Summary
Summary UBE - Agency (Notes)
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Formation Duties Liability (Contracts) Liability (Torts)
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AGENCY1) Formation
An agency agreement consists of an agent acting for a principal. This generally requires: (1) Both
parties’ capacity to enter the agreement; (2) Both parties’ consent; (3) Agent acting on Principal’s
behalf; (4) Agent acting under Principal’s exclusive control. If the agreement is for the duration of at
least one year, it must be in writing under Statute of Frauds. However, agency agreements never
require consideration.
2) Duties
An agent owes fiduciary duties to the principal, as well as contractual duties. Fiduciary duties require
the agent to act with reasonable care as an ordinary prudent person would in like position for the
principal’s best interests, act with loyalty by avoiding engagements with competing ventures and
taking advantage of the agent’s position to gain personal benefits through the agency, and acting with
obedience by obeying the principal’s instructions carefully. If the agent breaches any of these duties,
the principal is entitled to contractual remedies like rescission of the agreement, damages, accounting
of any profits gained, withholding compensation for the agent.
A principal owes contractual duties to the agent such as fully cooperating with the agent and
compensating him for any expenses incurred in carrying out the principal’s instructions. If the
principal breaches such duties, the agent is entitled to contractual remedies like terminating the
agreement, claiming damages or asserting a lien over his compensation.
3) Liability (Contracts)
Generally, where an agent has entered a contract with a third party on the principal’s behalf, the
principal may be liable to the third party for the agent’s actions in two ways. Under contract theory,
a principal may be liable if the agent had authority to enter the contract, or his actions are ratified.
Firstly, the agent must have had actual authority. This means the principal must have expressly
authorised the agent to enter into said contract. Alternatively, the principal may have impliedly given
him authority where it is customary in nature to enter such contract, or the principal’s previous
dealings imply he had such power to enter the contract. In such case, the agent must have had
reasonable belief that he had power to do so based on the principal’s manifestations. If there is no
actual authority, the principal may be liable if the agent had apparent authority. Unlike actual
authority, the third party must have had reasonable belief that the agent had power to enter the
contract, based on the agent’s actions. For example, the agent may have pointed out he is working for
a principal, or he has business signs representing his relationship with the principal. Lastly, where
there is no authority at all, the principal may still be liable by ratifying the agent’s actions. Most states
require under the Second Restatement that the principal be unidentified, if disclosed. Few states under
the Third Restatement allow any principal to ratify his actions. Ratification means that the principal
fully accepted the entire transaction, knew or should have known of all the material facts of the
transaction, and had capacity to do so. Such acceptance does not have to be express, in that it can
implied by his application of those benefits, or remaining silent by failing to enforce any lawsuits to
prevent the transaction. Unlike tortious actions, the third party can only sue the principal or the agent.
If the agent had authority or his actions were ratified, the third party can sue the principal.
The third party can sue the agent depending on the state’s approach. Some states require the
principal’s existence to be disclosed. In this case, the third party can sue the agent only if there is
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