The Law of Agency - June 5

Question 1

What are the two sources of an agency relationship? (Q)

Answer 1

The two sources of an agency relationship are:

the parties’ manifestation of assent to form an agency relationship and
operation of law (e.g., laws that appoint a state official as the agent of a non-resident motorist for the purpose of service of process).

If the parties assent to forming the relationship, there are no special formalities. If an agent and a principal manifest assent that the agent will act for the benefit and subject to the control of the principal, then an agency relationship is formed. This assent or consent may be manifested verbally, in writing, or through conduct. If an agency relationship exists, both the principal and the agent may be liable to third parties in tort for the agent’s conduct.

Question 2

What legal capacity must a party have to act as a principal? (Q)

Answer 2

To act as a principal, a party must have the legal capacity to possess rights and incur obligations. Principals may be individuals, corporations, organizations, associations, or other entities that have the requisite capacity.

The capacity requirement means that minors and incapacitated persons may not be principals. Likewise, an unincorporated non-commercial organization that cannot possess rights or undertake obligations has no capacity to act as a principal.

Question 3

What legal capacity must a party possess to serve as an agent? (Q)

Answer 3

An agent may be any person of any legal capacity. That means a person with a limited legal capacity (e.g., a minor or an incapacitated person) may be an agent.

Although a person’s legal capacity has no impact on the person’s ability to be an agent, the person’s legal capacity will impact the person’s potential liability as an agent. This is because an agent’s legal capacity governs the extent to which the agent may be held liable to the principal or third parties.

Question 4

Is it possible for a principal to appoint, or authorize an agent to appoint, multiple co-agents for the same principal? (Q)

Answer 4

Yes. It is possible for a principal to appoint, or authorize an agent to appoint, multiple co-agents for the same principal. Similarly, the same agent may serve multiple co-principals in the same transaction or matter.

Question 5

What is a sub-agent? (Q)

Answer 5

A sub-agent is appointed by an agent to act on behalf of the principal. Generally, the sub-agent is considered to be in an agency relationship with the agent as well as the principal. Therefore, the principal can be liable for both the agent’s and the sub-agent’s conduct.

Not all agency relationships permit an agent to appoint a sub-agent. An agent’s authority to appoint a sub-agent depends on the particulars of that agency relationship.

Question 6

A man agreed to loan his bike to his brother. Before the brother rode off, the man asked his brother to drop a letter off at the post office for him. The brother did not respond in any way and rode off without taking the letter. Unfortunately, the man’s brother rode the bike extremely quickly and negligently hit a jogger.

Can the jogger recover from the man on the theory that the man and his brother were in an agency relationship? (Q)

Answer 6

No. The jogger may not recover from the man on the theory that the man and his brother were in an agency relationship. An agency relationship arises if an agent and a principal manifest assent that the agent will act for the principal’s benefit and subject to the principal’s control. This assent may be manifested verbally, in writing, or through conduct. If an agency relationship exists, both the principal and the agent may be liable to third parties in tort for the agent’s conduct.

Here, although the man asked his brother to take a letter for the man’s benefit, the brother said nothing and did not take the letter. There is nothing else showing or manifesting any agreement that the brother was acting for the man’s benefit and subject to the man’s control. Thus, there is no agency relationship between the man and his brother, and the man is not liable to the jogger under an agency theory.

Question 7

Can an agent’s actual authority be terminated? (Q)

Answer 7

Yes. An agent’s actual authority can be terminated by:

the death of the principal or agent,

the principal’s loss of capacity,

unilateral or mutual revocation by the principal and/or the agent,

the occurrence of circumstances that should cause the agent to reasonably conclude that the principal would no longer manifest assent, or

as specified by statute.

Actual authority may be irrevocable by the principal if it is related to: (1) a power given as security, (2) a proxy to vote securities, or (3) an ownership interest that is irrevocable under statutory law.

Question 8

Does the termination of an agent’s actual authority automatically terminate any apparent authority held by the agent? (Q)

Answer 8

No. The termination of actual authority does not automatically terminate any apparent authority held by the agent. Rather, apparent authority terminates when it is no longer reasonable for the third party with whom an agent deals to believe that the agent continues to act with actual authority.

