capacity.

Question 15

T/F - A principle always has the power to revoke an agent’s actual authority, but may not always have the right to do so.

Answer 15

True.

Example: In a contract where the agent can sue for breach if the principle terminates the agency (the contract).

Question 16

T/F - A principle always has the power to revoke an agent’s actual authority UNLESS the agent’s power is coupled with an interest in the subject matter of the power.

Answer 16

True.

This is the case where someone gets a loan from a bank and grants a deed of trust to a bank and authorizes the bank to sell the property if need be.

Question 17

T/F - An agent’s authority terminates when, because of intervening events, the agent should realize the principle would no longer consent to action by the agent if the principle know of the intervening event.

Answer 17

True.

Example - A principle authorizes an agent to purchase a house on the principle’s behalf. The agent subsequently learns that the house has been largely destroyed by fire. The agent’s authority is terminated.

Question 18

How does death of the principle affect authority of the agent to act on his or her behalf?

Answer 18

As a general rule, the principle’s death terminates the agent’s authority at the MOMENT OF DEATH, REGARDLESS OF WHETHER THE AGENT HAS NOTICE OF THE PRINCIPLE’S DEATH.

HOWEVER, if the principle granted authority in a DURABLE POWER OF ATTORNEY, the agent’s authority does NOT terminate UNTIL the agent has ACTUAL KNOWLEDGE OF THE PRINCIPLE’S DEATH.

FURTHER, a principle’s death terminates an agent’s actual authority UNLESS the agent’s power is coupled with an interest in the subject matter of the power.

Question 19

T/F - A principle’s loss of capacity terminates an agent’s actual authority.

Answer 19

True.

UNLESS the principle grants the agent authority in a durable power of attorney.

Question 20

What is a durable power of attorney?

Answer 20

One that expressly provides the agent has authority despite the principle’s loss of capacity.

Question 21

What is apparent authority?

Answer 21

Created by a MANIFESTATION OF THE PRINCIPLE THAT CAUSES A THIRD PARTY TO REASONABLY believe that the agent is authorized.

Question 22

Can an agent create her own apparent authority?

Answer 22

NO.

Apparent authority is created by a manifestation of the principle, not a manifestation of the agent.

Question 23

What is agency by estoppel?

Answer 23

A principle is estopped from denying an agent or other person’s authority when:

1) A person purports to enter into a transaction with a third party on the principle’s behalf;
2) The third party changes position because they believed the person was authorized; AND
3) EITHER: (a) the principle intentionally or carelessly caused the third party’s belief, OR (b) the principle knew of the third party’s belief and that the third party might change their position because of it, but failed to take reasonable steps to notify the third party of the facts.

Question 24

What is agency by ratification?

Answer 24

Even if an agent acted with no power to bind the principle to a contract, the principle is subject to liability on the contract if the principle ratifies it. To ratify a contract, the principle MUST AFFIRM THE PRIOR ACT that was done or purported to be done on the principle’s behalf.

A principle’s affirmation of a prior act can be either EXPRESS OR IMPLIED.

Question 25

What is vicarious liability? When can it be imposed?

Answer 25

The principle is legally responsible for the agent’s conduct merely because of the existence of the agency relationship.

Can be imposed on the principle either through RESPONEAT SUPERIOR or APPARENT AUTHORITY.

Question 26

What is respondeat superior?

Answer 26

Under this doctrine, a principle is vicariously liable for an agent’s torts or other misconduct IF:

1) The agent is a servant, AND
2) Servant commits the tort or other misconduct while acting WITHIN THE SCOPE OF EMPLOYMENT.

Question 27

What is considered “within the scope of employment?”

Answer 27

IF the conduct:

1) Is the kind the servant is employed to perform;
2) Occurs substantially within the authorized time and space limits;
3) Is actuated at least in part by a purpose to serve the principle; AND
4) Involves the use of force against another, any use of force is NOT unexpectable.

Question 28

T/F - Driving to and from work is “within the scope of employment.”

Answer 28

False

This is outside the time and space limits.

Question 29

When is the principle directly (not vicariously) liable to a third person harmed by an agent’s conduct?

