For which reason may the agent be liable in a gratuitous principal agent relationship?

CHAPTER 1

INTRODUCTORY MATTERS

TOPIC 1. DEFINITIONS AND TERMINOLOGY

§ 1.01 Agency Defined

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.

§ 1.02 Parties’ Labeling and Popular Usage Not Controlling

An agency relationship arises only when the elements stated in

§ 1.01 are present. Whether a relationship is characterized as agency in

an agreement between parties or in the context of industry or popular

usage is not controlling.

§ 1.03 Manifestation

A person manifests assent or intention through written or spoken

words or other conduct.

§ 1.04 Terminology

(1) Coagents. Coagents have agency relationships with the same

principal. A coagent may be appointed by the principal or by another

agent actually or apparently authorized by the principal to do so.

(2) Disclosed, undisclosed, and unidentified principals.

(a) Disclosed principal. A principal is disclosed if, when an

agent and a third party interact, the third party has notice that the

agent is acting for a principal and has notice of the principal’s

identity.

(b) Undisclosed principal. A principal is undisclosed if, when an

agent and a third party interact, the third party has no notice that

the agent is acting for a principal.

(c) Unidentified principal. A principal is unidentified if, when

an agent and a third party interact, the third party has notice that

the agent is acting for a principal but does not have notice of the

principal’s identity.

(3) Gratuitous agent. A gratuitous agent acts without a right to

compensation.

(4) Notice. A person has notice of a fact if the person knows the fact,

has reason to know the fact, has received an effective notification of the

fact, or should know the fact to fulfill a duty owed to another person.

Notice of a fact that an agent knows or has reason to know is imputed to

the principal as stated in §§ 5.03 and 5.04. A notification given to or by

an agent is effective as notice to or by the principal as stated in § 5.02.

(5) Person. A person is (a) an individual; (b) an organization or

association that has legal capacity to possess rights and incur obli-

gations; (c) a government, political subdivision, or instrumentality or

entity created by government; or (d) any other entity that has legal

capacity to possess rights and incur obligations.

(6) Power given as security. A power given as security is a power to

affect the legal relations of its creator that is created in the form of a

manifestation of actual authority and held for the benefit of the holder

or a third person. It is given to protect a legal or equitable title or to

secure the performance of a duty apart from any duties owed the holder

of the power by its creator that are incident to a relationship of agency

under § 1.01.

(7) Power of attorney. A power of attorney is an instrument that

states an agent’s authority.

(8) Subagent. A subagent is a person appointed by an agent to

perform functions that the agent has consented to perform on behalf of

the agent’s principal and for whose conduct the appointing agent is

responsible to the principal. The relationship between an appointing

agent and a subagent is one of agency, created as stated in § 1.01.

(9) Superior and subordinate coagents. A superior coagent has the

right, conferred by the principal, to direct a subordinate coagent.

(10) Trustee and agent-trustee. A trustee is a holder of property who

is subject to fiduciary duties to deal with the property for the benefit of

charity or for one or more persons, at least one of whom is not the sole

trustee. An agent-trustee is a trustee subject to the control of the settlor

or of one or more beneficiaries.

CHAPTER 2

PRINCIPLES OF ATTRIBUTION

TOPIC 1. ACTUAL AUTHORITY

§ 2.01 Actual Authority

An agent acts with actual authority when, at the time of taking

action that has legal consequences for the principal, the agent reasonably

believes, in accordance with the principal’s manifestations to the agent,

that the principal wishes the agent so to act.

Comment:

a. Scope and cross-references. Section 1.03 defines manifesta-

tion. Section 2.02 covers the scope of actual authority, including

criteria with which to assess the reasonableness of the agent’s belief.

Sections 3.01 and 3.02 state the means by which a principal creates

actual authority, including circumstances in which a writing is

required.

b. Terminology. As defined in this section, ‘‘actual authority’’

is a synonym for ‘‘true authority,’’ a term used in some opinions.

The definition in this section does not attempt to classify different

types of actual authority on the basis of the degree of detail in the

principal’s manifestation, which may consist of written or spoken

words or other conduct. See § 1.03. As commonly used, the term

‘‘express authority’’ often means actual authority that a principal

has stated in very specific or detailed language.

The term ‘‘implied authority’’ has more than one meaning.

‘‘Implied authority’’ is often used to mean actual authority either (1)

to do what is necessary, usual, and proper to accomplish or perform

an agent’s express responsibilities or (2) to act in a manner in which

an agent believes the principal wishes the agent to act based on the

agent’s reasonable interpretation of the principal’s manifestation in

light of the principal’s objectives and other facts known to the agent.

