Business Associations

Agency Restatement definition

The fiduciary duty that arises when:

• one person (principle) manifests assent to another person (agent) that the agent shall act on behalf of the principle

• Subject to principle’s control

• Agent manifests assent or otherwise consents so to act

Required capacity for PRINCIPLE to enter into a agency relationship

• Legal capacity

• Must be an individual/valid legal entity

• Not a minor (in most cases)

Equal Dignity Rule

states an agency relationship must be in writing IF the principle is authorizing the agent to conduct a transaction that requires a signed writing (i.e. a real estate transaction that falls within the statute of frauds)

Duel Agency

is allowed if both of the principles waive the conflict of interest

Competency in and Agency Relationship

The focus is only on the competence of the principle (NOT the agent)

• Principle must be a competent adult (akin to competency required to enter (k))

• Agent may be incompetent or even a minor

When is competency of a principle measured? (Rest. 3rd of Agency 3.04)

When the agent acts - NOT when the principle enters into the agency agreement

If an agent exceeds their actual authority

• principle is not bound

• principle may ratify the unauthorized action after the fact

Implied authority of an agent

• authority to take actions necessary/incidental to achieve the principle’s objectives in the agency relationship

Termination of the agency relationship

Upon agent’s breach of fiduciary duties

Loss of capacity of a principle

Terminates the agent’s authority

• When the agent has notice of the incapacity OR and adjudication of incompetence

Universal Agent

Agent who is empowered to engage in any/all activities, of any type, on behalf of the principle

• Relatively rare

• Baldwin v. Tucker (Ky. 1901)

General Agent

Agent who has been authorized to engage in a series of transactions/all transactions of a particular type

• Sometimes for a continuous, ongoing period

Special Agent

Agent authorized to engage in a single transaction or a time-limited series of transactions

• NOT multiple transactions for a continuous, ongoing period

Agent’s Duty of Loyalty

Owed to principle in all things related to their agency

• If the agent’s and principle’s interests ever conflict, and the conflict implicates the agency, then the agent must subordinate their own interests to the principle’s

• Agent must NOT engage in self-dealing or seek to enrich themselves by virtue of their position as agent

• Prohibits dealing with the principle as an adverse party in any transaction related to the agency relationship

• Typically may not deal with the principle on the agent’s own account in a matter touching the agency

• May not serve mult. principles with adverse interests in the same transaction

• Agent must not hold a substantial stake in a party adverse to the principle

• Must always be on the principle’s “side” and act for the principle’s benefit

Compensated Agent Breach

If a compensated agent breaches her duties, the principle has a right to withhold payment

• Principle may seek damages (either for breach of contract or in tort)

• Principle may also bring action for an accounting (forces agent to turn over all the $/property owed to the principle)

Agent’s Duty of Loyalty: Adverse Parties

Agent owes fiduciary duty to act for the principal’s benefit

• must refrain from acting on behalf of an adverse party

• An agent acts for an adverse party in a transaction when the agent has a substantial economic interest in the party with whom the principle deals

• So long as a transaction in which an agent acts as/on behalf of an adverse party is connected with the agency relationship, the agent is subject to the duty (EVEN IF the agent has no direct/indirect responsibility to conduct the transaction on behalf of the principle)

• Agent may seek principle’s informed consent to engage in an activity that would otherwise be a breach of the duty (must disclose all material facts and otherwise acts in good faith)

Waiver of duty of loyalty via agent disclosure

• agent must disclose ALL material facts

• agent must otherwise act in good faith

Agency Agreement

• must comply to terms of the agreement

• both have duty to uphod agreement

Meinhard v. Salmon (NY 1928)

• Rule of law: Co-adventurers, like partners, have a fiduciary duty to each other, including sharing in any benefits that result from the parties’ joint venture

• Reasoning:

  • A co-adventurer who manages a joint venture’s enterprise has the strongest fiduciary duty to the other members

  • The Midpoint lease was an extension of the subject matter of the Bristol lease, in which Meinhard had a significant investment

  • Salmon was given the opportunity to enter into the Midpoint lease bc he managed the Bristol Hotel property

  • Bc Salmon’s opportunity arose from his status as the managing co-adventurer, he had a duty to tell Meinhard about it

• Remedy for Meinhard: A trust attaching the shares of stock should be granted to Meinhard, with the parties dividing the shares equally, but with Salmon receiving and additional share

  • Salmon’s additional share enables him to retain control/management of the Midpoint property (according to the terms of the joint venture, Salmon was to have for the entire length of the joint venture)

