class two: agency and employment - one agency and its relations to others 1

Class Two:

Agency and Employment - OneAgency and its Relations to Others

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Last week we spoke about:• Class Procedures• Are you a sailboat or a submarine?• The Textbook – Anderson’s Business Law• The Class Content:1. Agency;2. Partnerships and personal business entities;3. Corporations;4. Public Authorities;5. Limited Liability Companies;6. Insurance; and7. Bankruptcy

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Tonight:We will begin with:

The Wonderful World of Agency

aka “show me the money”3

Remember: Every wonderful adventure

starts with a good book?

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An Adventure in the Law

For the very first step on our Adventure we need to know:

What is the “Law”?We need to find out, we need to discover this answer.

And just how do we do that?

Well good law students, like good adventures and explorers,love books.

Books are the treasure trove of answers.

That is why every really wonderful adventure

starts with a good book

Adventures in the Law – So Just What is the Law?

So Let’s Start with Black’s

• Black’s Law Dictionary is the Gold Standard of Legal Definitions.

• If we need to know a term in the law, a legal definition, we should start with Black’s.

Adventures in the Law – So Just What is the Law?

• And so,

What is the “Law”?

• The “Law” has been defined by Black’s Law Dictionary as follows:

• “That which is laid down, ordained, or established.• A rule or method according to which a phenomena or actions co-exist or

follow each other.

• Law, in its generic sense, is a body of rules of action or conduct proscribed by controlling authority, and having binding legal force. …

• Law is a solemn expression of the will of the supreme power of the state.”

• Perhaps the simplest description of the Law, however, is that:

“Law is the Rules by which civilization is ordered.”

The Chief Elements / Components of the Law are:

1. Rules

2. Pronounced, laid down and/or issued

by a controlling authority;

3. That are consistent and lasting; and

4. That are enforceable and followed

by the governed.

• Early laws were simply directives from a king or sovereign.

Modern Laws Include: Constitutions: Both Federal and State

Statutes: Enacted by Elected Legislative Bodies

(Such as Congress or State Legislature)

Case Law: Also known as “The Common Law”

(Case Decisions delivered by Courts)

Regulations: Promulgated by government (Executive) agencies (Agency pronouncements designed to amplify or clarify their authority as provided in statute or constitution)

Executive Orders: Issued by Executive (President or Governor) (Instructions by the Executive to their agencies directing them how to execute a procedure or law)

The United States of America A Representative, federal, Republic.

Pursuant to our United States Constitution,our laws come from our government and our government comes from the people.

This system is set up by our United States Constitutionwhich is the Rule Book for our Government and its Laws.

The United States of America A Representative, federal, Republic.

Articles IV and VI of the United States Constitutionexpressly provide:

The United States shall guarantee to every State in this Union a Republican Form of Government … andThis Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any state to the Contrary notwithstanding.

As a result of this representative, federal, republic:Laws are made pursuant to the following construct:

Federal Government (For All National Laws – Supreme but Limited Powers)

President (Executive) Congress (Legislative) Federal Courts (Judicial)

State Government (For All State Laws – Subservient but Unlimited Powers)

Governor (Executive) State Legislature (Legislative) State Courts (Judicial)

Federal Government (Separation of Powers and Checks and Balances)

President (Executive) Congress (Legislative) Federal Courts (Judicial)

Supreme Court

US Senate US House of Representatives

US Court of Appeals

US District Court

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State Government (Pursuant to State Constitution – Similar Checks and Balances)

Governor (Executive) State Legislature (Legislative) State Courts (Judicial)

NYS Court of Appeals

NYS Senate NYS Assembly

Appellate Division of NYS Supreme Court

NYS Supreme Court

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Priority of Laws:

1. Constitution: Established by Convention of Elected Delegates to provide governmental framework and protections of individual rights, they are supreme to all other laws as interpreted by the Courts

2. Statute: Laws passed (enacted) by an elected legislative body (Congress or State Legislature) and signed into law by the Executive (President or Governor).

3. Regulation: Promulgated by government (Executive) agencies to amplify or clarify their authority as provided in statute or constitution.

4. Executive Order: Issued by Executive (President or Governor) as an instruction to their agencies on how to execute a procedure or law.

Case Law or Common Law -Decisions issued by courts which provide legal rules by: 1. Interpretation of a Constitution, Statute, Regulation or Executive Order, or 2. Clarifying or creating law pursuant to past court decisions.

This is a class on the Law of Business Organizations

One can not have a true understanding the Law of Businessand the Organizations which are its vehicle to accomplish itsgoals, unless they have a true understanding of the Law.

Moreover to truly understand the Law of Business, we needto understand these Organizations as the vehicle whichdelivers the needs of Commerce.

That requires us to have an understanding of the Law whichgoverns the rules of the road upon which we drive that vehicle.

So Let’s Start with Black’s

• Black’s Law Dictionary is the Gold Standard of Legal Definitions.

• If we need to know a term in the law, a legal definition, we should start with Black’s.

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Black's Law Dictionary – 8th Edition (Thompson West 1999)

Defines the term Agency as follows:

• “A fiduciary relationship created by express or implied contract or by law, in which one party (the agent) may act on behalf of another party (the principal) and bind that other party by words or actions.”

Ok… What does this tell us?19

The Elements of the Agency Relationship: 1. A fiduciary relationship 2. Created:

a. by express contract; b. by implied contract; or c. by law,

3. In which one party (the agent) may act 4. On behalf of another party (the principal)5. and bind such principal (via their authority)6. by words or actions

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Agency In General – Agents you can think of

Real Estate

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Insurance

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Sports

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Theatrical

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Agency In General Contract Liability

The Agency Relation Arises From Contract

• Contract LiabilityContract liability in agency refers to the legal relationship whereby one party (called an agent) is authorized to represent the other party (called a principal) in business dealings with third parties.

