29.1 Nature: Chapter 29 - Agency

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Chapter 29 -- Agency

In a principal-agent relationship, one party, the principal, permits and directs


another party, the agent, to act for or represent the principal.  The agent is
subject to the principal's control.  Agency law is an integral part of the
operation of the various forms of business organizations and employment
relationships. 

An agent can legally bind the principal to third parties only when the agent acts
within the authority conferred by the principal.  Authority is either actual or
apparent.  An agent that purports to contract without authority to bind the
principal or without disclosure of the principal's identity is liable to the third
party.  Agents who commit torts are personally liable regardless of the principal's
liability.  A principal is liable for an agent's tort if the tort resulted from the
principal's own negligence or if the agent's act was done within the scope, and
during the course, of employment.  A large volume of civil litigation concerns a
principal's liabilities for the actions of an agent. 

Chapter 29 -- Outline
 29.1 Nature
      A.  Fundamentals
      B.  Types of Agents
      C.  Types of Principals
      D.  Employees vs.  Independent Contractors

 29.2 Rights and Duties


      A.  Contractual Duties and Duties Implied by Law
      B.  Agent's Duties to the Principal
      C.  Principal's Remedies for Agent's Breach of a Duty
      D.  Principal's Duties to the Agent
      E.  Agent's Remedies for Principal's Breach of a Duty

 29.3 Authority of Agent


      A.  Types of Authority
      B.  Agent's Authority to Appoint Subagents
      C.  Ratification by the Principal

 29.4 Liability to Third Parties


      A.  General Rule
      B.  Principal's Contractual Liability
      C.  Principal's Tort Liability
      D.  Agent's Contractual Liability
      E.  Agent's Tort Liability

 29.5 Termination
      A.  Termination by Acts of the Parties
      B.  Termination by Operation of Law
      C.  Agency Coupled with an Interest
      D.  The Effect of Termination on Authority