Minors and Agency Relationships

• (k) entered into is voidable by the minor (though the other party may still be entitled to some compensation so long as there was not fraud or overreaching)

• May choose to ratify the (k) when they reach the age of majority

• Most states: minors may not void (k)s for necessaries (ex: food, shelter, clothing)

• Capacity to authorize an agent to act: follows the same framework as general (k) formation

• Generally, may not act as a principle

Minors acting as principles

Generally, not allowed but if they do appoint an agent they may:

• Disaffirm the appointment or any actions of the agent

• May not avoid an agreement for necessaries undertaken by an agent

• Some states have special rules for minors engaged in the entertainment industry

Requirements to act as a principle

• Legal Capacity

  • Must be an individual or a valid legal entity (that has rights and liability)

• Age of majority

• Mental Capacity

Mental Capacity required to be a principle

• Understand the nature and consequences of entering the agreement

When an agency relationship is entered into without mental capacity of the principle

Most states:

• Can be voided by the principle once they regain mental capacity; OR

• Voided by the principle’s personal representative

Few states: Hold (k) void

Agent’s appointment/actions done on behalf of an incompetent principle

May be disaffirmed or ratified by the principle once they regains competence or by the principle’s personal representative

Requirements to be an agent

Generally, anyone may act as an agent

• Minors and incompetent individuals (who are unable to enter into (k)s on their own behalf) may serve as agents in most states

  • Some states require a minimum mental capacity

• Lack of capacity may limit the agent’s obligations and liabilities to the principle or 3rd parties

Restrictions on who may serve as an agent

Some states:

• Prohibit an agent from representing both parties in a transaction (Dual Agency)

  • Parties can sometimes waive this restriction, so long as they give informed consent (sometimes must be in signed writing)

• Many states require agents in certain activities (EX: real estate) to be licensed

• There are some non-delegable duties that principles may not assign to an agent

A principle’s non-delegable duties

Either as a matter of (k) OR by operation of law

• pertinent to the principle and only the principle may carry out the actions

Agency Relationship Formation Requirements (Restatement)

• Consent of both parties (sometimes required in writing) - General rule: Oral agreement is sufficient to manifest consent

• NO consideration required

How may parties manifest consent to enter into an agency relationship?

• Orally

• In writing (sometimes the law requires this and the principle will not be bound if the agreement is not in writing)

  • UNLESS doctrine of estoppel binds the principle in spite of an invalid agreement

• By the parties’ conduct

When is consent required in writing for the formation of an agency relationship?

Generally, oral agreement will suffice

• Some states: writing NOT required even when the state’s statute of frauds requires that a (k) is entered into by the agent to be in writing

  • Writing only required IF there is a specific legal provision requiring certain types of agency agreements to be in writing

• Other states: adhere to the Equal Dignities Rule

Equal Dignities Rules for Agency Relationship Formation

Followed by some (not all) states

• Any (k) that must be evidenced in a writing under the statute of frauds may only be entered into by an agent IF the agency agreement is also in writing

Gratuitous Agent

Agent that serves with no compensation (no consideration in the formation of the relationship with the principle)

Methods of Agency Creation

1. Actual authority

2. Apparent authority

3. Defacto agency relationship based on Estoppel

4. Operation of law

Apparent authority

principle says/does something that communicates to a 3rd party that the agent is authorized to act on their behalf

Defacto agency relationship based on the doctrine of estoppel

Prevents a principle from denying the existence of/avoiding the consequences of an agency relationship, bc the principle:

1. Intentionally/carelessly caused 3rd party to believe that a valid agency agreement existed; OR

2. Failed to correct the 3rd party’s reasonable belief that an agency relationship exists, despite being aware that the 3rd party might detrimentally rely on that belief

Affirmative acts to create an agency relationship

1. Actual authority

2. Apparent authority

3. Estoppel

4. Operation of Law

Agency Formation by Operation of Law

Many states have statutes that create limited agency relationships to serve specific purposes

• Ex: state may enact a non-resident motorist statute which authorizes the Secretary of State/other official to act the agent for any out of state driver for purposes of receiving service of process

Types of authority that gives an agent the power to act

1. Actual

2. Apparent

3. Inherent

4. Ratification

Actual Authority

The power the principle specifically grants to agent to act OR that the agent reasonably believed was authorized by the principle

• may be express or implied

Express actual authority

Any power specifically granted to an agent (orally or in writing)

• Construed according to a reasonable person standard

Implied actual authority

Power granted to the agent through the conduct of the principle

1. Incidental to express authority

2. Custom or practice

3. Acquiescence

4. Agent of necessity

Implied actual authority of an agent that is incidental to the express authority of the agent

