Liability of Principal for Agent's Contracts Flashcards
1
Q
Kinds of Authority
A
- actual
- apparent
- ratified
- majority of q’s in this area will test actual vs. apparent authority
- evaluate in that order (actual, then apparent, then ratified)
2
Q
Basic Significance of Authority in Agency
A
- agent has power to bind principal to a contract agent enters on principal’s behalf only if agent acted w/ authority
3
Q
Actual Authority - Basic Concept
A
- authority that the agent reasonably believes they possess based on principal’s dealings with them
-> if principal’s words or conduct would lead reasonable person in agent’s position to believe agent has authority to act on principal’s behalf, agent has authority to bind principal
4
Q
Types of Actual Authority
A
- express
- implied
5
Q
Express Authority
A
- that which is actually contained w/in four corners of the agency agreement
-> authority conveyed by the principal in words
-> effective even if was granted mistakenly or b/c of misrepresentation
6
Q
Authority - All or Nothing
A
- for contract liability, there’s no such thing as “partially authorized” -> agent either had authority or didn’t
-> ex: agent has authority to buy 100 widgets but buys 110 b/c there’s a sale -> NOT authorized b/c authority exceeded
7
Q
Implied Authority - Basic Concept
A
- authority the agent reasonably believes they have as a result of the principal’s words or actions
8
Q
Implied Authority - List
A
Includes authority:
- incidental to express authority
- arising out of custom known to agent
- resulting from prior acquiescence by principal
- to take emergency measures
- to pay for and accept delivery of goods where there’s authority to purchase
- to manage investments in accordance w/ “prudent investor” standard
- to delegate authority in cases of ministerial acts, where circumstances require, where performance is impossible w/o delegation, or where delegation is customary
9
Q
Authority - Titles
A
- notion that title or position conveys authority can also be used to establish actual authority to the extent the agent reasonably believes they have authority to act based on the title or position given to them by the principal
10
Q
Termination of Actual Authority - Significance
A
- basically, if you’ve determined principal granted express or implied authority to enter a contract, make sure you check whether principal terminated authority before concluding that they’re bound
11
Q
How Termination May Occur
A
- happening of an event specified in agent’s + principal’s agreement as something that will terminate agent’s authority
- lapse of a reasonable time if a time for termination isn’t specified in the agreement
- change in circumstances (includes destruction of subject matter of authority, insolvency of agent or principal + change in law or business conditions
- agent’s breach of fiduciary duty
- either party’s unilateral termination (both have the power to terminate agency unilaterally, ALTHOUGH termination may constitute breach of contract
- operation of law (ex: death or loss of capacity of either party except where durable power of attorney is present
12
Q
Death of Principal
A
- death terminates the agency unless it’s irrevocable
- effective only when the agent has notice of it
13
Q
Irrevocable Agencies
A
- 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 is supported by consideration
- neither will such agencies be terminated by operation of law
14
Q
Apparent Authority - Basic Theory
A
- 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
-> even though between agent + principal, no such authority was really granted - if principal’s words/conduct would lead a reasonable person in third party’s position to believe that the agent has authority to act on principal’s behalf, the agent has apparent authority to bind the principal
15
Q
Actual vs. Apparent Authority
A
- actual authority = based on principal’s manifestations + how they affect reasonable agent
- vs apparent authority still based on principal’s manifestations, but focused on how they affect reasonable third party
- apparent authority can exist even when actual authority doesn’t
16
Q
Types of Apparent Authority
A
- when agent exceeds actual authority
- when agent has no actual authority
- inherent authority
17
Q
Apparent Authority - Exam Tip
A
- make sure you discuss what happened between the principal and the third party
-> ask yourself what the principal did to indicate to the third party that the agent had authority
18
Q
Apparent Authority - When Agent Exceeds Actual Authority
A
- prior act: principal bound where previously permitted agent to exceed express or implied authority + knows that the third party is aware of this
- Power of position- apparent authority through agent’s title or position -> creates reasonable belief in third party that agent was authorized to act for principal in ways typical of someone w/ that title or position
19
Q
Apparent Authority - Where Agent Has No Actual Authority
A
- generally, if agent didn’t have any actual authority when entered contract for principal, principal will not be bound by agent’s acts
BUT certain situations in which principal may be bound -> consider:
- unilateral agent representations
- impostors
- lingering apparent authority
- notice
- writing manifesting authority
- death or incompetency
20
Q
Unilateral Agent Representations
A
- likely NO apparent authority
- principal generally not bound when principal does nothing to hold agent out as having authority + the only statement of authority comes from purported agent’s claim they have authority
- can’t create apparent authority by mere representations of an agent or other actor
21
Q
Apparent Authority - Impostors
A
- where principal negligently permits an impostor to be in a position to appear to have agency authority, principal will be held liable for impostor’s actions undertaken w/ such authority
- principal essentially estopped from denying the imposter was their agent
22
Q
