CONDITIONS TO USE

THE MATERIAL SET FORTH BELOW (THE “OUTLINE”) IS

BEING PROVIDED FOR USE BY THE STUDENT SOLELY TO
PARTIALLY ASSIST THE STUDENT IN PREPARING FOR THE
CLASS LECTURES OF MICHAEL J. LOMBARDO (THE
“INSTRUCTOR”) CONCERNING THE COURSE MATERIAL
FOR MGT 401 TO BE PRESENTED IN CLASS BY THE
INSTRUCTOR. REVIEW OF THE MATERIAL INCLUDED IN
THE OUTLINE IS NOT A SUBSTITUTE FOR CLASS
ATTENDANCE OR FOR TAKING NOTES DURING THE
CLASS LECTURES. THE INSTRUCTOR RESERVES THE
RIGHT TO EXPAND, SUPPLEMENT, ADD TO, OMIT FROM,
CORRECT, UPDATE, OR OTHERWISE MODIFY THE
MATERIAL INCLUDED IN THE OUTLINE, AT ANY TIME
AND FROM TIME TO TIME, IN ANY CLASS, WITHOUT
POSTING ANY CHANGES TO THE OUTLINE. IN ADDITION
TO THE MATERIAL INCLUDED IN THE OUTLINE, EACH
STUDENT IS RESPONSIBLE FOR ALL OF THE MATERIAL
INCLUDED IN THE CHAPTERS REQUIRED TO BE READ AS
SET FORTH IN THE COURSE OUTLINE PREPARED BY THE
INSTRUCTOR, AND FOR ALL MATERIAL PRESENTED
DURING THE CLASS LECTURES. RELIANCE SOLELY ON
THE MATERIAL INCLUDED IN THE OUTLINE IN
PREPARING FOR ANY TEST TO BE GIVEN BY THE
INSTRUCTOR IS PROHIBITED. THE INSTRUCTOR
RESERVES THE RIGHT TO DISCONTINUE POSTING ANY
MATERIAL ON THE WEB AT ANY TIME.

1
 AGENCY
(Chapters 19 and 20 (pages 438-440))

1. What is it ? Where one (an agent) is authorized to represent another (the principal) in
business matters with third persons. It is a contractual relationship.

a. Comparison With Contracts

i. Consideration - None needed. An agent can act without

compensation

N.B. There is an implied right to compensation

ii. Capacity - Only the principal must have contractual

capacity (Exception - An agent cannot be an adjudicated
incompetent).

 An agent lacks capacity if the agent tries to represent more than one
principal in the same transaction without disclosure.

iii. Statute of Frauds - An agency relation need not be in writing.

Exceptions

 Equal Dignities Rule

 Power of Attorney-must be in writing

2. Classes Of Agency - Method of creation

a. Actual Authority
b. Apparent Authority
c. Ratification

 ___________________________________________________

a. Actual Authority

i. Types

A. Expressed - Agent can do

what the principal specifically authorizes even if the
agent obtains the authority through mistake, fraud or
misrepresentation.

B. Implied - Grant of authority

by general language - Agent has the authority necessary to
carry out the mandate.
2
(1) Sources to determine what implied authority exists

aa. Custom in the industry or trade

bb.
Prior dealings between the agent and
principal

cc.
Agent can do what is reasonable
under the circumstances.

 Emergencies - Agent can do anything

necessary to solve the problem.

(2) Sub Agents

aa.
Delegation of Authority. Agent can
delegate authority if:

1. Principal authorizes agent.

2. If not
authorized, the agent delegates tasks
requiring no skill or judgment

3. There is implied authority to delegate

4. Emergencies.

bb.
Principal Bound. A Subagent can
bind a principal if the subagent is properly
appointed.

cc.
Personal Liability of Subagent.
Subagent is personally liable for the
subagent=s actions if improperly appointed
(it=s a breach of warranty of authority)

dd.
Agent Liability. An agent is liable for
the actions of the subagent if:

3
 1. The agent had
no authority to appoint the subagent.

2. Agent was
negligent in appointing the subagent.

ii. Termination of Actual Authority

A. By Agreement - The
agreement establishing the agency relation can
specify a time or event which terminates the relation.

N.B. A unilateral act of either the principal or agent may

terminate the agreement (but there may be liability for
breach).

 Employment At Will Doctrine-

 Employee may be terminated at any time without

reason

 Exceptions

 Implied Contract (e.g. handbook)

 Whistle Blowers (i.e. those who report or refuse

to participate in illegal conduct) are protected by
some federal and state statutes (e.g. Sarbanes-
Oxley which protects those who disclose
financial fraud of publicly traded companies).

B. After a reasonable period of

time under the circumstances-If the act is not accomplished
within a reasonable period of time, or if
circumstances have significantly changed (e.g. the subject
matter is destroyed), the authority automatically terminates.

