Agency Law

Question 1

Agency Relationship

Answer 1

Generally, an agency relationship is created when one person (the principal) manifests an intent that another person (the agent) act on his behalf and both parties consent to the agreement.

A principal is contractually bound to the acts of the agent if the agent acted with actual or apparent authority.

Question 2

Actual Authority

Answer 2

Actual authority is authority that the agent reasonably thinks he possesses based on the principal’s dealings with him. Actual authority can be express (e.g., contained within an agreement between the parties) or implied from the words or actions of the principal.

Question 3

Apparent Authority

Answer 3

Apparent authority arises when the principal “holds out” the agent as having certain authority, causing third parties to reasonably believe the agent has such authority.

–Policy is to protect innocent third parties who rely on the principal’s holding out of a person as their agent

–Apparent authority is based on the principal’s manifestations to a third party. (thus, it cannot be created by the mere representations of an agent or other actor)

–There are situations where the agent either exceeds their authority or no longer has authority, yet the principal is still bound through apparent authority (e.g., prior acts [that principal permitted and knows that the third party is aware of this], power of position [established through an agent’s title or position], impostors [where principle negligently permits], lingering apparent authority [after actual authority ends]).

• Notice may be necessary to all third parties with whom the principal knows the agent dealt
• Death or incompetency of principal doesn’t automatically terminate agent’s apparent authority (majority view); and when there’s a written authority of the agent that’s relied upon by a third party, the agent’s apparent authority isn’t terminated unless the principal recovers the written authority.

Question 4

Elements to Establish an Agency Relationship

Answer 4

(1) Consent - Of both the principal and the agent is necessary (can be established expressly or by implication from the parties’ conduct)
(2) On Behalf of - The agent must be acting primarily for the benefit of the principal
(3) Control - The agent must act subject to the principal’s control, but the degree of control exercised by the principal doesn’t have to be significant.
(4) Capacity - Principal must have full contractual capacity; agent must have at least minimal mental capacity
(5) Writing if required - By Statute of Frauds (equal dignities rule)

–Note: Consideration is NOT required.

Question 5

Capacity to Form Agency Relationships

Answer 5

Principal: Must have contractual capacity (a minor’s appointment of an agent is voidable, and incompetents and most unincorporated organizations cannot be principals)

Agent: Needs only minimal capacity (exception: if agent has literally no mental capacity, they cannot act for the principal)

Question 6

Equal Dignities Rule

Answer 6

Many states require agency agreements to be in writing when the agent is to enter into certain contracts within the Statute of Frauds (mostly land transactions), or when the agency agreement itself would fall within the Statute of Frauds.

Question 7

Agent’s Duties to the Principal

Answer 7

An agent is a fiduciary of their principal. Thus, in addition to any contractual duties, the agent owes the principal fiduciary duties of loyalty, obedience to lawful instructions, and reasonable care under the circumstances (including duty to disclose all relevant information).

–Duty of Care: An agent owes a duty to their principal to carry out their agency w/ reasonable care. The degree of care is a “sliding scale” depending on any special skills that the agent may have. (measure of “reasonableness” may vary based on compensation)

–Duty of Loyalty: The agent owes a duty of undivided loyalty to the principal. (e.g., can’t abuse position to profit for themselves, must act solely for benefit of agent, must refrain from dealing w/ an adverse party, can’t compete with principal concerning subject matter of agency)

Question 8

Subagents

Answer 8

A subagent is a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal.

–An agent has absolute liability to the principal for breaches by a subagent.

–If the principal AUTHORIZED the agent to appoint the subagent, the subagent owes the principal the same duties as the agent owes the principal.

–If the agent was NOT AUTHORIZED to appoint a subagent, the subagent does not owe duties to the principal but does owe duties to the agent.

–A principal generally owes no duty to compensate a subagent even if the agent had authority to hire the subagent.

Question 9

Principal’s Duties to Agent

Answer 9

The principal owes the agent all of the duties imposed by their contract, reasonable compensation, and reimbursement for expenses.

The principal also should generally cooperate w/ the agent and not unreasonably interfere w/ the agent’s performance.