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Agency In General Contract Liability

The Agency Relation Arises From Contract

• Scope of Appointments

A principal may appoint an agent to do any act EXCEPT an act which by its nature, by public policy, or by contract, requires personal performance by the principal.

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Agency In General: Nature of the Agency Relationship:

• An agency relationship is created by an express or implied agreement, whereby one person, the agent, is authorized to make contracts with third persons, on behalf of, and subject to the control of, another person - the principal.

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Agency In General: Purpose of Agency:

• The effect of a proper exercise of authority by an agent is to bind the principal and third person to a contract.

• The agent, not being a party to the contract, is not liable, in any respect, under the contract.

deals with third personand makes contracts on

behalf of principal

Parties tothe

contract(s)28

Agency In General: Classification of Agents:

• Special Agents:

A special agent is authorized by the principal to handle a specific business transaction.

• General Agents:

A general agent is authorized by the principal to transact all business affairs of the principal at a certain place.

• Universal Agents:

A universal agent is authorized by the principal to perform all acts that can be legally delegated to a representative.

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CREATION OF THE AGENCY RELATIONSHIP - Continued

Elements of the Creation an Agency Relationship• Capacity

There must exist the capacity to enter into the agency agreement

• FormalitiesThere must exist the formalities of a contractual relationship: Consent must exist, but No Consideration and No Written Contract

Required

• Modes of CreationThere must a contractual relationship established: a. By Act of the Parties

● Actual Authority ● Apparent Authority ● Inherent Authority ● Ratification

b. By Operation of Law ● Estoppel ● Statute

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CREATION OF THE AGENCY RELATIONSHIP - Continued Elements of the Creation an Agency Relationship1. Capacity

A threshold (condition precedent) to the creation of an agency relationship is that the respective parties must have CAPACITY.

• Capacity is defined as: 1. “The power to create or enter into a legal relationship under the same circumstances in which a normal person would have the power to create or enter into such relationship.”

2. “The satisfaction of a legal qualification, such as legal age or soundness of mind, that determines ones ability to enter into a binding contract.”

Note: The degree of capacity required for a principal differs from that required for an agent.

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CREATION OF THE AGENCY RELATIONSHIP - Continued Elements of the Creation an Agency Relationship1. Capacity – Continued:

A condition precedent to the creation of an agency relationship is that the respective parties must have capacity.

a.Principal Must Have Contractual CapacityGenerally, one who has contractual capacity may be a principal and enter into a contract through an agent.

b. Agents Generally Need Not Have Contractual CapacityAs a general rule, any person may be an agent, even if they have no contractual capacity. But there are limitations to this rule.

c. Disqualification of AgentsA person, however, can be disqualified from being an agent.

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CREATION OF THE AGENCY RELATIONSHIP - Continued Elements of the Creation an Agency Relationship1. Capacity – Continued:

a. Principals: Must Have Contractual Capacity

Generally, one who has contractual capacity may be a principal and enter into a contract through an agent.

1) Minors As a general rule, a minor cannot bind himself absolutely in contract; therefore, his appointment of an agent as well as the agent's actions are voidable and can be disaffirmed.

2) Incompetents An incompetent's appointment of an agent as well as the agent's actions may be disaffirmed by the incompetent or his committee or personal representative.

3) Unincorporated Organizations Unincorporated not-for-profit organizations such as churches and clubs CANNOT be principals. - However, members of such organizations may be held jointly liable as principals if they have authorized or assented to the act giving rise to the litigation.

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CREATION OF THE AGENCY RELATIONSHIP - Continued Elements of the Creation an Agency Relationship

1. Capacity – Continued:

b. Agents Generally Need NOT Have Contractual Capacity

As a general rule, any person may be an agent, even if they have no contractual capacity.

But there are limitations to this rule.

1) Minors Minors may validly be appointed as agents.

2) Incompetents Individuals incompetent to enter into a valid contract on their own behalf may still act as another's agent.

3) Exceptions Courts nonetheless, have held that a minimal age and mental capacity is usually required.

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1. Capacity – Continued:

c. Disqualification of Agents

A person, however, can be disqualified from being an agent.1) Representation of Both Parties An agent cannot represent both parties unless both parties are fully advised of the facts and agree to the dual representation.

2) Self-Dealing The agent may not secretly act for her own account.

3) Not Licensed If the law requires the agent to have a license, he cannot act as an agent without one (such as certain brokers, real estate agents, or insurance agents).

In practice, this means that the unlicensed agent cannot recover commissions for their work. [N.Y. Real Prop. Law §442-d]

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CREATION OF THE AGENCY RELATIONSHIP - Continued Elements of the Creation an Agency Relationship2. Formalities:

a. Consent As the relationship is a contract, consent must be manifested by both the

principal and the agent to create an agency relationship.

b. No Consideration Required Unlike a standard contract, however, consideration is not necessary for the creation of an agency relationship.

c. Writing – No Written Contract Required1. General Rule-No Writing Required Another exception to this contractual relationship is that normally, the existence of the agency DOES NOT have to be evidenced by a writing.

Note: This is true even where the Statute of Frauds requires the agreement that the agent is entering on behalf of the principal to be in writing.

2. Conveyance of Real Estate An exception to this exception, however is where a party relying on a written contract of sale of an interest in realty greater than one year must show that the agent's authority to sign was in writing or that the principal has ratified the signing. [See N.Y.S. General Obligations Law §5-703, §5-1111] 36


3. Modes of Creation of the Agency Relationship a. By Act of the Parties (By Appointment, Conduct or Ratification)

1. Actual Authority 2. Apparent Authority 3. Inherent Authority

- Incidental Authority - Customary Authority

4. Ratification

b. By Operation of Law 1. Estoppel (Courts) 2. Statute

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3. Modes of Creation of the Agency Relationship Continued a. By Act of the Parties There are four ways in which the parties may create an agency relationship. They are as follows:

1. Actual Authority The principal may, by direct communication to the agent, orally or in writing, actually appoint and authorize the agent to act on the principal's behalf.

