Agent's fiduciary duties and contract liability

Care Without Perfection: The Standard the Agent Must Meet

An agent’s duty of care asks whether the agent performed the agency undertaking with the care, competence, and diligence that an agent in the same circumstances would ordinarily exercise. The question is not whether the result was poor; it is whether the agent’s conduct was unreasonable when judged at the time of performance.

Run the analysis in this order:

Identify the undertaking. What did the agent agree or undertake to do for the principal? The duty applies to the agent’s performance of assigned work, handling of the principal’s property or information, and exercise of delegated discretion.
Set the correct standard. Use the care, competence, and diligence ordinarily exercised by agents in similar circumstances. If the agent possesses or represents that the agent possesses special skill, the comparison is to an agent with that skill. A professional, broker, accountant, or experienced manager cannot defend careless performance by invoking the standard of an inexperienced layperson.
Compare conduct to the standard. A mistake is not automatically negligence. The agent may choose among reasonable methods when the principal has delegated discretion. But ignoring an obvious risk, failing to take ordinary safeguards, mishandling property, or failing to communicate when reasonable performance requires communication can breach the duty.
Connect breach to loss. The principal must show that the careless conduct caused a legally cognizable loss. A careless act with no resulting loss may still be a breach, but it ordinarily produces no damages claim. The agent may be required to reimburse losses proximately caused by the breach.

The care standard is different from strict liability. An agent does not guarantee success merely by accepting the assignment. It is also different from loyalty: an agent who makes an honest but careless mistake presents a care problem; an agent who secretly benefits from the transaction presents a loyalty problem even if the transaction is excellent.

For partners, the statutory threshold is higher than ordinary negligence. Under RUPA § 404(c), a partner must refrain from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. Under ULLCA § 409(c), the comparable duty of care uses the same heightened categories for the member or manager to whom the provision applies. Thus, a partner’s or LLC fiduciary’s ordinary care lapse is not necessarily a statutory duty-of-care violation; ask whether it rises to one of those specified categories. A corporate officer acting as an agent is governed by MBCA § 8.42(a), which requires the care that a person in a like position would reasonably exercise under similar circumstances.

This is closed-book-be able to state the ordinary-agent standard and the RUPA and ULLCA statutory thresholds without relying on supplied law.

The duty of loyalty requires the agent to act for the principal’s benefit in matters connected with the agency, not to exploit the position for personal advantage. The central question is whether the agent placed a personal or third-party interest in conflict with the principal’s interest without proper consent.

For an ordinary agent, apply these rules:

No secret material benefit. The agent may not acquire a material benefit from a third party in connection with transactions conducted or services performed for the principal. A commission, kickback, gift, discount, referral fee, or other economic advantage can qualify. The principal need not prove that the price was excessive or that the transaction caused a loss. The agent may have to account for and disgorge the benefit.
No adverse dealing with the principal. The agent may not deal with the principal on the agent’s own account as an adverse party in a transaction connected with the agency unless the principal gives informed consent. Buying the principal’s property, selling the agent’s property to the principal, or secretly representing the other side creates the problem.
No undisclosed conflict or dual representation. The agent may not act for another person whose interests materially conflict with the principal’s interests in the matter. If the agent represents both sides, each affected principal must give informed consent after adequate disclosure.
No misuse of property or confidential information. The agent may not use the principal’s property, confidential information, or agency position for the agent’s own benefit or for another’s benefit. The agent’s duty concerning confidential information can continue after the agency ends, even though the general duty not to compete ordinarily ends with the agency.
No competition during the agency. The agent may not compete with the principal concerning the subject of the agency while the agency continues. An agent may not take unfair advantage of a business opportunity learned through the agency, misuse the principal’s confidential information or agency position, or compete with the principal concerning the subject matter of the agency without consent.

The agent can avoid a loyalty violation through informed consent. Consent must follow disclosure of the material facts, including the agent’s interest or conflict and, where relevant, the agent’s role for another party. A vague instruction such as “you may do anything beneficial” does not necessarily authorize a concealed self-dealing transaction. Consent obtained only after the agent hides the critical fact is not informed consent. Ratification after full disclosure can also validate conduct that otherwise would breach loyalty.