Question 9

In an agency relationship, may an agent serve multiple principals in the same transaction or matter? (Q)

Answer 9

Yes, in an agency relationship, an agent may serve multiple principals in the same transaction or matter—but only if the agent can fulfill the agent’s duties to all principals.

An agent who acts for more than one principal in a transaction has a duty:

to deal fairly and in good faith with each principal and

to disclose to each principal the fact that the agent is also acting for the other principal or principals and all other facts that would reasonably affect the principal’s judgment.

Question 10

In the agency context, what is the test for the existence of actual authority? (Q)

Answer 10

In the agency context, the test for whether actual authority exists is whether: (1) an agent has been granted the power to take an action (2) that has legal consequences for the principal. At the time of taking action, the agent must reasonably believe—based on the principal’s words or conduct—that the principal has authorized the agent to take such action. Some states require a writing signed by the principal to prove that the agent has actual authority to enter into certain, binding transactions.

Question 11

Must a principal expressly provide authority to an agent for the agent to have actual authority? (Q)

Answer 11

No. A principal need not expressly provide authority for an agent to have actual authority. A principal may provide either express or implied actual authority to an agency. A principal expressly provides actual authority to take action if the principal specifically states, orally or in writing, that authority has been granted for a specific undertaking. However, a principal may impliedly provide actual authority for an agent to take action if:

the principal intentionally or negligently allows the agent to believe that such authority has been granted, or

the action is necessary or customary for carrying out the agent’s expressly authorized duties.

Question 12

What is implied authority? (Q)

Answer 12

An agent has implied authority to take action if the principal intentionally or negligently allows the agent to believe that such authority has been granted.

Question 13

What is inherent authority? (Q)

Answer 13

An agent has inherent authority to take action that is necessary or customary for carrying out the agent’s expressly authorized duties.

Question 14

In the agency context, what are the possible methods for terminating an agent’s actual authority? (Q)

Answer 14

In the agency context, an agent’s actual authority may be terminated if:

the principal or the agent dies;

the principal loses capacity;

one or both parties revoke the agency relationship;

circumstances occur that should cause the agent to reasonably conclude that the principal would no longer manifest assent to the authority, like a specified event or a fixed period of time; or

a statute mandates the termination.

Generally, the termination of an agent’s actual authority becomes effective only once the agent or the third party has notice of the terminating event.

Question 15

In the agency context, is it possible for a principal to be unable to revoke an agent’s actual authority? (Q)

Answer 15

Yes. In the agency context, it is possible for a principal to be unable to revoke an agent’s actual authority. A grant of actual authority to an agent may be irrevocable if the authority is related to:

a power given as security,

a proxy to vote securities, or

an ownership interest that is irrevocable under statutory law.

Question 16

A business owner told one of her workers that one of the owner’s commercial storage facilities had been experiencing petty theft. The owner decided to have a new alarm system installed. The owner instructed her worker to purchase and arrange for the installation of a new alarm system for approximately $5,000. The worker made the purchase and arranged for the alarm company to install the system. Commercial businesses in that county needed a permit to operate an alarm. The worker then filed the necessary paperwork with the county office to order the permit. The owner received the permit and a bill for $500 from the county the following month.

Did the worker have the legal authority to bind the owner to the $500 permit payment? (Q)

Answer 16

Yes. The worker had inherent authority to bind the owner to the $500 permit payment. In an agency relationship, an agent has actual authority if the principal has granted the agent the power to take action that has legal consequences for the principal. This authority is express if the principal specifically gives the agent authority for a defined undertaking. An agent also has implied or inherent authority to take an action that is necessary or customary for carrying out any expressly authorized duties.

Here, the worker was the owner’s agent. The worker had express authority to buy the alarm system but did not have express authority to order the permit. However, obtaining a permit is a necessary part of getting an operable alarm system. Thus, the worker had implied or inherent authority to order the permit and bind the owner to pay for it.

