BUSINESS ASSOCIATIONS 1
I. The Law of Agency
A. The Creation of the Agency Relationship
1. Agency Defined—Agency is the fiduciary relationship that arises when one person(a principal) manifests assent to another person(an agent) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents to act. R3 Agency §1.01
i. Key elements, mutual assent, control, and benefit
ii. Persons are defined as individuals or organizations. R3 Agency §1.04(5)
iii. Simply labeling a person as a principal or an agent is irrelevant. R3 Agency §1.02
2. Agency relationships have inward and outward looking legal consequences.
i. Inward looking consequences relate to the relationship between the principal and agent and are largely governed by the contracts between the parties and the law of fiduciary duties.
ii. Outward looking consequences relate to the relationship among the principal, agent, and a third party and are governed by the various “principles of attribution.”
B. Scope of Agent’s Authority
1. Can be limited or general
2. Defined and limited by the manifestations of principal
3. Just because a person has agency authority for a principal in one respect does not mean that the agent has authority in other respects.
C. Duties of Agent
1. Duty of Loyalty
i. General Fiduciary Principle—Agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship. R3 Agency §8.01.
a. If through the breach of this loyalty, the agent has realized a material benefit, the agent has a duty to account for the benefit, its value, or its proceeds.
b. The agent is subject to liability to deliver the benefit, its proceeds, or its value to the principal.
c. An agent’s breach of fiduciary duty is a basis on which the agent may be required to forfeit commission and other compensations paid or payable to the agent during the period of the agent’s disloyalty.
ii. Material Benefit Arising Out of Position—An agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted or other actions taken on behalf of the principal or otherwise through the agent’s use of the agent’s position. R3Agency §8.02
a. A person who acts as an agent acts for the benefit of the principal and the principal should reap the turns of good fortune that may occur in connection with a transaction the agent undertakes on the principal’s behalf.
b. The risks generated from the agent’s interactions with third parties are borne by the principal and so should the rewards.
c. The agent is not in a position to assess material benefits in relation to the principal generated from interactions with third parties.
iii. Acting as or on behalf on an adverse party—An agent has a duty not to deal with the principal or on behalf of an adverse party in a transaction connected with the agency relationship. R3Agency §8.03.
iv. Competition—throughout the duration of an agency relationship, an agent has a duty to refrain from competing with the principal and from taking action on behalf or otherwise assisting the principal’s competitors. During that time, an agent may take action, not otherwise wrongful, to prepare for competition following the termination of the agency relationship. R3Agency §8.04.
v. Use of Principal’s Property: Use of Confidential Information—An agent has a duty (1) not to use property of the principal for the agent’s own purpose or those of a third party; and (2) not to use or communicate confidential information of the principal for the agent’s own purposes or those of a third party. R3Agency §8.05
a. An agent may use property of the principal for something not of the principal’s behalf if given permission by the principal
b. The rule is a corollary to a principal’s right, as an owner of property, to exclude usage by others.
vi. Exception–Principal’s Consent §8.06
a. (1)Conduct by an agent that would otherwise constitute a breach of duty as stated in §§8.01-8.05 does not constitute a breach of duty if the principal consents to the conduct.
b. (2) An agent who acts for more than one principal in a transaction between or among them has a duty to
1. to deal in good faith with each principal
2. to disclose to each principal the fact that the agent acts for the other principal or principals, and all other facts that the agent knows.
2. Duty of Care
i. Duty Created by Contract §8.07—An agent has a duty to act in accordance with the express and implied terms of any contract between the agent and the principal.
ii. Duties of Care, Competence, and Diligence §8.08—Subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances.
a. The specific skills that an agent must possess to be competent depend on the nature of the service that the agent undertakes to provide and the circumstances under which it will be provided.
b. If an agent undertakes to perform services as a practitioner of a trade or profession, the agent “is required to exercise the skill and knowledge normally possessed by members of that profession.”
c. Unless the agent represents that the agent possesses greater or lesser skill.