The consequences differ from those for care. The principal may recover losses, rescind a transaction when rescission is available, and require the agent to surrender an improper profit. The agent cannot argue that the principal received a fair price if the agent secretly earned a material benefit. A fair result may defeat damages based on loss, but it does not ordinarily erase the duty violation or the disgorgement remedy.

For partnerships, RUPA § 404(b) lists the statutory duty of loyalty: the partner must account to the partnership for property, profit, or benefit derived from partnership business or use of partnership property; must refrain from dealing with the partnership as or on behalf of an adverse party; and must refrain from competing with the partnership before dissolution. ULLCA § 409(b) contains the parallel LLC categories. A partner’s or member’s personal gain from partnership or LLC business fits the specific accounting-for-benefit category.

Do not confuse competition with preparation to compete. An agent who quietly plans a future business, without using the principal’s confidential information or competing in the agency’s subject matter while still engaged, may not yet have breached loyalty. Soliciting the principal’s customers or diverting a transaction before the agency ends is different: it is present competition or misuse of the agency position.

Disclosure Changes the Contract: Who Is Bound and Why

Contract liability begins by classifying what the third party knew when the contract was made:

A disclosed principal exists when the third party knows both that the agent is acting for a principal and the principal’s identity.
A partially disclosed principal, also called an unidentified principal, exists when the third party knows the agent is acting for a principal but does not know that principal’s identity.
An undisclosed principal exists when the third party does not know that the agent is acting for anyone else.

The disclosure classification answers who is treated as a party; it does not by itself establish that the principal is bound. For principal liability, the agent still must have authority or the principal must ratify or otherwise be bound under the applicable authority rule. Apparent authority generally cannot bind an undisclosed principal because the third party cannot reasonably rely on a manifestation from a principal whose agency relationship is unknown.

Disclosure status	What the third party knows	Principal’s contract position	Agent’s contract position
Disclosed	Agency and principal’s identity	Bound if agent had authority or principal later ratified	Ordinarily not a party and not contractually liable
Partially disclosed	Agency but not principal’s identity	Bound if agent had authority or principal later ratified	Ordinarily also a party and liable
Undisclosed	Neither the agency nor principal’s identity	Bound if agent acted with actual authority or principal later ratified	Ordinarily also a party and liable

For a disclosed principal, the authorized contract is ordinarily between the principal and the third party. The agent is not personally liable merely for signing or negotiating as agent. The result changes if the agent expressly agrees to be liable, guarantees performance, or breaches the agent’s warranty of authority by claiming authority that does not exist. An agent who lacks authority may be liable to the third party for the loss caused by the implied warranty of authority, unless the third party knew the agent lacked authority.

For a partially disclosed principal, both the principal and agent are ordinarily liable on an authorized contract. The third party knows an agency exists but cannot evaluate the unknown principal’s credit, reliability, or identity. That missing identity is the fact that makes the agent a party. The principal may enforce the contract as well, subject to the same authority requirement and to defenses available under the contract.

For an undisclosed principal, both the principal and agent are ordinarily parties when the agent acted with actual authority. The agent’s actual authority can bind a principal even though the third party did not know the principal existed. The agent remains liable because the third party believed it was contracting with the agent.

There are limits. The parties can agree that only the agent will be liable. Also, an undisclosed principal may not enforce the contract, or may not be able to substitute itself without consequence, when the third party intended to contract only with the agent or when the principal’s participation would materially change the third party’s performance or rights. These are contract-specific exceptions.

Use this sequence because authority and disclosure answer different questions:

Loading diagram…

A purchasing agent for Harbor, Ava was authorized to buy one specialized machine from Supplier.

Harbor’s identity and Ava’s agency were disclosed to Supplier before the contract was signed.

Ava secretly accepted a $5,000 payment from Supplier for directing the purchase to Supplier.

The machine was fairly priced, Harbor received exactly the machine it authorized Ava to buy, and Harbor never consented to Ava’s payment.

The purchase contract contained no provision making Ava personally liable.

Practice

Which two statements are most accurate?

