LIABILITY OF PRINCIPAL FOR AGENT’S CONTRACTS Flashcards
ACTUAL AND APPARENT AUTHORITY
- Agent has power to bind principal to K agent enters on principal’s behalf only if agent acted w/ authority.
- There are 3 types of authority: actual, apparent, and ratified.
- When deciding whethe principal will be bound on agent’s K, it should first be determined whether agent had actual authority.
- If they did not, look to see whether apparent authority was present.
- Ratified authority comes into play only if principal grants authority after K is made.
Tip
Most important of all agency concepts for exam purposes are those involving actual & apparent authority. A very high % of questions will require you to display your understanding of this area.
Actual Authority
- Actual authority: agent reasonably believes they possess authority based on principal’s dealings w/ them.
- Put differently, if principal’s words /conduct would lead a reasonable person in agent’s position to believe agent has authority to act on principal’s behalf, agent has actual authority to bind principal.
- Actual authority may be express/implied.
Express
- Express authority: actually contained w/in 4 corners of agency agreement.
- So it’s authority that’s conveyed by principal in words (oral/written).
- It’s effective even if it was granted mistakenly/ because of misrep.
All or Nothing
- When determining whether agent acted w/ authority in entering K for a principal, note that this is an all/ nothing issue–they had authority/not.
Implied
- Implied authority is authority agent reasonably believes they have as a result of principal’s words/ actions.
- Includes authority
(1) Incidental to express authority
(2) Arising out of custom known to agent
(3) Resulting from prior acquiescence by principal;
(4) To take emergency measures
(5) To delegate authority in cases of ministerial acts, where circumstances require, where performance is impossible w/o delegation, or where delegation is customary
(6) To pay for & accept delivery of goods where there is authority to purchase
(7) To give general warranties as to fitness & quality & grant customary covenants in land sales, collect payment, & deliver where there is authority to sell AND
(8) To manage investments in accordance w/ “prudent investor” standard - Note: The notion that title/position conveys authority can also be used to establish actual authority to extent that agent reasonably believes they have authority to act based on title/position given to them by principal.
Termination of Actual Authority
- If you have determined that a principal granted an agent express/implied authority to enter K for principal, before finalizing your conclusion that principal will be bound, you need to ensure that authority was not terminated before K was made.
How Termination May Occur
Termination/revocation of actual authority occurs by:
(1) The happening of event specified in agent’s & principal’s agreement as something that will terminate agent’s authority
(2) Lapse of a reasonable time if a time for termination is not specified in agreement
(3) Change in circumstances, including destruction of SM of authority, insolvency of agent/principal, & change in law/business conditions
(4) Agent’s breach of fiduciary duty
(5) Either party’s unilateral termination (both parties have power to terminate an agency unilaterally, although such termination may constitute a breach of K) OR
(6) Operation of law (ex. death/loss of capacity of either party except where a durable POA—written authority that says it will not terminate on principal’s disability—is present. Termination in case of a principal’s death is effective only when agent has notice of it)
Tip
Bar examiners sometimes try to play on your
emotions by making it seem unfair to terminate agent’s authority at principal’s death. Answer w/ your head & not your heart—death terminates an agency unless agency is irrevocable (see below).
Irrevocable Agencies
- Neither an agency coupled w/ an interest nor a power given as security may be unilaterally terminated by principal if agency was given to protect agent’s (or 3rd party’s) rights & it is supported by consideration.
- Neither will such agencies be terminated by operation of law.
Apparent Authority
a. Basic Theory
- Apparent authority exists when principal “holds out” another as having authority & based on this holding out, 3rd party reasonably believes authority exists (even though as between agent & principal, no such authority has been granted).
- Put differently, if principal’s words/conduct would lead a reasonable person in 3rd party’s position to believe that agent has authority to act on principal’s behalf, agent has apparent authority to bind principal.
- So remember, apparent authority arises from reasonable beliefs of third parties.
- The policy of apparent authority is that it protects innocent 3rd parties who rely on principal’s holding out of a person as their agent.
