Agency

Question 1

What are the three elements of a principal-agent relationship?

Answer 1

1. Manifestation of consent by the principal that the agent act on the principal’s behalf; and
2. Subject to the principal’s control; and
3. The agent manifests consent.

Question 2

How do you prove the existence of the agency?

Answer 2

By the evaluation of the facts:

• What the parties said
• What the parties did
• How the parties acted
• The parties’ course of dealing over time
• Even silence may be used to show a party’s consent

Agent compensation is not essential

Question 3

Who are the three “players” in an agency question?

Answer 3

• The Principal
• The Agent
• The Third Party

Question 4

What are some of the basic principles that govern an agency relationship?

Answer 4

The agent has certain duties and obligations to the principal.

The principal has certain duties and obligations to the agent.

The principal is responsible for tortious acts committed by the agent that fall within the scope of the agency.

The agent has the ability to enter into binding agreements on the principal’s behalf, as long as the agreement may be traced to the principal’s authority.

The agent’s knowledge (in the subject matter of the agency) is imputed to the principal.

Question 5

Factors to determine respondeat superior

Third Restatement § 7.07, comment f

Answer 5

• The extent of control that the agent and the principal have agreed the principal may exercise over the details of the work (Note that the extent of control that the principal actually exercises is relevant as well);
• Whether the agent is engaged in a distinct occupation or business;
• Whether the type of work done by the agent is customarily done under a principal’s direction or without supervision;
• The skill required in the agent’s occupation;
• Whether the agent or the principal supplies the tools or other instrumentalities required for the work and the place in which to perform it;
• The length of time during which the agent is engaged by a principal;
• Whether the agent is paid by the job or by the time worked;
• Whether the agent’s work is part of the principal’s regular business;
• Whether the principal and agent believe they are creating an employment relationship; and
• Whether the principal is or is not in business.

Question 6

What is the Doctrine of Respondeat Superior?

Answer 6

Employers are vicariously liable (i.e. responsible) for the torts of their employees that arise within the scope of the employee’s employment.

However, principals are not responsible for the torts of their independent contractors (non-employee agents) unless the tort

(1) arises out of an area over which the principal exercised control, or
(2) falls into one of the exceptions such as an inherently dangerous activity or a non-delegable duty.

Question 7

Factors to determine if a Franchise Arrangements create an agency relationship

Answer 7

The extent of the franchisor’s involvement in the franchisee’s day-to-day operations;

The franchisor’s right to control the franchisee’s operations (even if that control is not exercised), which might include provisions in the franchise agreement such as pricing requirements, audit rights, and approval of advertising; and

The right of the franchisor to terminate the relationship (which could suggest that the franchisor has the power to control the franchisee’s actions, even if explicit rights to control are not articulated.

If the franchisor exercises sufficient control over the franchisee to characterize the relationship as an employee/employer relationship, then the franchisor would be vicariously liable for tortious conduct of the franchisee (or even tortious conduct of the franchisee’s employees) that occurs within the scope of that employee/employer relationship.

Question 8

Intentional Torts by Agents

Answer 8

A court finds a principal liable for harm done as a result of the intentional tort of an agent if it is foreseeable that some harm might arise out of the specific employment/agency relationship, even if the specific harm that occurred was not foreseeable if the tort was of “characteristic risk” associated with the agency relationship.

Example: Bouncer

Question 9

Frolic

Answer 9

When an employee leaves employment to do something for personal reasons.

Question 10

Detour

Answer 10

When an employee is still engaged in employment but strays only slightly from the direct assignment.

Question 11

Continuum of Control

Non-Employee Agents and Independent Contractors

Answer 11

Rule: When a fact pattern involves an independent contractor or a non-employee agent if the tort occurs in an area over which the principal exercises some control, the principal might still be liable.

However, if the tort occurs in an area over which the principal does not exercise control, then there is no liability unless the activity falls within one of the exceptions.

