978-1285860381 Chapter 28 Solution Manual Part 2

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Other Duties of an Agent

Duty to Obey Instructions

An agent must obey her principal’s instructions unless the principal directs her to behave illegally or

unethically.

Duty of Care

An agent has a duty to act with reasonable care. In other words, an agent must act as a reasonable person

would under the circumstances. Under some circumstances, an agent is held to a higher – or lower –

standard than usual. An agent with special skills is held to a higher standard because she is expected to

use those skills.

Duty to Provide Information

An agent has a duty to provide the principal with all information in her possession that she has reason to

believe the principal wants to know. And, she has a duty to provide accurate information.

Principal’s Remedies when the Agent Breaches a

Duty

A principal has three potential remedies when an agent breaches her duty:

The principal can recover from the agent any damages the breach has caused.

If an agent breaches the duty of loyalty, he must turn over to the principal any profits he has

earned as a result of his wrongdoing.

If the agent has violated her duty of loyalty, the principal may rescind the transaction.

Duties of Principals to Agents

In a typical agency relationship, the agent agrees to perform tasks for the principal, and the principal

agrees to pay the agent. The respective duties of agents and principals can be summarized as follows:

Duties of Agents to Principals Duty of Principals to Agents

Duty of loyalty Duty to compensate as provided by the agreement

Duty to obey instructions Duty to reimburse for reasonable expenses

Duty of care Duty to cooperate

Duty to provide information

Terminating an Agency Relationship

Termination by Agent or Principal

Either party has the power to terminate an agency relationship; they may not, however, have the right.

The relationship may be terminated at the completion of a term agreement, whenever desired in an agency

at will, or wrongfully terminated at another time.

Question: Oliver and Campbell signed a contract agreeing that Campbell would represent Oliver in

his divorce. Near the end of the trial, Oliver decided he would handle the case himself and fired

Campbell. Does Oliver have the right to fire Campbell? Campbell wanted to finish the case because

a “big win” would enhance his reputation.

Answer: Oliver had the right to fire Campbell, but Oliver had to pay the balance owing on the

Change in Circumstances—Loss or Destruction of Subject Matter

Additional Case: You Be The Judge: Gagnon v. Coombs2

Facts: Eighty-five year old Francis Gagnon and his wife lived on a farm in Shelburne, Massachusetts.

They also owned land in Hillsborough, New Hampshire. They had two children: Joan Coombs, who lived

20 miles from Shelburne, and Frank Gagnon who lived in a trailer on a far corner of the farm. Joan

suggested that her parents sign powers of attorney appointing her as their agent so that she could take care

of them and their property.

Frank found out about the power of attorney when he checked his mother into a nursing home. Frank

then moved his trailer in to the main house and convinced his father to revoke the power. Francis did so,

but never told Joan explicitly. Two months later, Mrs. Gagnon died and Mr. Gagnon signed a purchase

and sale agreement for the Shelburne farm. He gave the property in Hillsborough to Frank.

When Mr. Gagnon told Joan about the sale of the land and his intention to move to Hillsborough to

live with Frank, she crafted her own plan. Not realizing that her power of attorney had been revoked, she

used it to transfer the Shelburne property to a trust that she had created and that she controlled. Francis’s

lawyer wrote to Joan demanding that she return the Shelburne property to him. She refused.

The trial court found that Joan had the authority under the power of attorney to convey the Shelburne

property to the trust. Francis appealed.

You Be The Judge: Did Joan have the right to convey the Shelburne farm to a trust that she had

established? Does the property belong to the trust or to Francis?

Holding: Judgment for Joan reversed. The court ruled that Joan had violated her fiduciary duties to

Francis by acting in her interest, not his. Also, he had “lost” the property when he signed a P&S on it and,

therefore, her power of attorney did not permit her to transfer it. .

Question: What is a power of attorney?

Answer: It is a document authorizing someone to be an agent.

Question: When does it expire?

Answer: It expires when the principal revokes it, when the principal dies or if the principal becomes

Question: Francis never told Joan that he revoked her power of attorney. If Joan did not know, how

could her authority be revoked?

