Agency and Partnership Flashcards
Summary
As a general matter, an agent binds a principal to a contract, whether or not the principal is disclosed to the third party, if the agent had either actual or apparent authority to enter into the contract. Without that authority, the agent alone is liable on the contract unless the principal becomes liable by subsequently ratifying the contract. An agent acting with authority is not liable on the contract if the principal’s identity is disclosed to the third party, but is liable if the principal’s identity is not disclosed or only partially disclosed, unless the contract provides otherwise.
Applying these principles here, because the woman disclosed that she was acting for the inventor on the chip contract, but purchased different chips from those specified by the inventor, the inventor is not liable because the woman did not have authority to enter into the contract; the woman is also liable on the chip contract because she impliedly warranted that she had authority.
Both the woman and the inventor are liable on the blue-lens contract. Although the woman did not disclose that she was acting for the inventor on the blue-lens contract, the inventor is liable on this contract because he had given the woman actual authority to buy the blue lenses on his behalf; the woman is also liable because she signed the contract in her own name.
Finally, both the inventor and the woman are liable on the shutoff-switch contract that the woman entered into on behalf of the partially disclosed inventor, even though the switches were different from those authorized. The inventor became liable by ratifying the contract when he accepted the different switches, and the woman became liable by signing a contract on behalf of a partially disclosed principal.
[NOTE: While the contracts in this question are for the sale of goods and, thus, governed by Article 2 of the Uniform Commercial Code, the UCC does not contain agency rules resolving the issues in this question. Thus, common law principles govern. UCC § 1-103(b).]
When an agent enters into a contract with a third party on behalf of a disclosed principal on terms that were not authorized by the principal, who is liable to the third party: the agent, the principal, or both?
With respect to the chips, the woman (agent) is liable on the contract, but the inventor (principal) is not because the woman, notwithstanding her disclosure that she was acting as his agent, lacked actual or apparent authority to enter into the contract on behalf of the inventor with the chip manufacturer.
A principal is not liable on a contract entered into by an agent unless the agent had actual or apparent authority. See generally Restatement (Second) of Agency § 140; accord, Restatement (Third) of Agency § 6.01. In the absence of actual or apparent authority, it is irrelevant whether the agent disclosed to the third party that the agent was acting on behalf of a disclosed principal. See generally Restatement (Second) of Agency § 144; accord, Restatement (Third) of Agency §
6.01.
Who is liable to the chip manufacturer: the inventor, the woman, or both? Explain. R
Actual authority exists when the principal by written or spoken words or other conduct “causes the agent to believe that the principal desires . . . [the agent] to act on the principal’s account.” Restatement (Second) of Agency § 26. While rephrased, the Third Restatement is similar and provides that “[an] agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.” Restatement (Third) of Agency § 2.01.
Apparent authority is created with respect to a third person when “by written or spoken words or any other conduct” the principal causes the third person “to believe that the principal consents to have the act done on his behalf by the person purporting to act for him.” Restatement (Second) of Agency § 27. The Third Restatement is similar: “[a]pparent authority . . . is created by a person’s manifestation that another has authority to act with legal consequences for the person who makes the manifestation, when a third person reasonably believes the actor to be authorized and the belief is traceable to the manifestation.” Restatement (Third) of Agency § 3.03.
Who is liable to the chip manufacturer: the inventor, the woman, or both? Explain. Application
Here, the inventor is not liable on the Series B chips contract because the woman had neither actual nor apparent authority to purchase these chips on the inventor’s behalf. First, there is no basis to conclude that the woman had actual authority to buy Series B chips. The inventor instructed the woman to buy only Series A chips; thus, the woman only had actual authority to purchase the Series A chips and no others. She exceeded her actual authority when she purchased the Series B chips.
Next, there was no apparent authority here. There are no facts to suggest that the inventor (as opposed to the woman) manifested to the chip manufacturer that the woman had authority to acquire Series B chips. Without such evidence, there is no apparent authority.
While the inventor (principal) is not liable to the chip manufacturer on the chip contract, the woman (agent) would be liable to the chip manufacturer for damages because she breached the implied warranty to the manufacturer that she had authority to act on behalf of the inventor. A person who “purports to make a contract . . . with a third party on behalf of another person, lacking power to bind that person, gives an implied warranty of authority to the third party and is subject to liability to the third party for damages for loss caused by the breach of that warranty, including loss of the benefit expected from performance by the principal.” Restatement (Third) of Agency § 6.10; accord, Restatement (Second) of Agency §§ 329–330. Because she breached this warranty, she is liable to the manufacturer.
When an agent enters into a contract with a third party on behalf of an undisclosed principal on terms authorized by the principal, who is liable to the third party if the principal later repudiates the contract: the agent, the principal, or both?
Both the inventor and the woman are liable to the blue-lens manufacturer on the contract for blue lenses. The inventor is liable because the woman acted with actual authority; the woman is liable as a party to the contract because the principal was undisclosed.
Who is liable to the blue-lens manufacturer: the inventor, the woman, or both? Explain. R
“An undisclosed principal is bound by contracts . . . made on his account by an agent acting within his authority.” Restatement (Second) of Agency § 186; accord, Restatement (Third) of Agency § 6.03.