Lingering Apparent Authority
A
- apparent authority can linger after actual authority ends
23
Q
Apparent Authority + Notice
A
- where actual authority has terminated, agent still has apparent authority to act on principal’s behalf as to all third parties w/ whom principal knows he dealt unless and until the third parties receive either actual or constructive notice of the termination
24
Q
Writing Manifesting Authority
A
- where agent’s actual authority terminated but third parties rely on written authority of agent, agent’s apparent authority is not considered terminated
-> UNLESS principal recovers the written authority
25
Death or Incompetency
- majority view is that death or incompetency of principal does NOT automatically terminate the agent's apparent authority
26
Inherent Authority
- derived solely from agency relationship
- results in principal being bound even though agent had no actual or apparent authority to perform the particular act
- occurs b/c courts wish to protect innocent third parties rather than a principal who did give some actual authority to the agent
27
Examples of Inherent Authority
- respondeat superior
- principal held liable where agent exceeds their actual authority but the conduct is similar to the acts authorized
28
Improper Disposition of Goods
- principal held liable for disposition of their goods by an agent possessing them if 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
29
Ratification - Basic Concept
- agency relationship is created by ratification when agent purports to act on behalf of principal w/o any authority at all, but principal subsequently validates the act + becomes bound
- serve as substitute for "before-the-transaction" authority
30
Effect of Ratification
- gives transaction retroactive effect
- UNLESS principal lacked contractual capacity at time agent entered into unauthorized transaction OR
- unless retroactivity would interfere w/ intervening third party rights
- upon ratification, agent relieved of liability for breach of duty + their implied warranty of authority
31
Methods of Ratifying
- may be express or implied through conduct of principal
- most common form of express ratification = oral or written affirmation of contract
- most common form of implied ratification = when principal accepts benefits of the contract
- other ratifying conduct includes silence if there's a duty to disaffirm or suing on the transaction
32
Requirements for Ratification
For ratification to occur, principal must:
- have knowledge of (or have reason to know) all material facts regarding the contract
- accept the entire transaction (meaning can't merely ratify a portion of the transaction) AND
- have capacity (be competent and of legal age)
* note that this is a unilateral act of the principal + no consideration is required
33
What May Be Ratified
Generally, principal may ratify anything UNLESS:
1) performance was illegal at time of ratification
2) third party has withdrawn OR
3) there's been a material change in circumstances
34
Who May Ratify
Under 2nd Restatement (followed by most states):
- an undisclosed principal (one whose existence + identity is withheld from the third party) may not ratify
- disclosed principals (ones whose existence + identity are known to the third party) may ratify
- unidentified principals (existence known, but identity withheld) may also ratify
Under modern view of 3rd Restatement, ANY principal may ratify
35
Liabilities of the Parties - Third-Party vs. Principal
- principal will be liable to the third party on a contract entered into by agent if agent had valid authority (actual, apparent, or through ratification) to act
- if agent didn't have authority + principal hasn't ratified, principal can't be held liable
36
Liability - Third Party vs. Agent - General Rule
- if agent had actual authority or apparent authority to enter contract for principal, or if principal ratified previously unauthorized contract, agent CANNOT be held personally liable on the contract
- BUT exception if existence + identity of principal are not disclosed
37
Liability of Agent to Third Party - Disclosed Principal
- general rule is NO liability for agent if principal's existence + identity are disclosed, BUT liable if the parties to the contract intended the agent to be liable
- if agent did not have authority to enter into contract, agent can be held liable to third party for damages for breaching an implied warranty that principal w/ contractual capacity exists + that they, the agent, had authority to contract for the principal
38
Unidentified and Undisclosed Principals
- unidentified = 3rd party knows existence of principal but not identity
- undisclosed = 3rd party knows neither existence nor identity
- in both of these cases, EITHER the principal or agent can be held liable on the contract if the agent had authority to enter the contract
- majority of courts permit 3rd party to file suit against both principal and agent but, upon objection of either defendant, 3rd party must elect prior to judgment which party they wish to hold liable
- BUT if 3rd party obtains a judgment against the agent w/o knowing principal's identity, they can later sue the principal when their identity is discovered if the judgment hasn't been satisfied
39
Third-Party Liability to Principal and Agent - Disclosed Principal Situations
- when principal is disclosed, ONLY the principal, not agent, may enforce contract + hold third party liable
40
Third-Party Liability to Principal and Agent - Unidentified/Undisclosed Principal Situations
- either principal or agent may enforce contract + hold third party liable
- if agent enforces contract, principal is entitled to all rights + benefits thereunder
- principal can't enforce K if there's been an affirmative fraudulent misrepresentation of the principal's identity or if there's an unforeseen increased burden to the third party due to the fact that performance is due to the principal and not the agent