Agent authorized to take any actions necessary to utilize the express authority granted or achieve expressly authorized objectives

Implied actual authority based on custom or practice

Generally, an agent may act in accordance with customs and practices

• UNLESS principle has reserved some type of authority

Implied actual authority via acquiescence

Authority for an agent to continue to do any act that the principle has previously acquiesced to the agent doing

• assessed based on the course of conduct between the principle and the agent

Implied actual authority via agent of necessity

Agent has authority to act reasonable in the event of an emergency

• generally temporary - lasts only until the agent is able to obtain guidance from the principle

Apparent Authority

power created in an agent as a result of the principle’s dealings with 3rd parties

• A principle holds out an agent as authorized to act on their behalf and will be bound by the agent’s actions/representations to the 3rd party

• Only created when the principle’s conduct creates a reasonable belief in the mind of the 3rd party that the agent is authorized to act AND the 3rd party is induced to act in reliance on the apparent authority of the agent

Ways to establish apparent authority in an agent

1. Principle affirmatively states that the agent is authorized to act when they are not

2. Principle fails to correct mistaken belief of the 3rd party that the agent has authority to act when it would be reasonable to do so (P would have to be aware of the 3rd party’s mistaken belief for this rule to apply)

3. Principle negligently allowed an unauthorized person to present themselves as an authorized agent

4. Principle failed to take appropriate steps to notify 3rd parties that a former agents was no longer authorized to act

Inherent Authority

Agent is given actual authority, → agent goes beyond the scope of authority given to them → fairness requires that the actions are binding on principle to ensure fairness to 3rd parties

• It does not matter if the principle had NO direct dealings with the 3rd party to give rise to inherent authority

• Holds a principle liable for the unauthorized acts of an agent when fairness requires it

3rd Rest. of Agency: Inherent Authority

Does away with this type of authority

• instead, works exclusively with the framework of Actual and Apparent authority and Estoppel

Ratification of unauthorized acts of an agent by a principle

• principle elects that unauthorized actions of the agents be binding retroactively

• Can affirm later by words or conduct

• If ratified, will be treated as if it was authorized beforehand by the principle (unless the principle lacked mental capacity at the time of the act)

• NOT PERMITTED if it would cause adverse and inequitable effects on the rights of 3rd parties

• If the principle’s conduct seemed to ratify the act, and a 3rd party detrimentally relies on this implied ratification, the principle is bound by the seemingly ratified action

Requirements for a ratification by a principle

1. Principle must be fully informed of all relevant facts

2. Principle may not usually change the terms or partially ratify the agent’s acts

Ratification where the principle did not have mental capacity at the time the agent acted but later regained capacity

The unauthorized act will be treated as valid only from the time of ratification

Termination of an Agent’s Authority

1. Death of the agent or the end of an agent’s existence (if entity)

2. Death or cessation of the principle terminates the agent’s actual authority

3. Loss of capacity of the principle

4. By agreement - specified time or upon the completion of the principle’s objective

5. Change in circumstances

6. Revocation

7. Agent breaches fiduciary duties

8. Operation of law

Death/cessation of a principle (Rest. 3 of Agency)

Terminates the agent’s actual authority only once the agent has notice

• Some states: agent’s authority ceases at the moment of death of the principle

Incapacitation of the principle in agency termination

Terminates the agent’s actual authority when:

1. The agent has notice of the incapacity; OR

2. An adjudication of incompetence - NOTE: an agency agreement may state that the agent’s authority continues even after incapacity or only becomes effective upon the incapacity of the principle)

Termination of Agency by Change in Circumstances

Circumstances have changed so much that the agent should recognize that the principle would no longer want to continue the agency

Termination of an Agency via Revocation

Can typically be revoked by either the agent or principle

• EXCEPTION: agency powers that are granted as securities and certain proxies may be irrevocable (at least until the interest secured is satisfied)

Reminders to the principle in terminating actual authority of an agent

• Termination of an agent’s actual authority does not necessarily terminate their apparent authority

• Principle may need to take additional steps to notify 3rd parties that the agent is no longer authorized, or they may still be bound by their unauthorized actions due to their apparent authority

Agent’s duties: Contractual Obligations

1. Must perform the duties in the agency agreement

2. Must refrain from unauthorized acts

Agent’s Duties: Duty of Loyalty

Agent owes this duty to a principle in all things related to the agency

• Agent must always act for the principle’s benefit

  • No self-dealing or personal enrichment by virtue of their position as the agent