Exceptions:

There are certain situations in which a principal still is liable for the torts of an agent who is not an employee and over whom the principal exercises no control. Those situations are:

Inherently dangerous activities;

Non-delegable duties; and

Negligent hiring

Question 12

Inherently Dangerous Activities

Answer 12

Inherently dangerous activities include any activity that is likely to cause harm or damage unless some precautions are taken.

Question 13

Non-Delegable Duties

Answer 13

A non-delegable duty is one that a person may not avoid by the mere delegation of a task to another person.

For example, landlords have certain non-delegable duties to their tenants. Attorneys have certain non-delegable duties to their clients.

If something is “non-delegable,” it does not mean that an agent may not be hired to perform the task. It means that hiring an agent to perform the task will not discharge or transfer the principal’s responsibility or liability.

Question 14

Negligent Hiring

Answer 14

Negligent hiring is that liability is based on the principal’s negligence in hiring the independent contractor, not on attributing responsibility for the tortious act of an independent contractor to an innocent principal.

Question 15

What are two key points to remember about principal-agent liability?

Answer 15

1. The agent is always liable for his own negligence. Agency problems focus on the question of whether the third party can also recover from the non-negligent principal.
2. If the principal is negligent, then the principal is liable for his own negligence, not because of respondeat superior, and not because of the principal-agent relationship.

Question 16

Apparent Agency

Definition

Answer 16

A principal (or alleged principal) could also incur liability for the wrongdoing committed by an agent (or an alleged agent), acting with apparent authority on behalf, or purportedly on behalf, of the principal. (Third Restatement § 7.08.)

Question 17

Apparent Agency

Elements of

Answer 17

• A reasonable belief by the third party that the alleged agent is an agent of the principal (i.e. reasonable reliance);
• Some action or inaction by the principal to create (or to fail to dispel) that reasonable belief on the part of the third party; and
• Some showing (in many cases) that the third party’s injury could have been avoided had the alleged principal exercised control over the alleged agent. In other words, the third party’s injury arose out of that third party’s reasonable belief that an employee/agency relationship existed.

Question 18

Theory of Apparent Agency

Answer 18

Apparent agency arises in situations in which the person committing the tort is not the employee, or perhaps not even the agent, of the principal. Therefore, the principal would not be liable for the alleged agent’s tort under the traditional agency analysis discussed above.

However, if there are circumstances that led the injured third party to reasonably believe that an employment or agency relationship existed between the principal and the alleged agent, and those circumstances existed because of some action or inaction (i.e. manifestation) on the part of the principal, then the principal might still be liable under a theory of apparent agency, even if no employment relationship existed.

Many courts, but not all, will also require that the injury to the third party resulted because of the third party’s reasonable—albeit incorrect—belief that the alleged agent was, in fact, an agent of the principal—in other words, some showing that if the alleged agent had been under the control of the principal, then the principal would, or could, have exercised control to avoid the tort which took place.

Question 19

AGENCY PROBLEMS INVOLVING CONTRACTS

Key Question

Answer 19

Ask in a contract action, whether the principal is bound by the agent’s actions.

Question 20

Authorities which an agent binds a principal to an agreement

Answer 20

• Actual Authority (both express and implied);
• Apparent Authority;
• Ratification (which is authority granted after the fact);
• Liability of an Undisclosed Principal (This type of authority used to be included in the concept of “Inherent Authority,” but that term has been eliminated in the Third Restatement.); and
• Estoppel (Note that Estoppel is not technically a form of authority; rather, it is a doctrine that (as applied in this context) prevents a Principal from arguing that no authority existed. However, even in circumstances in which the Principal might be bound to an agreement by the doctrine of Estoppel, the doctrine may not be used independently by that Principal to enforce the agreement against a third party.)

Question 21

Actual Authority

Answer 21

Actual Authority exists when the principal communicates to the agent about the activities in which the agent may engage and the obligations the agent may undertake. This communication may be spoken or written; it may be through silence or implied in the job. There are two forms of actual authority: express and implied.

