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Creation of an Agency Relationship

A. Definitions and Terminology:

1. Agency

a. Restatement (Third) of Agency §1.01

i. Agency is the fiduciary relationship that arises when one-person (a

"principal") manifests assent to another person (an "agent") that the agent

shall act on the principal's behalf and subject to the principal's control, and the

agent manifests assent or otherwise consents so to act.

b. Agency is a relationship that is created when one party, the principal, either expressly

or impliedly authorizes another party, the agent, to act on his or her behalf.

2. Coagents

3. Gratuitous agent: Agent is not paid by the principal for the work they do. The agent acts in

good faith. Restatement (Third) of Agency §1.04(3)

a. Only a gratuitous if its agreement states it. The default rule is that the principal must

compensate the agent. Restatement (Third) of Agency §8.13


4. Subagent

5. Coprincipals:

B. Requirements for acting as a principal or agent

1. Capacity:

a. Parties may only enter into an agency relationship if they possess the requisite

capacity. The level of capacity necessary is different for a principal than an agent.

b. The relevant time at which capacity is measured is not when the principal enters into

the agency agreement but when the agent acts. Restatement (Third) of Agency § 3.04.

c. Principal:
i. The party must be either an individual or a recognized legal entity, like a

partnership or a corporation, capable of holding rights and undertaking

obligations. Restatement (Third) of Agency § 1.04.

(a) Legal Capacity: Must be an individual or a valid legal entity. Must

have reached the age of majority and have the required mental


d. Agent:


2. Limitations on serving as an agent

C. How agency relationships are created

1. Formal requirements: Restatement (Third) of Agency § 1.03.

a. Creation of an agency relationship involves 2 steps: Manifestation by the principal &

consent by the agent.

i. Consent of both parties:

ii. “through spoken words or other conduct”

(a) Writing, if required by law: oral agreement is usually sufficient and

other conduct may be sufficient as well.

2. Methods of creation: Is it an affirmative act or operation of law?

a. Actual Authority:

b. Apparent Authority: An agent may be vested with apparent authority when the

principal says or does something to communicate to a third party that the agent is

authorized to act on his behalf. Restatement (Third) of Agency § 3.03.

c. Estoppel: A de facto agency relationship may be created based on the doctrine of


i. This doctrine prevents a principal from denying the existence or avoiding the

consequences of an agency relationship, because the principal (1)

“intentionally or carelessly” caused a third party to believe that a valid agency

relationship existed or (2) failed to correct a third party’s reasonable belief

that an agency relationship existed despite being aware that the party might

detrimentally rely on that belief. Restatement (Third) of Agency § 2.05.

d. Operation of law:

i. Many states have statutes that create limited agency relationships to serve

specific purposes.

D. General Fiduciary Principal

II. The Agent’s authority to act

A. Overview:

B. Types of agents:

1. Universal agent: An agent who is empowered to engage in any and all activities, of any

type, on behalf of the principal.

2. General agent: An agent is authorized to engage in a series of transactions or all transactions

of a particular type, sometimes for a continuous, ongoing period.

3. Special Agent: An agent authorized to engage in a single transaction or a time-limited series

of transactions

C. Types of Authority:

1. Actual Authority: Actual authority refers to the power that the principal specifically granted

to the agent to act or that the agent believes was authorized by the principal. Restatement

(Third) of Agency § 2.01. Actual authority may be express or implied.

a. Expressed Authority: Any power specifically granted by the principal to the agent,

whether orally or in writing. This is construed according to a reasonable person

standard. Restatement (Third) of Agency § 2.02. Power is expressly given either

orally or in writing.
b. Implied Authority: power granted by the principal to the agent through the

principal’s conduct, rather than through an express oral or written statement.

i. Implied authority may arise in a number of ways:

(a) An agent has implied authority to take any action “necessary or

incidental to achieving the principal's objectives.” Restatement

(Third) of Agency § 2.02.

(i) This means that the agent is authorized to take whatever action

is necessary to utilize the authority expressly granted or

achieve the objectives expressly authorized.

(b) An agent may have implied authority to act in accordance with

industry customs and practices.

(i) Unless the principal has reserved some types of authority, an

agent may act in accordance with such customs and practices.

(c) An agent has implied authority to continue to do any act that the

principal has previously acquiesced to the agent doing, despite the

agent not having actual authority to engage in the activity.

(i) This is really about a course of conduct between the parties.

