III. Substitutes for Actual Authority

Question 1

Apparent Authority

Answer 1

• SCENARIO: Principal lead third party to mistakenly believe agent has authoirty
• POLICY: protects innocent 3P who relise on principal hold A as an agent
• BY PRINCIPAL: Principal must have created a REASONALBE belief of agency
  
  • cannot be created by AGENT CONDUCT ALONE
  • e.g. agent tells 3P he has contract authority; no agency if that’s it; agency if the principal was present and silent at time it was said
• PROBLEM: Can linger after actual authority ends among multiple 3P
  
  • must examine from the REASONABLE 3P persepective
  • telling the agent he no longer has authority is not enoguh; must communicate to 3P

Question 2

Ratification

Answer 2

• HOW: Even if agent lacked authority, principal can ratify by
  
  • expressly AFFIRMING the contract;
  • ACCEPTING the benefit of it;
  • or SUING 3P on it.
• REQUIREMENTS: P must
  
  1. have KNOWLEDGE of all material facts
  2. must accept ENTIRE TRANSACTION; and
  3. must have CAPACITY both at ratification ad at time of original contract
• INTERVENING RIGHTS: since ratification is retoractive, must protect rights of BONA FIDE PURCHASERS; If 3P sells it to a BFP, rights are severed. (did not have notice of deficiency of property)

Question 3

Adoption

Answer 3

• NOT RETROACTIVE: means that when the initial contract was made, there was no capacity but the principal accepts it anyway
• Most common in situations where company has not yet been formed
• Once adopted, it does not relieve the agent of liability; only adds the corp to liability; corp, agent, and 3P must agree to adopt