	(A) Harbor is not bound because Ava’s secret payment made Ava’s conduct unauthorized.	(B) Ava is not personally liable on the purchase contract merely because Harbor was disclosed and the purchase was authorized.	(C) Ava breached her duty of loyalty by accepting a material benefit from Supplier without Harbor’s informed consent.	(D) Supplier may recover the $5,000 from Ava only if Harbor proves that the machine was overpriced.	(E) Ava’s secret payment changed Harbor’s status from disclosed to partially disclosed.	(F) Harbor automatically owes nothing on the contract because Ava breached her fiduciary duty.
Your answers

Three Fast Decisions: Care, Loyalty, and Disclosure

Practice

Mira was an agent for a gallery and was responsible for storing a valuable sculpture overnight. She left it outside an unlocked loading area despite an available locked storage room, and the sculpture was stolen. Which result is most accurate?

Leo purchased supplies for PrincipalCo and told the supplier he was acting for a client but did not identify PrincipalCo. PrincipalCo had authorized the purchase, and the supplier later demanded payment from both Leo and PrincipalCo. Who is most accurate?

Priya was a sales agent for a manufacturer and received a private commission from a distributor for steering the manufacturer’s order to that distributor. The manufacturer knew the order was fairly priced but did not know about Priya’s commission. Which result is most accurate?

High-Yield Points - ⚡ Biggest Takeaways

Apply ordinary reasonable-agent care unless a partnership or LLC statute supplies its heightened threshold. Treat every undisclosed material benefit connected with the agency as a loyalty danger, even after a fair transaction. Classify disclosure first: disclosed usually protects the agent, while partially disclosed and undisclosed principals ordinarily leave both principal and agent liable.

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Practice Questions: Agent's fiduciary duties and contract liability

1. A bakery owner hired a buyer to order routine ingredients and told the buyer privately, "Do not place any order exceeding $5,000 without my approval." Over the next six months, the buyer placed three orders between $6,000 and $8,000 with the same supplier. The owner learned of each order shortly after placement, accepted the deliveries, and paid each invoice without objecting or informing the supplier of the buyer's limit. The buyer then placed a $7,500 flour order with that supplier. Before delivery, the owner discovered the order and refused to perform, asserting that the buyer had exceeded the private limit. The supplier had reasonably believed that the buyer could place the order and had not relied solely on the buyer's own representations. Which of the following best states whether the bakery is bound?

A. The company is not bound because the buyer lacked actual authority under the owner's private instruction.
B. The company is not bound because only the buyer's statements supported the supplier's belief in authority.
C. The company is bound because its payment of similar prior orders reasonably indicated that the buyer had authority.
D. The company is bound only if it later expressly approves the order after learning every material term.

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Answer: C. The company is bound because its payment of similar prior orders reasonably indicated that the buyer had authority.

The company is bound because its payment of similar prior orders reasonably indicated that the buyer had authority. - The owner accepted and paid three earlier orders of $6,000 to $8,000 from the same supplier without disclosing the buyer’s private limit. - That course of conduct reasonably indicated to the supplier that the buyer had apparent authority to place the $7,500 flour order, binding the bakery when it was placed. The company is not bound because the buyer lacked actual authority under the owner's private instruction. - The private $5,000 limit restricted the buyer’s actual authority, but the supplier had no notice of it. - Lack of actual authority does not defeat the apparent authority created by the owner’s handling of the earlier orders. The company is not bound because only the buyer's statements supported the supplier's belief in authority. - The supplier’s belief rested on the owner’s acceptance and payment of three similar orders, not solely on the buyer’s statements. - A principal’s conduct can support apparent authority when it reasonably leads the third party to believe the agent may act. The company is bound only if it later expressly approves the order after learning every material term. - Later ratification is unnecessary because the owner’s prior conduct gave the buyer apparent authority for this order. - The bakery became bound when the buyer placed the $7,500 order, so the owner’s refusal before delivery does not prevent liability.

2. A corporation operates six bakeries. Its board adopted a bylaw requiring advance board approval for any equipment purchase exceeding $50,000, and the corporation's standard master supply agreements informed suppliers of this requirement. The president, without board approval, signed a purchase order for a $70,000 commercial oven from a supplier with which the corporation had no prior master agreement and no history of prior dealings. The supplier had no knowledge of the approval requirement and began manufacturing a custom oven. When the oven was delivered, the board learned that the president had not obtained approval, but the board inspected the oven, installed it in one of its bakeries, and used it for six weeks without objecting to the supplier or attempting to return it. The corporation then argued that it was not bound because the president lacked authority to place the order. Which of the following is the supplier's strongest argument that the corporation is bound?