(d) An agent has implied authority to act reasonably in the event of an


(i) This is sometimes referred to simply as an agency of necessity.

(ii) This authority is generally temporary and lasts only until the

agent is able to obtain guidance from the principal.

2. Apparent Authority: Power created in an agent as a result of the principal’s dealings with

third parties. When a principal, whether by words or by conduct, holds out an agent to a third

party as having authority to act on his or her behalf, the principal will be bound by the

agent’s acts and representations to that third party. Note, however, that apparent authority
will only be created when the principal’s conduct creates a reasonable belief in the mind of

the third party that the agent is authorized to act and the third party is induced to act in

reliance on the principal’s conduct. Restatement (Third) of Agency § 2.03.

3. Inherent Authority:

4. Ratification:

D. Termination of agency:

III. Liability:

A. Contractual Liability:

1. Agent’s breach of duty to the principal

a. When an agent breaches a duty of care or proper performance to its principal and the

principal suffers harm, the agent is liable to the principal for damages.

b. Liability of agent to third party (§ 7.01- Agent’s Liability to Third Party)

i. Agent acts with actual or apparent authority:

(a) The type of principal is vital to determine whether the agent is liable

when involving actions, the agent had actual or apparent authority. See

Restatement (Third) of Agency § 1.04. When an agent holds herself

out to a third party as possessing actual authority to act on behalf of a

principal, the agent impliedly warrants that she possesses the necessary

authority. This implied warranty of authority ensures the third party

that the agent is authorized or, if not, may be held liable for the

damage that results.

(b) Disclosed Principal: The agent discloses to a third party the existence

of the principal and the principal’s identity ("I act for Jane Doe").

(i) If the agent has actual or apparent authority, the agent will not

be liable for acts performed within the scope of such authority,

as long as the relationship of the agency and the identity of the

principal have been disclosed.

(ii) The disclosed principal is liable to a third party since the agent

is not part of the contract.

(iii)Agent may be liable if the parties intended to extend liability to

the agent.

(c) Unidentified/partially disclosed principal: the agent discloses to a

third party the existence of the principal but not the principal’s

identity. (I act for an interested party")

(i) So long as the agent acted with actual authority, the

unidentified principal will be a party to the contract and

consequently liable to the third party. Restatement (Third) of

Agency § 6.02.

(ii) Where the principal is not bound because the agent has no

actual or apparent authority, the agent is liable to the third party

for breach of the implied warranty of.

(d) Undisclosed principal: An agent dealing with a third party discloses

neither the existence nor the identity of the principal. In such

situations, the third party believes he or she is dealing with the agent

alone (*no words* or “I am acting for myself]”)

(i) In these situations, the agent and the third party are parties to

the contract. Restatement (Third) of Agency § 6.03.

(ii) Both the agent and the undisclosed principal are liable on the

contract. Restatement (Third) of Agency §§ 2.06, 6.02.

ii. Agent did not act with actual or apparent authority:

(a) A principal will not be liable for unauthorized actions by individuals

purporting to be agents.

(b) If an agent enters a contract with a third party without authorization

from the principal and the principal refuses to ratify the contract, the

third party may seek damages against the agent.

(c) It is important to note, that the agent may expressly disclaim the

warranty of authority. Moreover, a third party may not enforce a

warranty of authority against an agent if the third party was aware that

the agent had no power to enter the contract. Restatement (Third) of

Agency § 6.10.

c. Liability of third party to principal:

i. A disclosed principal may enforce a contract against a third party,

Restatement (Third) of Agency § 6.01

ii. An unidentified and undisclosed principal may also enforce a contract against

a third party. Restatement (Third) of Agency §§ 6.02-03.

(a) The major exception to this rule arises in cases where allowing the

unidentified or undisclosed principal to enforce the contract would

result in an injustice to the third party.

d. Liability of agent to principal

i. If the agent has acted without actual authority, but the principal is

nevertheless bound because the agent had apparent authority, the agent is

liable to indemnify the principal for any resulting loss or damage.

e. Liability of principal to agent

i. If the agent has acted within the scope of the actual authority given, the

principal must indemnify the agent for payments made during the course of
the relationship whether the expenditure was expressly authorized or merely

necessary in promoting the principal's business.

B. Tortious liability

1. Respondeat Superior

a. An employer is subject to liability for torts committed by employees while acting

within the scope of their employment. Restatement (Third) Of Agency § 2.04

i. Under the doctrine of respondeat superior, it is well settled that an employer

can and will be held liable for the tortious acts of his or her employees

committed within the scope of their employment.

ii. Liability may only be established by satisfaction of a two-part test.