Question 17

In the agency context, what is the test for the existence of apparent authority? (Q)

Answer 17

In the agency context, the test for whether apparent authority exists is whether: (1) a principal intentionally or negligently (2) allows a third party (3) to believe that an agent has actual authority. Although the tests are similar, apparent authority is not the same as implied actual authority that exists because the principal intentionally or negligently allows the agent to believe the agent has actual authority. For apparent authority, the third party’s belief is what matters—not the agent’s. A third party may recover from the principal based on an agent’s apparent authority by establishing that:

the principal was responsible for the agent’s appearance of authority, and

the third party reasonably relied on the agent’s representation or action.

Question 18

In the agency context, what is the test for whether an agent’s apparent authority has been terminated? (Q)

Answer 18

In the agency context, generally, an agent’s apparent authority has been terminated only when it is no longer reasonable for the third party to believe that the agent has actual authority. One way to accomplish this is for the principal to expressly notify the third party that the agent’s authority has terminated.

Question 19

A business owner had given a worker the title of head of purchasing. The worker’s business cards had the worker’s full name and title. For three years, the worker had been the owner’s agent, periodically ordering raw materials from a local vendor on the business owner’s behalf. The owner had always paid promptly for the delivered materials. One day, the owner then told the worker that the worker could no longer place any orders larger than $1,000. The owner did not inform any third parties about the worker’s new purchasing limitations. The next day, the worker received a call from the local vendor and ordered $5,000 of raw materials. When the owner received the bill, she was furious and refused to pay it.

Is the owner liable for the $5,000 order? (Q)

Answer 19

Yes. The owner is liable for the order. Apparent authority exists if a principal allows a third party to believe an agent has actual authority. Apparent authority is terminated only if it is no longer reasonable for the third party to believe the agent has authority, like if the principal tells the third party that the agent has no authority. If an agent has apparent authority, the principal can be liable for the agent’s actions.

Here, by giving the worker a title indicating purchasing authority and paying for the worker’s orders, the owner allowed the third-party vendor to believe the worker had authority to place orders. This gave the worker apparent authority. At the time the worker placed the $5,000 order, nothing had happened to make the vendor’s belief unreasonable and terminate the worker’s apparent authority. Thus, the owner is liable for the order.

Question 20

In agency, what is ratification? (Q)

Answer 20

In agency, ratification occurs if a principal (1) adopts or affirms an agent’s unauthorized action and (2) has knowledge of the material facts of the action, such that the action is given the same effect as if taken by an agent with actual authority. Material facts are those that substantially affect the existence or extent of the obligations related to the agent’s unauthorized action. A principal may ratify actions by affirmatively manifesting assent or by reasonably indicating consent with appropriate conduct. Typically, a principal may only ratify actions that are taken by a party who is acting or purporting to act as an agent on the principal’s behalf.

Question 21

May a principal who ratified his agent’s unauthorized actions subsequently avoid the effect of ratification under some circumstances? (Q)

Answer 21

Yes. A principal who ratified his agent’s unauthorized actions may subsequently avoid the effect of ratification if, at the time of the affirmance, the principal was both unaware of material facts relevant to the agent’s unauthorized actions and of his own ignorance of those facts. A principal may only ratify actions that were taken by a party who was acting or purporting to act as an agent on the principal’s behalf.

Question 22

What is a disclosed principal? (Q)

Answer 22

A disclosed principal is a principal whose identity and agency relationship are known to third parties. Even if the principal’s identity isn’t overtly disclosed, but a third party has enough information available to reasonably infer the identity of the principal, the principal is considered disclosed. A disclosed principal, but not the principal’s agent, is liable for contracts within the scope of the agent’s actual or apparent authority.

Question 23

What is an undisclosed principal? (Q)

Answer 23

An undisclosed principal is a principal whose identity and agency relationship are not known to a third party. Thus, the third party dealing with the agent does not know that the agent is acting for someone else. Both an undisclosed principal and the principal’s agent are liable for a contract within the scope of the agent’s actual authority. Apparent authority cannot exist in this context, because apparent authority is premised on a manifestation from a principal to a third party that the agent is permitted to act on behalf of the principal. However, if the principal is undisclosed, there can be no such manifestation of authority, because the third party believes the agent is acting on the agent’s own behalf.

Question 24

What is a partially disclosed principal? (Q)

Answer 24

A partially disclosed principal is a principal whose agency relationship, but not identity, is disclosed to a third party. Therefore, the third party knows that the agent is acting on behalf of another, but not the particular identity of that person. Both the principal and the principal’s agent are liable for contracts within the scope of the agent’s actual or apparent authority.

