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Business Organizations
University of Kansas School of Law
Harper Ho, Virginia

Business Organizations


Fall 2013

Creating Agency

Agency [Res 1.01] = Is the fiduciary relationship that arises when one person (a principal) manifests assent to another person (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 so to act.

Elements to Creating Agency

1. Control (agent is subject to the principal’s control)

a. How much evidence is needed for control?

2. Benefit (the agent has to be acting primarily for the benefit of the principal)

3. Mutual Assent (both parties assent to the agency relationship) [Manifestation] ***usually the key issue***

a. Verbal

b. Written

c. Other conduct (actions)

**** An Employee is automatically an agent of the employer*****

****Intent = It need not be the specific intent to create an agency relationship (it can still happen)****

a. Must intend to do what would cause an agency relationship [Res 1.02]

Parties’ Labeling & Popular usage not Controlling (Res. 3rd 1.02) = An agency relationship only arises when the elements stated in 1.01 are present

1. Whether a relationship is characterize as agency in an agreement between parties or in the context of industry or popular usage is not controlling (i.e. you don’t have to say/state “agency” for the agency relationship to be formed and vise versa)

Manifestation (Res 3rd 1.03) = A person manifests assent or intention through written or spoken words or other conduct

Subangency [Res 3.15] = Is a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal, and for whose conduct the appointing agent is responsible to the principal

1. The relationship b/w a subagent and the appointing agent and b/w the subagent and the appointing agent’s principal are relationships of agency

2. An agent may appoint a subagent only if the agent has actual or apparent authority to do so

Co-Principals = Two or more persons may as co-principals appoint an agent to act for them in the same transaction or matter

Agent’s Implied Warranty of Authority [Res 6.10] = A person who purports to make a contract, representation or conveyance to a 3rd party on behalf of another person, lacking power to bind that person

1. Gives an implied warranty of authority to the 3rd party; and

2. Is subject to the 3rd party for damages for loss caused by breach of that warranty (including loss of the benefit of expected performance by the principal); UNLESS

3. The principal or purported principal ratifies the act [see 4.01]; or

4. The person who purports to make the contract (etc) gives notice to the 3rd party that no warranty of authority is given; or

5. The 3rd party knows that the person who purports to make the contract (etc) acts without actual authority

Agent’s Representations [Res 6.11]

1. Principal not liable for an agent’s false representations about his authority (unless the agent acted with actual or apparent authority)

2. Principal is liable for representations made incidental to a contract (etc) when

a. Agent has actual or apparent authority to enter into the contract (etc); Unless

b. The 3rd party knew or had reason to know that the representation was untrue or the agent acted without actual authority

3. Principal is liable on the same basis when

a. Agent had actual authority in making the representation, or

b. The agent acted without actual authority in making the representation, but had actual authority to make true representations about the same matter; unless

c. The 3rd party knew or had reason to know it was untrue

4. When an agent falsely states to a 3rd party that the agent does not act on behalf of a principal; the 3rd party may avoid the contract (etc) if the principal or agent had notice that the 3rd party would not have dealt with the principal

Agent’s Duties to Principal[Res 8.01-13]

Principal’s Duty to Agents [Duty under contract [8.13], duty to indemnify [8.14], duty to deal fairly and in good faith [8.15]

Agents with Multiple Principals [Res 3.14] = An agent acting in the same transaction on behalf of more than one principal may be one or both of the following:

a. A subagent (3.15)

b. An agent for co-principals (3.16)

General Fiduciary Principle [8.01] = An agent has a fiduciary duty to act loyally for the principal’s benefit

a. In all matters connected with the agency relationship

Remedies for Breach of Fiduciary Duty [8.01 comment d]

1. Injunction (non-monetary relief)

2. Avoid or rescind a contract (with agent or 3rd party)

3. Recovery for any losses caused by the breach

4. Punitive damages

5. Restitution for unjust enrichment (where the principal can’t prove losses can still recover for this)

a. if the agent has realized a material benefit, the agent has a duty to account for that benefit to the principal

6. Avoid a transaction (if agent’s breach is in connection with that transaction)

7. Forfeiture of commissions

Material Benefit Arising out of Position [8.02] = Agent has a duty NOT to acquire a material benefit from a 3rd party in connection with transactions conducted on behalf of the principal (or otherwise through the use of the agent’s position)

Acting on Behalf of an Adverse Party (8.03) = An agent cannot act as an adverse party in a transaction connected with the agency relationship

Competition [8.04] = For the duration of the agency relationship, the agent has a duty to refrain from competition with the principal

1. Or otherwise helping the competition

2. During the relationship, the agent may take action (not wrongful) to prepare for competition following the termination of the agency relationship

3. Can contract beyond the duration of the agency relationship

Use of Principal’s Property/Confidential Information [8.05]

1. Agent has a duty not to use the principal’s property or convey confidential info for his own purposes or those of a 3rd party

2. Not limited to the period of employment (potentially indefinite)[See comments] (Duration can be set via contract)

Principal’s Consent [8.06] = Conduct that would otherwise breach an agent’s duty, is not a breach of duty if the principal consents to the conduct, if

1. In obtaining the principal’s consent the agent

a. acted in good faith

b. Disclosed all material facts known by the agent (has reason to know or should know would reasonably affect the principal’s judgment)

c. Unless the principal already knows the facts or does

Apparent Authority [Res 2.03]= Is the power held by an agent or other actor to affect a principal’s legal relations with 3rd parties when a 3rd party reasonably believes the actor has authority to act on behalf of the principal

1. The belief must be traceable to the principal’s manifestations and must be received by the 3rd party (directly or indirectly); and

2. The scope of the agent’s apparent authority depends on the 3rd parties reasonable interpretation of the manifestation

3. Apparent Authority can exist even if someone is not an agent

Circumstances where Apparent Authority Comes Up

1. Where a person appears to be an agent of the principal, but is not (non-agent)

2. Where the agent has apparent authority extending beyond the termination of the agency relationship (for a reasonable period of time)

3. An agent who over-reaches their actual authority

Creation of Apparent Authority [Res 3.03] = Is created by a person’s manifestation that another has authority to act with legal consequences for the person who makes the manifestation, when

1. a 3rd party reasonably believes the actor to be authorized, and

2. The belief is traceable to the manifestation

Manifestations = Manifestations to a 3rd party can be created via (writing, speaking, or conduct)

1. writing /word of mouth from the principal

2. authorized statements of the agent

3. documents or other indicia of authority given by the principal to the agent

4. By 3rd parties who have heard of the agents authority from authorized or permitted channels of communication

1. Also look at [1.03] which defines manifestation very concisely

2. Does not require directed communication from the principal to a 3rd party (manifestations can reach a 3rd party through the intermediary)

Estoppel v. Apparent Authority

1. Estoppel does not bind the 3rd party, only binds the principal

2. Estoppel requires detrimental reliance (liability for apparent authority does not)

Agent Acts with Apparent Authority [7.08] = P is subject to liability for a tort committed by an agent in dealing or communicating with a 3rd party on or purportedly on behalf of the principal; when

1. Actions taken by the agent with apparent authority constitute the tort; or

2. Enable the agent to conceal its commission

Terminating of Apparent Authority [Res. 3.11] = The termination of actual authority does not by itself end any apparent authority held by the agent (must give actual notice to 3rd party)

1. Apparent authority ends when it is no longer reasonable for a 3rd party with whom the agent deals to believe the agent continues to act with actual authority