Creating agency and the agent's authority

An agency relationship is created when a principal manifests assent that another person will act on the principal’s behalf and subject to the principal’s control, and the other person consents to do so. The manifestation may be express or inferred from conduct; no particular words, label, payment, or consideration is required. An agent may therefore be unpaid, and calling the person an “independent contractor” does not by itself prevent an agency relationship.

The relationship has two separate questions. Agency asks whether the principal and actor have the required consensual relationship. Authority asks whether the actor has power to affect the principal’s legal relations in this particular transaction. An agency relationship may exist even though the agent lacks authority for a particular act. Conversely, a principal’s manifestations may create apparent authority even when actual authority is absent.

Run creation in this order:

Principal’s manifestation: Did the principal indicate that the actor should act for the principal and subject to the principal’s control? A private manifestation is enough; the third party need not know that the agency exists.
Actor’s consent: Did the actor agree, expressly or by conduct, to act on the principal’s behalf? The actor need not intend to create a legal agency relationship or understand the legal label.
Scope of the relationship: What task or role did the manifestation and consent cover? This determines whether a later act falls within the relationship, but it does not itself establish authority for every possible transaction.

A principal’s right to control is the relevant feature; continuous supervision is unnecessary. Thus, an agency relationship can coexist with a nonemployee relationship, a boundary developed more fully in the sibling chapter on respondeat superior and employee status. This is a closed-book topic-state these creation requirements and the authority distinctions from memory.

For business entities, identify the entity as principal and then locate its manifestation. Under MBCA § 8.01(b), corporate powers are exercised by or under the authority of the board, subject to the Act and the corporation’s governing documents. A board resolution, bylaws, appointment, officer title, or repeated corporate conduct may supply the relevant manifestation. But an officer’s position does not automatically establish actual authority for every transaction; it may instead support a third party’s apparent-authority argument.

ULLCA (2013) § 301(a) supplies an especially important limit: a member is not an agent of the LLC solely because the person is a member. The 2013 Act has no statutory ordinary-course or apparent-authority rule for members or managers. Their authority comes from ordinary agency principles, the operating arrangements, and any filed statement of authority. Do not import the former 1996 LLC rule into ULLCA (2013).

The Authority Fork: Put the Manifestation in the Right Place

Actual authority is authority the agent reasonably believes the principal has granted. The principal’s manifestation must reach the agent; the third party’s knowledge or belief is irrelevant. The question is what the agent reasonably understood from the principal’s words, conduct, role assignment, prior dealings, and surrounding circumstances when the agent acted.

Actual authority has two forms:

Express actual authority comes from direct instructions, a resolution, an appointment, or other words specifying what the agent may do.
Implied actual authority covers acts reasonably necessary, proper, or customary to accomplish the expressly authorized task. It may arise from the agent’s position, ordinary business practice, prior acquiescence, or the principal’s authorization of a larger assignment.

Implied authority is not unlimited. An agent authorized to purchase ordinary inventory may have authority to select suppliers and arrange routine delivery, but not necessarily to borrow money, sell the business, or transfer its real estate. The agent’s reasonable belief must be based on the principal’s manifestations, not on the agent’s unsupported assertion. If the agent knows the principal has prohibited the act, the agent cannot rely on a contrary personal assumption to establish actual authority.

A principal can limit actual authority privately. If the principal instructs an agent not to make purchases over $10,000, the agent lacks actual authority for a $20,000 purchase even if the supplier has never heard of the limit. The limit may not defeat apparent authority, however.

Apparent authority asks a different question: Did the third party reasonably believe that the actor had authority, and is that belief traceable to a manifestation by the principal? The transaction must also fall within the scope of the authority the principal appeared to confer. The manifestation may be direct, public, or communicated through conduct-such as giving the actor a managerial title, placing the actor in a position commonly associated with authority, or repeatedly permitting similar transactions.