A. The supplier can enforce the order because the president had apparent authority arising from the corporation's manifestations and the supplier's reasonable reliance.
B. The supplier cannot enforce the order because the president lacked actual authority under the board's bylaw.
C. The supplier can enforce the order because the board, with knowledge of the president's lack of approval, ratified the purchase by accepting delivery of the oven and using it for six weeks without objection.
D. The supplier cannot enforce the order because a corporate officer's position cannot support apparent authority for ordinary transactions.

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Answer: C. The supplier can enforce the order because the board, with knowledge of the president's lack of approval, ratified the purchase by accepting delivery of the oven and using it for six weeks without objection.

The supplier can enforce the order because the board, with knowledge of the president's lack of approval, ratified the purchase by accepting delivery of the oven and using it for six weeks without objection. - The board learned that the $70,000 order lacked approval, then inspected and installed the oven and used it for six weeks. - Keeping and using the custom oven without objection after learning of the unauthorized purchase ratified the order, binding the corporation despite the president’s lack of approval. The supplier can enforce the order because the president had apparent authority arising from the corporation's manifestations and the supplier's reasonable reliance. - Apparent authority depends on the corporation’s manifestations to the supplier and the supplier’s reasonable reliance when the order was placed. - The supplier had no prior agreement or dealings with the corporation, so apparent authority is less certain than the board’s later ratification. The supplier cannot enforce the order because the president lacked actual authority under the board's bylaw. - The bylaw required advance board approval for purchases exceeding $50,000, which the president did not obtain for this $70,000 oven. - Lack of actual authority does not prevent the corporation from becoming bound when its board later ratifies the purchase. The supplier cannot enforce the order because a corporate officer's position cannot support apparent authority for ordinary transactions. - An officer’s position can contribute to apparent authority for transactions ordinarily entrusted to that officer; it is not categorically irrelevant. - Regardless of what the president’s position conveyed when he ordered the oven, the board’s informed acceptance and use provide the stronger basis for enforcement.

3. A hardware store corporation hired a purchasing manager and told her privately that she could order no more than $8,000 of tools per month. For two years, the corporation allowed the manager to place larger orders with a hardware supplier, paid every invoice, and listed her on its website as “Purchasing Manager.” When the corporation later decided that the manager should stop ordering from that supplier, it sent the supplier a signed letter stating that the manager no longer had authority to order on its behalf and removed her title from the website. Despite receiving this notice, the manager ordered $12,000 of tools in the corporation’s name. The supplier, having received the corporation’s letter, shipped the tools anyway, claiming it still believed she was authorized. The corporation refused delivery and denied that the manager could bind it. Which of the following is the corporation’s strongest argument that it is not bound?

A. The manager lacked actual authority to place the order, so the corporation cannot be bound under any theory of agency.
B. The corporation’s actual notice to the supplier of the limitation terminated the manager’s apparent authority, making the supplier’s continued reliance unreasonable.
C. The supplier’s decision to ship the tools despite the notice constituted an independent breach that excuses the corporation’s performance.
D. Because the manager exceeded her authority once, all of her subsequent apparent authority was automatically revoked as a matter of law.

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Answer: B. The corporation’s actual notice to the supplier of the limitation terminated the manager’s apparent authority, making the supplier’s continued reliance unreasonable.