2. Apparent Authority The principal may, by communication to the third party, orally or in writing, indirectly authorize the agent to act on the principal’s behalf.

3. Inherent Authority The principal, by actually authorizing the agent to act, may be liable for acts performed by the agent, even if such acts are in violation of the principal's orders.

4. Ratification An agency relationship may be created by the principal's later, subsequent affirmation (ratification) of the actions of one who purported to be acting on behalf of the principal. Basically, a ratification affirms a previously unauthorized act. 38


3. Modes of Creation of the Agency Relationship Continued b. By Operation of Law Under certain circumstances, the law may impose an agency relationship. They are as follows:

1. Estoppel In certain instances, the law may impose an agency relationship under the doctrine known as estoppel. Under these circumstances the principal is legally estopped from denying the existence of the agency under a theory of equitable relief.

Note: There is little difference recognized in law between estoppel and apparent authority as they both depend on a third person's reliance on a communication from the principal. The former is merely an equitable remedy to prevent unjust enrichment, while the latter gives rise to a contract with its accompanying rights and obligations.

2. Statute In other instances an agency may be created by statute. Such statutes are usually, however, designed to accomplish or address a limited purpose.

Example: Certain statutes will designate the Secretary of State as an agent for the limited purpose of receiving service of process. [See N.Y.S. Vehicle and Traffic Law §2531] 39

CREATION OF THE AGENCY RELATIONSHIP Continued

AGENCY BYAPPOINTMENT

AGENCY BYCONDUCT

AGENCY BYRATIFICATION

AGENCY BYOPERATION OF LAW

Express authorization — appointed to act for or on behalf of another

Actual Authority (Such as Power of Attorney)

Conduct of principal as to agent and third person consistent with the existence of an agency relationship

Apparent Authority

With knowledge of an agent’s act, the principal accepts or retains the benefit of the act, or brings an action to enforce legal rights based on the act, or defends the action, or fails to repudiate the act.

Statutes or Courts create or find an agency when none would otherwise exist.

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TYPES OF AGENCY AUTHORITY

Express Authority: Principal tells agent to perform a certain act

Buy new office furniture and sell specified used furniture

Incidental Authority: An act reasonably necessary to perform the act expressly

authorized by the principal

Customary Authority: An act that, according to the custom of similar

businesses in the community, usuallyaccompanies the act performed under

express authority.

Apparent Authority: Principal leads third party to believe that the agent has

authority to serve as an agent.

Buy furniture on credit when funds are

not made available to pay for items.

Issue receipts for used furniture sold

Principal was present when third partypurchased furniture from agent and did not stop the unauthorized transaction.

ExpressAuthority

Actual Authority

IncidentalAuthority

CustomaryAuthority

ApparentAuthority

No Authority

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TYPES OF AGENCY AUTHORITY Elements of Agency Authority

1. Actual Authority – The Three Part Test: In determining whether a prospective agent has actual authority, it must be

determined:

a. Whether the requisite formalities, if any, have been complied with; b. What type of actual authority (express or implied) is present; and c. Whether the authority has been terminated.

A. Types of Actual Authority Actual or real authority is that authority the agent reasonably thinks they possess. It does not depend upon knowledge of, or reliance by, the third party. There are two basic types of real authority:

1. Express Authority That authority contained within the "four comers" of the agency agreement. It is the authority contained in the communication, whether written or oral, from the principal to the agent. Generally, the grant is, but need not be, in writing.

2. Implied Authority (Includes Incidental and Customary) Implied actual authority is authority that the agent (not the third party) reasonably believes they have as a result of the actions of the principal.

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A. Types of Actual Authority Continued

1. Express Authority Continued This is the authority contained within the "four comers" of the agency agreement. It is the authority contained in the communication, whether written or oral, from the principal to the agent. Generally, the grant is, but need not be, in writing.

a. Construction of Authority In general, the grant of authority given to an agent will be interpreted in a fashion similar to interpretation of offers under contract law (i.e., reasonable person standard). (1) Extravagant Language: Grants of authority often contain "extravagant" language that give extremely broad

powers to the agent, e.g., "to conduct any business on principal's behalf." Courts generally

tend to limit application of such broad grants to what appears to actually be intended by the

parties. (2) Specific vs. General Language Specific language in the grant of authority will prevail over general language. (3) Reasonable Belief of Agent The agent is free to act upon the grant of authority as they reasonably believe the

principal intended. In construing the intent of the principal, the agent may look to the principal's

words and acts when he conveyed authority.

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1. Express Authority Continued This is the authority contained within the "four comers" of the agency agreement. It is the authority contained in the communication, whether written or oral, from the principal to the agent. Generally, the grant is, but need not be, in writing. b. Express Authority Granted Mistakenly Express authority may exist even though the principal did not intend to convey

such authority but did so by mistake. Mistakes may involve:

(i) Mistake as to Person: A mistake as to the person to whom the authority is given; or

(ii) Mistake as to Subject Matter: A mistake as to the subject matter of the agency. Notes: Art wishes Bob to enter into a transaction on his behalf, but mistakenly tells Catherine to do it. Catherine has actual express authority to act on Art's behalf. Art wishes Catherine to buy a piece of real estate (Whitestone Manor) on his behalf. Mistakenly, he tells Catherine to purchase Blackstone Manor instead. Mary has actual express authority to purchase Blackstone Manor.

c. Express Authority Granted Because of Misrepresentation

The fact that an agent induces the principal to grant authority by misrepresentation will not affect the extent of the authority actually granted.