C. By operation of law
(1) Death or incapacity of principal
aa. Exceptions

1. If grant of
authority specifically states it is
irrevocable upon incapacity (does not
4
 apply to death)

2. Agency
coupled with an interest (i.e. agent
has an interest in the subject matter
other than to receive a commission or
other compensation)
(2) Death of Agent

b. Apparent Authority

i. Application - Situations where the third party

reasonably believes that the agent has authority.

ii. Requirements

A. Manifestation by Principal -
Principal must do something or refrain from doing
something

B. Reliance - Third party must

reasonably rely on the manifestation.

C. Lingering Apparent Authority

- When actual authority has terminated, the principal must
give notice to 3rd parties with whom the agent has dealt and
who are known to the principal that the authority has been
terminated.

 Notice is not required where the 3rd party knew or could

have reasonably known of the termination

 Notice is not required upon the death or incapacity of

the principal (authority is automatically terminated)
c. Ratification

i. Application - Situations where agent

originally had no authority, however, the principal
ratifies the actions of the agent with the same affect as if the
agent originally had authority

ii. Elements

A. Principal must have knowledge of all material facts

B. Principal must manifest intent to ratify

5
  Manifestation - Principal accepts the benefits of the
agreement or takes action to enforce the agreement

C. Status quo must remain between the time

the agent negotiates the transaction until the time of
ratification.

 Status Quo - Subject matter of the contract must

remain the same and there must not be any
intervening rights
D. Principal must have capacity

 Principal must have capacity at the time the agent

enters into the agreement with the 3rd party. If not,
and if the agreement is later ratified, it is an invalid
ratification.

3. Rights and Duties

a. Agent to Principal

i. Care - An agent must use the skill and

prudence a reasonable person would use in his own affairs

 Extent of Care - depends on the type of agent (paid

professional - highest standard; gratuitous agent - ordinary
care)

ii. Loyalty - Duty to avoid a conflict of interest.

iii. Obey Reasonable Instructions

b. Principal to Agent

i. Compensate - An agent has an implied

right to compensation for the reasonable value of the services
if compensation has not been addressed by the principal and
agent.

ii. Indemnification B Reimbursement

iii. Non-Interference - Principal has a duty

not to interfere with the agent=s performance.

c. Remedies for Breach of Duty

i. Lawsuit - Breach of contract

6
 ii. Equitable Remedy - Applies only to breach of the duty
of loyalty - Court will require the agent to hold the improperly
obtained profits in a constructive trust.

iii. Self Help

A. Principal - Can offset compensation

owed against damages sustained

B. Agent - Can retain property belonging to

principal as a setoff against compensation due.

d. Liabilities

i. Classification of Principal

A. Disclosed Principal - Third party knows

that the agent is acting as an agent for a principal, and
who the principal is.

B. Undisclosed Principal - Third party does

not know that the agent is acting as an agent and not in
his/her own right.

C. Partially Disclosed Principal - Third party

knows that the agent is acting as an agent for a
principal, but does not know who the principal is.

ii. Specific Liabilities

A. Third Party Sues for Contract Breach

(1) Liability of Agent

aa. If the
agent claims to have authority but in fact
has none (actual, apparent or ratified),
then agent is personally liable.

bb. Agent is
personally liable to third party if the
agent is acting for an undisclosed
principal or partially disclosed principal.

(2) Liability of Principal

aa. Disclosed
Principal - Liable to third party.

7
 bb.
Undisclosed or Partially
Disclosed Principal - Liable to the third
party once the principal is disclosed.

B. Suit against Third Party for Contract Breach

Rule - Principal alone can hold a third party liable

except where there is an undisclosed principal and the
agent=s performance is important to the third party.

C. Liability for Torts - Respondeat Superior

(1) Rule - Principal is liable

for the torts of his/her servants (i.e. agents,
employees) while acting within the scope of
employment.

aa.
Agent Liability. An agent is
always liable for his own torts

bb. Principal
Liability. Principal is not liable for the
torts of an independent contractor

1. Agent v. independent contractor

a.
Rule - If the
principal has the right
(even if not exercised) to
control a person=s
activities, then that person
is an agent.

b. Examples of Control –

c. Torts of Subagents -
Principal is liable for the
torts of those hired by the
agent, if the agent had the
authority to hire.

cc. Scope of Employment

1.
8
 Nature of Job - Principal
is liable if the agent is doing
something the principal knows or
should know the agent is doing,
even if not part of the job
description.

2.
Frolic and Detour -
Usually applies to drivers of
vehicles - One who causes an
injury to another after
substantially deviating from the
designated route, or while on
personal business, will not impute
liability on the part of the
principal. Also, if injury is
sustained by an unauthorized
passenger, liability will not be
imputed to the principal.

 N.B. V&T Law -

 Intentional torts - Liability is

imputed to the principal if the
agent thought he was
benefiting the principal, even
if no benefit was received.