LIABILITY OF PRINCIPAL FOR AGENT’S CONTRACTS

Question 1

ACTUAL AND APPARENT AUTHORITY

Answer 1

• 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.

Question 2

Tip

Answer 2

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.

Question 3

Actual Authority

Answer 3

• 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.

Question 4

Express

Answer 4

• 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.

Question 5

All or Nothing

Answer 5

• 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.

Question 6

Implied

Answer 6

• 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.

Question 7

Termination of Actual Authority

Answer 7

• 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.

Question 8

How Termination May Occur

Answer 8

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)

Question 9

Tip

Answer 9

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).

Question 10

Irrevocable Agencies

Answer 10

• 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.

Question 11

Apparent Authority
a. Basic Theory

Answer 11

• 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.

Question 12

Compare–Actual vs. Apparent Authority

Answer 12

• 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!

Question 13

Tip

Answer 13

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.

Question 14

Types of Apparent Authority
z When Agent Exceeds Actual Authority

Answer 14

• There are situations where agent exceeds their authority, yet principal is still bound

Question 15

Prior Act

Answer 15

• Where principal previously permitted agent to exceed their authority & knows 3rd party is aware of this, principal is bound through APPARENT authority.

Question 16

Power of Position

Answer 16

• 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.

Question 17

When Agent Has No Actual Authority

Answer 17

• 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.

Question 18

Unilateral Agent Representations

Answer 18

• 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.

Question 19

Impostors

Answer 19

• 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.

Question 20

Lingering Apparent Authority

Answer 20

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

Question 21

Notice May Be Necessary
.

Answer 21

• 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

Question 22

Writing Manifesting Authority

Answer 22

• 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.

Question 23

Death or Incompetency

Answer 23

• Majority view: death/incompetency of principal does not automatically terminate agent’s apparent authority.

Question 24

Inherent Authority (Inherent Agency Power)

Answer 24

• 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:

Question 25

Respondeat Superior

Answer 25

• Under doctrine of their employee committed w/in scope of employment.

Question 26

Conduct Similar to that Authorized

Answer 26

• Where an agent exceeds their actual authority (violates orders), but conduct is similar to acts authorized, principal will be held liable.

Question 27

Improper Disposition of Goods

Answer 27

• 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.

Question 28

RATIFICATION
3.2.1 Effect of Ratification

Answer 28

• 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

Question 29

Methods of Ratifying

Answer 29

• 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.

Question 30

Requirements for Ratification

Answer 30

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.

Question 31

What May Be Ratified and by Whom

Answer 31

• 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

Question 32

LIABILITIES OF THE PARTIES
3.3.1 Third Party vs. Principal

Answer 32

• 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

Question 33

Third Party vs. Agent

Answer 33

• 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

Question 34

Disclosed Principal

Answer 34

• 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.

Question 35

Agent Breaches Warranty of Authority

Answer 35

• 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.

Question 36

Unidentified and Undisclosed Principals

Answer 36

• 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.

Question 37

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Answer 37

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Question 38

Tip

Answer 38

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.

Question 39

Third-Party Liability to Principal and Agent
a. Disclosed Principal Situations

Answer 39

• When principal is disclosed, only principal, not agent, may enforce K & hold 3rd party liable.

Question 40

Unidentified and Undisclosed Principal Situations

Answer 40

• 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.

Question 41

When Principal May Not Enforce Contract

Answer 41

• 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.