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2. Implied AuthorityImplied actual authority is authority that the agent (not the third

party) reasonably believes they have as a result of the actions of the principal. Implied authority may arise in the following ways:

a. Implied from Express Authority

b. Implied from Custom and Usage

c. Implied by Acquiescence

d. Implied Because of Emergency or Necessity

e. Implied Because of Litigation

f. Specific Situations (1) Authority to Delegate (2) Authority to Purchase (3) Authority to Sell (4) Authority to Manage Investments

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2. Implied Authority ContinuedImplied actual authority is authority that the agent (not the third party) reasonably

believes they have as a result of the actions of the principal. Implied authority may arise in the following ways:

a. Implied (incidental) from Express Authority Express authority granted to an agent to accomplish a particular result

necessarily implies authority to use all means reasonably necessary for its accomplishment.

Note: Alex hires Bill to manage her apartment building. The express grant of authority states quite simply that Bill is "to manage”. Nothing more is conveyed in the grant. To

manage the building, Bill must employ a janitor, purchase fuel for heating, arrange for the

painting and repair of screens as needed, and occasionally redecorate an apartment. The

authority of Bill to do these things, while not expressly granted, is implied because these acts are

necessarily and incidental to the proper management of the building.

b. Implied (customary) from Custom and Usage Unless specifically directed otherwise, an agent has implied authority to act in accord with general custom or usage. However, the agent must have

knowledge of the custom or usage.

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2. Implied Authority Continuedc. Implied by Acquiescence

Authority by acquiescence is implied authority resulting from the principal's acceptance of, or failure to object to, a series of unauthorized acts (i.e., a

series of ratifications), that reasonably leads the agent to believe that they have the authority to do the same act in the future.

Note: Mary, the office manager for Peter's company, has regularly bought its office supplies without previous authorization. Peter has never objected. Mary has implied authority by acquiescence to continue these purchases.

d. Implied Because of Emergency or Necessity When the agent has no specific instructions on what to do in case of an

emergency, they have implied authority to take reasonable measures that are necessary

until they can contact her principal.

Note: In case of a railroad accident, the highest ranking trainman can bind the railroad to pay for emergency medical expenses.

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2. Implied Authority Continuede. Implied Because of Litigation

An agent's authority may be implied because of litigation.

Note: A stipulation of settlement made by counsel in open court will bind his client even where it exceeds his actual authority. A party may be relieved from the consequences of a stipulation entered into during litigation only where there is cause to invalidate the attorney-client contract (e.g., fraud, collusion, mistake, or accident).

f. Specific Situations (1) Authority to Delegate The principal will be held to have impliedly consented to a delegation of authority by

the agent in the following cases:

(a) Ministerial Acts

(b) Delegation Required by Circumstances

(c) Custom

(d) Impossibility

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2. Implied Authority Continued

f. Specific Situations (1) Authority to Delegate In general, an agent's authority will not be construed to permit them to delegate any of

their authority. The courts reason that an agency relationship is a consensual relationship,

and the principal has not consented to someone else performing the agent's functions.

However, the principal will be held to have impliedly consented to a delegation of authority by the agent in the following cases:

(a) Ministerial Acts An agent may employ a subagent to execute ministerial acts. (b) Delegation Required by Circumstances Often circumstances may indicate that the employment of a subagent would be necessary. If so, authority to delegate will be implied. (c) Custom An agent may delegate to a subagent when it is the custom of a particular

business. (d) Impossibility A principal will be held to have impliedly consented to subdelegation where those

acts being performed could not, by definition, be performed by the agent .

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2. Implied Authority Continuedf. Specific Situations

(2) Authority to Purchase Authority to purchase on behalf of the principal generates certain implied authority. (a) Authority to Pay An agent is deemed to have authority to pay for the goods he is authorized to purchase. He may do this either out of the principal's funds or on credit if such funds are unavailable. (b) Authority to Accept Delivery An agent with authority to purchase goods is also deemed to have authority to accept

delivery of the goods.

(3) Authority to Sell An agent with authority to sell the principal’s property will have certain implied

authority. (a) Authority to Warrant An agent with authority to sell personal property may give general warranties for quality and quantity; as to real property the agent may grant the customary covenants. (b) Authority to Collect i. Only If Agent Has Possession of Goods ii. Can Collect Only Cash (c) Authority to Deliver An agent having authority to sell the principal's property generally is deemed to have

authority to deliver possession of such property upon receipt of proper payment. (4) Authority to Manage Investments An agent having authority to manage investments will have their authority construed in accordance with a "prudent investor" standard. Also, when the agent is investing for

the principal, the agent should take title to investments in the principal's name. If title is

taken in the agent's name, their position as agent must be clearly designated.

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B. Termination of Actual Authority Once having determined that the requisite formalities exist and that

there is express or implied actual authority, you should ask whether the authority has been terminated.

Termination of actual authority may occur in the following ways:

1) By Lapse of Timea) Specified Timeb) Time Not Specified

2) By Happening of Event

3) By Breach of Agent's Fiduciary Duty 4) By Change of Circumstances

a) Destruction of the subject matter of the authority;b) A drastic change in business conditions;c) A change in relevant laws; andd) Insolvency of the agent or principal, if relevant.

5) By Unilateral Act of Principal or Agent 6) By Operation of Law

a) Deathb) Incapacity of Principalc) Dissolution of Corporation or Partnership 51


B. Termination of Actual Authority Once having determined that the requisite formalities exist and that there is express

or implied actual authority, you should ask whether the authority has been terminated. Termination of actual authority may occur in the following ways:

1) By Lapse of Timea) Specified Time

If the agency relationship is to last for a set period of time, the agent's authority will terminate upon expiration of this period. b) Time Not Specified If there is no set period of time specified in the agreement between the principal and

agent, the courts will imply termination within a reasonable time period.