29.1 NATURE A.  Fundamentals


B.  Types of Agents
C.  Types of Principals
D.  Employees vs.  Independent
Contractors
A. Fundamentals.  Agency is an express or implied consensual relationship formed
when two parties agree that one, the agent, will represent the other, the
principal, in dealing with third parties.  The agent is subject to the
principal's control and can affect the principal's legal relationships with
third parties.  Absent special circumstances, only the principal is legally
responsible for transactions negotiated by an agent.  The principal ordinarily
has contractual liability to third parties for contracts entered into by the
agent on behalf of the principal.  Thus, the principal-agent relationship is
representative.  The agent has derivative authority to act for, and in place of,
the principal.  The agent is an extension of the principal. 
1. The principal must manifest consent that the agent may act on the
principal's behalf.  The test for the existence of an authorized agency is
objective. 
a. EXAMPLE: Art asked Pat for permission to broker a piece of land that
Pat wished to sell.  Pat laughed and walked away from Art while shaking
her head.  Pat did not manifest consent to Art, and an agency was not
formed. 
b. However, an agency may be implied in law when an intention to form the
relationship is absent or even when the subjective intention is not to
form it.  For example, it may arise by estoppel if a person holds
him/herself out as an agent, the alleged principal knows (or should
know) of the representation and fails to deny it adequately, and a
third party detrimentally relies on the existence of an agency. 
2. The agent must agree to act on the principal's behalf. 
a. EXAMPLE: Paul asked Anne, a local attorney, to represent him in the
sale of a farm.  Anne replied that she would draft the necessary
documents.  An agency was formed because both parties manifested
consent. 
3. The agency must have a legal purpose. 
a. EXAMPLE: Paul asked Anne, a local attorney, to act on his behalf to
purchase a rare painting that was stolen from the National Museum 3
years earlier.  Anne agreed to do so.  An agency was not formed because
receiving stolen property is illegal. 
4. An agency relationship need not necessarily be a contractual relationship. 
However, if the agency arises by contract, all requisite elements of a
contract must be present.  Most agencies are made by contract. 
5. An agent need not be compensated for the agency relationship to exist. 
Uncompensated agents are known as gratuitous agents. 
6. Typically, no formalities are required to form an agency. 
a. The relationship may be formed by oral agreement. 
1) If the object of the agency, e.g., the sale of land, is subject to
the statute of frauds, a writing is required. 
a) EXAMPLE: Tara orally agrees to allow Ross to manage her
investment portfolio for the next 2 years.  Because more than 1
year is required to complete the contract, the agency
relationship is subject to the statute of frauds, and the
agreement is unenforceable.  Under the equal dignities rule, the
authority of the agent must be established with the degree of
formality required for the act authorized.  For the agency
relationship to be enforceable at law, Tara and Ross must enter
into a written agreement. 
b. A power of attorney is a formal written appointment of an agent.  It is
often used to authorize an agent to enter into a transaction or execute
documents.  Despite the name given to the document, the agent it
appoints need not be an attorney at law. 
1) A general power of attorney authorizes the agent to do anything that
may be necessary to transact the principal's legal affairs. 
2) In contrast, a special power of attorney grants the agent authority
to carry out only specifically enumerated duties. 
7. If the principal does not have the legal capacity to perform the act
authorized by the agency, the act of the agent on behalf of the principal
may not be enforceable at law. 
a. A contract entered into by an agent on behalf of an incompetent
principal is ordinarily voidable by the principal. 
1) EXAMPLE: Lori is 15 years old.  Art is 25 years old.  Lori and Art
agree that Art will act for Lori to purchase a stereo from Smith. 
Smith agrees to sell the stereo to Lori by entering into the
transaction with Art.  Lori then refuses to purchase the stereo. 
Smith cannot enforce the contract against Lori because Lori is a
minor and has the power to disaffirm the contract. 
b. Temporary or permanent mental incapacity of the principal does not
always terminate preexisting agency authority when a durable agency was
expressly conferred by a written power of attorney. 
c. An incompetent agent can bind a competent principal.  The agent's
capacity is irrelevant because an agent's act is deemed to be the act
of a principal. 
1) But incapacity of the agent to perform the act authorized by the
principal may suspend or terminate the agency. 
a) EXAMPLE: The facts are the same as in the preceding example
except that Lori is 25 and Art is 15.  Smith may sue Lori for
breach of contract because Lori has contractual capacity and is
the principal.  Art's age is irrelevant provided he has the
capacity to understand and follow the principal's instructions. 
8. An agent may be thought of as a mere extension of the principal.  Some
scholars describe the relationship as a conduit between the principal and
the third party. 
9. The principal authorizes the agent to act on his/her behalf.  The principal
is a party to the transaction; the agent is not.  When the agent acts, the
legal effect is as if the principal had acted. 
10. The third party may deal physically with the agent, but (s)he deals legally
with the principal.  The principal and the third party are the parties to
the transaction negotiated, and the agreement is between the third party
and the agent. 
a. EXAMPLE: A wants to sell a tractor but does not wish to negotiate
directly with potential buyers.  A and B agree that B will sell A's
tractor as agent for A.  B contacts C and offers to sell A's tractor. 
C agrees to buy the tractor.  A and B are principal and agent,
respectively.  A and C are parties to the sale of the tractor.  B is
not a party to the sale. 
11. Notice to an agent with actual or apparent authority is also deemed to be
notice to the principal.  Moreover, notice given by an authorized agent is
deemed to have been given by the principal. 
a. The principal is assumed to have knowledge of important facts known by
the agent. 
B. Types of Agents.  Some of the more common types of agency relationships and
agents are discussed below. 
1. Special agents are engaged for a particular transaction and are authorized
to perform specific activities subject to specific instructions. 
a. EXAMPLE: A stockbroker might be authorized to purchase common stock of
a specified company. 
2. General agents are authorized to perform a range of acts.  They are
authorized to perform all acts relevant to the purpose for which they are
engaged. 
a. EXAMPLE: A stockbroker may be authorized to manage an investment
portfolio to maximize short-term profits. 
3. Universal agents are unlimited general agents.  Universal agents are
authorized to conduct all of the principal's business that the principal may
legally delegate. 
a. EXAMPLE: P, a celebrity, employs A.  She instructs him to take care of
all her business and personal interests.  Thereafter, she refers to A
as "my manager." A is a universal agent. 
4. Uncompensated agents are known as gratuitous agents. 
5. A del credere agent guarantees the obligations of the third party to the
principal. 
a. EXAMPLE: Distributor and Seth contract that Seth will be paid a 10%
commission on sales agreements entered into with retailers by Seth as
sales agent of Distributor, providing that Seth guarantees the retail
customers' credit accounts.  Thus, as a condition of formation of the
agency, Seth is obligated to pay if a customer does not.  Seth is a del
credere agent. 
6. A factor or commission merchant differs from a broker because (s)he has
possession of the goods (s)he sells and usually sells in his/her own name. 
A broker merely brings the parties together. 
C. Types of Principals.  Fundamentally, there are three types of principals:
1. Disclosed principals are known to exist by the third party.  The third party
knows the agent is acting for the principal and knows who the principal is. 
2. Partially disclosed principals are known to exist by the third party.  The
third party knows the agent is acting for the principal, but the third party
does not know the principal's identity. 
3. Undisclosed principals are not known to the third party.  The third party
believes that (s)he is dealing with the principal and not an agent.  The
third party does not know that the agent is acting on behalf of a
principal.  Instead, the third party believes that the agent is acting on
his/her own behalf. 
a. Under general contract law principles, the third party may sue the
agent of the undisclosed principal personally, and vice versa, because
the third party intended to deal only with the agent. 
b. The undisclosed principal may ordinarily sue or be sued upon the
contract made on his/her behalf except when suit would be unfair to the
other party.  The undisclosed principal may not be able to enforce a
contract involving
1) Credit extended by the third party
Unique personal services of the agent
2) Nondelegable duties
A contract that is a negotiable instrument
3)

