Liability of Principal For Agent's Contracts

Question 1

Actual Authority

Answer 1

• Authority that the agent reasonably believes they possess based on the principal’s dealings with them.
• Actual authority may be express or implied.
• Actual authority is all or nothing. Either the agent had the authority or they didn’t; there is no mid-ground.

Question 2

Express Actual Authority

Answer 2

• Authority that is actually contained within the four corners of the agency agreement.
• Authority that is conveyed by the principal in words (oral or written).

Question 3

Implied Actual Authority

Answer 3

• Authority the agent reasonably believes they have as a result of the principal’s words or actions.
• Actual authority can be inferred in actions that are part and parcel of the actual authority.
• Actual authorithy can be inferred from custom or from acquiescence by the principal.

Question 4

Termination of Actual Authority

Answer 4

Actual authority can terminate:
* at a specified time;

• after the occurrence of a specifed event;
• within a reasonable time;
• due to a change of circumstances;
• after a **breach of fiduciary duty **
• Unilateral act – both parties have the power to terminate unliterally. But unilateral termination may constitute a breach of contract.
• Death or incapacity of the agent or principal.

Note: Termination in the case of principal’s death is effective ONLY when the agent has notice of it.

Question 5

Irrevocable Agencies

Answer 5

An agency coupled with an interest or a power given as security.

Irrevocable Agencies CANNOT be unilaterally terminated by the principal if the agency was given to protect the agent’s rights and it is supported by consideration.

Irrevocable agencies cannot be terminated by operation of law.

Question 6

Apparent Authority

Answer 6

• 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.
• If the principal’s words or conduct would lead a reasonable person in the third party’s position to believe that the agent has authority to act on the principal’s behalf, the agent has apparent authority.
• **Apparent authority arises from reasonable beliefs of third parties. **

Question 7

Actual vs. Apparent Authority

Answer 7

• Actual authority is based on principal’s manifestations and how they affect the reasonable agent.
• Apparent authority is based on the principal’s manifestation and how they affect the reasonable third party.

Question 8

Types of Apparent Authority

Answer 8

• When agent exceeds actual authority;
• When agent has no actual authority;
• When agent has inherent authority;

Question 9

Apparent Authority & Prior Acts

Answer 9

Where principal previously permitted the agent to exceed their express or implied authority and knows that the third party is aware of this, the principal is bound through apparent authority.

Question 10

Apparent Authority & Power of Position

Answer 10

• Apparent authority can be established based on the agent’s title or position.
• When the agent is in a position that customarily carries with it certain responsibilties, the principal is liable for the agent’s acts that come within these customary responsibilities.

Question 11

Unilateral Agent Representations

Answer 11

• Generally, a prinicipal is not bound when principal does not to hold the agent out as having authority.
• Apparent authority CANNOT be created by mere representations of an agent or other actor.

Question 12

Imposter Agents

Answer 12

When the principal negligent permits an imposter to be in a position to appear to have agency authority, the principal will be held liable for the imposter’s actions.

This is agency by estoppel.

Question 13

Lingering Apparent Authority

Answer 13

• Apparent authority can linger after actual authority has ended.
• Apparent authority can exist in the minds of many third parties and until all of those members are ntoified, there may be lingering apparent authority.
• Notice may be necessary to all third parties with whom the principal knows the agent dealt with.
• Where an agent’s actual authority has been terminated but 3RPs rely on a written authority of the aent, the agent’s apparent authority is not considered to be terminated unless principal recover the written authority.
• (Majority View) Death or incompetency of the principal does not automatically terminate the agent’s apparent authority.

Question 14

Inherent Authority

Answer 14

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.

Two types of inherent authority: (1) respondeat superior; (2) conduct similar to that authorized.

Question 15

Improper Disposition of Goods

Answer 15

The principal will be held liable for the disposition of their goods by an agent possessing them if the agent was given some indicia of ownership or if the goods disposed of were sold by an agent who is a dealer in the particular goods.

Question 16

Creation By Ratification

Answer 16

Ratification = “after the fact authority”

• An agency relationship is created by ratification when an agent purports to act on behalf of the principal without any authority and then subsequently, the principal validates the act and becomes bound.
• The transaction is given a retroactive effect UNLESS the principal lacks contractual capacity at the time the agent entered the transaction or if retroactivity would interfere with intervening 3RPs rights.
• Once relationship is ratified, the agent is relieved of liability for breach of duty and implied warranty of authority.

Question 17

Methods of Ratification

Answer 17

• Ratification can be express or implied.
• Express ratification: oral or written affirmation of a contract.
• Implied ratification: Acceptance of the benefits of the contract by the principal.
• Silence is an implied form of ratification if there is a duty to disaffirm or suing on the transaction.

Question 18

Requirements For Ratification

Answer 18

The principal must:
1. have knowledge of all material facts regarding the contract;
2. Accept the entire transaction; AND
3. Have capacity (be competent and of legal age)

Ratification is a unilateral act of the principal and no consideration is required.

Question 19

Undisclosed Principal

Answer 19

A principal whose existence and identity are withheld from the third party.

• In most states, an undisclosed princiapl may NOT ratify.

Note: Under the modern, any principal may ratify.

Question 20

Unidentified Principal

Answer 20

A principal whose existence is known but whose identity is withheld to the third party.

Note: Under the modern, any principal may ratify.

Question 21

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What May Be Ratified

Answer 21

A prinicipal may ratify anything unless:
1. performance was illegal at the time of ratification;
2. the third party has withdrawn; OR
3. there has been a material change in circumstances

Question 22

Who is bound on the contract?

Answer 22

• Actual authority, apparent authority, or ratification –> principal is bound, but agent is not.
• Undisclosed or partially disclosed principal –> principal is liable on the contract AND the agent is also liable.

Question 23

Contract Liability – Principal

Answer 23

A principal will be liable to the third party on a contract entered into by their agent if the agent had valid authority to act.

If agent did not have authority and principal has not ratified –> principal cannot be held liable on the contract.

Question 24

Principal vs. Agent – Contract Liability

Answer 24

If agent had actual authority or apparent authority, or if principal ratified –> agent cannot be held personally liable on the contract.

Exception: If the existence and identity of the principal are not disclosed to the third party, the agent can be personally liable.

Question 25

Third Party vs. Agent – Contract Liability

Answer 25

If the principal is unidentified or if the principal is undisclosed, either the principal or the agent can be held liable on the contract if the agent had authority to enter the contract.

Majority of courts permit a third party to file suit against both the principal and the agent BUT, if either party objects, the third party must elect which party they want to hold liable.

Question 26

Third Party Liability to Principal

Answer 26

When the principal is disclosed, only the principal may enforce the contract and hold the third party liable.

Question 27

Third Party Liability – Unidentified or Undisclosed Principal

Answer 27

When the principal is unidentified or undisclosed, either the principal or agent may enforce the contract and hold the third party liable.

If agent enforces the contract, the principal is entitled to all of the rights and benefits under the contract.