Agency- LIABILITY OF PRINCIPAL FOR CONTRACTS ENTERED INTO BY AGENTS

Question 1

What are the two main types of authority?

Answer 1

1. Actual authority

2. Apparent authority

Question 2

What are the two types of actual authority?

Answer 2

1. Express Actual Authority

2. Implied Actual authority

Question 3

What is actual authority?

Answer 3

Actual authority is authority that the agent

reasonably thinks she possesses based on the principal’s dealings with her.

Question 4

When does the agent have actual authority to bind the principal?

Answer 4

if the principal’s words or conduct would lead a reasonable person in the agent’s position to believe that the agent has authority to act on the principal’s behalf, the agent has actual authority to bind the principal.

Question 5

What is express actual authority?

Answer 5

Authority conveyed by the principal in words (oral or written).

Question 6

P goes to an office where, as he knows, several brokers have desks, and leaves upon the desk of A, thinking it to be the desk of X, a note signed by P, which states: “I authorize you to contract in my name for the purchase of 100 shares of Western Union stock at today’s market.” Unaware of the mistake, A comes to work, finds the note, and makes a contract with T in P’s name for the purchase of the shares. Was A authorized to enter into this contract? Why or why not?

Answer 6

Yes, A has express actual authority. P’s signed note without a specific name on it would lead a reasonable person in A’s position to believe that she was authorized. It does not matter P’s intent.

Question 7

What is implied actual authority?

Answer 7

Authority the agent reasonably believes she has as a result of the principal’s actions

Question 8

In what ways can the agent infer their authority for implied actual authority?

Answer 8

Anything reasonably inferred form principal’s words or conduct, from custom, or from acquiescence by the principal

Question 9

Paulina authorizes Albert to manage his apartment building. Paulina only states that Albert is “to manage”—nothing more. To manage the building, Albert must employ a janitor, purchase fuel for heating, and occasionally redecorate an apartment. Is Albert authorized to do these things? Why or why not?

Answer 9

Yes, The authority of Albert to do these things, while not expressly granted, is implied because these acts are necessarily incidental to (“part and parcel of”) the proper management of the building.

Question 10

Albert, the office manager for Paulina’s company, has regularly bought office supplies for the
company without previous authorization. Paulina has never objected. Does Albert have authority
to continue these purchases?

Answer 10

Yes. Albert has implied authority from acquiencense to continue these purchases.
The approval by Paulina of Albert’s prior transactions would lead a reasonable person in Albert’s position to believe that he had authority to buy supplies for Paulina in the future.

Question 11

Actual authority must exist when the agent ______ _______ _________.

Answer 11

Enters into a contract.

Question 12

In what 5 ways can actual authority be terminated?

Answer 12

It will be terminated/revoked

(1) after a specified time or event, or after a reasonable time (if there is no specified time or event);
(2) by a change of circumstances (e.g., the subject matter of the agency is destroyed);
(3) by a breach of the agent’s fiduciary duty;
(4) by a unilateral act of either the principal or the agent; or
(5) by death or incapacity of the principal or the agent.

Question 13

Paula collects rare books. She hires Alice to find a rare book to complete her collection. Alice searches everywhere for the rare book. As Alice is about to pay for the book, Paula dies. Is Paula’s estate bound by the contract and liable to pay for the book?

Answer 13

No, via actual authority. Actual authority terminated upon Paula’s death. (there may be some other way they can recover, but not through actual authority)

Question 14

What is 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.

Question 15

When would there be apparent authority?

Answer 15

if the principal’s words or conduct would lead a reasonable person in the third party’s position to believe that the agent has authority to act on the principal’s behalf, the agent has apparent authority to bind the principal.

Question 16

Who does apparent authority protect?

Answer 16

The policy of apparent authority is that it protects innocent third parties who rely on the principal’s holding out of a person as his agent.

Question 17

What is actual authority based on?

Answer 17

Actual authority is based on the principal’s manifestations (words or conduct) and how they affect the reasonable agent.

Question 18

What is apparent authority based on?

Answer 18

Apparent authority is based on the principal’s manifestations (words or conduct) and how they affect the reasonable third party.

Question 19

Can apparent authority exist even when actual authority does not exist?

Answer 19

Yes, Apparent authority can exist even when actual authority does not.

Question 20

Frodo tells Paris Hilton, “If you want to buy the ring, see Gandalf.” Frodo has never given Gandalf authority to sell the ring. Who is the principal, who is the agent, who is the third party?

Answer 20

Frodo is the principal
Gadalf is the agent
Paris Hilton is the third party

Question 21

Frodo tells Paris Hilton, “If you want to buy the ring, see Gandalf.” Frodo has never given Gandalf authority to sell the ring. If Paris contracts with Gandalf, is Frodo bound? Why or why not?

Answer 21

Yes, because of apparent authority. Fordo’s words led Paris to reasonably believe that Gandalf had authority

Question 22

Can apparent authority be established though title or position?

Answer 22

Yes, Apparent authority may be established

through an agent’s title or position

Question 23

How would a third party argue that apparent authority existed by position?

Answer 23

the third party would argue that an agent’s title or position, which was given to him by the principal, created a reasonable belief in the third party that the agent was authorized to act for the principal in ways that are typical of someone who holds that title or position.