Answer: Francis told Joan indirectly. When she found out that he had signed a purchase and sale

Question: But even after Francis signed the P&S, he still owned the property. Couldn’t Joan transfer

it to the trust?

Answer: It didn’t matter if he still owned the property. Joan knew that he had taken control of it and

Question: Francis was elderly. Wasn’t Joan doing what was best for him?

1 Based on Oliver v. Campbell, 273 P.2d 15 California Supreme Court, 1954

2 39 Mass. App. Ct. 144; 654 N.E.2d 54; 1995 Mass. App. LEXIS 545 Massachusetts Appeals Court

1995

Question: Was Joan really doing what was best for Francis?

Question: What is the moral of this story?

effect of Termination

Once an agency relationship ends, the agent no longer has the authority to act for the principal. If the

agent continues to act, the agent is liable to the principal for any damages he incurs as a result.

Principal’s Liability for Contracts

The principal is liable for the acts of an agent if (1) the agent had authority, or (2) the principal ratifies the

acts of the agent.

Authority

A principal is bound by the acts of an agent if the agent has authority. There are three types of authority:

express, implied, and apparent.

Express Authority

The principal grants express authority by words or conduct that, reasonably interpreted, cause the agent to

believe the principal desires her to act on the principal’s account.

Implied Authority

Unless otherwise agreed, authority to conduct a transaction includes authority to do acts that are

reasonably necessary to accomplish it.

Apparent Authority

A principal can be liable for the acts of an agent who is not, in fact, acting with authority, if the principal

does something that causes a third party reasonably to believe that the agent is authorized. The issue for

apparent authority is what the principal has done, not the agent, as viewed from the perspective of a third

party who dealt with the agent.

Role Play: Apparent Authority

This skit requires no rehearsal; any three students can play the roles. Provide a copy to each of the

students a few minutes before class so that they have an opportunity to read it in advance. (Use

highlighter to indicate their lines.)

Anne Dawson, to class: Hello, my name is Anne Dawson. I am a salesperson for the Pure Brush

Company.

James Fraser, to class: My name is James Fraser. I am director of sales at Pure Brush Company

and Anne’s boss.

Connie Lynch, to class: My name is Connie Lynch. I live in Kansas City.

James Fraser to Anne Dawson:

I’m terribly afraid, Anne, that we will have to let you go. You have missed your sales quota three out

of the last four months. Frankly, I just don’t think you are working hard enough. I’m terribly sorry,

but my boss, Franklin, is breathing down my neck to get sales up, and you are simply not pulling your

weight.

Anne Dawson: I can’t believe you guys are doing this. You know my husband has been sick,

and I haven’t been able to work a full week. But I’m the best salesperson you’ve got. Please just let

me get over this crisis and I’ll be your best producer. I promise.

James Fraser: I’m really sorry, Anne. I know it’s been tough for you. But I don’t have any

choice. Franklin is in my face all the time about you. Look, give me back your samples and forms

now. Take the rest of the week off, and I’ll see you get paid for this week and one more. I’m really

sorry.

Anne Dawson (looking sneaky):

I’ve used up all my forms and my sample case was stolen out of my car last week. I’m out of here

now. You guys are going to regret this. [She stomps off.]

James Fraser: You’re probably right. I’m sorry and good luck.

Anne Dawson ringing Connie Lynch’s doorbell.

Anne Dawson (very upbeat):

Hi, Connie! I’m Anne Dawson from the Pure Brush Company. How ya doing?

Connie Lynch: Oh, yeah, hi.

Anne Dawson: We’ve got this fabulous new product you’ll just love–it’s a brush for

cleaning blinds. I remember last time you told me that your husband has asthma. Did you know that

dust is the major cause of asthma attacks? The Mayo Clinic health letter had an article about asthma

just last month. If you use this fabulous brush regularly, your husband’s asthma will be so much

better! Let me show you a sample.

Connie Lynch (hesitating):

Well, it seems like a good idea. How much is it?

Anne Dawson: Normally, it’s $99, but right now we’re having a super special. It’s

reduced to only $69 if you pay cash.

Connie Lynch: Gee, I don’t know. It still seems kind of expensive.