4)
c. If the identity of a principal becomes known to the third party, and
the third party thereafter consents to the principal's performance of a
contract involving personal services or credit, the principal may
enforce it. 
1) EXAMPLE: Absent consent of the third party, the principal is not
permitted to tender his/her own performance if the contract is for
personal services of the agent. 
d. Once the principal is discovered by the third party, (s)he may look to
the principal for performance. 
e. If the agent acts outside the scope of actual authority, the
undisclosed principal is usually not liable to the third party. 
f. The undisclosed principal may ratify a contract formed beyond the scope
of the agent's actual authority by accepting the benefits of the
contract or by other affirmative conduct.  But see module 29.1,
subtopic C.3.b. 
1) Even a nonexistent principal may ratify most contracts.  Such a
ratification ordinarily is tantamount to an assignment by the agent
of a contract to which the agent was a party. 
a) A nonexistent principal exists when a person represents to a
third party that (s)he is acting as an agent, but the purported
principal has not, in fact, established the purported agency
relationship. 
D. Employees vs.  Independent Contractors.  An agent is typically either an
employee of the principal or an independent contractor.  Very important legal
consequences hinge on this distinction.  Ordinarily, to the extent that a person
has the right to control or exercises control over another, (s)he is liable for
the other's conduct. 
1. Except in the case of a gratuitous or noncontractual relationship, agents
are either employees or independent contractors. 
a. The distinction between employees and independent contractors depends
on the quantum of control retained or exercised by the principal over
the agent. 
1) The principal-employer has actual control over the physical efforts
of an employee. 
2) In contrast, the principal engaging an independent contractor lacks
such control.  The independent contractor is responsible only for
the finished product of his/her labor. 
b. The degree of control a principal exerts, and whether it results in the
agent's having employee or independent contractor status, may not be
clear.  The status of the agent is a factual determination based on
considerations such as the following:
1) The parties' agreement regarding the degree of control to be
exercised by the principal
2) The amount of control and direction the principal actually exerts
over the agent's work
3) The level of exclusivity of the agent's services performed for the
principal
4) The relationship between the nature of the principal's business and
the occupation and work of the agent
5) The specialization required for the task
6) The manner in which the agent is compensated, e.g., for completion
of work or upon expiration of time
7) The party that provides the agent's place of work, tools, and
supplies, and otherwise pays the agent's overhead expenses
8) The duration of the relationship
c. EXAMPLE 1: The University of North wants to build a wall in front of
its law school.  UN purchases the necessary tools and supplies and
hires a crew of workers.  The workers are paid by the hour and
supervised by the manager of the UN physical plant.  The workers are
employees. 
d. EXAMPLE 2: The University of West wants to build a wall in front of its
law school.  UW engages Buildem High, Inc., to construct the wall. 
Buildem High provides its own tools, materials, and workers.  Buildem
High is paid a comprehensive fixed amount upon completion of the wall. 
Buildem High is an independent contractor. 
2. The distinction between an employee and an independent contractor is crucial
to determining the principal's liability for the agent's torts.  To the
extent that a person has the right to control another, (s)he may be liable
for the results of the other's conduct. 
a. Under the doctrine of respondeat superior , an employer is liable for
employees' torts if they were committed within the scope and during the
course of employment. 
1) This liability of the employer is vicarious liability. 
With respect to the employer, it is strict liability. 
2)
b. A principal is usually not liable for the torts of an independent
contractor.  But exceptions exist, and the principal is liable for
his/her tortious selection of an independent contractor.  Refer to
module 29.4. 