Compare–Actual vs. Apparent Authority
- Actual authority is based on principal’s words/ conduct & how they affect the reasonable agent.
- Apparent authority is based on principal’s words /conduct & how they affect reasonable 3rd party.
- Remember, apparent authority can exist even when actual authority does not!
Tip
In an apparent authority situation, you need to
discuss what transpired between principal & 3rd third party. This differs from an actual authority situation, where you would be discussing what transpired between principal & agent. In discussing apparent authority, ask yourself what principal did to indicate to 3rd party that agent had authority.
Types of Apparent Authority
z When Agent Exceeds Actual Authority
- There are situations where agent exceeds their authority, yet principal is still bound
Prior Act
- Where principal previously permitted agent to exceed their authority & knows 3rd party is aware of this, principal is bound through APPARENT authority.
Power of Position
- Apparent authority may be established through an agent’s title/position.
- Indeed, it is somewhat common for 3rd party to argue that an agent’s title/position, which was given to them by principal, created a reasonable belief in 3rd party that agent was authorized to act for principal in ways that are typical of someone who holds that title/position.
- So, when agent is in a position that customarily carries w/ it certain responsibilities, principal is liable for agent’s acts that come w/in these customary responsibilities.
When Agent Has No Actual Authority
- Generally, if agent did not have any actual authority when they entered K for a principal, principal will not be bound by agent’s acts.
- However, there are certain situations in which principal may be bound.
Unilateral Agent Representations
- Principal generally will not be bound when principal does nothing to hold agent out as having authority & only statement of authority comes from purported agent’s claim they have authority.
- Apparent authority is based on principal’s words/ conduct to 3rd party.
- Thus, apparent authority cannot be created by the mere representations of an agent/other actor.
Impostors
- Where principal negligently permits an impostor to be in a position to appear to have agency authority, principal will be held liable for impostor’s actions
undertaken w/ such authority. - In other words, we’ll have an agency by estoppel & principal will be estopped from denying imposter was their agent.
Lingering Apparent Authority
- Remember, apparent authority can exist even when actual authority does not.
- Similarly, apparent authority can linger after actual authority ends.
Notice May Be Necessary
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- Where agent’s actual authority has terminated, he will have apparent authority to act on principal’s behalf as to all 3rd parties w/ whom principal knows he dealt unless & until 3rd parties receive either
actual/constructive notice of termination
Writing Manifesting Authority
- Where agent’s actual authority has been terminated but 3rd parties rely on a written authority of agent, agent’s apparent authority is not considered to be terminated—unless principal recovers the written authority.
Death or Incompetency
- Majority view: death/incompetency of principal does not automatically terminate agent’s apparent authority.
Inherent Authority (Inherent Agency Power)
- Inherent authority is derived solely from agency relationship & results in principal being bound even though agent had no actual/apparent authority to perform particular act.
- This occurs b/c cts wish to protect innocent 3rd parties rather than a principal who gave some actual authority to the agent.
- Examples of inherent authority include:
Respondeat Superior
- Under doctrine of their employee committed w/in scope of employment.
Conduct Similar to that Authorized
- Where an agent exceeds their actual authority (violates orders), but conduct is similar to acts authorized, principal will be held liable.
Improper Disposition of Goods
- Principal will be held liable for disposition of their goods by agent possessing them if agent was given some indicia of ownership, or if goods disposed of were sold by an agent who is a dealer in particular goods.
RATIFICATION
3.2.1 Effect of Ratification
- An agency relationship is created by ratification when an “agent” purports to act on behalf of a “principal” w/o any authority at all, but “principal” subsequently validates act & becomes bound.
- In other words, even if “agent” had no authority at time of entering into K, “principal” will still be bound by “agent’s” actions if “principal” ratifies K.
- It gives transaction retroactive effect unless “principal” lacked contractual capacity at time “agent” entered into unauthorized transaction (in which case “principal” is deemed to have “adopted” K), or unless retroactivity would interfere w/ intervening 3rd party rights.
- Upon ratification, “agent” is relieved of liability for BOD & their implied warranty of authority
Methods of Ratifying
- Ratification may be express/implied through conduct of “principal.”