Question 25

Under agency law, may a principal and the principal’s agent be liable for the agent’s contracts and torts? (Q)

Answer 25

Yes. Under agency law, a principal and the principal’s agent may be liable for the agent’s contracts and torts. Contract liability depends on whether the principal is disclosed, partially disclosed (or unidentified), or undisclosed. Additionally, although a principal is generally not liable for a contract outside the scope of an agent’s authority, the principal may nonetheless ratify and assume liability for an unauthorized contract. For a principal to be liable for an agent’s tort, the plaintiff must prove that the principal was responsible for the agent’s appearance of authority to bind the principal, and the plaintiff reasonably relied on the agent’s representation.

Question 26

In the agency context, can apparent authority exist if the principal is undisclosed? (Q)

Answer 26

No. In the agency context, apparent authority cannot exist if the principal is undisclosed. Apparent authority exists if a principal causes a third party to believe an agent has authority to act on the principal’s behalf. However, if a principal is undisclosed, then the third party is unaware of the principal. The third party will have no reason to believe an agent is acting for a principal if the third party has no awareness of that principal. If a third party enters into a deal with an undisclosed principal, the principal and the agent will be bound by any actions taken within the scope of the agent’s actual authority. However, the third party may or may not be bound by the deal (e.g., the third party will not be bound if the agent fraudulently failed to disclose the principal, because the third party would not knowingly agree to a deal with that principal).

Question 27

If a third party has notice that an agent is acting for a principal but does not know the principal’s identity (i.e., if the principal is partially disclosed), will the unidentified principal be bound by actions within the agent’s authority? (Q)

Answer 27

Yes. If a third party has notice that an agent is acting for a principal but does not know the principal’s identity (i.e., if the principal is partially disclosed), both the principal and the agent will be bound by any act within the agent’s authority. The third party will also be bound both to the agent and the partially disclosed principal, because the agent is considered a party to the contract if the principal is partially disclosed.

Question 28

A woman owned a small farm and supplied produce to local grocery stores. The woman was also an agent for a national produce distributor. The national produce distributor instructed the woman to contact a local grocery store and offer to supply pumpkins for the upcoming holiday season. The woman contacted the store but falsely represented that she was not acting on behalf of the national produce distributor. The store representative assumed that the woman was offering local pumpkins and placed a large order. During the discussion with the woman, the store representative repeatedly told the woman that the store sold only local produce. Once the pumpkins were delivered, the store representative learned that the pumpkins had not been grown locally. The store representative sought to void contract for the pumpkin order.

May the store void the contract for the pumpkin order? (Q)

Answer 28

Yes. The store may void the order from the undisclosed national distributor. If a third party does not have notice that an agent is acting on behalf of a principal (i.e., if the principal is undisclosed), the principal and the agent are still bound by any actions taken within the scope of the agent’s actual authority. However, the third party may not be bound. Specifically, a third party can void a contract if:

an agent of an undisclosed principal falsely represents that she is not acting for a principal, and
the principal or the agent had notice that the third party would not have dealt with the principal.
Here, the woman falsely indicated that she was not acting on behalf of the national distributor. The woman knew the store would not have dealt with the distributor, because the store repeatedly told her that it sold only local produce. Thus, the store may void the contract for the order.

Question 29

A charitable organization instructed its agent to contact a local event planner to organize an upcoming charity dinner. The agent was instructed not to disclose the charity’s identity. The agent informed the event planner that she was acting on behalf of a principal but could not divulge the principal’s identity. The event planner agreed to the arrangement and entered into a contract. The contract provided that event planner was to organize the dinner, and in exchange, the unidentified principal would pay the event planner for her time and give the agent a commission. However, the event planner later learned that she had a conflict in her work schedule and backed out of the event, breaching the contract. The charity was forced to cancel the dinner, and the agent never got any commission. The agent sued for the planner’s breach.

Was the agent a party to this contract? (Q)

Answer 29

Yes. The agent was a party to this contract. If a third party has notice that an agent is acting for a principal but does not know the principal’s identity (i.e., if the principal is partially disclosed), the principal and the agent will be bound by any act within the agent’s authority. The third party will also be bound both to the agent and the partially disclosed principal, as the agent is considered a party to the contract if the principal is partially disclosed.