29.2 RIGHTS AND DUTIES A.  Contractual Duties and Duties Implied by
Law
B.  Agent's Duties to the Principal
C.  Principal's Remedies for Agent's Breach
of a Duty
D.  Principal's Duties to the Agent
E.  Agent's Remedies for Principal's Breach
of a Duty
A. Contractual Duties and Duties Implied by Law.  The majority of agency
relationships are formed by contract; the parties must perform according to the
terms of the agreement.  Additionally, the law of agency establishes certain
fundamental duties owed by the agent and the principal to each other.  These
duties supplement contractual duties.  Ordinarily, parties may modify or
eliminate, by agreement, one or all of these fundamental duties. 
B. Agent's Duties to the Principal.  The agent owes five basic duties to the
principal.  They arise by operation of law regardless of whether they are
expressed in the agency agreement.  The duties are set forth below. 
1. Duty of obedience
a. The agent must follow all lawful and explicit instructions of the
principal and not act outside his/her authority. 
b. If the principal's instructions are not clear, the agent must act in
good faith and in a reasonable manner considering the surrounding
circumstances. 
c. If an emergency arises and the agent cannot contact the principal, the
agent may deviate from the principal's instructions to the extent the
deviation is warranted. 
2. Duty of care and diligence
a. The agent must use the care and skill of a reasonable person in like
circumstances.
b. The agent must use any special skills or knowledge (s)he has. 
1) EXAMPLE: Mac Farmer appointed Ben Broker to sell his tomatoes at the
best available price.  Broker took the tomatoes to market and sold
them to the first wholesale buyer he encountered.  A wholesale buyer
in the next stall was paying 10 cents per pound more for tomatoes. 
Broker breached his duty of care and diligence. 
3. Duty of notification
a. The agent must use reasonable efforts to notify the principal of all
information (s)he possesses that is relevant to the subject matter of
the agency and that (s)he knows or should know will be imputed to the
principal. 
1) EXAMPLE: Al was a broker authorized to sell Ed's mangos for $10 per
pound.  The day after Al was authorized to sell, the price of mangos
rose to $12 per pound.  Al sold them for $10 without consulting Ed. 
Al breached his duty of notification because a reasonable person
would have known that Ed would want to be informed of a 20% change
in market price. 
4. Duty to account
a. The agent must account for money or other property received or expended
on behalf of the principal. 
b. The agent must not commingle his/her own money or property with money
or property received from or for the principal. 
1) EXAMPLE: Paula, an attorney, acted as Carol's agent in selling a
plot of land.  Paula received the sales proceeds on behalf of
Carol.  Paula deposited them in her business checking account. 
Several weeks later, Paula sent Carol a check for the sales proceeds
net of her expenses.  Paula did not explain how she had arrived at
the amount of the check.  Paula breached her duty to account because
she did not keep the sales proceeds segregated from her own funds
and did not account to Carol for the money retained for expenses. 
5. Fiduciary duty
a. The agent must act with utmost loyalty and good faith solely for
his/her principal's interest. 
b. The agent must not compete with the principal. 
c. The agent must not represent the principal if (s)he has a conflict of
interest, but the principal may consent to representation by the agent
if (s)he has full knowledge of all material facts. 
1) EXAMPLE: Celia is representing Nancy in a real estate transaction. 
Carmen approaches Celia and asks that she represent her in the same
transaction.  If Celia agrees to represent Carmen, she breaches her
duty to Nancy.  If Celia agrees to represent Carmen, who does not
know that Celia represents Nancy, Celia breaches her duty to Carmen
as well. 
d. The agent may not buy from him/herself for the principal without
permission. 
e. The agent may not make secret profits on transactions entered into for
the principal. 
1) EXAMPLE: Principal authorized Agent to sell a product for $6 per
can.  Agent sold the product for $9 per can and pocketed $3 per
can.  Principal was unaware of the profits made by Agent.  Agent
breached a fiduciary duty by making secret profits. 
C. Principal's Remedies for Agent's Breach of a Duty.  The agent is customarily
liable to the principal for losses resulting from the agent's breach of a duty. 
1. A constructive trust in favor of the principal will be imposed on any
profits obtained by the agent as a result of breaching his/her fiduciary
duty.  In effect, the agent holds the profits in trust for the benefit of
the principal.  The principal may recover the profits by suing the agent. 
2. If the principal is sued for the agent's negligence, or the agent ignores
the principal's instructions, the principal has a right to indemnification
from the agent. 
D. Principal's Duties to the Agent.  Most agency relationships are governed by
contract.  Thus, most duties are specifically set forth in the agreement. 
Additionally, the law implies certain duties from the existence of an agency
relationship.  The most fundamental of such duties are discussed below. 
1. The principal has a duty to compensate the agent for his/her services unless
the agent agrees to act gratuitously for the principal.  If the duty to
compensate is not expressed in the agency agreement, it will be implied.  If
the rate or amount of compensation is not expressed, compensation in an
amount equal to the reasonable value of the agent's services will be
implied. 
a. EXAMPLE: An agreement listing a single family residence to be marketed
by a real estate broker does not provide for compensation to the
broker.  The agreement does not expressly state that brokerage will be
gratuitous.  A court will hold that reasonable compensation was
intended and may measure it by the commission rate usually charged by
real estate brokers in the locale for facilitating sales of single
family residences. 
2. The principal has a duty to reimburse the agent for authorized payments made
or expenses incurred by the agent on behalf of the principal. 
a. Authorization may be implied from the customs of the business or the
course of dealings between the principal and the agent. 
1) EXAMPLE: Jane has managed 12 rental properties for Jack during the
past 5 years.  Jack acquires another rental property and asks Jane
to manage it.  Jane agrees and insures the property in the same
manner as she has insured Jack's other properties.  Jane's authority
to insure the property may be implied because she obtained insurance
on the other 12 properties. 
3. The principal has a duty to indemnify the agent for losses suffered or
expenses incurred while the agent acted as instructed in a legal transaction
or in a transaction the agent did not know to be wrongful. 
4. The principal has a duty not to act in a manner that will impair the agent's
performance. 
5. An agency relationship does not relieve the principal of the general duty of
care (that of a reasonable person under the circumstances) owed by one
person to another. 
6. The principal has a duty to disclose known risks involved in the task for
which the agent was engaged if (s)he knows or should know of the risk and
knows or should know the agent is unaware of the risk. 
7. The principal has a duty to provide an agent who is an employee with
reasonably safe working conditions. 
a. The principal has a duty to inspect the premises and warn the agent of
unsafe conditions. 
E. Agent's Remedies for Principal's Breach of a Duty.  The agent has normal tort
and contract remedies available, such as damages and injunctive relief.  The
agent may also
1. Terminate the agency relationship
Counterclaim if the principal sues
2. Demand an accounting