The corporation’s actual notice to the supplier of the limitation terminated the manager’s apparent authority, making the supplier’s continued reliance unreasonable. - The corporation’s payments for larger orders and its website listing previously gave the supplier reason to believe the manager could order on its behalf. - Once the supplier received the corporation’s signed letter stating that she no longer had authority to order, that earlier course of dealing could not justify shipping the $12,000 order. The manager lacked actual authority to place the order, so the corporation cannot be bound under any theory of agency. - The private $8,000 monthly limit meant the manager lacked actual authority for this $12,000 order. - Lack of actual authority alone does not defeat apparent authority, which the corporation’s earlier conduct had created before it notified the supplier. The supplier’s decision to ship the tools despite the notice constituted an independent breach that excuses the corporation’s performance. - Shipping after receiving the letter does not itself establish a breach by the supplier that excuses the corporation. - The decisive issue is whether the supplier could reasonably rely on the manager’s authority after receiving notice, not whether shipment was prudent. Because the manager exceeded her authority once, all of her subsequent apparent authority was automatically revoked as a matter of law. - The corporation had paid larger orders for two years, so exceeding the private limit did not automatically end the authority the supplier reasonably perceived. - The supplier’s belief became unreasonable because of the corporation’s direct notice, not because a prior order exceeded the manager’s authority.

4. A beverage company appointed an employee as its purchasing manager but privately limited the manager to purchases under $25,000. For two years, the company allowed the manager to negotiate ingredient purchases, use a company email address bearing the title “Purchasing Manager,” and sign contracts that the company performed. The company never disclosed the dollar limit to suppliers. The manager then signed a $40,000 ingredient contract with a supplier that had previously completed three smaller transactions through the manager. The supplier knew only the manager's title and the company's prior performance. When market prices fell, the company refused delivery and asserted that the manager lacked authority. The supplier seeks payment under the contract. Which of the following is the supplier's strongest argument that the company is bound?

A. The company is bound because its conduct caused the supplier reasonably to believe that the manager had authority to purchase inventory.
B. The company is bound because a managerial title conclusively gives an employee actual authority to enter any ordinary supply contract.
C. The company is not bound because the manager lacked actual authority, regardless of the company's communications to the supplier.
D. The company is not bound because an agent cannot create apparent authority unless the agent expressly describes the authority to the third party.

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Answer: A. The company is bound because its conduct caused the supplier reasonably to believe that the manager had authority to purchase inventory.

The company is bound because its conduct caused the supplier reasonably to believe that the manager had authority to purchase inventory. - Apparent authority arises from the company’s conduct: it gave the employee a purchasing-manager role and company email address, then performed contracts the manager signed. - The supplier had completed three earlier transactions through the manager and did not know of the private $25,000 limit, supporting a reasonable belief that the manager could make the $40,000 purchase. The company is bound because a managerial title conclusively gives an employee actual authority to enter any ordinary supply contract. - A title does not conclusively establish actual authority; the company privately limited this manager’s purchases to less than $25,000. - The title matters instead as part of the company’s manifestations supporting apparent authority, alongside its performance of earlier contracts. The company is not bound because the manager lacked actual authority, regardless of the company's communications to the supplier. - The $40,000 contract exceeded the manager’s actual authority under the private $25,000 limit. - That limit does not defeat apparent authority if the company’s conduct reasonably led the supplier to believe the manager could bind it. The company is not bound because an agent cannot create apparent authority unless the agent expressly describes the authority to the third party. - An agent’s own description of authority is neither required nor, by itself, sufficient to create apparent authority. - Here, the relevant manifestations came from the company: its placement of the manager in the purchasing role and its performance of contracts the manager signed.

5. Before any corporation was formed, a promoter signed a two-year office lease that stated, "Tenant: BrightPath, Inc., a corporation to be formed, by Elena Ortiz, promoter," and further provided, "Landlord agrees that Elena Ortiz signs solely as promoter for the corporation and shall have no personal liability under this lease once the corporation is formed and adopts the lease." The landlord knew that BrightPath did not yet exist. After incorporation, BrightPath's board learned of the lease, moved the company into the office, and paid rent for six months. The corporation later stopped paying rent. The landlord sued both the corporation and the promoter for unpaid rent. Which of the following best states the parties' potential liability?

A. Only the promoter is potentially liable because a corporation cannot assume obligations arising before its formation.
B. Only the corporation is potentially liable because the lease expressly disclaimed the promoter's liability once the corporation adopted the lease.
C. Both the corporation and the promoter are potentially liable because adoption alone never releases a promoter absent a contrary agreement.
D. Neither is potentially liable because the landlord knowingly contracted with an entity that did not yet exist.