• Actual Express Authority involves examining the principal’s explicit instructions.
• Actual Implied Authority involves examining the principal’s explicit instructions and asking what else might be reasonably included in those instructions (i.e. implied) to accomplish the job. Implied Authority includes actions that are necessary to accomplish the principal’s original instructions to the agent; it also includes those actions that the agent reasonably believes the principal wishes him to do, based on the agent’s reasonable understanding of the authority granted by the principal.

Question 22

Apparent Authority

Definition

Answer 22

Apparent authority is created when a person (principal or apparent principal) does something, says something, or creates a** **reasonable impression (a “manifestation”) that another person (the apparent agent) has the authority to act on behalf of that apparent principal.

Apparent Authority is not about what the principal wants the agent to do.

It is about what a third party reasonably believes the principal has authorized the agent to do.

Question 23

Ratification

Definition

Answer 23

Ratification is authority that is granted by the principal after an agreement has been made. It involves situations in which an agent enters into an agreement on behalf of the principal without any authority (actual or apparent) to do so.

There are two questions to ask in determining if there was a valid ratification of such an agreement: 1) Did the principal, through word or deed, manifest his assent to (“affirm”) the agreement? 2) Given the facts and circumstances of the situation, will the law give effect to that assent?

Affirmation may be express or implied. (It is often implied by a principal accepting the benefits of the transaction.)

Once an agreement or transaction has been ratified, the law treats it as if the agent with actual authority originally did it. Both parties to the agreement are bound.

Once a contract has been ratified, it generally creates retroactive authority. One significant exception to this treatment occurs when the principal had no capacity to enter into the agreement at the time it was made.

Question 24

Limitations on Ratification

Answer 24

For a ratification to be valid, the principal must know or have reason to know, at the time of the alleged ratification, the material facts relating to the transaction.

A principal may not partially ratify a transaction. It is all or nothing.

If the third-party manifests an intention to withdraw from the transaction prior to the ratification, the principal may not then ratify the agreement.

Ratification will be denied when necessary to protect the rights of innocent third parties. (This usually happens when there has been some material change in the circumstances between the time of the transaction and the time of the purported ratification.)

Question 25

Liability of an Undisclosed Principal

Definition

Answer 25

An undisclosed principal is liable for certain unauthorized transactions of his agent when:

1) a third party has made a “detrimental change in position;”
2) the principal had notice of the agent’s conduct;
3) the conduct might induce third parties to change their positions; AND
4) the principal did not take reasonable steps to notify the third parties of the facts.

Liability of an undisclosed principal most often arises in situations in which the agent acts in a manner consistent with the authority that a third party would reasonably believe the agent to have under the same circumstances had the principal been disclosed. Third Restatement § 2.06

Question 26

Estoppel

Elements

Answer 26

Estoppel involves:

• Intentional, negligent, or otherwise culpable acts or omissions by the principal, which create an appearance of authority in the purported agent;
• A third party who reasonably, and in good faith, acts in reliance on that appearance of authority; and
• The third-party changes her position in reliance upon that appearance of authority.

Estoppel requires that the third party alter his or her position in reliance on the purported authority.

In contrast, apparent authority requires a manifestation by the principal (directly or indirectly) to the third party. No such manifestation is required for estoppel, merely some culpable act or omission by the principal.

Question 27

AGENCY ANALYSIS SUMMARY FOR PRINCIPAL’S LIABILITY IN TORT AND/OR CONTRACT

Answer 27

In addressing an agency question involving a principal’s responsibility for an agent’s actions, it might be helpful to use the following questions as an analysis flow chart:

• Is there a Principal-Agent relationship?
• If so, does the issue involve a tort or a contract?

Tort

If the issue involves a tort, then in order to determine whether the principal is liable, students should evaluate the following questions:

• Is there an Employee (“EE”)/Employer (“ER”) relationship?
  
  • Did the Principal have the right to exert control over the means and manner in which the Agent performed the task(s)?
• If the Agent is an EE, did the tort occur within the scope of the employment or was it clearly outside the scope (“frolic or detour”)?
  