2) By Happening of Event The agency agreement may specify that it is to last until a specified event happens. When

that event takes place, authority will be terminated.

Note: Zamira is hired to work on public relations for the space exploration program until an astronaut has successfully been landed on Mars. With the first landing of an astronaut

on Mars, the agency relationship terminates.

3) By Breach of Agent's Fiduciary Duty A breach of a fiduciary duty by the agent terminates the agent’s authority.

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B. Termination of Actual Authority ContinuedTermination of actual authority may occur in the following ways:

4) By Change of Circumstances A change of circumstances that should cause an agent to realize the principal would not want

the agent to exercise her authority terminates her authority. A change of circumstances sufficient

to bring about termination would include the following:

a) Destruction of the subject matter of the authority; b) A drastic change in business conditions; c) A change in relevant laws; and/or d) Insolvency of the agent or principal, if relevant.

5) By Unilateral Act of Principal or Agent Either the principal or the agent can unilaterally terminate the agency relationship.

Note: Communication of a declaration that the agency is at an end is sufficient. It is important to note that the power to unilaterally terminate the relationship exists even though the party who exercises that power may be in breach of the agency contract when they do so

(i.e., the parties have the power, but may have to face the legal and financial

consequences of such a termination). Accordingly, the breaching party could therefore be liable for

damages.

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6) By Operation of Law An agency relationship may be terminated by operation of law without regard to the parties

wishes.a) Death (1) In General The death of either the principal or the agent terminates the agency relationship at the time of death,

with or without knowledge of the surviving party.

(a) Power of Attorney A power of attorney (i.e., a written instrument authorizing an agent to perform specific acts),

not involving a principal in the military service, terminates upon the death of either party. (2) Exceptions

(a) Bank Transactions The Uniform Commercial Code ("U.C.C.") provides that a bank may pay or collect the

commercial paper of a customer until it receives notice of death and has a reasonable opportunity to act

on it. Even with knowledge of the customer's death, a bank may for 10 days after the date of

death pay or collect commercial paper drawn on or prior to the date of death. [See U.C.C. §4-405] (b) Military Employees

The death of a principal who is a member of the armed forces does not terminate a written power of attorney if the attorney-in-fact does not have actual knowledge or notice of the principal's

death and acts pursuant to the power in good faith. [N.Y.S. General Obligations Law §3-501]

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6) By Operation of Law Continuedb) Incapacity of Principal

(1) Adjudicated If the principal is formally adjudicated an incompetent, the prior authority possessed by his agent is immediately terminated and any transaction by the agent with third parties is void.

(a) U.C.C. Exception U.C.C. section 4-405 provides that a bank may continue to honor transactions for a

customer's account until it learns of the adjudication of incapacity and has a reasonable time to act.

(2) No Adjudication(a) Knowledge If an agent enters into a transaction with a third party and the third party has knowledge of the

principal's incapacity at the time of the transaction, the transaction is void. (b) No Knowledge If an agent enters into a transaction with a third party and the third party has no knowledge of

the principal's incapacity other than death at the time of the transaction, the agreement is valid.

(c) Statute - Power of Attorney N.Y.S. General. Obligations Law § 5-1505 authorizes a principal to provide in a written power

of attorney (called durable) that the power shall not be affected by the subsequent

incompetence or disability of the principal. If this authorization is given, all acts done by the attorney-in-fact

during the subsequent disability or incompetence of the principal would have the same effect as if

the principal were competent and not disabled. If a committee s appointed for the principal, then

the attorney is accountable to the committee rather than to the principal. The committee may

revoke, suspend, or terminate the power to the same extent as the principal were he was

competent.c) Dissolution of Corporation or Partnership Generally, the dissolution of a corporation or partnership terminates any agency

relationship.

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C. Irrevocable Agencies Continued There are two types of agencies that may not be unilaterally terminated by the

principal:

- Subject Matter: where the agent has an interest in the subject matter of the agency, - Security: Where the agent has a power given for security.

1. Definitions a) Agency Coupled with an Interest This is where an agent has an "interest" when she has been given immediately

exercisable rights in the property. Note: Dawn owes Edgar $20,000. Dawn gives Edgar a written power of attorney authorizing Edgar to sell

her her farm Black Rock, and to remit to Dawn any money received in excess of $20,000. Edgar

accepts this as a discharge of Dawn’s debt. Dawn cannot revoke Edgar's power to sell Black Rock.

b) Power Given as Security A power given as security is normally exercisable by the agent only upon a

subsequent default by the principal. These transactions normally involve a loan to the principal with

the principal posting collateral and giving the agent authority to sell in the event of a

default. Note: Powers given as security involve a principal-agent relationship where the agent is really acting

for their own benefit. Therefore, even though agency is involved, the agent has their own interest

in the subject matter of the agency power.

c) Agency Status Strictly speaking, the above are not agencies at all because the first is technically an assignment for purposes of securing a loan, and in the second the agent is not acting

under the control of the principal or for the principal, but as the principal where default

occurs. In addition, unlike other agency relationships, these do not terminate by operation of law .

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C. Irrevocable Agencies Continued There are two types of agencies that may not be unilaterally terminated by the

principal:

- Subject Matter: where the agent has an interest in the subject matter of the agency,

- Security: Where the agent has a power given for security.

2) Restatement View The Restatement (Third) of Agency ("Restatement") does not distinguish between these

two types of interests-it treats them both as powers given as security. Under the Restatement

view, the power is absolutely irrevocable other than in accord with the agreement. Pursuant to

this view, there are two other requirements that must be met.

a) Purpose of Grant The grant of authority must have been given to protect a debt, other duty, or title of the agent or third person.

b) Consideration The grant must be supported by consideration.