The near-miss is the location of the belief:

Actual authority depends on the agent’s reasonable belief, created by the principal’s manifestation to the agent.
Apparent authority depends on the third party’s reasonable belief, created by the principal’s manifestation to the third party or public.

The agent’s own statement-“I have authority”-is not, by itself, a principal manifestation. If the principal has held the person out as a manager, the agent’s statement may be consistent with the principal’s manifestation, but the statement alone cannot create apparent authority. Likewise, a third party’s subjective confidence is insufficient if the principal did nothing to support it or if the third party knew the actor lacked authority.

The consequence of apparent authority is that the principal may be bound even though the agent had no actual authority. Lack of actual authority does not end the analysis. Ask whether the principal’s title, conduct, prior dealings, or other manifestation reasonably supported the third party’s belief. A third party who received notice that the authority was limited cannot ordinarily claim a reasonable contrary belief.

Partnership law contains a targeted statutory rule. Under RUPA § 301(1), a partner’s act that apparently carries on the partnership’s ordinary course binds the partnership unless the partner had no authority and the person dealing with the partner knew or had received a notification that the partner lacked authority. The two-part exception matters: lack of authority alone does not prevent the ordinary-course act from binding the partnership; the outsider must also know or have received notification of the lack of authority.

An act outside the partnership’s ordinary course is different. Under RUPA § 301(2), such an act binds the partnership only if authorized by the other partners. The fact separating the rules is not simply whether the particular partner often performed the act. It is whether the act apparently carries on the ordinary course of the partnership’s business. A partner’s routine personal practice cannot make an extraordinary partnership transaction ordinary.

Question	Actual authority	Apparent authority	RUPA § 301(1) ordinary-course act	ULLCA (2013) member or manager
Whose belief or source matters?	Agent’s reasonable belief from principal’s manifestation to agent	Third party’s reasonable belief from principal’s manifestation	Outsider deals with partner in an apparently ordinary-course act	Agency manifestations, governing arrangements, or filed statement
What defeats the power?	No manifestation, unreasonable belief, or private limit known to agent	No principal manifestation, unreasonable belief, or third party’s knowledge of the limit	Partner lacked authority and outsider knew or received notification	Membership alone does not establish agency
Immediate consequence	Principal is bound even if outsider knew nothing	Principal is bound despite lack of actual authority	Partnership is bound unless the statutory exception applies	Apply ordinary agency law rather than a statutory ordinary-course rule

The sequence below prevents the common error of stopping after finding no actual authority:

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The End of Power: Revocation Does Not Erase the Appearance

Separate three events: termination of actual authority, termination of the agency relationship, and termination of apparent authority.

Actual authority ends when the principal revokes it, the agent renounces it, the agreed time or event occurs, or circumstances change so that the authority no longer reasonably exists. Revocation may be express or implied by conduct inconsistent with the authority. As between principal and agent, revocation is effective when communicated to the agent or otherwise made known to the agent. The agent’s previous authority does not continue merely because a third party has not yet learned of the revocation.

The agency relationship itself ends when either party manifests an intention to end it, when the agreed period or task ends, or when an event such as death or incapacity makes the relationship terminate under ordinary agency principles. A change in circumstances can also end authority-for example, destruction of the subject matter of the assignment or completion of the authorized transaction. Ending authority for one type of act does not necessarily end the entire agency relationship.

The near-miss is that ending actual authority does not automatically eliminate apparent authority. A principal that privately revokes an agent’s authority may remain bound to an outsider who reasonably relies on the principal’s earlier manifestation. Apparent authority continues only while the outsider’s belief remains reasonable. Notice of the revocation, notice that the agency ended, removal of the holding-out conduct, or other facts making the belief unreasonable can terminate that appearance.

Death or incapacity generally ends actual authority and the agency relationship, but a third party who lacks notice may still raise apparent authority if the principal’s earlier manifestations make the belief reasonable. The same distinction applies when an agency ends by expiration or renunciation. The third party’s knowledge is therefore often the decisive fact.