Anne Dawson: Expensive? What is money when it comes to your husband’s health?

You ought to have at least three of these–one for each room with blinds. That way you can whisk the

dust off any time!

Connie Lynch: You’re right. I’ll buy three of them.

Anne Dawson: Just sign this form right here.

Question: Does Anne Dawson have express authority to act for the Pure Brush Company?

Question: Does she have implied authority?

Question: Does Dawson have any authority?

Answer: Apparent authority. This means that the principal has not authorized her to act but the

Question: What has Pure Brush Company done to make Connie Lynch believe that Dawson was

authorized to act?

Answer: It did not retrieve her samples and forms. Many companies require their sales staff to put

Question: Is there anything else the company could have done?

Additional Case: Dickinson v. Charter Oaks3

Facts: Marlee and Richard Snowdon bought a house next door to Hal and Carol Dickinson. Carol had

owned the house for 30 years; Hal had moved in 10 to 15 years later when he and Carol married. Hal had

no ownership interest in the property.

The Snowdons decided to clean out an area of overgrowth adjacent to the Dickinson land. Richard

spoke with Hal, who okayed the work. Marlee hired Charter Oaks for the project. Hal expressed

impatience to Richard over the lack of progress and Richard told Hal that Charter was coming soon.

As Charter was working the first day, Hal came out into the yard to look at what was going on and

then went back into the house. The next day, Carol returned from an out-of-town trip and was upset to

see what Charter had done. She ordered the company to stop work. She then filed a lawsuit seeking

damages for the harm to her property.

Charter admitted that Carol had not personally given permission for the landscaping work, but

claimed it had relied on Hal’s apparent authority. The jury returned a verdict for Charter on Carol’s

trespass and damage to vegetation claims and Carol appealed.

Issue: Did Hal Dickinson have apparent authority to make decisions about Carol Snowdon’s property?

Holding: Judgment for Charter Oaks affirmed. A husband and wife are not necessarily agents for each

other. However, in this case, Hal worked frequently in the Dickinson yard, both alone and with his wife.

He also dealt with contractors, including a tree service Carol hired. No one ever told the Snowdons that

Hal was not authorized to make decisions about landscaping. Therefore, it was reasonable for the

Snowdons to assume that Hal did have authority on landscaping matters.

Question: Who owned the house that the Dickinsons lived in?

Question: Did Hal have actual authority to make decisions on landscaping?

Question: Did Carol tell Charter Oaks that Hal had authority?

Question: Did Carol give approval to Charter Oaks for the work they did?

Question: So wouldn’t Charter Oaks be liable for the damage they did to Carol’s property?

Question: Do all spouses have apparent authority for each other.

Question: Then why does Hal have apparent authority?

Answer: He did landscaping work himself and he supervised contractors who worked in the yard.

Question: The fact remains, though, that this was Carol’s property and she did not approve Charter

Oak’s work. Is the result in this case fair?

Answer: Carol was is in a better position to prevent the harm than either the Snowdons, who drew

3 2003 Ohio 2055; 2003 Ohio App. LEXIS 1940 Court of Appeals of Ohio, 2003

Example

This letter appeared in the legal advice column of the Chicago Tribune:

I signed a lease and lived with a roommate. He had financial trouble and, as a result, we didn’t

pay the rent for the past month. One night I went back to my apartment and found the locks

changed. The landlord informed me that my roommate had told him that we had moved out and

that my roommate had returned the apartment keys to him. My roommate has moved out of town

and I don’t know where he is. The landlord refuses to let me back in the apartment, where all my

belongings are located.4

This is a good example of an instance where there is not apparent authority. After two cases in which an

employee had apparent authority, it is also useful to give students an example of the alternative.

Question: Did the roommate who left town have apparent authority in this case?

Answer: Probably not. Under apparent authority, the third party must reasonably believe that the

Writing Exercise: Apparent Authority

If students prepared the apparent authority writing exercise, ask them to share examples of apparent

authority. What elements do they have in common with Dickinson v Charter Oaks? Does the class agree

that they are valid examples of apparent authority?