3.

29.3 AUTHORITY OF AGENT A.  Types of Authority


B.  Agent's Authority to Appoint
Subagents
C.  Ratification by the Principal
A. Types of Authority.  An agency relationship involves the mutual understanding of
a principal and an agent that the agent will act on behalf of the principal
under the principal's direction and control.  Pursuant to an agency
relationship, the agent may legally bind the principal only when the agent has
authority to do so.  The Restatement (Second) of Agency defines authority as the
agent's ability to affect the principal's relations with third parties. 
Authority exists in two fundamental forms. 
1. Actual authority results from consent by the principal manifested to the
agent.  Actual authority grants the agent the right and the power to bind
the principal to third parties. 
a. Express actual authority results from written or spoken words
communicated by the principal to the agent. 
1) EXAMPLE: Pam wrote to Amy telling her to sell Pam's car for
$10,000.  Amy has express actual authority to sell the car for
$10,000. 
b. Implied actual authority is incidental authority implied by words or
conduct manifested by the principal to the agent.  It is authority
necessary to carry out the purposes for which the agency was
established. 
1) Implied actual authority may also be indicated by the custom and
usage of the business or by the agent's position relative to the
purposes for which the agency is formed. 
a) EXAMPLE: Ted was hired as a salesperson at Appliance Showrooms. 
The manager told Ted to follow the example of the other
salespeople.  They are authorized to sell a 6-month extended
warranty on the Sunup oven.  Ted has implied actual authority to
sell the extended warranty. 
2) Express authority to achieve a result necessarily carries the
implied authority to use reasonable means to accomplish the
expressly authorized action. 
a) EXAMPLE: Bill hired Del to manage a marine fuel dock.  Del's
authority to purchase fuel for resale may be implied by the
express authority to manage the marine fuel dock. 
2. Apparent authority or ostensible authority (authority by estoppel) is
granted by language or conduct of the principal manifested to a third party
that reasonably induces the third party to rely on the agent's authority. 
Apparent authority gives the agent the power but not the right to bind the
principal to third parties.  Actual authority confers both the right and
power. 
a. EXAMPLE: Buzzy works for Cuzzy at Cuzzy's Fine Furniture.  Cuzzy
maintains a charge account at the local gas station.  Cuzzy has
authorized the gas station to fill the gas tank of Buzzy's truck
whenever he uses it for Cuzzy's business.  After this arrangement has
been in effect for several months, Buzzy begins to fill his gas tank at
the station on Friday afternoons, even though his truck is not being
used for Cuzzy's business.  Although Buzzy does not have the legal
right to buy gas on Cuzzy's account, he has apparent authority to bind
Cuzzy.  However, Buzzy is liable to Cuzzy. 
b. Because apparent authority requires a manifestation from the principal
to the third party, it cannot be based on the words or actions of the
agent, and it cannot exist if the principal is undisclosed. 
1) The basis of apparent authority is justifiable reliance on the
conduct of the principal. 
c. Apparent authority requires that the third party not have knowledge of
the agent's lack of actual authority.  Such knowledge negates the third
party's reasonable reliance on the principal's manifestation. 
B. Agent's Authority to Appoint Subagents.  An agent ordinarily does not have the
power to delegate authority or to appoint a subagent. 
1. However, the principal may intend that the agent be permitted to delegate
authority.  Evidence of such intent may be found in
a. An express authorization
b. The character of the business
c. Usage of trade
d.  Prior conduct of the principal and agent
2. An agent may be authorized to appoint a subagent. 
a. The subagent is an agent of both the principal and the agent. 
The subagent's acts bind the principal as if the acts were done by the
b. agent. 
The subagent owes a fiduciary duty to both the principal and the
c. agent. 
3. If the agent lacks authority to appoint a subagent but does so anyway, the
subagent cannot bind the principal. 
C. Ratification by the Principal.  In the law of agency, a ratification is a
voluntary election to adopt an act purportedly done on one's behalf and to treat
the act as if it were originally authorized. 
1. Ratification allows the principal to authorize
a. The agent's previously unauthorized act after the act is done
A nonagent's act done in the name of the principal
b.
2. An undisclosed principal may not be able to ratify certain contracts
involving personal services, credit extended by the third party, or
nondelegable duties.  Refer to module 29.1. 
a. A purported principal who is nonexistent when an agent enters into a
contract may ratify the contract if it could have been authorized by
that principal when the agent entered into it.  Refer to the example
below. 
b. If the agent's unauthorized act is purportedly for an identified
principal, only that identified person may ratify it. 
c. Contractual rights and duties may be assigned and (to a lesser extent)
delegated, respectively, even by a person who ratified a contract
subsequent to the agent's entering into it with another party. 
3. Ratification may be either express or implied.  It may be indicated by the
principal's language or conduct that reasonably indicates intent to ratify. 
a. EXAMPLE: John entered into a contract to purchase 500 pounds of fish
from Nick.  John told Nick the fish were for Al's Restaurant.  Al did
not know John or Nick.  When the fish arrived at Al's Restaurant, Al
read the bill of lading, shrugged his shoulders, and accepted the
shipment.  Al's ratification of John's action was implied by his
actions in accepting the shipment. 
4. The principal may not ratify part of a transaction.  Ratification is an all-
or-nothing proposition. 
5. Effective ratification requires the principal to be aware of all material
facts when manifesting acquiescence in the agent's act. 
6. Ratification relates to the time of the agent's act. 
a. The agent's act is treated as authorized by the principal at the time
it was performed. 
7. Ratification is irrevocable. 
8. An agent has no liability to the third party after ratification.  But if the
principal does not ratify, the agent is liable to the third party for breach
of the implied warranty of authority. 