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Answer: B. Only the corporation is potentially liable because the lease expressly disclaimed the promoter's liability once the corporation adopted the lease.

Only the corporation is potentially liable because the lease expressly disclaimed the promoter's liability once the corporation adopted the lease. - BrightPath adopted the lease by moving into the office and paying rent for six months, making it potentially liable for unpaid rent. - The lease expressly ended Elena’s personal liability once BrightPath was formed and adopted it, and both conditions occurred. Only the promoter is potentially liable because a corporation cannot assume obligations arising before its formation. - A corporation can become liable on a preformation contract by adopting it after incorporation, as BrightPath did through occupancy and rent payments. - Elena’s liability ended under the lease’s express provision when BrightPath formed and adopted the lease. Both the corporation and the promoter are potentially liable because adoption alone never releases a promoter absent a contrary agreement. - Ordinarily, a corporation’s adoption does not by itself release a promoter from a preformation contract. - This lease supplies the contrary agreement: Elena has no personal liability once BrightPath is formed and adopts it. Neither is potentially liable because the landlord knowingly contracted with an entity that did not yet exist. - The landlord’s knowledge that BrightPath had not yet formed does not prevent the corporation from later adopting the lease. - BrightPath’s occupancy and rent payments support its liability, while the lease’s express terms govern Elena’s release.

6. A heating company employed a technician to perform residential furnace inspections. The company instructed technicians not to repair unrelated appliances during inspection visits. While inspecting a customer’s furnace, the technician noticed a broken ceiling fan. Hoping to earn a personal tip, the technician offered to repair the fan after clocking out. The customer agreed. The technician used his own tools, accepted payment personally, and damaged the ceiling while attempting the repair. The customer knew that the written furnace appointment covered only inspection services, but believed that the technician remained a company employee. The customer sued the company under respondeat superior for the ceiling damage. Which of the following is the company’s strongest argument against vicarious liability?

A. The company is liable because the technician had actual authority to attend the customer’s property.
B. The company is liable because technicians commonly perform repairs of the type the technician attempted.
C. The company is not liable because the customer, rather than the company, requested the additional repair.
D. The company is not liable because the technician substantially departed from assigned work for a purely personal purpose.

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Answer: D. The company is not liable because the technician substantially departed from assigned work for a purely personal purpose.

The company is not liable because the technician substantially departed from assigned work for a purely personal purpose. - Respondeat superior generally requires a tort committed within the scope of employment, but the technician damaged the ceiling while repairing an unrelated fan after clocking out. - He used his own tools and accepted payment personally, supporting the company’s argument that the repair was a personal undertaking, not company work. The company is liable because the technician had actual authority to attend the customer’s property. - Authority to enter for the scheduled furnace inspection did not extend the technician’s assigned work to an unrelated fan repair. - The customer knew the written appointment covered only inspection services, even though the technician remained a company employee. The company is liable because technicians commonly perform repairs of the type the technician attempted. - The facts do not establish that company technicians commonly repair ceiling fans; the company expressly instructed them not to repair unrelated appliances. - Even similarity to a technician’s usual skills would not make this after-hours, personally paid repair part of the assigned inspection. The company is not liable because the customer, rather than the company, requested the additional repair. - The technician offered to repair the fan, and the customer agreed; the customer did not initiate the request. - In any event, a customer’s request alone does not determine scope of employment; the separate task and personal purpose make the company’s stronger argument.

7. Two founders signed and filed articles of incorporation for Bright Labs Corporation, believing in good faith that the filing was complete and valid. Unknown to them, the filing was rejected by the secretary of state's office for a technical defect, though they were never notified. Believing the corporation existed, the founders operated the business as Bright Labs Corporation, signed a supply contract in the corporate name, and dealt with a supplier who believed it was contracting with a validly formed corporation. The supply contract went unpaid. The supplier now seeks to hold the founders personally liable, arguing that Bright Labs Corporation never legally came into existence. Which of the following best states the founders' liability under generally accepted corporate principles?

A. The founders are personally liable because a corporation that fails to file valid articles never exists for any purpose.
B. The founders are not personally liable because Bright Labs qualifies as a de facto corporation, shielding them from personal liability to the supplier.
C. The founders are personally liable because de facto corporation status requires actual notice to the third party of the incorporation defect.
D. The founders are not personally liable because the supplier's belief that a corporation existed automatically estops it from asserting personal liability.