Here, the principal instructed the agent to enter the contract, conferring actual authority. The event planner knew of the principal but not the principal’s identity. Thus, the agent was a contracting party. Because the event planner’s breach prevented the agent from receiving her commission, the agent may be able to bring a claim against the planner for the resulting damages.

Question 30

In addition to the elements of the particular tort claim, what two additional elements must a third party establish to recover against a principal for a tort committed by an agent with apparent authority? (Q)

Answer 30

In addition to the elements of the particular tort claim, to recover against a principal for a tort committed by an agent with apparent authority, a third party must establish that:

the principal was responsible for the agent’s appearance of authority to bind the principal, and

the third party reasonably relied on the agent’s representation.

Apparent authority arises if the principal’s words and actions cause a third party to reasonably believe that the agent has authority to bind the principal.

Question 31

What is the test for determining whether a principal has ratified an unauthorized action? (Q)

Answer 31

A principal has ratified an unauthorized action only if the principal:

has knowledge of the material facts surrounding the agent’s unauthorized action and

adopts or affirms the action by either expressly manifesting assent or reasonably indicating consent with appropriate conduct.

Generally, a principal is not liable for an action outside the scope of an agent’s authority. However, if a principal ratifies an unauthorized action, the action has the same effect as if had been taken by an agent with actual authority and the principal will become liable for the action.

Question 32

Can a principal ratify actions taken by an individual who was not acting or purporting to act as the principal’s agent? (Q)

Answer 32

No. A principal cannot ratify actions taken by an individual who was not acting or purporting to act as the principal’s agent. A principal may only ratify actions taken by a party who is acting or purporting to act as an agent on the principal’s behalf.

Question 33

May a principal be held directly liable for an agent’s tortious conduct? (Q)

Answer 33

Yes. A principal may be held directly liable for an agent’s tortious conduct. A principal is directly liable to a third party harmed by an agent’s tortious conduct if:

the agent acted with actual authority;

the principal ratified the act; or

the principal negligently hired, trained, or supervised the agent.

Even if a principal is not directly liable for an agent’s tortious conduct, the principal still may be held vicariously liable for the agent’s tortious conduct if the agent: (1) acted with apparent authority or (2) was an employee acting within the scope of employment.

Question 34

A business owner instructed a worker, the owner’s agent, to meet with a local vendor to discuss placing a large order for supplies. The worker met with the vendor and the vendor made the worker a favorable offer that was valid for only 60 minutes. The worker was unable to contact the business owner during that time and decided to accept the offer on the owner’s behalf. Later that day, the worker met with the owner and told the owner about the deal. After learning the material facts of the deal, the owner did not dispute the legitimacy of the contract. The owner also began using the supplies once they were delivered under the contract.

Has the owner ratified the contract? (Q)

Answer 34

Yes. The owner has ratified the contract. In an agency relationship, a principal may ratify the unauthorized actions of an agent who is acting or purporting to act on the principal’s behalf. Ratification occurs if a principal:

has knowledge of the material facts surrounding an agent’s unauthorized action and

adopts or affirms the action by expressly manifesting assent or reasonably indicating consent with appropriate conduct.

If a principal ratifies an action, the action has the same effect as if had been taken by an agent with actual authority.

Here, the worker entered the contract while acting as the owner’s agent to talk to the vendor. Although the owner did not authorize the worker to enter the contract, after learning the material facts, the owner indicated consent to the contract by not objecting to it and using the supplies. Thus, the owner ratified the contract.

Question 35

Can a principal be directly liable to a third party harmed by an agent’s conduct? (Q)

Answer 35

Yes. A principal can be directly liable to a third party harmed by an agent’s conduct if (1) the agent’s tortious conduct is within the scope of the agent’s actual authority or has been ratified by the principal, or (2) the principal was negligent in selecting, training, retaining, supervising, or otherwise controlling the agent. An agent is always liable for his own tortious conduct, regardless of whether the agent is acting with actual or apparent authority or within the scope of employment.