29.4 LIABILITY TO THIRD PARTIES A.  General Rule


B.  Principal's Contractual
Liability
C.  Principal's Tort Liability
D.  Agent's Contractual Liability
E.  Agent's Tort Liability
A. General Rule.  The intended result of a valid agency relationship is to bind the
principal and to insulate the agent from personal liability to third parties. 
1. When an agent acts within the scope of actual authority and contracts with a
third party on behalf of a disclosed principal, the agent is usually not
liable on the contract to either the third party or the principal. 
a. Only the principal is liable to the third party. 
The agent is subject to liability to the principal for any breach of
b. the
1) Principal-agent contract
Fiduciary duty owed the principal
2)
2. But if the agent is acting for an undisclosed or partially disclosed
principal, the agent is contractually liable to the third party. 
B. Principal's Contractual Liability.  If the agent has authority, either actual or
apparent, the principal will be liable on contracts entered into with a third
party by the agent. 
1. If the agent has neither actual nor apparent authority, the principal will
not be bound in contract. 
C. Principal's Tort Liability.  A principal may be liable in tort for his/her
wrongful acts and those of the agent that result in harm to a third party. 
1. Direct liability results from the principal's own negligent or reckless
action or failure to act in conducting business through agents if the
principal
a. Negligently selects an agent, e.g., hires a person (s)he knows to be a
convicted embezzler for a position of trust
b. Fails to give proper orders or make proper regulations
c. Fails to employ the proper person or machinery in work involving risk
of harm
d. Fails to supervise the activity
e. Allows wrongful conduct by others on his/her premises or with his/her
machinery
1) EXAMPLE: Boss is in the demolition business.  Eager works for Boss
and normally carries explosives for Boss.  One day Boss was sick and
unable to go to work.  Rather than postpone the destruction of a
twenty-story building, Boss sent Eager to do the job.  Eager had
virtually no training in the proper techniques.  Eager used too much
dynamite.  The blast destroyed both the target building and the
building next to it.  Boss is liable in tort for negligent
destruction of the second building. 
2. Vicarious liability results from acts of the agent attributed to the
principal. 
a. The principal is liable if (s)he authorizes the agent's wrongful act
that results in damage to another. 
b. The principal is liable for the agent's unauthorized wrongful acts if
the agent is an employee and the act is done within the scope and
during the course of employment.  This rule reflects the doctrine of
respondeat superior (let the superior respond). 
1) EXAMPLE: Karen Green delivered groceries for Craig's Market, a sole
proprietorship.  Green was driving to deliver an order when she ran
a red light and crashed into another vehicle.  Craig is liable for
damages resulting from Green's negligence. 
c. The principal is liable for torts involving misrepresentation
regardless of whether the agent is an employee or an independent
contractor.  The agent's act must be within the scope of actual or
apparent authority. 
1) EXAMPLE: Jim engaged Heather, a real estate broker, to market his
home.  Heather told the Smiths that Jim's home was only 5 years old
when it was 15 years old.  Jim is liable for any harm suffered by
the Smiths as a result of the misrepresentation. 
3. Independent contractors.  If an agent is an independent contractor, the
principal is usually not liable for the tortious acts of the agent.  But
exceptions exist. 
a. Some duties may not be delegated as a matter of law or public policy,
such as a duty of an employer to provide employees with a safe
workplace. 
1) The employer does not avoid liability by engaging an independent
contractor to correct unsafe conditions in the workplace. 
b. Ultrahazardous activity is usually the subject of strict liability.  A
party may not avoid liability by contracting out ultrahazardous
activity or a project that includes it.  Examples of ultrahazardous
activities include
1) Using explosives (blasting)
Using poisonous gas
2) Transporting hazardous substances such as volatile chemicals