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Answer: B. The founders are not personally liable because Bright Labs qualifies as a de facto corporation, shielding them from personal liability to the supplier.

The founders are not personally liable because Bright Labs qualifies as a de facto corporation, shielding them from personal liability to the supplier. - The founders made a good-faith attempt to incorporate by signing and submitting articles, unaware that the filing had been rejected for a technical defect. - They then exercised corporate powers by operating and contracting as Bright Labs Corporation, so the de facto corporation doctrine shields them from personal liability on the supply contract. The founders are personally liable because a corporation that fails to file valid articles never exists for any purpose. - Rejection of the filing means Bright Labs was not a de jure corporation, but it does not rule out de facto corporate status. - Treating every defective filing as creating personal liability would disregard the founders’ good-faith attempt and their operation in the corporate name. The founders are personally liable because de facto corporation status requires actual notice to the third party of the incorporation defect. - De facto corporation status turns on the attempt to incorporate and the subsequent use of corporate powers, not the supplier’s notice of the defect. - The supplier believed it was dealing with a valid corporation; its lack of notice does not make the founders personally liable under this doctrine. The founders are not personally liable because the supplier's belief that a corporation existed automatically estops it from asserting personal liability. - The supplier’s dealings with Bright Labs may raise corporation by estoppel, a separate doctrine from de facto corporation. - The supplier’s belief alone does not automatically establish estoppel; the founders’ stronger basis for avoiding liability is their good-faith incorporation attempt and subsequent corporate operation.

8. A real estate agent, acting without any actual or apparent authority, signed a contract on behalf of a landowner to sell a parcel of land to a buyer for $200,000. The landowner did not learn of the contract until after it was signed. Upon learning of the contract, the landowner accepted a $20,000 deposit check from the buyer and instructed her attorney to begin preparing closing documents. Two weeks later, the landowner changed her mind, returned the deposit, and refused to close. The buyer sues to enforce the contract. Which of the following best states whether the landowner is bound?

A. The landowner is bound because her acceptance of the deposit and instructions to prepare closing documents ratified the unauthorized contract.
B. The landowner is bound because the agent's statement to the buyer independently established actual authority for the sale.
C. The landowner is not bound because the agent had no actual or apparent authority at the time the contract was signed.
D. The landowner is not bound because ratification requires a signed writing identical to the original contract.

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Answer: A. The landowner is bound because her acceptance of the deposit and instructions to prepare closing documents ratified the unauthorized contract.

The landowner is bound because her acceptance of the deposit and instructions to prepare closing documents ratified the unauthorized contract. - After learning of the $200,000 contract, the landowner accepted the buyer’s $20,000 deposit and directed her attorney to prepare closing documents, conduct that ratified the agent’s act. - Ratification binds the landowner despite the agent’s initial lack of authority; returning the deposit two weeks later does not undo it. The landowner is bound because the agent's statement to the buyer independently established actual authority for the sale. - Actual authority must come from the landowner’s authorization, not from the agent’s statement to the buyer. - The landowner is bound by her later ratification, not by anything the agent said when signing the contract. The landowner is not bound because the agent had no actual or apparent authority at the time the contract was signed. - The agent had neither actual nor apparent authority when signing, so the contract did not bind the landowner at that time. - Her subsequent acceptance of the deposit and instructions to prepare closing documents ratified the contract. The landowner is not bound because ratification requires a signed writing identical to the original contract. - Ratification can be shown by affirming conduct, including knowingly accepting a transaction’s benefits. - The landowner’s acceptance of the $20,000 deposit and instructions to prepare closing documents support ratification without an identical signed writing.

9. Three architects formed a general partnership without a written partnership agreement. One contributed 60% of the initial capital, and the other two each contributed 20%. The partners agreed to share profits equally but did not discuss voting rights. Six months later, the partner who contributed 60% proposed admitting an outside investor as a fourth partner. That partner voted in favor of admission, but the other two partners opposed it. No partner has withdrawn, and the partnership remains solvent. Under generally accepted default rules governing general partnerships, which of the following best states how management votes and admission of the investor should be handled?