Question 36

If an agent is an employee acting within the scope of employment, may the employing principal (i.e., the employer) be vicariously liable to a third party harmed by that agent’s tortious conduct? (Q)

Answer 36

Yes. If an agent is an employee acting within the scope of employment, the employing principal may be vicariously liable to a third party harmed by an agent’s tortious conduct if the agent was acting within the scope of employment (also known as the doctrine of respondeat superior). An agent is acting within the scope of employment if the agent is performing work assigned by the employing principal or engaging in conduct subject to the employing principal’s control.

However, an employing principal is not liable (either directly or vicariously) for an agent’s independent course of conduct that is outside the scope of employment and not intended to serve any purpose to the employing principal.

Question 37

In the agency context, may an agent be liable to a third party harmed by the agent’s tortious conduct? (Q)

Answer 37

Yes. In the agency context, an agent may be liable to a third party harmed by the agent’s tortious conduct. The agent can be held liable for the agent’s own tortious conduct, regardless of whether the agent is acting:

as an agent or employee,

with actual or apparent authority, or

within the scope of the agent’s employment.

Question 38

May a principal be vicariously liable to a third party harmed by an agent’s tortious conduct if the conduct was within the scope of the agent’s apparent authority? (Q)

Answer 38

Yes. A principal may be vicariously liable to a third party harmed by an agent’s tortious conduct if the conduct was within the scope of the agent’s apparent authority. Generally, there are two types of circumstances that may make a principal vicariously liable for an agent’s tortious conduct. A principal may be vicariously liable if the agent was acting within the scope of either the agent’s:

apparent authority or

employment (also known as the doctrine of respondeat superior).

Question 39

An inventor created and manufactured a face mask that could rapidly filter smoke-filled air. The face mask was particularly useful to individuals trapped in areas close to wildfires. The inventor contracted with a number of independent contractors throughout the country to be the inventor’s sales force and sell the face mask for the inventor. The inventor set the price of the face mask but did not otherwise control any aspect of the contractors’ work. After a recent rash of wildfires throughout the country, the price of each face mask increased by 500 percent. Even with the price increase, the independent contractors secured a large number of rush orders. Various state agencies were notified of the price change and began investigating price-gouging claims.

May the inventor be held vicariously liable for the price-gouging claims for sales made by the independent contractors? (Q)

Answer 39

Yes. The inventor may be held vicariously liable for the price-gouging claims for sales made by the independent contractors. An independent contractor is a hired party who has significant control and discretion over the manner, terms, and conditions of the work to be performed on the principal’s behalf. Generally, a principal does not have vicarious liability for matters over which the independent contractor has control and discretion. However, if the principal has control and discretion over specific matters, then the principal may be vicariously liable for those matters.

Here, the inventor cannot be held liable for many aspects of the independent contractors’ sales work. Nevertheless, because the inventor had full control over the price, the inventor may be vicariously liable for any claim related to pricing, including the price-gouging claims.

Question 40

A restaurant owner employed staff to work in her restaurant. As part of their normal job duties, the staff sat restaurant patrons at tables in the restaurant. Generally, the staff members sat individuals in specific sections of the restaurant based on their ethnicity. The staff engaged in this practice because recommendation cards submitted by customers repeatedly praised and requested it. A group of patrons noticed the practice and sued the restaurant owner for discrimination.

Can the restaurant owner be vicariously liable for the staff’s seating conduct? (Q)

Answer 40

Yes. The restaurant owner can be vicariously liable for her staff’s seating conduct. A principal may be vicariously liable to a third party harmed by an agent’s conduct if the agent was acting within the scope of either the agent’s:

apparent authority or
employment (also known as the doctrine of respondeat superior).

However, an employing principal is not liable under the doctrine of respondeat superior for an agent’s independent course of conduct that is outside the scope of employment and not intended to serve any purpose of the employing principal.

Here, seating patrons is one of the staff’s job duties and within the staff’s scope of employment. The ethnicity-based seating practice was intended to make restaurant clientele happy, which furthers the owner’s business purpose. Thus, the owner may be vicariously liable for her staff’s conduct under the doctrine of respondeat superior.