3)
c. A principal who negligently selects an independent contractor or
negligently allows an independent contractor to perform an activity
that causes injury is liable for his/her own negligence. 
1) Thus, if the principal knows of tortious conduct of the independent
contractor and ignores it, the principal may be liable for injury
caused by the conduct. 
d. The principal is liable for representations made by an independent
contractor on behalf of the principal when the independent contractor
is acting with either actual or apparent authority. 
e. The tort liability of a principal for acts of an independent contractor
is not based on respondeat superior (as it may be in the case of an
employee) but on the principal's own negligence or strict liability. 
D. Agent's Contractual Liability. 
1. The agent is liable on contracts unless (s)he has authority and the
principal's identity is known to the third party. 
a. EXAMPLE 1: Wes Hardin authorized Tom Brown to contract with Alice for
the purchase of Alice's restaurant.  Brown explained to Alice that he
was representing a principal and identified Wes.  Brown and Alice
entered into a contract.  Wes refused to consummate the purchase. 
Brown is not liable because he had authority and represented a
disclosed principal. 
2. If an authorized agent represents a partially disclosed principal, the agent
and principal have joint and several liability. 
a. If the principal is undisclosed, the traditional rule applies the
doctrine of election; that is, the third party may, after learning of
the existence and identity of the principal, elect to hold the agent or
the principal liable, but the election of one releases the other. 
However, many states now impose joint and several liability in these
circumstances. 
b. EXAMPLE 2: The facts are the same as in the previous example, but Brown
did not identify Wes by name.  Brown merely referred to Wes as "my
client." Brown may be liable on the contract because he was
representing a partially disclosed principal, and Alice did not know
the principal's identity. 
3. The agent may assume liability on any contract by
a. Making the contract in his/her own name
Participating as a comaker of the contract with his/her principal
b. Guaranteeing the principal's performance

c.
4. Implied warranty of authority.  An agent, by purporting to represent a
principal, implicitly warrants that (s)he has actual authority for his/her
conduct (e.g., entering into a contract on behalf of the principal). 
a. The agent also warrants that the principal is legally competent but not
that the principal is able to, or will, perform a contract. 
b. Thus, the agent may be liable to a third party for breach of the
implied warranty of authority. 
5. An agent is also subject to liability to the principal for breach of the
underlying principal-agent contract, e.g., for acting beyond the scope of
actual authority. 
a. The principal-agent contract gives rise to a fiduciary duty.  The agent
may be liable for breach of this duty. 
1) Transactions between agent and principal may be voidable by the
principal. 
2) A constructive trust for the benefit of the principal may be imposed
on property held or acquired by the agent. 
E. Agent's Tort Liability.  The agent is liable for his/her torts. 