  • If the tort was intentional with no purpose to serve the ER, was it foreseeable (characteristic of the risks that arise from the employment)?
• Even if there is not an EE/ER relationship, is there sufficient control to create a “non-employee agent,” and, if so, did the tort occur within the scope of that control?
• Even if there is no control exercised over the Agent, does the event fall into an exception such as an inherently dangerous activity, a non-delegable duty, or negligent hiring?
• Even if there is no liability for the Principal under a control analysis, is there a claim for Apparent Agency because the third party reasonably relied on the appearance of agency and was harmed as a result of that reliance?

Contract

If the issue involves a contract, then in order to determine whether the Principal is bound, students should evaluate the following questions:

• Did the Principal give Actual Authority to the Agent (either express or implied)?
• Did the Principal make some manifestation to the third party creating Apparent Authority?
• Was the Principal undisclosed, creating liability of an undisclosed principal (formerly Inherent Agency Power (IAP))?
• Did the Principal ratify the contract?
  
  • Do any exceptions apply (didn’t know all the facts, partial ratification, unfair to third party)?
• Is Estoppel an issue?
  
  • Did the Principal do something wrong, or fail to do something, that created an impression with the third party?
  • Did the third party rely and alter his or her position to his or her detriment?

Question 28

Agent’s Liability for Torts

Answer 28

An agent is liable for his or her tortious conduct regardless of whether the principal is also liable through vicarious liability. (Third Restatement § 7.01.)

Question 29

Agent’s Liability for Contracts

Answer 29

Typically an agent is not liable as a party to the contracts that that agent enters into on behalf of a disclosed principal unless there are special circumstances and/or the parties agree that the agent will be liable under the contract.

However, there are two situations in which the agent will usually be treated as a party to a contract:

1. An undisclosed principal; or
2. An unidentified principal (also known as a “partially disclosed principal”)

Question 30

Undisclosed Principal

Answer 30

An undisclosed principal exists when an agent is acting on behalf of a principal, but the agent does not tell the third party (and the third party does not know) that the agent is acting on behalf of a principal. Because the third party thinks it is entering into an agreement with the agent and no other person is disclosed, the agent is presumed to be a party to the agreement and is bound by the agreement.

Question 31

Unidentified Principal

Answer 31

An unidentified principal (also known as a partially disclosed principal) exists when an agent tells the third party that the agent is acting on behalf of a principal, but the identity of the principal is not disclosed. Because an unidentified party may not enter into a contract, the agent is usually treated as a party to the agreement and is bound by the agreement.

Question 32

Potential liability of an agent in a contract fact pattern

Analysis

Answer 32

• If the principal is disclosed and the agent, with authority to do so, enters into an agreement with a third party, then, generally, the principal will be bound but the agent will not.
• If the principal is undisclosed or unidentified and the agent, with authority to do so, enters into an agreement with a third party, then, generally, the principal will be bound, but the agent will also be bound.
• If the principal is undisclosed or unidentified and the agent, without authority to do so, enters into an agreement with a third party, then the agent will be bound, but the principal is not typically bound unless the circumstances trigger the provisions of the Third Restatement (discussed above) for liability of an undisclosed principal, or there is some additional action (such as ratification) on the part of the principal.
• If the principal is disclosed and the agent, without authority to do so, enters into an agreement with a third party, then, depending upon the circumstances, the principal may or may not be bound, and the agent (although probably not bound) could be liable to the third party for a breach of the agent’s warranty of authority or could be liable to the principal for the damages caused by the agent’s improper actions.

