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Agency refers to the legal relationship whereby an agent is authorized to represent a principal in business dealings with third parties
Elements of a valid Agency Relationship
A valid agency relationship must contain:
  • (1) consent by both the agent ad principal; 
  • (2) capacity by both parties to enter into the relationship; 
  • (3) controal by the principal of the agent's objectives; 
  • (4) certain formalities
a. Principal Must Have Contractual Capacity- A principal must have contractual capacity. Thus, a minor's appointment of an agent is voidable, and incompetents and most unincorporated organizations cannot be principals.
  • However, in many jurisdictions, partnerships and other organized business entities can be principals and appoint agents.)
b. Agent Needs Only Minimal Capacity- One may be an agent even though he has no contractual capacity.
  • Exception: If the agent has literally no mental capacity, he cannot act for the principal.
The principal is said to have consented when the manifestation of such intent has reached the agent. The agent is said to have consented when his actions (not beliefs) demonstrate such.
Control of Objectives
The principal must control the objectives of the agent. It is not necessary for the principal to control the means the agent uses to achieve those objectives.
a. Consent Consent of both parties is required. b. Consideration Not Required No consideration is necessary. c. Writing Generally no writing is required, but many states require a writing when the contract the agent is to enter into with a third party is within certain provisions of the Statute of Frauds, most notably land transactions.
Agents Duties
In addition to any express contractual duties that the agent owes the principal, fiduciary duties of loyalty, obedience to reasonable directions, and reasonable care under the circumstances (including duty to disclose all relevant information) are owed.
  • While a gratuitous and a compensated agent may owe the same duty of care, the measure of "reasonableness" may vary because compensation is a proper circumstance to consider.
Principals remedies
The principal's remedies against the agent include contract actions (against compensated agents), tort actions, actions for secret profits, equitable actions for an accounting, and withholding of compensation for intentional torts or intentional breaches of fiduciary duty.  The principal may recover the actual profits or properties held by the agent whether or not the agent's profit has caused the principal any loss.
Subagent Duties
If appointed with proper authority, the subagent owes the principal the same duties as the agent. If the subagent is unauthorized, he owes no duties to the principal, but does owe duties to the agent.
Principals duties
The principal owes the agent all of the duties imposed by their contract, reasonable compensation, and reimbursement for expenses. The principal also generally should cooperate with the agent and not unreasonably interfere with the agent's performance.
Agents Remedies
A compensated agent has the usual contract remedies against the principal (but has a duty to mitigate damages). Also, an agent has a right to a possessory lien for any money due from the principal, including compensation owed for services.
Actual Authority
Actual authority is authority that the agent reasonably believes she possesses based on the principal's dealings with her. It may be express or implied. a. Express Express authority is that which is actually contained within the four corners of the agency agreement. It is effective even if it was granted mistakenly or because of misrepresentation. b. Implied Implied authority is that which the agent reasonably believes she has as a result of the principal's actions. It includes authority:
  • 1) Incidental to express authority;
  • 2) Arising out of custom known to the agent;
  • 3) Resulting from prior acquiescence by the principal;
  • 4) To take emergency measures;
  • 5) To delegate authority in cases of ministerial acts, where circumstances require, where performance is impossible without delegation, or where delegation is customary;
  • 6) To pay for and accept delivery of goods where there is authority to purchase;
  • 7) To give general warranties as to fitness and quality and grant customary covenants in land sales, collect payment, and deliver where there is authority to sell; and
8) To manage investments in accordance with the "prudent investor" standard.
Termination of actual authority
Termination of actual authority occurs by:
  • 1) Lapse of a specified or reasonable time;
  • 2) The happening of a specified event;
  • 3) A change in circumstances, including destruction of the subject matter of the authority, insolvency of the agent or principal, and a change in the law or business conditions;
  • 4) Agent's breach of fiduciary duty;
  • 5) Either party's unilateral termination (although such termination may constitute a breach of contract); or
  • 6) Operation of law (e.g., death or loss of capacity of either party except where a durable power of attorney—written authority that says it will not terminate on the principal's disability—is present).
Apparent authority
Apparent authority exists when the principals actions or manifestations give a thrid party reaon to believe that the agent has authority, even though the agent really doesn't have that authority. The belief by the third party must be reasonable
  • In discussing apparent authority, ask yourself what the principal did to indicate to the third party that the agent had authority. 
  • Apparent authority exists because of the principals actions, not the agents. This can be manifested through silence (the agents asserts that he or she has authority in the presence of the principal and the principal says nothing) or after temination of the relationship (the agency relationship terminates but the third party is not notified and relies on the agent's relationship with the principal). 
Where the principal negligently permits an impostor to be in a position to appear to have agency authority, the principal will be held liable for the impostor's actions undertaken with such authority.
Lingering Apparent authority
(1) Notice May Be Necessary
  • Where an agent's actual authority has terminated (unless due to death or incompetence), he will have apparent authority to act on the principal's behalf as to all third parties with whom the principal knows he dealt unless and until the third parties receive either actual or constructive notice of the termination.
(2) Writing Manifesting Authority
  • Where an agent's actual authority has been terminated but third parties rely on a written authority of the agent, the agent's apparent authority is not considered to be terminated.
(3) Death or Incompetency 
  • Death or incompetency of the principal terminates all authority of the agent without notice to either the agent or third parties. There is a limited exception for a bank honoring transactions for a customer's account until it learns of the customer's death or incompetency and has a reasonable time to act.