Note: Clark lends $2,000 to Bert in exchange for Bert's promissory note. Two weeks later, at Clark’s request, Bert secures his obligation to repay Clark the $2,000 by giving Clark a security interest in his car.

The security interest provides that Clark may sell the car upon Bert’s default on the promissory note.

Clark’s authority to sell the car upon Bert's default is revocable because at the time Bert gave Clark the

security interest there was no consideration.

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2. Apparent Authority

A. Apparent Authority (also known as Ostensible Authority) Defined

Generally speaking, a person is not responsible for the act of another who assumes to represent him, unless he has made the other his representative and conferred upon

her the powers that she purports to possess. The mere assertion by an agent of her

powers is not sufficient to bind the principal because an agent cannot "bootstrap" her own authority. A third party must ascertain at his peril the authority of the agent.

There is no presumption of agency.

a. Basic Theory Where the principal "holds out" another as possessing certain authority, thereby inducing others reasonably to believe that authority exists, the agent has apparent authority to act,

even though as between herself and the principal such authority has not been granted.

Note: Apparent authority differs from actual authority in that apparent authority arises out of reasonable beliefs of third parties, whereas actual authority arises out of reasonable

beliefs of agents.

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2. Apparent AuthorityA. Apparent Authority (also known as Ostensible Authority) Defined

a. Basic Theory Continued1. "Holding Out" by Principal a) Affirmative Action The "holding out" may be by word or conduct on the part of the principal.

Note: Pat tells Tom that Anne is Pat's agent and has the power to contract for Pat. In fact, Anne has no actual authority to contract for Pat. If Anne contracts with Tom on Pat's behalf, then Pat will be bound under the doctrine of apparent authority.

b) Inaction The "holding out" may also be by inaction on the part of the principal. Accordingly,

when it comes to agency, there must be some duty to act, (i.e., to disclose) or apparent authority will attach.

Note: Anne, in Pat's presence, tells Tom that she is Pat's agent when in fact she is not. Under these circumstances, Pat has a duty to correct A's representation; if he does not, Anne will have

apparent authority to act on Pat's behalf.

2. Reasonable Reliance by Third Party In addition to the requirement that some "holding out" must be traceable to the principal,

the third party must reasonably rely on the "holding out." Note: Payment to the attorney for a claimant after settlement or judgment discharges the debtor's

obligation. The attorney has at least apparent authority to collect. If the attorney absconds with the money, his

client may not thereafter compel the debtor to pay a second time.

3. Negligence on Part of Principal Where the principal's negligence was the proximate cause of the acts of an unauthorized person, the principal may be estopped from disclaiming liability to third parties.

Note: Alex, president and treasurer of Yelraf Motors Corp., leaves the corporation checks and the corporation signature stamp on his desk, in plain view, overnight. While cleaning up that night, without authorization , the janitor executes several of the corporation checks and cashes them early the next morning.

Alex, having negligently allowed this to occur, is liable on the checks cashed by the janitor . [See U.C.C. §3-406]

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2. Apparent Authority B. Types of Apparent Authority (a/k/a as Ostensible Authority):

1. Where Agent Has No Actual Authority of Any Type There are certain situations in which, at the time the agent acts, they have no actual authority

to do anything at all for the principal, yet nonetheless, the principal may be bound by the agent's

act. a. Impostors Where the principal negligently permits an impostor to be in a position where the impostor appears to have authority to act for the principal, the principal will be held liable for the impostor's act undertaken with such authority.

Note: Hampex Inn, a hotel corporation, employs one person as a night clerk. While the night clerk is away from the desk, a stranger goes behind the desk, poses as the clerk, accepts valuables for placement in

the hotel safe from a guest who is registering, and absconds with them. Hampex Inn would be held

liable to the guest for the stolen valuables.

b. Lingering Apparent Authority (1) General Rule--Notice May Be Necessary An agent's actual authority terminates when she knows or should have known of the termination. What about a third party who has had a pattern of dealing with the agent

while they had actual authority? If the principal knows of the dealings between their past

agent and the third party, such principal must give notice to the third party that the agent's actual authority has been terminated. If the principal fails to do so and if the third party did not

know nor reasonably should have known of the termination of the agent's actual authority,

then the agent will continue to have apparent authority.

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1. Where Agent Has No Actual Authority of Any Type Continued: There are certain situations in which, at the time the agent acts, they have no actual authority

to do anything at all for the principal, yet nonetheless, the principal may be bound by the agent's

act. b. Lingering Apparent Authority Continued

(2) Writing Manifesting Agent's Authority If the principal has given the agent a writing manifesting her authority that is meant to

be shown to third parties, the agent's apparent authority will not be terminated with

respect to third parties who see and rely on the writing after termination of her authority.

(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. This rule has been changed with respect to banks by

U.C.C. section 4-405, which provides that a bank can continue to honor transactions for a customer's account until it learns of his death or adjudication of incompetency and has

had a reasonable time to act. Even with knowledge, a bank can continue for 10 days after

death to pay or certify checks drawn on or prior to the date of death unless ordered to stop payment by a person claiming an interest in the account.

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2. Apparent Authority

B. Types of Apparent Authority (a/k/a as Ostensible Authority):

2. Where Agent Has Some Present Actual Authority There are situations in which the agent exceeds her authority to act on behalf of

the principal, yet the principal is still bound by the agent's acts. a. Prior Acts Where the principal has previously allowed the agent to act beyond her authority and the principal knows that a third party is aware of this fact, the principal will be bound by the

agent's unauthorized act.