Rati-cation

If a person accepts the benefit of an unauthorized transaction or fails to repudiate it, then he is as bound

by the act as if he had originally authorized it. He has ratified the act.

Agent’s Liability for Contracts

Fully Disclosed Principal

An agent is not liable for any contracts she makes on behalf of a fully disclosed principal.

Unidenti-ed Principal

In the case of an unidentified principal, the third party can recover from either the agent or the principal.

(An unidentified principal is also sometimes called a “partially disclosed principal.”)

Undisclosed Principal

The text describes instances in which both William Zeckendorf and Harvard University, assembled large

parcels of land as undisclosed principals. Students who completed the research assignment on straw

buyers should present their findings. Here are some general questions for the class:

Under what circumstances is it fair or unfair to operate as an undisclosed principal?

One reason to purchase land as an undisclosed principal is to prevent the owner of a final

unsold lot from charging an exorbitant price. Is it fair for the last purchaser to receive a much

higher price?

4Robert A. Boron, “Double Cross; Lies and Fast Exit Leave Roommate Out in the Cold,” Chicago Tribune, June 24, 1994, p. 34.

Unauthorized Agent

Thus far in this section, we have been discussing an agent’s liability to a third party for a

transaction that was authorized by the principal. Sometimes, however, agents act without the

authority of a principal. If the agent has no authority (express, implied, or apparent), the

principal is not liable to the third party and the agent is.

Additional Case: Van Damme v. Gelber5,

Facts: Alexandre Van Damme was eager to buy a painting by the artist Gerhard Richter. Nahum Gelber

was willing to sell his Richter entitled “A.B. Diffus”. Van Damme hired Christophe Van De Weghe to

inspect the painting at the Toronto apartment of Gelber’s son. Van De Weghe was not officially told

whose apartment it was, but Gelber’s son was present and Van De Weghe saw a letter on the kitchen table

addressed to Gelber. Van Damme’s agent signed a contract with Gelber’s agent, Gasiunasen Gallery, to

buy the painting for $2.6 million. Gasiunasen signed the contract “Gasiunasen Gallery as Seller by

Seller’s Agent.”

Between the time the contract was signed and Van Damme wired the purchase price to Gasiunasen, a

different Richter painting has sold at auction for $5.55 million. Believing he had made a bad deal, Gelber

refused to accept Van Damme’s payment.

Van Damme sued Gasiunasen for breach of contract. Gasiunasen moved to dismiss on the grounds

that he was an agent for a fully disclosed principal.

Issue: Was Gasiunasen liable under the contract?

Holding: Yes, Gasiunasen was liable under the contract; his motion to dismiss was denied. According to

the court, an agent of a fully disclosed principal cannot be personally liable under a contract. Van De

Weghe did not know who the seller was when he inspected the painting at the Toronto apartment. He

“inferred: the seller’s identity from an envelope lying on the kitchen counter. Although this inference

turned out to be correct, the disclosure of a principal’s identity cannot depend on a person’s ability to

make inferences. Gelber’s name does not appear in the contract. Gelber’s name as the owner does appear

in an e-mail from Gasiunasen to the escrow agent, but there are no allegations that Van Damme was privy

to this e-mail.

According to the court, a principal whose identity has not been disclosed, although the agency

relationship is known is referred to “partially disclosed”. The agent fort a partially disclosed principal

will be liable on any contract that he makes on behalf of his principal, unless the parties to the contract

expressly agree that the agent will not be liable. An agent who enters into a contract on behalf of a

partially disclosed principal is jointly and severally .liable with the principal.

Question: Who signed the contract?

Question: Did Van Damme know that Gelber owned the painting?

Question: If Van Damme knew that Gelber was the owner of the painting, then why does the court

consider Gelber a partially disclosed principal?

Answer: Because Van De Weghe did not officially know that Gelber was the owner, nor did he

Question: But Van De Weghe knows that Gasiunasen is not the owner, right?

5 2008 N.Y. Misc. LEXIS 203, Supreme Court of New York, 2008.

Answer: True, but the court stated that a partially disclosed principal is one whose identity is not

Question: What is joint and several liability?