Question 41

If authorized by the principal, can an agent appoint a subagent? (Q)

Answer 41

Yes. If authorized by the principal, an agent can appoint a subagent. A subagent acts for the agent on behalf of the principal. Generally, the subagent is considered to be in an agency relationship with the agent as well as the principal. Therefore, the principal is potentially liable for both the agent’s and subagent’s conduct.

Question 42

What is an agent’s duty of loyalty? (Q)

Answer 42

An agent’s duty of loyalty is the requirement that an agent must act for the principal’s benefit on all matters related to the agency relationship.

However, under some circumstances, a principal may consent to an ordinary act or transaction that would otherwise constitute a breach of the duty of loyalty.

Question 43

If an agent engages in an ordinary act or transaction that is a breach of the duty of loyalty, may the principal consent to that act or transaction? (Q)

Answer 43

Yes. If an agent engages in an ordinary act or transaction that is a breach of the duty of loyalty, the principal may still consent to that act or transaction.

However, for a principal to validly consent to an ordinary act or transaction that would otherwise constitute a breach of the duty of loyalty, the agent must:

obtain the principal’s consent in good faith,

disclose any material facts that would reasonably affect the principal’s judgment, and

otherwise deal fairly with the principal.

Question 44

A woman instructed her agent to inquire about a large parcel of land that was being offered for sale. While inspecting the parcel of land, the agent noticed a small parcel of land for sale across the street and decided to submit a bid for the small parcel on his own behalf. The woman ultimately submitted an offer for the large parcel, and the offer was accepted. The woman then inspected the large parcel of land, and she noticed the small parcel across the street and put in a bid for that property as well. However, ultimately, the agent’s bid was the winning bid for the small parcel. Upon learning that the agent had outbid her for the small parcel, the woman was furious.

Did the agent compete with the woman and, therefore, violate the agent’s duty of loyalty? (Q)

Answer 44

No. The agent did not compete with the woman in violation of the agent’s duty of loyalty. An agent must act for the principal’s benefit in all matters related to the agency relationship. This duty of undivided loyalty encompasses the obligations to avoid both competition and self-dealing. This duty also prohibits the agent from dealing with the principal as an adverse party, or on behalf of an adverse party, in any transaction related to the agency relationship.

Here, the woman asked the agent to inquire about the large parcel of land. The agency relationship governed that transaction, but the relationship did not extend to the unrelated small parcel of land across the street. Because the agent’s acquisition of the small parcel of land was outside of the parties’ agency relationship, the agent’s purchase did not violate his duty not to compete against the woman.

Question 45

In the agency context, what does the duty to avoid competition with the principal prohibit an agent from doing? (Q)

Answer 45

In the agency context, the duty to avoid competition with the principal prohibits the agent from:

dealing with the principal as an adverse party or on behalf of an adverse party in any transaction related to the agency relationship,
personally competing with the principal during the agency relationship, and
taking action on behalf of or otherwise assisting the principal’s competitors.
The duty to avoid competition a specific obligation imposed by the agent’s more general duty of undivided loyalty.

Question 46

What is an agent’s duty against self-dealing? (Q)

Answer 46

An agent’s duty against self-dealing prohibits the agent from engaging in transactions intended primarily to benefit anyone other than the principal. Specifically, the agent may not acquire a material benefit from a third party in connection with transactions or other actions taken on behalf of the principal or by virtue of the agent’s position. Additionally, the agent may not use the principal’s property or utilize or communicate the principal’s confidential information for the agent’s own purposes or the purposes of a third party.

Question 47

A man had an agent who represented him at various auctions to bid on pieces of art from the seventeenth century. A woman wanted to retain the same agent to attend the same auctions and bid on pieces of art from the eighteenth century. The agent accepted the work from the woman. The agent did not tell either the man or the woman that the agent was working as agent for more than one principal at the auctions, because the agent believed that the scope of her work for each principal was different enough to prevent any conflicts of interest.

Did the agent violate any of her fiduciary duties by not to disclosing the arrangements to the two principals? (Q)

Answer 47

Yes. The agent violated her fiduciary duties to both principals by not disclosing that she was working for multiple principals. An agent is allowed to act for more than one principal in some situations. However, an agent who acts for more than one principal in a transaction has a duty to deal fairly and in good faith with each principal. The agent must also disclose to each principal:

the fact that the agent is also acting for the other principal or principals, and

all other facts that would reasonably affect the principals’ judgments.