Note: Adam, a janitor in Paul's employ, has no authority to employ other people for Paul. On two prior occasions, however A dam hired Ted, a painter, to do some painting in Paul's building. Paul subsequently paid Tom's invoices without protest. If Adam hires Tom to do another paint job, Paul

would be found liable to Tom for his services.

b. Position (1) In General

Where the principal places the agent in a position that carries with it certain customary responsibilities, the principal is liable for the agent's acts that come within these

customary responsibilities, even though the agent had no actual authority to perform the acts. Note: Dark Pines Golf Club, a country club, hires Jack to be the food service manager with the understanding that Jack will personally pay for all expenses of the dining room and will split the

profits with Dark Pines Golf Club. Jack orders $10,000 worth of food from Ted’s Fish Fry and House of Clams, but Jack does not pay upon delivery. If Jack does not pay Ted’s, Dark Pines Golf Club

would be held liable for the food so purchased.

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2. Where Agent Has Some Present Actual AuthorityThere are situations in which the agent exceeds her authority to act on behalf of

the principal, yet the principal is still bound by the agent's acts.

b. Position (2) General vs. Special Agent

In determining whether the agent's position customarily includes the act that they have performed, courts often rely on the distinction between a general and special agent. - General Agent: A general agent is one who is authorized to engage in

(i) a series of transactions (ii) involving a continuity of service.

- Special Agent: A special agent is authorized to engage in one or more transactions not involving a continuity of service.

A general agent's apparent authority is considerably broader than a special agent's.c. Secret Limiting Instructions

Where a principal secretly limits the actual authority of his agent to act, and the agent, when dealing with a third party, acts beyond the scope of the limitation, the principal will be

bound by the agreement made between the third party and agent.

Note: David owns an antique store. A shipment of antique clocks arrives from London. David tells Jenn, his sales associate, not to sell a special grandfather clock because the value has not been

determined. David goes to lunch, and misunderstanding her instructions, Jenn enters into a sales contract with Edward for the grandfather clock. David is bound on the sales contract even if the value of the

clock is greater than the sales price.

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3. Inherent Authority A. Inherent Authority Defined

1. Inherent Authority Inherent authority or inherent agency power, is an equitable doctrine, and results

in the principal being bound by the agent's acts in certain situations even when the agent has no actual or apparent authority.

a. Basic Rationale The principal will sometimes be held liable on inherent authority grounds due to balancing

interests. Courts normally tend to want to protect innocent third persons as opposed to a principal, who in

fact gave some actual authority to the agent. In effect, the principal that turned the agent loose on the world, should have some responsibility for their misdeeds.

b. Examples 1. Respondeat Superior The principal is held liable for the torts of an employee committed within the scope of

employment even though there is no actual or apparent authority. 2. Conduct Similar to that Authorized Where a general agent exceeds their actual authority but the act performed is similar to the

act authorized, the principal will be held liable. 3. Improper Disposition of Goods-Apparent Ownership One recurring problem is the improper disposition of goods by a person to whom they have been entrusted. a) General Rule-Mere Possession Insufficient Generally, the fact that the agent has possession of the principal's goods does not entitle the agent to sell them or transfer good title.

b) Indicia of Ownership Where the principal transfers possession of property to the agent and gives the agent some

document of title or other indicia of ownership, the agent has the power to transfer good title even though the transfer is unauthorized.

c) Dealer in the Goods Under the U.C.C., where a dealer in goods of the type sold improperly sells the principal's goods to a third party in the ordinary course of business, the third party takes good title. [See U.C.C. §2-403]

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4. Ratification A. Generally There are situations where an individual Prospective Agent will purport to act on behalf of a

Prospective Principal without any type of authority. In such a situation, may still be bound by such Prospective Agent’s act if such Prospective Principal subsequently ratifies such Prospective Agent's act.

1. Effect of Ratification a. "P" Bound

When "P" ratifies an unauthorized transaction by "A," "P" becomes bound on the contract.b. "A" Relieved of Liability for Breach of Warranty Generally, when a prospective agent acts without authority he breaches his implied warranty of authority.

Such prospective agent’s authority is relieved of this liability if the prospective principal ratifies.

c. Contract Given Retroactive Effect If ratified, a transaction will be treated as if it had been entered into with authority. However, there are

several situations in which the ratification is considered effective on the date of ratification and does not relate

back. 1) Incapacity

If "P" has capacity at the time of the ratification, but did not have capacity at the time that "A" entered into the unauthorized transaction, then there will be no retroactive effect. The contract will be

considered valid from the time of the ratification.

2) Intervening Rights Ratification will not have retroactive validity where its operates to the prejudice of third persons who

have, in the meantime, acquired rights that would be jeopardized if the transaction were valid

retroactively. Note:: Prospective agent Art, without authority, contracts to sell prospective principal Paul’s

automobile to Tom for $2,500. Paul without knowledge of Art’s purported transaction, contracts to sell the

car to Kevin for $2,000. Subsequently finding out about Art's transaction at the higher price, Paul

decides to affirm it. Kevin's intervening rights in the subject matter of the transaction will prevent this.

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2. What Constitutes Ratification

a. Prerequisites 1) The Prospective Principal Must Know Material Facts

There can be ratification only where the Prospective Principal has or reasonably should have knowledge of the material facts at the time of the alleged affirmance..

2) The Prospective Principal Must Accept Entire Transaction Ratification must be of the entire transaction. The Prospective Principal may not

merely ratify a portion of the transaction (unless, of course, the transaction[s] is severable).

3) The Prospective Principal Must Have Capacity The Prospective Principal must be competent and of legal age in order to ratify.

4) No Consideration Needed Ratification is a unilateral act of the Prospective Principal and requires no

consideration.