Answer 29

When:

1) The principle AUTHORIZES OR RATIFIES the agent’s conduct; OR
2) The principle is negligent in selecting, supervising, OR otherwise controlling the agent.

Question 30

What is the liability of the agent for torts or other misconduct?

Answer 30

An agent is liable for his or her own torts or other misconduct.

The fact that an agent commits a tort or other misconduct while serving as an agent does NOT protect the agent from liability.

Question 31

What is an agent’s liability in contractual dealings?

Answer 31

On behalf of the principle, the agent can incur liability in TWO WAYS:

1) As a party to the contract; OR
2) For breach of the agent’s IMPLIED WARRANTY OF AUTHORITY.

Question 32

When is an agent considered to be a party to a contract on behalf of the principle?

Answer 32

Depends on whether the principle is disclosed, partially disclosed, or undisclosed.

DISCLOSED PRINCIPLE - when the third party has notice of both the EXISTENCE AND IDENTITY of the principle.

PARTIALLY DISCLOSED PRINCIPLE - when the third party has notice of the EXISTENCE of the principle, but NOT THE IDENTITY of the principle.

UNDISCLOSED PRINCIPLE - when the third party has NO NOTICE of the principle’s existence.

Unless the agent and third party agree otherwise, an agent who enters into a contract on behalf of a DISCLOSED principle does NOT become a party to the contract.

Unless the agent and third party agree otherwise, an agent who enters into a contract on behalf of a PARTIALLY DISCLOSED OR UNDISCLOSED principle DOES become a party to the contract.

Question 33

What is the agent’s implied warranty of authority?

Answer 33

An agent is liable to a third party for breach of the implied warranty of authority if the agent enters into a transaction on behalf of the principle, but LACKS the power to bind the principle to the transaction.

Question 34

What are the duties of the principle?

Answer 34

Refrain from Unreasonable Interference - A principle has a duty to refrain from UNREASONABLY INTERFERING with the agent’s work.

Compensation - There is a duty to pay compensation for the agent’s services if the principle makes an EXPRESS OR IMPLIED PROMISE to pay compensation.

Indemnification - Duty to indemnify an agent in accordance with the terms of any agreement between them.

Finally, if the principle and agent have no agreement regarding indemnification, then the principle has a duty to indemnify the agent where the agent, in carrying out the principle’s business:

1) Incurs authorized or necessary expenses, OR
2) Suffers a loss that fairness dictates the principle should bear.

Question 35

What are the duties of an agent?

Answer 35

TWO DUTIES:

1) DUTY OF LOYALTY - requires agent to act solely for the benefit of the principle in matters connected with the agency. Unless the principle and agent agree otherwise, an agent has a duty not to deal with an adverse party without the principle’s knowledge and consent.

The duty of loyalty further maintains that the agent shall refrain from profiting or acquiring any material benefit from transactions the agent undertakes on the principle’s behalf, UNLESS the principle consents.

Unless the parties agree otherwise, an agent has a duty not to compete with the principle concerning the subject matter of the agency. The agent also has a duty not to use the principle’s confidential information for the agent’s benefit, nor anyone else’s benefit.

IF an agent receives a benefit as a result of violating the duty of loyalty, the principle is entitled to recover from him what the agent received and also any amount of ACTUAL DAMAGES CAUSED BY THE AGENT’S BREACH.

2) PERFORMANCE BASED DUTIES - Unless the principle and agent agree otherwise, an agent is subject to a duty to the principle to ACT WITH THE CARE AND SKILL THAT IS STANDARD IN THE LOCALITY FOR THE KIND OF WORK that the agent is employed to perform. In addition. the agent MUST EXERCISE ANY SPECIAL SKILL THE AGENT HAS.

An agent has a DUTY TO OBEY all lawful and reasonable instructions of the principle. There is a duty to GIVE THE PRINCIPLE INFORMATION when the agent has notice of facts that the agent should know might affect how the principle desires to act in a transaction. If the agent fails to communicate the information, principle is still liable because the information is treated as being ATTRIBUTED to the principle.

An agent MUST KEEP ACCURATE RECORDS AND ACCOUNTS of money and property received or paid out on behalf of the principle, and also RENDER THEM TO THE PRINCIPLE.