(a) First, there must be an employer-employee relationship between the

tortfeasor and the party to be held liable;

(i) An individual hired by an employer to perform work may be an

employee or an independent contractor, and this distinction is

critical for purposes of respondeat superior.

(ii) This is a highly factual inquiry, and courts will often look at a

number of factors to guide their determination.

(a) Murrell v. Goertz, 597 P.2d 1223 (1979): “An

independent contractor is one who engaged to perform

a certain service for another according to his own

methods and manner, free from control and direction of

his employer in all matters concerned with the

performance of the service except as to the result


(i) This definition focuses on who controls the

manner of performance.
(b) Other factors that courts often consider when making

the determination: the agreement or understanding of

the parties; the type of business involved; the right to

control the details of the work, such as the hours

worked, materials used, or routes taken; whether the

employment is temporary or long-term; the manner in

which the work is compensated (Hourly? Flat rate?).

Bostic v. Connor, 524 N.E.2d 881 (1988).

(b) Second, the employee must have committed the tort while acting

within the scope of his or her employment.

(i) An employer will only be held vicariously liable for the torts

committed by employees acting within the scope of their

employment. Restatement (Third) of Agency § 2.04.

(ii) Courts take expansive view

(a) Courts have taken a fairly broad view of what falls

within an employee’s scope of employment, and even

wholly personal actions taken by employees deemed

“necessary to the comfort, convenience, health, and

welfare of the employee while at work” will be deemed

to fall within the scope. Bussard v. Minimed, Inc., 105

Cal.App. 4th 798 (2003).

(b) An employee concurrently engaged in work-related

activity and personal activity will be deemed to be

acting within the scope of employment. Id.

(c) An employee acting in direct contravention of the

employer’s rules may nevertheless be held to be acting

within the scope. Id.

(c) Determining if action falls within the scope of employment is really a

factual question. First, you must determine whether the action is a

frolic or mere detour.

(i) A frolic is a serious or major departure from the employee’s

duties. The deviation must be substantial. A frolic falls outside

the scope of employment. The employer will not be held

vicariously liable for acts of an employee on a frolic, and

vicarious liability will not resume until the employee returns to


(ii) By contrast, a detour is a comparatively small deviation from

the employee’s duties for personal activities. A detour is within

the scope of employment.

iii. It is important to note that intentional torts will almost always be deemed

outside the scope of employment. Maxine Gerard, Inc. v. William B. May &

Co., 51 Misc. 2d 711 (1966).

(a) Nevertheless, an employer may still be held vicariously liable for

intentional torts that the employer authorized, done for the employer’s

benefit, or that are incidental to the nature of the employer’s business.

See Chuy v. Philadelphia Eagles Football Club, 595 F.2d 1265 (3d Cir.


(b) Further, a principal may be held vicariously liable for the fraudulent

misrepresentations of an agent if the agent was authorized to speak on

the matter. See Chase Manhattan v. Perla, 65 A.D.2d 207 (1978).

2. Liability for acts of independent contractors

a. An employer may be held liable for torts of independent contractors related to

inherently dangerous activities, such as activities involving explosives, or non-

delegable duties.

b. An employer who holds out an independent contractor as an employee or

intentionally or carelessly creates the belief that the contractor is an employee may be

estopped from denying that the contractor is an employee in a tort action by a third

party. Restatement (Third) of Agency § 2.05.

3. Vicarious liability

a. If an employer is held liable for the acts of his or her employees, that generally means

that liability is joint and several. The individual who has been harmed may seek

satisfaction from either the tortfeasor or the employer, or both (but may only obtain

one satisfaction).

b. Vicarious liability is derivative in nature.

i. If the tortfeasor has a good defense, the employer will not be held liable


ii. However, that a defense that is personal to the employee will not preclude

recovery against the employer.

4. Direct Liability: Employer’s tortious conduct

a. An employer may be held directly liable for his or her own tortious conduct. In

addition, an employer may be held liable for negligently hiring or retaining an

employee or failure to train an employee. See F & T Co. v. Woods, 594 P.2d 745


b. Based on similar principles, an employer may be held liable for negligent selection of

an independent contractor.

IV. Partnerships
A. Overview:

1. There are many unincorporated business organizations, including sole proprietorships,

general and limited partnerships, and limited liability partnerships.