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2. What Constitutes Ratification Continued b. Methods of Ratifying 1) Express Affirmance

A transaction may be expressly affirmed by the Prospective Principal. 2) Implied Affirmance

Conduct on the part of the Prospective Principal that would be consistent with approval of the heretofore unauthorized act may be taken as a ratification.

a) Acceptance of Benefits If the Prospective Principal accepts the benefits of the transaction when it is still

possible to decline, he will be deemed to have ratified.

Note: A Prospective Principal Peter’s, part-time gardener, Prospective Agent Alan contracted with Fred, without authority," to have Peter's trees pruned. Peter is not deemed to have accepted the

benefits because there is no way Peter could reject or return them.

b) Silence If a Prospective Principal is silent where he would otherwise have a duty to disaffirm

the transaction, his silence will act as a ratification.

c) Lawsuit If a Prospective Principal brings a lawsuit involving the transaction, it will be

construed as a ratification.

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3. What May Be Ratified a. General Rule Anything a Prospective Principal could have legally done can be ratified. Accordingly, as

long as a Prospective Agent’s act could have legally been performed or authorized by a Prospective

Principal at the time a Prospective Agent acted, then the Prospective Principal may ratify.

Note: On June 1, Prospective Agent, without any authorization, contracts on Prospective Principal's behalf to establish an off-track betting parlor. On July1, the legislature legalizes off-track betting.

Prospective Principal may not ratify after July1 because Prospective Agent’ s original act was illegal.

b. Exceptions 1) Performance Illegal

If contract performance would be illegal at the time of the ratification, it may not be ratified. Note: Assume same off-track betting example as above, except that offtrack betting was legal on

June 1 and outlawed on July 1. Accordingly, the Prospective Principal may not ratify after July 1.

2) Withdrawal by Third Party If, prior to ratification, the third party indicates that she will not be bound by the

contract, the Prospective Principal may not ratify.

3) Material Change of Circumstances Where there has been a material change of circumstances so that it would not be

equitable to hold the third party to the contract, there can be no ratification. Note: Prospective Agent sells Prospective Principal’s house to Ken. Before ratification, the house is destroyed by fire. Prospective Principal may not ratify.

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4. Who May Ratifya. General Rule The general rule is that a Prospective Principal alone can ratify. A Prospective Principal

may not elect to treat the contract as her own.

Note: On June 1, Prospective Agent Art, without any authorization, contracts on Prospective Principal Paul's behalf to establish an off-track betting parlor. On July1, the legislature legalizes off-track betting.

Paul may not ratify after July 1 because Art’s original act was illegal.

b. No Ratification by Undisclosed Principal Because the act must be entered into by Prospective Agent Alex on behalf of Prospective Principal Pam, an undisclosed principal cannot ratify because the third party never relied

upon her existence. (Compare with ratification in tort situations, however. There it is not

necessary that the third party have knowledge of Pam as long as Alex intended to act on his behalf.)

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THE FUNDAMENTALS OF AGENCY General Review

A. Creating the Agency• Agencies can be created by express conduct;

• Agencies created by conduct create apparent authority;

• A person, who is not an agent, who attempts to do an unauthorized act, may create an agency where the principal later approves (ratification).

• In such cases there needs to be an Intention to Ratify.

• Conditions of Ratification include:• Where the Agent purported to act on behalf of the principal;• Where the Principal is capable of authorizing the act; and• Where the Principal has full knowledge of material facts.

• Effect of Ratification is the creation of an agency relationship.

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THE FUNDAMENTALS OF AGENCY General Review B. Scope of the Agent’s Authority

• The usual method of creating an agency is by express authorization;

• Apparent Authority: agency relationship is be found to exist when the principal causes or permits a third person to reasonably believe that an agency relationship exists;

• The third person cannot claim that apparent authority existed when that person knows that the agent’s conduct is adverse to the interests of the principal or that the agent is exceeding the limits of his authority;

• An unauthorized transaction by an agent for a principal may be ratified by the principal, giving it enforceability;

• An agent acting with authority has the power to bind the principal;

• The scope of an agent’s authority may be determined from the express words of the principal to the agent; this is called express authority; and

• An agent has incidental authority to perform any act reasonably necessary to execute the authority given the agent.

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THE FUNDAMENTALS OF AGENCY General Review B. Scope of the Agent’s Authority Continued

• An agent’s authority may be implied so as to enable the agent to perform any act in accordance with the general customs or usage's in a business or an industry;

• This authority is often referred to as customary authority;

• A third party has a duty to ascertain the agent’s authority;

• When an Agent acts adverse to their principal, third parties should ask the principal what are the limitations on Agent’s Authority;

• “Obvious” Limitations CAN be held against third parties.

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THE FUNDAMENTALS OF AGENCY General Review C. Termination of Agencies

• An agency relationship can be terminated by act of either the principal or the agent.

• The terminating party may be liable for damages to the other if the termination is in violation of the agency contract.

• An agency is automatically terminated upon:(1) the death of the principal or agent; (2) insanity of the principal or agent; (3) bankruptcy of the principal or agent; (4) impossibility of performance; or (5) war.

• When the law requires the giving of notice in order to end the power of the agent to bind the principal, individual notice must be given or mailed to all persons who had prior dealings with the agent.

• Notice to the general public can be given by publishing the announcement in a newspaper of general circulation in the affected geographic area.

• An Agency is revoked when agent receives notification, whereupon the Agent looses the right to bind the principal.

• Termination is effective without giving notice to third persons, but the Agent may still have apparent authority. 73

The Case of the U-Haul FallMichael Maurillo et al. v. Park Slope U-Haul et al.

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Thank you for Coming• Bonus Questions of the Day • For next time – Read Chapters 39 and 40

We are a hot bench.• Questions.

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class two: agency and employment - one agency and its relations to others 1

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