A narrow exception protects a power coupled with an interest. If the agent holds a proprietary interest in the subject matter of the power and the power was granted as security, the principal ordinarily cannot revoke it merely by changing instructions, dying, or becoming incapacitated. A mere expectation of a commission, fee, or future compensation is not that kind of interest.

For a fact pattern, ask:

What was the principal’s manifestation, and what did the actor consent to do?
At the time of the act, did the agent reasonably believe actual authority existed?
If not, did the principal’s manifestation support the outsider’s reasonable belief in apparent authority?
Did a special statute change the result-for example, RUPA § 301(1), RUPA § 301(2), or ULLCA (2013) § 301(a)?
If authority or agency ended, did the outsider receive notice or otherwise lose a reasonable basis for apparent authority?

A Two-Choice Authority File: Find Both Routes Without Confusing Them

Brightline appoints Dana as its purchasing manager, and Dana accepts the position. Brightline tells Dana that she may buy routine inventory up to $20,000 per order, but on Tuesday Brightline tells Dana that her purchasing authority is revoked immediately; Brightline does not notify outsiders. Brightline has publicly identified Dana as purchasing manager and has permitted her to place similar orders with Vendor for two years. On Wednesday Dana orders $15,000 of routine inventory from Vendor, which has not learned of the revocation. Dana also asks Bank for a $50,000 loan for Brightline and tells Bank only that she can bind Brightline; Brightline has made no communication to Bank about Dana’s authority.

Practice

Which two statements are most accurate?

	(A) Brightline and Dana formed an agency relationship when Brightline appointed Dana and Dana accepted the position.	(B) Dana had actual authority to place the Vendor order because Brightline’s earlier $20,000 instruction was never communicated to Vendor.	(C) Brightline may be bound to Vendor by apparent authority even though Dana lacked actual authority on Wednesday.	(D) Vendor cannot bind Brightline because an agent’s lack of actual authority always defeats apparent authority.	(E) Bank may bind Brightline because Dana’s own statement that she could bind Brightline is a principal manifestation.	(F) Brightline’s revocation necessarily ended every possible agency-based power, including apparent authority.
Your answers

Three Short Runs: Separate the Four Authority Questions

Practice

Olivia asks Marco to sell her bakery’s used oven on her behalf, and Marco agrees. He will receive no fee, and Olivia does not require a written agreement. Does an agency relationship exist?

Harbor publicly identifies Lee as its sales manager and has allowed Lee to negotiate routine customer contracts for years. Harbor privately instructs Lee not to sign contracts over $10,000, but gives Customer no notice of that limit. Lee signs a $15,000 routine contract with Customer, who reasonably relies on Lee’s position. Is Harbor potentially bound?

On Monday, Harbor tells Lee that Lee’s agency has ended immediately, but Harbor does not notify Customer and leaves Lee’s sales-manager title on its website. On Tuesday Customer, unaware of the termination, enters a routine contract reasonably relying on Lee’s apparent position. Which statement is most accurate?

High-Yield Points - ⚡ Biggest Takeaways

Creation requires the principal’s manifestation and the actor’s consent; authority is a separate inquiry. Actual authority rests on the agent’s reasonable belief; apparent authority rests on the outsider’s reasonable belief. Revocation ends actual authority immediately as communicated, but apparent authority may persist until reasonable notice.

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Practice Questions: Creating agency and the agent's authority

1. 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.

2. 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.

3. 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.

4. 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.

Show answer

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.

5. 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.

6. 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.

7. 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.

Show answer

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.

Flashcards: Creating agency and the agent's authority

1. What is an agency relationship, and what elements are required to create one?

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Agency is a fiduciary relationship in which an agent acts on behalf of and subject to the principal’s control, and the agent manifests assent or otherwise consents. No particular words or formalities are required unless a statute demands them.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.