Agency [Highly Tested Rules]

Question 1

What is an “agency”?

Answer 1

An agency is a fiduciary relationship that arises when one person (the “principal”) appoints another (the “agent”) to act on the principal’s behalf and subject to the principal’s control, and the agent consents to so act

Question 2

What is required to create an agency relationship?

Answer 2

An agency relationship is formed when (1) there is an agreement between the principal and the agent, (2) the agent’s conduct on behalf of the principal is primarily for the benefit of the principal, and (3) the agent is subject to the principal’s control (but the degree of control need not be significant)
* Principal must have contractual capacity
* Agent need only have minimal capacity (a minor can be an agent)

“ABC” – Agreement, Benefit, Control

Question 3

What are an agent’s duties to the principal?

Answer 3

An agent owes the principal:
* Duty of Care
* Duty of Loyalty
* Duty of Obedience
* Duty to Communicate
* K Duties (any other express contractual duties)

“CLOCK” – Care, Loyalty, Obedience, Communicate, K Duties

Question 4

What is an agent’s duty of care?

Answer 4

The agent owes a duty of care to the principal, which requires the agent to carry out their agency with reasonable care
* The degree of care depends on whether the agent has any special skills and whether the agent is compensated

Question 5

What is an agent’s duty of loyalty?

Answer 5

The agent owes a duty of undivided loyalty to the principal, which includes the following obligations:
1. the agent must not use their position as agent to profit themselves (if they do, they must account to the principal for any “secret profits”)
2. the agent must act solely for the benefit of the principal and not themselves or a third party
3. the agent must refrain from dealing with the principal as an adverse party or acting on behalf of an adverse party
4. the agent must not compete with the principal concerning the subject matter of the agency
5. the agent must not use the principal’s property (including confidential information) for the agent’s own purposes or a third party’s purposes

Question 6

What is an agent’s duty of obedience?

Answer 6

The agent owes a duty of obedience to the principal, which requires the agent to obey all reasonable directions of the principal

Question 7

What is an agent’s duty to communicate?

Answer 7

The agent owes a duty to communicate, which requires the agent to communicate relevant information that would affect the principal

Question 8

When is a principal liable for contracts entered into by an agent?

Answer 8

A principal is bound to a contract entered into by an agent on the principal’s behalf only if the agent had authority to enter into the contract

There are three types of authority:
1. Actual authority
2. Apparent authority
3. Ratified authority

Question 9

What is actual authority?

Answer 9

Actual authority may be express or implied
* Express Authority: the authority expressly conveyed by the principal to the agent, either orally or in writing
* Implied Authority: the authority the agent reasonably believes they have as a result of the principal’s words or actions, including where:
* the authority is incidental or necessary to carrying out the agent’s obligations to the principal
* the authority is implied from the principal’s prior acquiescence
* the authority is implied from custom known to the agent
* the authority is implied from the agent’s title or position

Question 10

How can actual authority be terminated?

Answer 10

An agent’s actual authority can be terminated by:
1. the occurrence of an event specified in the agency agreement
2. lapse of a reasonable time (if the agency agreement does not specify a time)
3. a change in circumstances (e.g., destruction of the subject matter of the authority, insolvency of the agent or principal, change in the law, business conditions)
4. the agent’s breach of fiduciary duty
5. either party’s unilateral termination
6. operation of law (e.g., death or loss of capacity of either party except where a durable power of attorney exists)

Question 11

When does an agent have apparent authority to bind the principal to a contract?

Answer 11

Apparent authority exists when the principal “holds out” another as possessing authority and, based on the principal’s words or conduct, a third party reasonably believes that the person has such authority
* Apparent authority does NOT exist if the third party knows that the agent lacks actual authority

Question 12

What is “lingering” apparent authority?

Answer 12

When an agent’s actual authority has terminated, the agent will still have apparent authority to act on the principal’s behalf as to all third parties with whom the principal knows he dealt until such third parties receive actual or constructive notice of the termination
* If the agent’s actual authority has terminated, but third parties rely on a written authority of the agent, the agent’s apparent authority continues unless the principal recovers the written authority

Question 13

When does an agent have inherent authority to bind the principal to a contract?