iii. Duty to Act Only Within Scope of Actual Authority and to Comply with Principal’s Lawful Instructions §8.09
a. An agent has a duty to take action only within the scope of the agent’s actual authority.
b. An agent has a duty to comply with all lawful instructions received from the principal and persons designated by the principal concerning the agent’s actions on behalf of the principal.
iv. Duty of Good Conduct §8.10—An agent has a duty, within the scope of the agency relationship to act reasonably and to refrain from conduct that is likely to damage the principal’s enterprise.
v. Duty to Provide Information §8.11—An agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know.
vi. Duty Regarding Principal’s Property §8.12—An agent has a duty, subject to any agreement with the principal,
a. Not to deal with the principal’s property so it appears to be the agent’s property.
b. Not to mingle the principal’s property with anyone else’s
c. to keep and render accounts to the principal of money or other property received or paid out on the principal’s account.
3. Breach—If an agent breaches the duty of loyalty the principal’s primary remedies are damages and disgorgement of profits.
D. Duties of Principals
1. Duty Created by Contract §8.13—A principal has a duty to act in accordance with any express and implied terms of any contract between the principal and agent.
2. Duty to Indemnify §8.14—A principal has a duty to indemnify an agent.
i. When an agent makes a payment on the principal’s behalf, the principal must reimburse the agent for that payment.
ii. In the absence of a contract, the principal has a duty to indemnify an agent, if the agent makes a payment acting within the agent’s actual authority.
3. Principal’s Duty to Deal Fairly and in Good Faith §8.15—A principal has a duty to deal with the agent fairly and in good faith, including a duty to provide the agent with information about risks of physical harm or pecuniary loss that the principal knows, has reason to know, or should know are present in the agent’s work but unknown to the agent.
4. Food Lion, Inc. v. Capital Cities/ABC, Inc.
a. Employees are disloyal when their acts are inconsistent with promoting the best interest of their employer at a time when they were on its payroll.
b. An employee who delibera
or incidental to achieving the principal’s objectives, as understood by the agent.
iv. Reasonableness—Agent’s interpretation of the manifestation must be reasonable in light of the circumstances A knows of should have known and A’s fiduciary duty to the principal.
iv. Castillo v. Case Farms of Ohio—A principal may be held liable for the acts of its purported agent based on actual agency relationship created by the principal’s express and implied delegation of authority to the agent. Further, giving an agent express authority to undertake a certain act also includes an implied authority to do all things proper, usual, and necessary to exercise that express authority.
5. Apparent Authority
i. Definition—Apparent authority is the power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations. §2.03.
a. Manifestation by a principal to the third party.
b. Reasonableness. Third party must reasonably believe that the actor has the authority.
c. The existence of an agency relationship is not required.
i. Defintion—R3 Agency §2.05 A person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person’s account is subject to liability to a third party who justifiably is induced to a make a detrimental change in position because the transaction is believe to be on the person’s account, if…
ii. Principal is estopped from denying the agency relationship and may be liable for something purportedly done on the principal’s behalf.
iii. Manifestations to the third party are not necessary.
a. Principal intentionally or carelessly caused the third party to believe that the act was on the principal’s behalf
b. Or having notice of the belief of the third party might cause the third party to change position, without taking steps to notify third party of the actual situation
c. Third party has to be induced to make a detrimental change in position because the third party reasonably believed the act was on behalf of the principal.
i. Definition §4.01(1)—Ratification is the affirmance of a prior act done by another, whereby the act is given the effect as if done by an agent with actual authority.
ii. How an act is ratified §4.01(2)—A person ratifies an act by
a. manifesting assent that the act shall affect the person’s legal relations or
b. conduct that justifies a reasonable assumption that the principal so consents
iii. An act is not ratified unless §4.01(3)
a. the act is ratifiable §4.03
b. the person ratifying has the capacity to ratify §4.04
c. the ratification is in a timely manner §4.05
d. the ratification encompasses the act in its entirety §4.07
iv. Effect—Ratification retroactively creates the effects of actual authority. §4.02(1)
F. Liability to Third Party in Tort