Liability of Principal for Agent's Contracts Flashcards
When does an agent have power to bind a principal to a contract that the agent entered on the principal’s behalf?
An agent has the power to bind a principal to a contract the agent enters on the principal’s behalf only if the agent acted with authority
When does an agent have actual authority?
Actual authority is authority that the agent reasonably believes they possess based on the principal’s words or conduct with them. Authority can be either A) express or B) implied.
Implied Authority — Authority that the agent reasonably believes they have as a result of the principal’s words or actions.
- Implied from Express Authority: Express authority granted to an agent to accomplish a particular result necessarily implies authority to use all means reasonably necessary for its accomplishment.
- Implied from Custom and Usage
- Implied from Prior Acquiescence
- Implied Because of Emergency or Necessity
- Implied Authority to Delegate: In certain circumstances, an agent has implied authority to delegate
- Implied Authorities to Pay and Accept Delivery: An agent will be deemed to have authority to pay for the goods she is authorized to purchase and/or accept deliver.
- Implied Authorities from Authority to Sell
- Implied Authority to Warrant: An agent having authority to sell personal property may give general warranties respecting quality and quantity; for real property, the agent may grant the customary covenants.
What are the main ways that actual authority can be terminated?
- By Lapse of Time
- By Happening of an Event: The agency agreement may specify that it is to last until a specified event happens. When that event takes place, authority will be terminated.
- By Change in Circumstances:A change of circumstances that should cause an agent to realize the principal would not want the agent to exercise her authority terminates her authority.
- By Breach of Agent’s Fiduciary Duties
- By Unilateral Act of Principal or Agent
- By Operation of Law
1a. Time Period Specified — Agent’s authority will terminate upon expiration of this period.
1b. Time Period NOT Specified — Agent’s authority will terminate within a reasonable time period
When is actual authority irrevocable ?
- Agency Coupled with An Interest: An agent has an interest when she has been given immediately exercisable rights in the property.
- Power Given as Security: A power given as security is normally exercisable by the agent only upon a subsequent default by the principal. These types of transactions normally involve a loan to the principal who posts collateral and gives the agent authority to sell in the event of default.
When does apparent authority exist?
Apparent authority exists when the principal “holds out” another as possessing authority and based on this holding out, a third party is reasonably led to believe that authority exists (even though as between the agent and the principal, no such authority has been granted)
What are the types of apparent authority?
- When Agent has No Actual Authority: When the agent’s actual authority does not exist, the agent will have apparent authority to act on principal’s behalf unless the third parties receive either actual or constructive notice of the termination.
- When Agent has Some Present Actual Authority: Either when agent has been previously authorized to act beyond their authority or when the principal has placed the agent in position of power.
- Inherent Authority: Inherent authority is derived solely from the agency relationship and results in the principal being bound even though the agent had no actual or apparent authority to perform the particular act (such as respondeat superior or conduct similar to that authorized)
2a. Prior Acts: When the principal has previously allowed the agent to act beyond her authority and the principal knows that a third party is aware of this fact, the principal is bound by the agent’s unauthorized act.
2b. Power of Position: When the principal places the agent in a position that carries with it certain customary responsibilities, the principal is liable for the agent’s acts that come within these customary responsibilities even though the agent had no actual authority to perform the acts.
What is ratification?
When an agent acts without authority, the principal may be bound if the principal validates the contract.
The transaction is given retroactive effect unless:
- The principal lacked contractual capacity at the time the agent entered into the transaction (principal is deemed to have adopted the contract)
- Retroactivity would interfere with intervening third-party rights
What are the main ratification requirements?
For ratification to occur, principal must:
- Have knowledge of (or have reason to know) all material facts regarding the contract
- Accept the entire transaction
- Have capacity (be competent and of legal age)
What kind of acts may be ratified?
A principal may ratify anything unless:
- Performance was illegal at the time of ratification,
- The third party has withdrawn,
- There has been a material change in circumstances.
Who may ratify an agent’s actions?
In most states, only a disclosed principal or an unidentified principal may ratify.
- Disclosed Principal: A principal whose existence and identify is known by the third party.
- Unidentified Principal: A principal whose existence is known but the identity is withheld.
- Undisclosed Principal: A principal whose existence and identity is withheld from the third party. They can’t ratify.
- Third Restatement — Any principal may ratify.
True or False: If the agent had authority, the principal is generally liable to the third party.
True. The general rule is that if the agent had authority, the principal is liable to the third party.
When is a an agent (who had authority) liable to a third party.
Generally, if the agent had authority, they are not liable, BUT the agent can be liable if the agent did not properly identify the principal.
Disclosed Principal: If the principal’s existence and identity are disclosed to the third party (a “disclosed principal” situation) the general rule is that the principal will be liable on an authorized contract and the agent will not be liable
Unidentified and Undisclosed Principals: Either the principal or agent can be held liable if the agent had authority to enter the contract.
Who can hold third parties to contracts?
Disclosed Principal Situations: Only the principal, not the agent, may enforce the contract and hold the third party liable.
Unidentified & Undisclosed Principal Situations: Either the principal or agent may enforce the contract and hold the third party liable.