Question 24

Can actual authority be created through power of position?

Answer 24

Yes, title or positiony can also
be used to establish actual authority to the extent that the the agent reasonably believes that he has authority to act based on the title or position given to him by the principal.

Question 25

P appoints A as “Treasurer,” and nothing more is stated. Will A have actual authority? Why or why not?

Answer 25

Yes, A will reasonably believe that he has the authority that treasurers typically have, and third parties who deal with A (and are aware of his position) will reasonably believe the same.

Question 26

P appoints A as “Treasurer.” If P tells A that he will not have authority to write checks on the company’s account will A have actual authority to write checks? Will A have apparent authority ot write checks?

Answer 26

No, If P tells A that he will not have actual authority to write checks on the company’s account.

Yes, A will have apparent authority to write checks with respect to third parties who are aware of his
position but are unaware of the limitation on his authority.

Question 27

What is apparent authority based on? Can apparent authority be created only the representations of the agent? Why or why not?

Answer 27

Apparent authority is based on the principal’s manifestations to a third party. Thus, apparent authority cannot be created by the mere representations of an agent or other actor.

Question 28

Albert tells Thomas that he is Paulina’s agent when in fact he is not. If Albert contracts with Thomas on Paulina’s behalf, will Paulina be bound?

Answer 28

No, there is no manifestation by paulina

Question 29

Now assume that Albert, in Paulina’s presence, tells Thomas that he is Paulina’s agent when in fact he is not. Paulina is silent. If Albert contracts with Thomas on Paulina’s behalf, will Paulina be bound Why or why not?

Answer 29

Yes, apparent authority exists. Paulina’s silence in the face of Albert’s statement will be viewed as conduct by Paulina to Thomas that misled Thomas.

Question 30

What is lingering apparent authority?

Answer 30

apparent authority can exist even when actual authority does not. Similarly, apparently authority can linger after actual authority ends.

Question 31

Beavis bought supplies from KMart on behalf of Butthead, but without permission by Butthead. Butthead paid KMart, but told Beavis not to do it again. Beavis ignores Butthead, and buys more supplies from KMart on behalf of Butthead. Does Beavis have actual authority to buy these supplies again?

Answer 31

No, Butthead told him not to do it.

Question 32

Beavis bought supplies from KMart on behalf of Butthead, but without permission by Butthead. Butthead paid KMart, but told Beavis not to do it again. Beavis ignores Butthead, and buys more supplies from KMart on behalf of Butthead. Does Beavis have apparent authority to buy these supplies again?

Answer 32

Yes, form K’mart’s perspective. Beavis had bought supplies from KMart before and Butthead had paid for them, so it is reasonable for KMart to think that Beavis was authorized to do it again..

Question 33

Beavis bought supplies from KMart on behalf of Butthead, but without permission by Butthead. Butthead paid KMart, but told Beavis not to do it again. Beavis ignores Butthead, and buys more supplies from KMart on behalf of Butthead. Beavis has apparent authority. How can Butthead destroy this apparent authority?

Answer 33

Tell Kmart that Beavis has no authority to bind Butthead. Then it would be unreasonable for Kmart to think Beavis has apparent authority

Question 34

What is harder to destroy, apparent authority or actual authority? Why?

Answer 34

much harder it is to destroy apparent authority—it can exist in the minds of many third parties

Question 35

What if the agent has no authority at the time of entering into the contract, in what instance will the principal still be bound?

Answer 35

if the principal ratifies the contract.

Question 36

What does ratification effectively serve as?

Answer 36

Ratification effectively serves as a substitute for before-the-transaction authority.

Question 37

What are the methods of ratification?

Answer 37

Express or implied

Question 38

What are the most common forms of express ratification?

Answer 38

Oral and written affirmation of the contract (ex: company resolution)

Question 39

What is the most common form of implied ratification?

Answer 39

The most common form of implied ratification is when the principal accepts the benefits of the contract.

Question 40

What are the 3 requirements for ratification?

Answer 40

(1) The principal must have knowledge of all material facts regarding the contract;
(2) The principal must accept the entire transaction. The principal cannot merely ratify a portion of the transaction;
(3) Ratification cannot be used to alter the rights of intervening parties.

Question 41

Lucy, acting without authority, sells Desi’s car for $6,000. Desi later agrees to sell it to John Wayne Bobbitt for $5,000. Can Desi ratify Lucy’s earlier sale when he learns about it?

Answer 41

No. He would like to (for the extra $1,000), but Bobbitt’s intervening rights in the subject matter of the transaction (he contracted to purchase the car) will prevent this.

Question 42

What is the general rule for liability on the contract?

Answer 42

If actual authority, apparent authority, or ratification is present, the principal is liable on the contract and the agent is not.

Question 43

What are the two the exceptions for liability on the contract for the principal?

Answer 43

1. If the principal is undisclosed (at the time of the agent’s transaction, the third party has no notice that the agent is acting for a principal) or
2. partially disclosed (at the time of the agent’s transaction, the third party has notice that the agent is acting for a principal, but has no notice of the principal’s identity), the agent is also liable on the contract. (The principal is still liable.)