Question 33

Duties of the Agent to the Principal

Answer 33

• Duty of care, competence, and diligence: An agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances unless the agent has special skills or knowledge, which would require the agent to act at the commensurate, higher level of skill or knowledge. (Third Restatement § 8.08.)
• Duty of loyalty: The agent has a duty to act loyally for the principal’s benefit in all matters connected with the agency. (Third Restatement § 8.01.)
• Duty not to acquire material benefits arising out of the agency: The agent may not acquire a material benefit from a third party in connection with transactions or actions taken on behalf of the principal or otherwise through the agent’s position. (Third Restatement § 8.02.)
• Duty not to act as (or on behalf of) an adverse party: An agent may not deal with the principal as or on behalf of an adverse party in a transaction connected with the agency relationship. (Third Restatement § 8.03.)
• Duty not to compete: The agent may not compete with the principal or take action on behalf of or otherwise assist the principal’s competitors. (Third Restatement § 8.04.) (Note that this prohibition does not extend beyond the end of the agency relationship and does not prohibit an agent’s preparing to compete, following the end of the agency relationship, provided the conduct is not otherwise wrongful.)
• Duty not to use principal’s property: An agent may not use property of the principal for the agent’s own purposes or the purposes of a third party. (Third Restatement § 8.05(1).) Moreover, an agent may not mingle the principal’s property with anyone else’s, including the agent’s. (Third Restatement § 8.12.)
• Duty not to use confidential information: An agent may not use or communicate confidential information of the principal for the agent’s own purposes or for the purposes of a third party. (Third Restatement § 8.05(2).) (Note that this prohibition would typically prevent the use or disclosure of confidential information learned during the agency relationship, even after the termination of that agency relationship.)
• Duty of good conduct: An agent must, within the scope of the agency, act reasonably and refrain from conduct that is likely to damage the principal’s enterprise. (Third Restatement § 8.10.)
• Duty to provide information: An agent has a duty to provide the principal with facts that the agent knows, has reason to know or should know, if the agent knows or should know that the principal would want to know those facts or if the facts are material to the agent’s duties to the principal, but only if providing the facts to the principal does not violate a superior duty owed by the agent to another person. (Third Restatement § 8.11.)

While the principal may waive some of these duties, such a waiver requires that the principal be fully informed and that the agent still act in good faith and still deal fairly with the principal. (Third Restatement § 8.06.) If an agent violates these duties without the consent of the fully-informed principal, the agent will be liable to the principal for damages. In the alternative, the agent could be liable to disgorge to the principal any profit made by the agent in violation of a duty, even if the principal could not have made the same profit.

Question 34

Duties of the Principal to the Agent

Answer 34

Duty to indemnify: A principal must typically indemnify an agent for costs, expenses, and/or damages incurred by the agent in the scope of the agency (provided the agent is acting within the scope of the agent’s actual authority) or when acting for the principal’s benefit and/or in accordance with any agreement between the agent and the principal. (Third Restatement § 8.14.)

Duty of good faith and fair dealing: A principal must deal with its agent fairly and in good faith. This duty includes an obligation to inform the agent about risks of physical harm or financial loss that the principal knows, has reason to know, or should know are present in the agent’s work but are unknown to the agent. (Third Restatement § 8.15.)

Problems involving a principal’s duties typically involve some damage or wrong done to, or incurred by, the agent and a question about the agent’s ability to seek redress from the principal.

In evaluating an agency question involving the potential liability of an agent, students should ask:

• Did the agent violate any duty to the principal?
• Did the agent violate any duty to a third party?
• Did the agent willfully or negligently damage a third party?
• For what damages, if any, might the agent be liable?
• If the agent has incurred any costs, expenses, or damages, does the agent have a claim for indemnification against the principal?

Question 35

General Agent

Definition

Answer 35

A general agent is an agent who has been authorized to engage in a series of transactions or all transactions of a particular type, sometimes for a continuous, ongoing period.

Question 36

Common Agent

Definition

Answer 36

A common agent is an agent who acts on behalf of more than one principal in a single transaction.

Question 37

Special Agent

Definition

Answer 37

A special agent is an agent authorized to engage in a single transaction or a time-limited series of transactions—not multiple transactions for a continuous, ongoing period.

Question 38

Universal Agent

Definition

Answer 38

A universal agent is an agent who is empowered to engage in any and all activities, of any type, on behalf of the principal.

Question 39

Agent Liability to Third Parties

Answer 39

An agent is liable on all contracts with third parties unless the existence and identity of the principal are fully disclosed, or if the third parties agree to hold the agent harmless. Restatement (Third) of Agency § 6.01-6.03.

