FORMATION OF THE AGENCY RELATIONSHIP & LIABILITY OF PRINCIPAL FOR CONTRACTS ENTERED INTO BY AGENTS

Question 1

Definition of Agency

Answer 1

Agency is the fiduciary relation which results from the
manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.

Question 2

CONSENT:

Answer 2

Consent of both the principal and the agent is necessary to form an agency relationship. Consent may be established expressly (written or oral statements), or by implication from the parties’ conduct.

Question 3

ON BEHALF OF:

Answer 3

This requirement is generally understood to mean that
the agent must be acting primarily for the benefit of the principal, rather than for the benefit of the agent or some other party.

Question 4

CONTROL:

Answer 4

The agent must act subject to the principal’s control, but the degree of control exercised by the principal does not have to be significant. The requisite level of control may be found simply by the fact that the principal has specified the task that the agent should perform, even if the
principal has not prescribed the deatails of how the task should be accomplished.

Question 5

Contractual CAPACITY:

Agent and Principal

Answer 5

A principal must have contractual capacity (because the contract is between the principal and a third party), but the agent does not (because the agent is just an intermediary).

Question 6

WRITING:

Answer 6

Agency law requires no writing, but the statute of frauds may. This is called the “equal dignities” rule—agency agreements must be in writing when the agent is to enter into certain contracts within the statute of frauds (or when the agency agreement itself would fall within the statute of frauds).

Question 7

CONSIDERATION:

Answer 7

Not required in the creation of the agency relationship

Question 8

TYPES OF AUTHORITY

Answer 8

1. Actual Authority
2. Apparent Authority

Question 9

ACTUAL AUTHORITY:

Answer 9

Actual authority is authority that the agent reasonably thinks she possesses based on the principal’s dealings with her.

Put differently, if the principals words or conduct would lead a reasonable person in the agents position to believe that the agent has authority to act on the principal’s behalf, the agent has actual authority to bind the principal. Actual authority may be oral or written.

Question 10

Types of Actual Authority

Answer 10

1. Express
2. Implied

Question 11

EXPRESS ACTUAL AUTHORITY: A

Answer 11

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

Question 12

IMPLIED ACTUAL AUTHORITY:

Answer 12

Authority the agent reasonably believes she has as a result of the principal’s actions (e.g., authority inferred from the principal’s words or conduct, from custom, or from acquiescence by the principal).

Question 13

TERMINATION OF ACTUAL AUTHORITY:

Answer 13

Actual authority must exist when the agent
enters into a contract.

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 14

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.

Put differently, if the principals words or conduct would lead a reasonable person in the 3rd 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.

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.

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

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

Note: Apparent authority can exist even when actual authority does not!

Question 15

Ways to Establish Apparent Authority:

Answer 15

1. POWER OF POSITION
2. UNILATERAL AGENT REPRESENTATIONS
3. LINGERING APPARENT AUTHORITY

Question 16

POWER OF POSITION:

Answer 16

Apparent authority may be established through an agent’s title or position. Indeed, it is somewhat common for a third party to 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.

Note: This notion that title or position conveys authority can also be used to establish actual authority to the extent that the agent reasonably believes that he has authority to act based on the title or position given to him by the principal.

Question 17

UNILATERAL AGENT REPRESENTATIONS:

Answer 17

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

Question 18

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 18

No - no manifestiation by Paulina

Question 19

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?

Answer 19

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 20

LINGERING APPARENT AUTHORITY:

Answer 20

As mentioned, apparent authority can exist even when actual authority does not.

Similarly, apparent authority can linger after actual authority ends.

Question 21

RATIFICATION:

Answer 21

Even if the agent had no authority at the time of entering into the contract, the principal will still be bound by the agent’s actions if the principal ratifies the contract.

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

Question 22

METHODS OF RATIFYING:

Answer 22

Ratification can be express or implied. The most common form of express ratification is oral or written affirmation of a contract (e.g., a company resolution). The most common form of implied ratification is when the principal accepts the benefits of the contract.

Question 23

REQUIREMENTS FOR RATIFICATION:

Answer 23

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 24

THE RULES OF LIABILITY ON THE CONTRACT - General Rule:

Answer 24

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

Question 25

THE RULES OF LIABILITY ON THE CONTRACT - Exception to the General Rule:

Answer 25

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 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.)