- Most common form of express ratification is oral/written affirmation of K (ex. company resolution)
- Most common form of implied ratification is when “principal” accepts benefits of K.
- Other ratifying conduct would include silence if there is a duty to disaffirm/suing on transaction.
Requirements for Ratification
For ratification to occur, “principal” must:
(1) Have knowledge of (or have reason to know) all material facts regarding K
(2) Accept entire transaction (“principal” cannot merely ratify a portion of transaction) AND
(3) Have capacity (be competent & of legal age)
- Ratification is a unilateral act of “principal” & requires no consideration.
- Note also that ratification cannot be used to alter rights of intervening parties.
What May Be Ratified and by Whom
- Generally, a “principal” may ratify anything unless: (1) performance was illegal at time of ratification,
(2) 3rd party has w/drawn, or
(3) there has been a material change in circumstances. - Under 2nd Restatement, which is followed by most states, an undisclosed “principal” (one whose existence & identity is w/held from 3rd party) may not ratify.
- Only disclosed (existence & identity of principal are known to 3rd party) or unidentified (existence of principal is known, but principal’s identity is w/held) “principals” may do so.
- This is b/c 2nd Restatement requires “agent” purport to be acting on behalf of a “principal”.
- However, the modern view of 3rd Restatement does not require agent to purport to be acting on behalf of a “principal”; therefore, under 3rd Restatement any “principal” may ratify.
- Note: A purported “agent” may not treat K as their own
LIABILITIES OF THE PARTIES
3.3.1 Third Party vs. Principal
- Principal will be liable to 3rd party on K entered into by their agent if agent had valid authority
(actual, apparent, or through ratification) to act. - If agent did not have authority to enter K & principal has not ratified K, principal cannot be held liable on K
Third Party vs. Agent
- As a general rule, if agent had actual/apparent authority to enter K for principal, or if principal ratified a previously unauthorized K, agent cannot be held personally liable on K.
- However, an exception applies (agent may be held personally liable) if existence & identity of principal are not disclosed
Disclosed Principal
- Although if principal’s existence & identity are disclosed to 3rd party (“disclosed principal”) the general rule is that principal will be liable on an
authorized K & agent will not be, agent will be liable if parties to K INTENDED agent to be liable.
Agent Breaches Warranty of Authority
- Even if principal’s existence & identity are fully disclosed, if agent did not have authority to enter into K (so principal will not be liable) agent can be held liable to 3RD party for damages for breaching an implied warranty that a principal w/ contractual capacity exists & that they, the agent, had authority to K for principal.
Unidentified and Undisclosed Principals
- If principal is unidentified (3rd party knows agent was dealing on behalf of a principal but does not know exactly who principal is) or if principal is undisclosed (agent does not reveal that they are on behalf of a principal), either principal/agent can be held liable on K if agent had authority to enter K.
- The majority of courts permit 3rd party to file suit against both principal & agent but, upon objection of either D, 3rd party must elect prior to judgment which party they wish to hold liable.
- On the other hand, if 3rd party obtains a judgment against agent w/o knowledge of principal’s identity, they can later sue principal when their identity is discovered if judgment has not been satisfied.
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Tip
Remember that the type of principal (disclosed,
unidentified, or undisclosed) is relevant only when you are considering whether agent is liable. Do not discuss the type of principal when analyzing the principal’s liability. Any type of principal will be bound if agent had authority.
Third-Party Liability to Principal and Agent
a. Disclosed Principal Situations
- When principal is disclosed, only principal, not agent, may enforce K & hold 3rd party liable.
Unidentified and Undisclosed Principal Situations
- When principal is unidentified /undisclosed, either principal/agent may enforce K & hold 3rd party liable
- Note that if agent enforces K against 3rd party, principal is entitled to all rights & benefits thereunder.
When Principal May Not Enforce Contract
- Principal may not enforce K if there has been an affirmative fraudulent misrep of principal’s identity or if there is an unforeseen increased burden to 3rd party due to the fact that performance is due to principal & not agent.