When Agents Exceeds Actual Authority
There are situations where the agent exceeds his authority, yet the principal is still bound. a) Prior Act Where the principal previously permitted the agent to exceed his authority and knows that the third party is aware of this, the principal is bound by the agent's unauthorized act. b) Position Where the agent is in a position that customarily carries with it certain responsibilities, the principal is liable for the agent's acts that come within these customary responsibilities.
  • A general agent has considerably broader apparent authority here than a special agent, who is engaged in specific transactions rather than a continuity of service.
An agency relationship is created by ratification when an "agent" purports to act on behalf of a "principal" without any authority at all, but the "principal" subsequently validates the act and becomes bound. Ratification gives the transaction retroactive effect unless the "principal" lacked contractual capacity at the time the "agent" entered into the unauthorized transaction (in which case the "principal" is deemed to have "adopted" the contract), or unless retroactivity would interfere with intervening third-party rights. Upon ratification, the "agent" is relieved of liability for breach of his implied warranty of authority
Prerequisites for ratification
For ratification to occur, the "principal" must know (or have reason to know) all material facts, accept the entire transaction, and have capacity (be competent and of legal age). Ratification is a unilateral act of the "principal" and requires no consideration.
Third Party vs Principal
The principal will be liable to the third party on a contract entered into by her agent if the agent had valid authority to act.
Third Party vs. Agent 
a. Disclosed Principal A disclosed principal (existence and identity known to the third party) is always liable on the contract, and the agent generally is not liable.
  • Exceptions: An agent is liable if the parties to the contract intended the agent to be liable, and an agent may be liable to the third party under his implied warranty that a principal with contractual capacity exists, and that he, the agent, had authority to contract for the principal.
b. Partially Disclosed and Undisclosed Principals A partially disclosed principal (one whose existence is known but whose identity is withheld) or an undisclosed principal (neither identity nor existence is disclosed) results in liability for both the principal and the agent.
  • The majority of courts permit a third party to file suit against both the principal and agent but, upon objection of either defendant, the third party must elect prior to judgment which party he wishes to hold liable. 
  • If the third party obtains a judgment against the agent without knowledge of the principal's identity, he can later sue the principal when her identity is discovered if the judgment has not been satisfied.
Third-Party Liability to Principal and Agent
a. Disclosed Principal Situations When the principal is disclosed, only the principal, not the agent, may enforce the contract and hold the third party liable. b. Partially Disclosed and Undisclosed Principal Situations When the principal is partially disclosed or undisclosed, either the principal or agent may enforce the contract and hold the third party liable.
  • 1) When Principal May Not Enforce Contract The principal may not enforce the contract if there has been an affirmative fraudulent misrepresentation of the principal's identity or if there is an unforeseen increased burden to the third party due to the fact that performance is due to the principal and not the agent.
Independent contractor or employee
As a general rule, a principal is liable only for torts committed by agents who are employees, not for torts of agents acting as independent contractors.
  • a. Right to Control The determinative distinction between the independent contractor and the employee is that with the independent contractor, the principal has no right to control the manner and method in which the job is performed, while with the employee, the principal does exercise such control.
Liability for acts of subservants
The doctrine of respondeat superior also applies to duly authorized subservants. Authorization to hire subservants can be express or implied. Implied authorization can arise from: past practices, emergency situations, or a reasonable necessity to achieve an authorized result. The employer is generally not liable for the torts of a subservant engaged without authority.
Liability for acts of an independent contractor 
A principal will incur direct liability for the acts of an independent contractor where:
  • (i) inherently dangerous activities are involved, 
  • (ii) nondelegable duties have been delegated, or (iii) the principal knowingly selected an incompetent independent contractor (if the principal was merely negligent in selecting the independent contractor, the principal is liable only for her own negligence in selection, not for the contractor's negligence).
Scope of employment
If an employer-employee relationship existed, the employer will be liable for the employee's torts if they were committed within the scope of the employee's employment.
  • 1. Same General Nature as Job To be within the scope of employment, the employee's conduct need not be actually authorized. Nor does prohibition by the principal necessarily remove the conduct from the scope of employment. If the nature of the employee's conduct is similar or incidental to that which was authorized, the conduct is probably within the scope of employment. However, serious criminal acts are normally considered to be outside the scope of employment.
Frolic and detour 
Consider whether the employee's conduct was within the time and place of the authorized employment. A detour or small deviation from the employer's direction is within the scope of employment, while a frolic or major deviation requiring a substantial departure from employment is beyond the scope. Once it is shown that the employee has left the scope of employment, there must be proof of return before the employer will be held liable for the employee's tort.
Motivations to serve the employer
Finally, consider whether the employee's conduct was actuated, at least in part, by a purpose to serve the employer. a. Passengers The employee's invitation to passengers, unless expressly authorized by the employer, is generally held to be outside the scope of the employment relationship, and the employer would not be held liable for injuries sustained by such passengers. b. Unauthorized Instrumentalities The employer is not liable for torts caused by the use of substantially different instrumentalities from those authorized (i.e., those creating a greater risk of harm). c. Trips with Two Purposes If the employee makes a trip with two purposes, it will be within the scope of employment if any substantial purpose of the employer is being served.
Intentional Torts
Intentional torts are not normally within the scope of employment unless a natural incident of the employee's duties (as where force is authorized), where the employee is promoting the employer's business, or where the nature of the work gives rise to hostilities. A principal is liable for an agent's misrepresentations if the agent had actual, apparent, or inherent authority to make statements concerning the subject matter involved.
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