Here, the agent was allowed to attend the same auctions and bid on artwork for both principals. However, the agent needed to disclose to each principal that she was also acting for the other principal, as well as all other facts that would reasonably affect the principals’ judgment. The agent’s failure to make these disclosures was a breach of her fiduciary duties.

Question 48

In the agency context, what are the agent’s duties of performance? (Q)

Answer 48

In the agency context, the agent’s duties of performance are:

a duty to act in good faith,

a duty to remain within the scope of actual authority granted by the principal, and

a duty to obey all lawful instructions given by the principal or other persons designated by the principal regarding actions taken on the principal’s behalf.

Courts have also recognized additional performance duties. The duty of care requires an agent to use a reasonable person’s diligence and skill to perform actions for the principal. Further, if an agent claims special skills, the agent is expected to use those skills to perform actions for the principal. The duty of good conduct requires the agent to act reasonably within the scope of the agency relationship and refrain from actions likely to damage the principal’s enterprise. The duty to provide information requires the agent to inform the principal of particular information.

Question 49

In the agency context, what does the duty of good conduct require an agent to do? (Q)

Answer 49

In the agency context, the duty of good conduct requires the agent to:

act reasonably and

avoid taking any action that is likely to damage the principal’s enterprise.

This duty is limited to actions an agent takes within the scope of the agency relationship and is in addition to the agent’s general duty of performance.

Question 50

In the agency context, what does the duty to provide information require an agent to do? (Q)

Answer 50

In the agency context, the duty to provide information requires an agent to use reasonable efforts to inform the principal of any facts that the agent knows or should know if the agent knows or should know that either:

the principal would want the facts, or

the facts are material to the agent’s duties.

The duty to provide information does not require an agent to inform the principal of certain facts if the agent would violate a superior duty that the agent owes to a third party by providing those facts to the principal.

Question 51

Does an agent have any duty with respect to his principal’s property? (Q)

Answer 51

Yes. An agent owes his principal the duty to avoid intermingling the principal’s property with the agent’s or anyone else’s property, as well as to safeguard the property. This duty is considered a subset of an agent’s duty of performance owed to his principal.

Question 52

What general duties does an agent owe a principal? (Q)

Answer 52

Generally, an agent owes a principal the duties of loyalty, care, and performance. Each of these duties includes a variety of obligations. Additionally, an agent must obey the express and implied terms of any contract with the principal.

Question 53

In the agency context, what does the duty of good faith require a principal to do? (Q)

Answer 53

In the agency context, the duty of good faith requires the principal to:

deal with the agent fairly and

inform the agent about any risks of physical or financial harm that the principal knows or should know are present in the agent’s work.

Generally, this duty means the principal must not take actions that will foreseeably cause an innocent agent to suffer a loss.

Question 54

In the agency context, what does the duty to indemnify require a principal to do?

Answer 54

In the agency context, the duty to indemnify requires a principal to compensate the agent for hurt, loss, or damage if:

indemnification is required by the terms of a contract between the agent and the principal,

the agent makes a payment while acting under actual authority,

the agent makes a payment that benefits the principal, or

the agent suffers a loss that should be indemnified by the principal in the interest of fairness and pursuant to their agency relationship.

In general, the duty to indemnify means a principal must indemnify an agent if the agent incurs costs or suffers losses on the principal’s behalf. Sometimes, the general duty to indemnify is broken down into a duty to indemnify the agent for losses and a duty to reimburse the agent for expenses paid on the principal’s behalf.

Question 55

What are the primary duties that a principal owes to an agent? (Q)

Answer 55

Generally, the duties a principal owes an agent are:

the duty of good faith,

the duty to indemnify (including reimbursement), and

a duty to act in accordance with the express and implied terms of any contract between the principal and the agent.

Some sources may also refer to a principal’s duty to compensate an agent. However, this is just a specific example of the general duty to comply with specific contractual terms regarding the agent’s compensation. If the parties’ agreement does not expressly address compensation, a contractual term requiring reasonable compensation will be implied into the parties’ agreement.