An agent who purports to act on his own account, but in fact is making a contract on behalf of an undisclosed principal, is also a party to the contract. Restatement (Second) of Agency § 322; accord, Restatement (Third) of Agency § 6.03. The rationale for this rule is that the third party has every reason in the case of an undisclosed principal and agency to assume that the person with whom it contracts expects to be liable on the contract. Additionally, to the extent the third party was relying on the financial solvency of the person on the other side of the contract, the third party would have no basis to rely on anyone but the agent who signed the contract.
Who is liable to the blue-lens manufacturer: the inventor, the woman, or both? Explain. Application
Here, the woman had actual authority from the inventor to purchase blue lenses at a price not to exceed $300 per unit. By contracting to purchase blue lenses for $295 per unit, the woman acted with actual authority in entering into the blue-lens contract. Thus, the inventor became bound to the contract, even though the third party had no reason to know that the woman was acting on behalf of the inventor. The inventor had no right to refuse to accept the shipment and refuse to pay for the blue lenses.
The woman is also liable on the contract because she purported to act on her own behalf. The blue-lens manufacturer relied on the woman being bound by the contract.
[NOTE: Because the inventor (not the woman) was the person who expected to reap the benefit of the contract with the blue-lens manufacturer, as between them the inventor has the primary responsibility to carry out the terms of the contract, and the agent acts as a surety for that obligation. Thus, if the manufacturer were to sue the woman and recover, the woman could seek to be recompensed by the inventor. If the manufacturer were to sue the inventor and then sue the woman, the woman would be entitled to raise all defenses available to a surety. Restatement (Second) of Agency § 335.
In addition, in some jurisdictions the third party may be required, prior to judgment, to elect whether to take judgment against the undisclosed principal or the agent. See Restatement (Second) of Agency § 210A. In such an election jurisdiction, either the inventor (undisclosed principal) or the woman (agent) could escape liability by making a demand on the third-party manufacturer to elect to take judgment against the other. This “election rule” has been heavily criticized and has been abandoned in some jurisdictions in favor of a “satisfaction rule” that allows the third party to take judgment against both the undisclosed principal and the agent, but entitles the third party to only one satisfaction of the judgment. See Restatement (Third) of Agency § 6.09. Thus, in a satisfaction jurisdiction, if both the inventor and the woman are sued, neither of them can escape judgment by demanding that the third-party manufacturer make an election.]
When an agent enters into a contract with a third party on behalf of a partially disclosed principal for goods different from those authorized by the principal, who is liable to the third party if the principal accepts the different goods: the agent, the principal, or both?
Both the inventor and the woman are liable on the contract for the shutoff switches. The inventor is liable by ratifying the contract; the woman is liable because she acted on behalf of a partially disclosed principal, and there is no indication that the third party agreed to look solely to the partially disclosed principal for payment.
Who is liable to the shutoff-switch manufacturer: the inventor, the woman, or both? Explain. Rule
When a third party contracts with a person that the third party knows is acting in an agency capacity for another but the third party is unaware of the identity of the principal, the principal for whom the agent acts is called a “partially disclosed principal.” Restatement (Second) of Agency § 4(2). Here, the shutoff-switch manufacturer knew that the woman was acting as someone’s agent but there is nothing to indicate that the manufacturer was aware of the principal’s identity. Thus, the inventor is a “partially disclosed principal.” A partially disclosed principal can be liable on a contract entered into by an agent who had actual or apparent authority. Restatement (Second) of Agency § 144; accord, Restatement (Third) of Agency § 6.02(1). Here, the woman acted without actual or apparent authority, so this cannot be the basis to hold the inventor liable on the contract. See Point One.
Who is liable to the shutoff-switch manufacturer: the inventor, the woman, or both? Explain. Application
On the other hand, even though the woman acted without actual or apparent authority, the inventor accepted the shutoff switches and used them in the production of the mowers. This amounts to a ratification of the contract between the woman and the switch manufacturer. Where the principal ratifies the act of an agent, the principal is liable on the contract just as if the agent had acted with actual authority. Restatement (Third) of Agency § 4.01(1). Ratification occurs if the principal’s conduct “justifies a reasonable assumption that” the principal consents to the act performed on the principal’s behalf. Id. § 4.01(2)(b); accord, Restatement (Second) of Agency §§ 82–83. Here, the inventor’s use of the switches justifies a reasonable assumption of consent. As for the woman, she is also liable on the contract. Unless the agent and the third party agree otherwise, an agent acting on behalf of a partially disclosed principal is a party to the contract if the agent acted with actual or apparent authority. Restatement (Second) of Agency § 321; Restatement (Third) of Agency § 6.02(2). Here, because of the inventor’s ratification of the contract, the woman is deemed to have acted with actual authority, and there is no indication that the manufacturer agreed to look solely to the partially disclosed principal for payment.
[NOTE: In addition, there is no requirement that the manufacturer “elect” either a remedy against the agent or a remedy against the principal where, as here, there is a partially disclosed principal. See Restatement (Second) of Agency § 336; Restatement (Third) of Agency § 6.09. Thus, neither the inventor nor the woman can escape liability by making a demand on the manufacturer to make an election to take judgment against the other.]