If the principal is undisclosed or partially disclosed, the agent remains liable on the contract unless released by the third party. Id. at § 6.03.

Question 40

Loss of Capacity by Principal

Answer 40

Loss of capacity terminates an agent’s authority. In that case, the principal’s incapacity ends the agent’s actual authority when the agent has notice of the incapacity or an adjudication of incompetence. Restatement (Third) of Agency § 3.07.

Question 41

Revocation of Agency Relationship

Answer 41

In general, a principal or agent may revoke most agency relationships at any time, unless any agency agreement provides otherwise.

Certain types of agency powers, such as those that are granted as securities and certain proxies, are irrevocable. Restatement (Third) of Agency § 3.12.

Question 42

Termination of Agent’s Actual Authority

Answer 42

An agent’s actual authority to bind a principal may be terminated by:

(1) the agent’s death, cessation of existence, or suspension of powers;
(2) the principal’s death, cessation of existence, or suspension of powers;
(3) the principal’s loss of capacity;
(4) an agreement between the agent and principal or the occurrence of circumstances on the basis of which the agent should reasonably conclude that the principal no longer would assent to the agent’s taking action on the principal’s behalf;
(5) a manifestation of revocation by the principal to the agent, or of renunciation by the agent to the principal; or
(6) the occurrence of circumstances specified by statute. Restatement (Third) of Agency § 3.06.

Question 43

The first obligation of a principal to an agent

Answer 43

In the relationship between a principal and an agent, the first and most obvious obligation of the principal is to comply with the terms of the agency agreement. Restatement (Third) of Agency § 8.13.

Question 44

Fiduciary Duty of Loyalty

Answer 44

An agent owes a fiduciary duty of loyalty to his or her principal in all things related to the agency. Restatement (Third) of Agency § 8.01.

Quite simply, this means that the agent must always be on the principal’s side and act for the principal’s benefit. This duty carries with it a number of obligations.

First, the agent must not engage in self-dealing or seek to enrich herself by virtue of her position as the agent. Restatement (Third) of Agency § 8.02.

Next, the agent may not represent an adverse party against the principal in a transaction. Restatement (Third) of Agency § 8.03.

The agent must also avoid engaging in competition with the principal, whether in the agent’s personal capacity or by working with third parties whose interests are adverse to the principal’s. Restatement (Third) of Agency § 8.04. Another way to say this is that the agent must avoid usurping the principal’s opportunities.

Further, the agent may not use the property or confidential information of the principal to serve the agent’s own purposes or those of anyone other than the principal. Restatement (Third) of Agency § 8.05.

The duty of loyalty is fairly comprehensive, but an agent may seek the principal’s informed consent to engage in an activity that would otherwise be a breach of the duty. Such a waiver will only be effective if the agent discloses all material facts and otherwise acts in good faith. Restatement (Third) of Agency § 8.06.

Question 45

Standard of Care

Agent

Answer 45

An agent has a duty to act with the reasonable care, skill, and diligence that would ordinarily be exercised by an agent in similar circumstances. While this is an objective standard, agents who have particular or specialized knowledge or skills are expected to use them and will be held to a standard of care that would be observed by agents possessing those special skills. Restatement (Third) of Agency § 8.08 cmt. c.

Question 46

Duties owed by Principal to Agent

Answer 46

1. Duty of good faith and fair dealing
2. Duty to comply with the terms of the agency agreement
3. Duty to indemnify for expenses incurred in the agency

Restatement (Third) of Agency §§ 8.13-8.15

Question 47

Duty of Loyalty

Principal to Agent

Answer 47

A principal does not owe an agent a duty of loyalty. Restatement (Third) of Agency ch. 8, topic 2, intro. note.

Question 48

Breach of Obligations by Compensated Agent

Remedies by Principal

Answer 48

If a compensated agent breaches his or her obligations, the principal has a right to withhold payment. Next, the principal may seek damages, either for breach of contract or in tort, depending upon the harm suffered. The principal may also bring an action for an accounting, which would force the agent to turn over all money or property owed to the principal. See Restatement (First) of Agency § 399.