29.5 TERMINATION A.  Termination by Acts of the


Parties
B.  Termination by Operation of Law

C.  Agency Coupled with an Interest

D.  The Effect of Termination on


Authority
A. Termination by Acts of the Parties.  Because the agency relationship is based on
the mutual consent of the parties, the relationship may be terminated by either
party. 
1. Either party has the power to terminate the relationship even if termination
breaches a contract. 
a. The principal may revoke the grant of authority at any time.  The
revocation may be implicit or explicit. 
b. The agent may renounce the grant of authority by giving notice to the
principal. 
c. If the termination breaches a contract, the nonbreaching party has the
remedies provided by contract law. 
d. The employment at will doctrine is subject to exceptions. 
1) Statutory exceptions preclude termination on the basis of certain
criteria, for example, race, religion, sex, age, disability, or
union activity. 
2) Most states recognize that an employer's conduct may result in an
implied in fact contract term that qualifies the right of
termination.  For example, an employment manual may state that
termination will be only for cause or after warnings have been
given. 
3) Most states also recognize a public policy exception.  Thus,
termination may be illegal if it was for reporting or refusing to
perform illegal acts or for the exercise of rights or the
performance of a duty, such as serving on a jury or complying with a
subpoena. 
2. Of course, the agency relationship terminates when its purpose is
fulfilled. 
a. EXAMPLE: Pat asks Alan to collect her mail and deposit her Social
Security checks in the bank while she is touring the world.  When Pat
returns home, the agency is terminated, and Alan is no longer
authorized to collect the mail or deposit the checks. 
3. The principal and agent may mutually terminate the agency. 
4. If the grant of authority is for a specified period of time, the agency
terminates when the period lapses. 
B. Termination by Operation of Law.  An agency may be terminated by operation of
law. 
1. If the principal files a petition in bankruptcy, any existing agency
relationship is terminated. 
a. EXAMPLE: Wholesale Corp.  engaged independent contractors as sales
representatives.  The sales representatives normally collected payments
from customers.  Wholesale Corp.  filed a bankruptcy petition.  The
sales representatives were no longer agents authorized to collect
payments. 
2. Insanity of the principal or the agent terminates the agency. 
a. The agency may merely be suspended during temporary mental incapacity. 
1) Contracts entered into during temporary mental incapacity may be
merely voidable by the principal, not void. 
b. Exceptions may apply with respect to negotiable instruments and bank
deposits. 
c. Many states have enacted statutes providing for a durable agency or
power of attorney.  Such statutes permit the agency to continue beyond
legal incompetence of the principal if the agency power was conferred
in a writing that expressly provides for the agency to exist after
incompetence of the principal. 
1) EXAMPLE: A possible clause in the writing might be "The authority
granted hereby shall not be affected by disability of the
principal."
2) The durable agency does not extend beyond death of the principal. 
3. Death of either the principal or the agent terminates the agency. 
a. A bank's agency authority ordinarily does not terminate until it
receives notice of a depositor principal's death. 
4. Destruction of the subject matter of the agency makes fulfilling the purpose
of the agency impossible and terminates the agency. 
5. The agent's violation of his/her fiduciary duty terminates the agency. 
a. An agent's actual authority may be terminated because of a breach of
the duty of loyalty if the agent obtains an interest in the subject
matter of the agency (the thing with regard to which the authority is
to be exercised).  The agent's interest must be
1) Adverse to the principal's interest
Obtained without the knowledge and consent of the principal
2)
6. A change of law that makes an authorized act illegal terminates the agency. 
7. The agency may be terminated by a change in circumstances that the agent
knows or should know would cause the principal to desire the end of the
agency. 
a. A change in the value of property or in the general business climate
may be a basis for such a termination. 
b. The agency might be revived upon a recovery or return to the initial
circumstances. 
c. If the agent knows that the principal is aware of the change and the
principal does not give new directions, the agency may not terminate. 
d. If the agent has reasonable doubts as to how or whether the principal
would want the agent to act, the agent may act reasonably; that is, the
agency would not be terminated. 
1) EXAMPLE: Tom authorized Myra to sell some platinum when its market
value was $100,000.  Two weeks later the market price of platinum
dropped.  Tom's platinum was then worth $50,000.  Myra sold the
platinum for $50,000, although she knew the market was volatile and
prices would probably revert to their former level in another week. 
The agency relationship might have terminated or been suspended by
operation of law when Myra learned of the substantial change in
market price. 
8. War between the countries of the principal and agent terminates the agency
because there is no way to enforce the relationship. 
C. Agency Coupled with an Interest.  An agency coupled with an interest (also known
as a power given as security) is said to be irrevocable. 
1. An agency coupled with an interest is one in which the agent has a specific
present beneficial interest in property that is the subject matter of the
agency. 
a. The interest is in the thing over which the agent's authority is to be
exercised. 
b. EXAMPLE: Dan borrowed $100,000 from Bank, giving Bank security in the
form of a grant of authority to sell Dan's farm in case of default. 
2. The authority may be conferred for the benefit of a third party, i.e., one
other than the principal or agent. 
3. In themselves, agreements such as the following are not agencies coupled
with an interest:
a. An attorney's contingent fee contract
Real estate management contract
b. Real estate exclusive listing agreement

c.
4. Termination
a. An agency coupled with an interest may be terminated
1) According to the terms of the agreement whereby it is granted
By surrender of the authority by the beneficiary of the agency
2) Upon destruction of the subject matter of the agency

3)
b. But an agency coupled with an interest is usually not terminated by
1) Revocation by the principal
Death of the principal
2) Loss of legal capacity of the principal

3)
5. An agency coupled with an interest is an agency in form but not in theory. 
The relationship is created primarily to benefit the agent rather than the
principal. 
D. The Effect of Termination on Authority.  Actual authority ceases to exist upon
termination, whether by act of the parties or by operation of law. 
1. Apparent authority ceases to exist upon termination of the agency by
operation of law.  Notice to third parties is not required. 
2. Apparent authority continues to exist until the third party receives notice
of the termination, if the termination is by an act of the parties. 
a. Actual notice to the third party is required if the
1) Third party previously dealt with the agent
Agent was specially credited to the third party
2) Agent and the third party had begun to deal

3)
b. Constructive notice, e.g., in a trade journal, is sufficient for other
third parties. 
3. If the authorization of the agent was written, the revocation of
authorization must be written (equal dignities rule). 

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