  • May not represent an adverse party against the principle in a transaction

  • May not compete with the principle (both in the agent’s personal capacity and in working with 3rd parties whose interests are adverse to the principle’s) - Agent must avoid usurping the principle’s opportunities

  • May not use the property/confidential information of the principle to serve the agent’s own purposes or the purposes of anyone other than the agent)

• Agent MAY seek informed consent of the principle to engage in an activity that would otherwise be a breach of this duty

Fiduciary duties of agents

Duties implied by law that are imposed on an agent (unless otherwise agreed to waive)

1. Duty of Loyalty

2. Duty of Care

Waiver of agent’s duty of loyalty

Principle may give informed consent to waive the duty of loyalty if:

• agent discloses all material facts; AND

• agent otherwise acts in good faith

Agent’s Duties: Duty of Care

Requires agent to act with a degree of care, skill, and diligence that would ordinarily be exercised by an agent in similar circumstances

• Objective standard

  • However, agents with specialized knowledge/skill are expected to utilize them and are held to a higher standard of care (based on an agent with those special skills in similar circumstances)

Duty of Obedience

• Obey lawful instructions of the principle in the carrying out of the agent’s duties

  • NO duty to break the law or carry out instructions that are unduly burdensome

• Conduct themselves reasonably

• Avoid acts that will harm the principle

Additional duties of the agent

1. Provide information to principle

2. Maintain the principle’s property separately

3. Keep proper records

Principle’s Duties: Contractual Obligations

• Comply with the original agency agreement

Principle’s Duties: Duty of Good Faith and Fair Dealing

• Expansive duty

  • provide necessary information to the agent to perform their duties

  • Inform agent of risks

• Requires principle to cooperate with the agent in the performance of the agent’s duties

• Avoid interfering unreasonably with the agency relationship

Principle’s Duties: Compensate and Indemnify

• Compensate the agent for services (unless gratuitous agent)

• Indemnify the agent for any payments or expenses properly incurred in the course of the agency

Remedies available to a principle in case of agent’s breach

1. Right to withhold payment

2. Seek damages for breach of contract

3. Seek damages in tort law

4. Bring an action for an accounting

5. Bring an action to recover secret profits

Principle brings action to recover secret profits

Equitable action that allows the principle to recover any personal profits the agent derived by breaching their fiduciary duties

Remedies available to an agent in event of principle’s breach

1. Seek damages for breach of contract (most common)

2. Agent’s lien - lien granted on any property belonging to the principle in the agent’s possession

Principle’s Liability to 3rd parties

1. Actual (express or implied) authority of an agent to enter into (k): Principle is bound

2. Apparent authority: Principle is bound IF 3rd party reasonably relied on the existence of an agency relationship

Agent’s liability to 3rd parties

Depends on the status of the principle

• (1) disclosed, (2) unidentified, (3) undisclosed

1. Disclosed: Generally NOT liable

2. Unidentified: Liable unless otherwise agreed upon with 3rd party

3. Undisclosed: Liable

Disclosed Principle

Agent discloses to 3rd party:

• (1) the existence of the principle, AND (2) identity of the principle

Disclosed principle will always be liable to the 3rd party

• Agent generally not held liable (unless parties specify otherwise)

Unidentified Principle

Agent discloses to 3rd party only the existence of a principle, but NOT the principle’s identity

• BOTH principle and agent will be held liable to the 3rd party

• Agent is party to the contract, thus liable to the 3rd party (unless parties specify otherwise)

Undisclosed Principle

Agent does not disclose the existence or identity of the principle

• 3rd party believes they are only dealing with the agent

• Only agent and 3rd party are parties to the contract

• BOTH the agent and principle are liable to 3rd party

Who within the agency agreement can enforce a (k) against a 3rd party?

• Disclosed principle: can always enforce

• Unidentified and Undisclosed principles: Can usually enforce

  • UNLESS: enforcement would result in injustice for the 3rd party

Liability when an agent acts WITHOUT authority

Principle will be bound IF:

• principle later ratifies the action

• principle will be estopped from denying existence agency where the principle’s conduct caused a 3rd party to detrimentally rely on on the existence of the agency

• principle failed to take steps to notify 3rd parties that former agent no longer has authority to act on their behalf

• principle’s negligence allowed unauthorized person to engage in activity on their behalf with 3rd parties

Principle otherwise NOT liable for the unauthorized actions of individuals pretending to be agents

Unauthorized agent is liable under implied warranty of authority

Implied warranty of authority

Unauthorized person’s power to act is assumed by 3rd parties when an agent in some way holds themselves out to be authorized to act on behalf of a principle