Answer 13

If the agent exceeds his actual authority, the principal may still be liable for the agent’s acts if they are similar to acts previously authorized by the principal

Question 14

What is ratification?

Answer 14

Ratification occurs when an agent takes action without authority, and the principal subsequently validates the action, thereby becoming bound by the action
* Ratification may be express (oral or written affirmation) or implied when the principal accepts the benefits of the contract or sues to enforce it

Question 15

What is required for ratification?

Answer 15

A valid ratification requires the principal to (1) have knowledge of (or reason to know) all material facts regarding the transaction, (2) accept the entire transaction and (3) have capacity

Question 16

When is an agent personally liable to a third party under a contract?

Answer 16

An agent is personally liable to third parties under a contract if:
1. the agent had no authority to enter into the contract, and the principal did not ratify the contract (the agent is said to breach an implied warranty of authority)
2. the agent had authority, but the principal was undisclosed or unidentified (either the agent or principal can be held liable)
3. the agent had authority and the principal was disclosed, but all parties to the contract intended the agent to be liable

Question 17

What is the doctrine of respondeat superior?

Answer 17

Under the doctrine of respondeat superior, an employer (principal) is vicariously liable for the torts of an employee (agent) committed within the scope of the employment
* BUT: A principal generally is not liable for torts committed by an independent contractor

Question 18

What is the difference between an employee and an independent contractor?

Answer 18

The difference betwen an employee and an independent contractor is that an employer retains the right to control the manner in which an employee performs their work, but a principal does not have a right to control the manner in which work is performed by an independent contractor

Question 19

What factors are considered in determining whether an agent is an employee or an independent contractor?

Answer 19

The following factors are considered in determining whether the agent is an employee or an independent contractor:
* the degree of skill required for the job (where great skill required, more likely independent contractor)
* who supplies the tools and facilities for the job (if principal supplies them, more likely employee)
* the period of employment (definite and/or short, more likely independent contractor; if indefinite and/or long, more likely employee)
* the basis of compensation (if time basis, more likely employee; if job basis, more likely independent contractor)
* the business purpose (if in furtherance of principal’s business, more likely employee)
* whether the agent has a distinct business (if own business, more likely independent contractor)
* the characterization and understanding of the parties
* the customs of the locality regarding supervision of work

Question 20

What factors are considered in determining whether an employee’s tort was committed within the scope of employment?

Answer 20

There are three factors helpful in determining whether an employee’s tort was committed within the scope of employment:
* whether the conduct was “of the kind” the employee was hired to perform
* whether the tort occurred “on the job,” meaning within the temporal and geographical limits of the employment
> Detour: a minor deviation from the employer’s direction that is still within the scope of employment
> Frolic: a major deviation that is beyond the scope of employment
* whether the conduct was intended, at least in part, to benefit the employer

Question 21

What is the general rule regarding an employer’s liability for an employee’s intentional torts?

Answer 21

As a general rule, an employer is NOT liable for the intentional torts committed by an employee, as intentional torts are not normally within the scope of employment

Question 22

When may an employer be held liable for an employee’s intentional torts?

Answer 22

An employer may be liable for an employee’s intentional torts where the conduct was:
1. a natural incident of the employee’s duties (e.g., a bouncer);
2. motivated by a desire to serve the principal; OR
3. specifically authorized or ratified by the principal

Question 23

When may a principal be held liable for an independent contractor’s torts?

Answer 23

Although a principal is not generally liable for the torts of an independent contractor, the principal will be liable where:
1. inherently dangerous activities are involved (e.g., blasting);
2. nondelegable duties have been delegated;
3. the principal knowingly selected an incompetent independent contractor; OR
4. the principal creates the appearance that an employer-employee relationship exists (though no such relationship actually exists), and a third party relies upon this appearance (i.e., “employer-employee by estoppel”)