A. Each partner has an equal vote, and admission of the investor requires unanimous partner consent.
B. Voting power follows capital contributions, and admission of the investor requires approval by partners holding a majority interest.
C. Each partner has an equal vote, and admission of the investor requires only a majority of the partners.
D. Voting power follows profit shares, and admission of the investor requires approval by partners holding two-thirds of those shares.

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Answer: A. Each partner has an equal vote, and admission of the investor requires unanimous partner consent.

Each partner has an equal vote, and admission of the investor requires unanimous partner consent. - Without a contrary agreement, each general partner has equal management rights, despite the 60%–20%–20% capital contributions. - Admitting a new partner requires unanimous consent, so the two opposing partners prevent the investor’s admission. Voting power follows capital contributions, and admission of the investor requires approval by partners holding a majority interest. - The 60% contributor does not receive 60% of management votes; each partner has an equal vote. - A majority capital interest cannot admit the investor because admission requires every partner’s consent. Each partner has an equal vote, and admission of the investor requires only a majority of the partners. - Equal voting rights are correct because the partners made no voting agreement. - Admission is not an ordinary matter decided by majority vote; the two partners’ objections defeat the required unanimous consent. Voting power follows profit shares, and admission of the investor requires approval by partners holding two-thirds of those shares. - Although profits are shared equally, management rights arise from partner status, not the agreed profit shares. - The opposing partners together hold two-thirds of the profit shares, but no two-thirds threshold governs admission; all three must consent.

Flashcards: Agent's fiduciary duties and contract liability

1. List three specific actions that would breach an agent's duty of loyalty to a principal.

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Breaches of loyalty include: acquiring a secret material benefit from a third party, dealing with the principal as an adverse party without informed consent, acting for another person whose interests materially conflict with the principal's, misusing the principal's property or confidential information, or competing with the principal during the agency.

2. State the ordinary standard of care an agent owes to a principal.

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An agent must perform the agency undertaking with the care, competence, and diligence that an agent in the same circumstances would ordinarily exercise. If the agent possesses special skill, the comparison is to an agent with that skill.

3. What are the three biggest takeaways regarding vicarious liability from this lesson?

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1. Vicarious liability under respondeat superior generally requires an employee’s tort committed within the scope of employment; employee status/control and scope are separate inquiries. 2. A joint venture requires shared control and an agreement to share profits; an express agreement to share losses is not necessarily required. 3. An independent contractor generally is not covered by respondeat superior, subject to recognized exceptions; the principal may still be liable for its own direct negligence.

4. What is the general rule regarding a principal's vicarious liability for an independent contractor's torts, and what are the recognized exceptions?

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A principal is generally not vicariously liable for an independent contractor's torts because the principal lacks control over the manner of work. Exceptions to this no-vicarious-liability rule include when the work involves an inherently or abnormally dangerous activity, or when the principal owed a nondelegable duty imposed by law. Direct liability for negligent hiring or supervision is not a vicarious liability exception.

5. When is an agent personally liable on a contract made for a principal?

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An agent is generally not liable on a disclosed principal’s authorized contract, but may be liable if the principal is undisclosed or partially disclosed, the agent lacked authority, or the agent agreed to be liable. A principal is bound when the agent acted with actual or apparent authority or the principal ratified the agreement.

6. When does an agent have apparent authority to bind the principal?

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Apparent authority exists when the principal’s manifestations to a third party reasonably cause the third party to believe the agent is authorized, and the third party reasonably relies on that belief. The agent’s own statements alone generally cannot create apparent authority.

7. When is a principal vicariously liable for an employee’s tort?

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Under respondeat superior, a principal is vicariously liable for an employee’s tort committed within the scope of employment. The employee’s conduct must generally be of the kind the employee was hired to perform, occur substantially within authorized time and space limits, and be motivated at least partly by a purpose to serve the employer.

8. What is the effect of an agent’s unauthorized act when the principal later ratifies it?

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Ratification occurs when the principal, with knowledge of material facts, affirms or accepts the benefits of an unauthorized act, thereby treating it as authorized from the outset. The principal must ratify the entire transaction and have capacity and authority to do so.