2. Sole proprietorship:

a. When one person owns and operates a business, that business is a sole proprietorship.

b. The sole proprietor owns all of the business assets and is personally responsible for

all of the liabilities.

i. Taxed as an individual: A sole proprietor doesn’t even have to file separate

tax returns for the business; instead, the owner just includes the business’s

income and expenses on his or her personal tax return.

c. The sole proprietor has complete control over all aspects of the business, but the

proprietor cannot limit his or her liability for business losses and debts.

i. May not limit personal liability

d. Cheap and easy to create compared to other unincorporated business organizations.

i. No formal requirements or legal filings are necessary.

(a) An individual can start a sole proprietorship simply by engaging in the

business. For example, a gardener who sells her crop at the local

farmer’s market owns a sole proprietorship.

(b) Sole proprietors may still be required to obtain the licenses or permits

required by law to carry on certain types of businesses. An attorney or

a real estate agent who wants to open up a solo practice will have to

obtain the licenses required by state law, but other filings need not be


3. Partnerships:
a. A partnership is a for-profit business jointly owned by two or more people. Each

partner contributes to the business (by investing money, time, specialized skills, or

even name recognition), and each partner shares in the profits and losses.

b. A partnership may have to register with the state, obtain any necessary licenses or

permits to engage in certain types of businesses, and make filings with the Internal

Revenue Service (IRS).

c. Nevertheless, a partnership is not obligated to file a separate tax return. Id. Rather, the

business’s profits and losses “pass through” to the partners, who include those

amounts when filing their personal tax returns.

d. A joint venture is really just a partnership formed by two or more people to engage in

a single undertaking or project. Joint ventures are generally treated exactly like other

partnerships under the law. UPA § 202 comment (1997).

e. General partnership (GP):

i. GP is a partnership in which all partners are entitled to engage in the

management of the company and share in the profits and liabilities.

ii. See Unif. P’ship Act § 202 (1997) (“RUPA”).

iii. Partnerships are governed by the laws of each state.

(a) All states have adopted some form of the Uniform Partnership Act

UPA (1997).

iv. The law assumes that all general partners share equally in management rights,

profits, and liabilities, absent some agreement otherwise. This is the default

type of partnership.

f. A limited partnership (LP)

i. LP is a partnership in which at least one partner acts as general partner and at

least one partner acts as a limited partner.

ii. LPs are governed by individual state statutes, but every state has adopted

some version of the Uniform Limited Partnership Act (1916) (ULPA) or the

Revised Uniform Limited Partnership Act (1976) (RULPA).

iii. Under the uniform acts, the general partner or partners are entitled to

participate in the management of the partnership and may be held personally

liable for the partnership’s debts and obligations.

iv. The limited partners, in contrast, may contribute capital and are entitled to

share in the profits but may be limited in their participation in management

and cannot be held personally liable for partnership debts.

g. Limited liability partnership (LLP) or a registered limited liability partnership


i. See generally, UPA § 1001 (1997).

ii. Only some states allow for the creation of a LLP or RLLP

(a) Some states only permit LLPs for certain types of professional


iii. These are partnerships made up only of limited partners.

iv. There are no general partners who control the business and are personally

liable for partnership debts.

v. This means that all of the partners are protected from personal liability for

partnership debts and obligations.

B. Partnership formation requirements:

1. A partnership is formed when two or more people agree to engage in a for-profit business as


a. Thus, a partnership agreement is a contract, and, as such, partners must possess

contractual capacity.

2. All parties must consent, either by words or conduct. See e.g., N.Y. P’ship Law §40(7).
a. A person cannot become a partner without the agreement of all other partners. Id.

3. Method:

a. For general partnerships, there is generally no legal requirement that the parties enter

into any type of formal agreement

i. However, even a general partnership agreement must be in writing if it falls

within the Statute of Frauds, such as a partnership agreement for a period

lasting longer than one year.

ii. When parties begin a partnership without a formal agreement, the question of

whether a partnership exists is often a question of fact.

(a) Owning property jointly is not enough, on its own, to evidence

formation of a partnership. UPA § 202(c)(1) (1997). Receiving a share

of the profits, however, is presumptive evidence that a partnership

exists, unless the profits were received as payment on a debt, wages,

rent, benefit, sale, or some other type of payment. Id.

b. For limited partnerships and limited liability partnerships, the partners generally must

file a certificate of limited partnership or some other official document with the

proper state authority, usually the secretary of state. See RULPA § 201 (1976).