Question 10

Implied Actual Authority

Answer 10

Implied actual authority is authority the agent reasonably believes they have as a result of the principal’s words or actions.

–It may arise out of custom known to agent; from prior acquiescences by the principal; to take security measures; to delegate authority; to pay for and accept goods where there’s authority to purchase; to give general warranties, collect payment, and deliver where there is authority to sell; and to manage investments in accordance w/ the “prudent investor” standard

Question 11

Termination of Actual Authority

Answer 11

Termination or revocation of actual authority occurs by:

• the happening of a specified event
• lapse of reasonable time
• a change in circumstances
• agent’s breach of fiduciary duty
• either party’s unilateral termination
• operation of law (e.g., death or loss of capacity)

Question 12

Irrevocable Agencies

Answer 12

Neither an agency coupled w/ an interest nor a power given as security may be unilaterally terminated by the principal if the agency was given to protect the agent’s (or a third party’s) rights and it’s supported by consideration.

Neither will such agencies be terminated by operation of law.

Question 13

Inherent Authority

Answer 13

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.

This occurs b/c the courts wish to protect innocent third parties rather than a principal who gave some actual authority to the agent (e.g., respondeat superior or where an agent exceeds their actual authority but the conduct is similar to acts authorized)

Question 14

Ratification

Answer 14

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 the “principal” subsequently validates the act and becomes bound.

–May be express (e.g., oral or written affirmation) or implied when the “principal” accepts the benefits of the contract.

–Upon ratification, the “agent” is relieved of liability for breach of duty and their implied warranty of authority.

–Note: Ratification cannot be used to alter the rights of intervening parties.

Question 15

Requirements for Ratification

Answer 15

For ratification to occur, the “principal” must:

1) Have knowledge of (or have reason to know) all material facts regarding the contract
2) Accept the entire transaction (can’t ratify merely a portion); AND
3) Have capacity (be competent and of legal age)

Question 16

Principal Liability on Contract

Answer 16

Principal is bound if valid authority existed (i.e., actual, apparent, by ratification).

Question 17

Agent’s Liability on Contract

Answer 17

Agent is bound unless the principal’s existence AND identity are disclosed. (Note: the agent can still be liable to the third party for damages for the breach of the implied warranty of authority [which warrants that a principal w/ contractual capacity exists + the agent had the authority to contract for the principal]).

Question 18

Unidentified and Undisclosed Principals

Answer 18

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 the authority to enter the contract.

–Unidentified Principal: The third party knows the agent was dealing on behalf of a principal but does not know exactly who the principal is)

–Undisclosed Principal: The agent does not reveal that they are contracting on behalf of a principal.

Remember: The type of principal (disclosed, unidentified, or undisclosed) is relevant only when you are considering whether the agent is liable.

Question 19

Third Party’s Liability on Contract

Answer 19

Bound to principal if valid authority existed; bound to agent if principal unidentified or undisclosed and agent enforces contract, but principal entitled to contract benefits.

Question 20

Independent Contractor or Employee?

Answer 20

Look chiefly to the extent of the principal’s control over the manner and method of the agent’s performance.

–An agent does not reserve/have a right to control the manner in which work is performed by an independent contractor.

Question 21

Liability for Acts of Independent Contractors

Answer 21

A principal will incur liability for acts of an independent contractor where: (1) inherently dangerous activities [such as blasting] are involved; (2) nondelegable duties have been delegated; or (3) the principal knowingly selected an incompetent independent contractor (if the principal was merely negligent in selecting the independent contractor, then liable only for their own negligence in the selection, not for the contractor’s negligence).

Question 22

Liability of Principal for Agent’s Torts

Answer 22

A principal may be vicariously liable for the torts of their agent under two theories: (1) respondeat superior and (2) apparent authority.

–Vicarious liability means that joint and several liability for the agent’s tort will be imputed to the principal.

–Note: In addition to vicarious liability, a principal may be directly liable for their own negligence in hiring, retaining, or supervising the agent. A principal may also be directly liable for an agent’s tort if they gave the agent actual authority to commit the tort or ratified the tort, or in other circumstances involving independent contractors.