• Thus, unauthorized people holding themselves out to be agents are liable to 3rd parties for their actions/ resulting damages

Unauthorized party can expressly say they have no warranty of authority and the 3rd party will have no remedy for their reliance on the assumed agent’s authority

Restatement 3rd of Agency 6.01

If the principle’s identity is disclosed, the agent generally will not be held liable on the contract (unless the parties specify otherwise)

Rights of an undisclosed principle to enforce a contract with a 3rd party

If an agent is acting within the scope of their agency relationship and enters into a contract with a 3rd party, BOTH the agent and the undisclosed principle are able to enforce the contract against the 3rd party

Individual’s unauthorized actions without actual binding power

When an agent purports to act on behalf of a principle in dealing/contracting with a 3rd party but lacks power to bind that principle, the agent gives the 3rd party an implied warranty of authority

Agent’s breach of implied warranty of authority

Agent subject to liability UNLESS:

1. Principle ratifies the action

2. the agent gives notice to the 3rd party that no warranty is made regarding their authority

3. 3rd party knows that the agent acts without actual authority

Individual or recognized legal entity requirement for principle capacity

• Entity must be capable of holding rights and undertaking obligations

  • An unincorporated noncommercial organization has NO capacity to act as a principle

    • However, individual members of an unincorporated noncommercial MAY act as principals in their personal capacities

The doctrine of respondeat superior

An employer is jointly and severally liable for their employee’s torts committed within the scope of their employment

Restatement 3rd of Agency: Death of a principle

A termination of actual authority is only effective once the agent has notice of the principal’s death

Revocation in Agency Relationships

• Generally, agents and principals can revoke most agency relationships at any time (unless agreement states otherwise)

• Certain types of agency powers (securities or certain proxies) are irrevocable

Tort Liability: independent contractors

• No employee-employer relationship

• employer will not be held vicariously liable

• fact-intensive analysis to determine if they are employee or independent contractor

  • Focus on who controls the manner of performance

  • Murrell v. Goertz (Okla. Civ. App. 1979)

Breach of Agent’s Duty of Loyalty: Adverse Parties

• Obligation to refrain from acting as an adverse party or om behalf of an adverse party in a transaction connected with the agency relationship

• Deemed to be acting as/on behalf of adverse party when the agent has a substantial economic interest in a 3rd party

• Must disclose all info and otherwise act in good faith to not be found in breach of duty

Employee’s frolic of their own v. Detour

A serious, substantial, or major departure from the employee’s duties

• Employers are not liable for the torts of employees while on a frolic

• A detour is a comparatively small deviation from employee’s duties for personal activities and considered WITHIN the scope of their employment

  • Thus, employers are liable for these torts

  • Pyne v. Witmer (Ill. 1989)

Coming and Going Rule

an employee is not acting within the scope of their employment while commuting to and from work

• employer generally NOT liable for torts of employees commuting to and from work

Liability for nondelegable duties

A principal who uses another party to preform nondelegable duties will remain liable for their torts committed in the course of preforming those duties,

• REGARDLESS of whether that party is an employee or an independent contractor

Nondelegable duties

• does NOT mean principal must personally perform the duty - RATHER, that the principal remains liable

When does the principle’s loss of capacity terminate the agent’s authorization?

• When the agent has notice that the principal’s loss of capacity is permanent; OR

• That the principal has been adjudicated to lack capacity

An agent’s actual authority to bind a principle is terminated by:

1. agents death, cessation of existence, or suspension of powers

2. Principal’s death, cessation of existence, or suspension of powers

3. Principals loss of capacity

4. agreement between agent and principal or the occurrence of circumstances on that basis of which the agent should reasonably conclude that the principal no longer would assent to the agent’s taking action on their behalf

5. manifestation of revocation by the principal

6. Occurrence of circumstances specified by statute

Unincorporated Organizations

1. Sole Proprietorship

2. Partnership

3. Limited Liability Partnership

Sole proprietorship

• Cheap/easy to create

• Proprietor owns all liabilities

  • Taxed as an individual

  • May not limit personal liability

Partnership

• Jointly owned by 2 or more individuals

• Easy to form

• Governed by the laws of each state

• Partners contribute by investing time, money, skills, or name recognition

• Each partner shares in the profits and losses

• Each participate in the control and management of the business

• Not obligated to file a separate tax return

  • Business’s profits and losses pass through to the partners who include those amounts in filing their personal taxes

General Partnership

• All partners manage the business

• All partners personally liable

• Law assumes (unless otherwise agreed upon) that all losses, profits, and liabilities and management rights