These meanings are not mutually exclusive. Both fall within the

definition of actual authority. Section 2.02, which delineates the

scope of actual authority, subsumes the practical consequences of

implied authority.

The term ‘‘inherent agency power,’’ used in the Restatement

Second of Agency and defined therein by § 8 A, is not used in this

Restatement. Inherent agency power is defined as ‘‘a term used TTT

to indicate the power of an agent which is derived not from authori-

ty, apparent authority or estoppel, but solely from the agency

relation and exists for the protection of persons harmed by or

dealing with a servant or other agent.’’ Other doctrines stated in

this Restatement encompass the justifications underpinning § 8 A,

including the importance of interpretation by the agent in the

agent’s relationship with the principal, as well as the doctrines of

apparent authority, estoppel, and restitution.

c. Rationale. Actual authority is a consequence of a principal’s

expressive conduct toward the agent, through which the principal

manifests assent to be affected by the agent’s action, and the agent’s

reasonable understanding of the principal’s manifestation. An

agent’s actions establish the agent’s consent to act on the principal’s

behalf, as does any separate manifestation of assent by the agent.

When an agent acts with actual authority, the agent’s power to

affect the principal’s legal relations with third parties is coextensive

with the agent’s right to do so, which actual authority creates. In

contrast, although an agent who acts with only apparent authority

also affects the principal’s legal relations, the agent lacks the right

to do so, and the agent’s act is not rightful as toward the principal.

Actual authority often overlaps with the presence of apparent au-

thorityTTTT

The focal point for determining whether an agent acted with

actual authority is the agent’s reasonable understanding at the time

the agent takes action. Although it is commonly said that a principal

grants or confers actual authority, the principal’s initial manifesta-

tion to the agent may often be modified or supplemented by subse-

quent manifestations from the principal and by other developments

that the agent should reasonably consider in determining what the

principal wishes to be done. A principal’s manifestations may reach

the agent directly or indirectly. Often a principal’s manifestation

will state that the agent should refrain from acting in a particular

way. In that situation, the agent’s failure to act conforms to the

principal’s expressed wishes.

Illustration:

1. P gives A a power of attorney authorizing A to sell a

piece of property owned by P. P subsequently says to A, ‘‘Don’t

sell the property. Lease it instead.’’ After P’s statement, A has

actual authority only to lease.

The presence of actual authority requires that an agent’s belief

be reasonable at the time the agent acts. It is also necessary that the

agent in fact believes that the principal desires the action taken by

the agent.

Illustrations:

2. Same facts as Illustration 1, except that A overhears P

say to a third party that P no longer wishes to sell the property

and wishes A to lease it. A has actual authority only to lease

because A knows P does not wish the property to be sold.

3. Same facts as Illustration 1, except that, after telling A

to lease the property instead of selling it, P tells F that P

regrets making this statement and wishes that the property be

sold. A is unaware of P’s statement to F. A sells the property to

T, showing T the power of attorney. T is unaware of P’s oral

statements to A and F. A did not have actual authority to sell

the property. A acted with apparent authority as defined in

§ 2.03.

Unless a principal’s manifestation expressly states that the

authority is irrevocable and constitutes a power given as security or

an irrevocable proxy as defined in § 3.12, the principal has power to

revoke actual authority even when the principal has contracted not

to do so. If a principal’s revocation of actual authority breaches a

contract with the agent, the agent’s authority terminates but the

principal is subject to liability to the agent for breach of contract.

Illustration:

4. Same facts as Illustration 1, except that the power of

attorney states that A’s authority to sell shall be irrevocable by

P for six months, in exchange for A’s promise to use best efforts

to sell the property. At the end of three months, P tells A that P

revokes A’s authority. A’s authority is terminated, but P is

subject to liability for breach of contract.

A principal’s manifestation to an agent often consists of an

intentional act. However, a principal may also convey actual authori-

ty to the agent through unintended conduct that the agent reason-

ably believes to constitute an expression of the principal’s inten-

tions.

Illustrations:

5. P drafts and executes a power of attorney authorizing A

to sell a piece of property. Following a change of mind, P drafts

and executes a second power authorizing A only to lease the

property. P inadvertently sends the first power to A and does

not otherwise communicate with A regarding the nature of A’s

authority. A has actual authority to sell the property.

6. Same facts as Illustration 5, except that after A receives

the power of attorney from P, P sends A a letter asking for a

status report on A’s efforts to lease the property. The letter also

states that P is glad the property will not be sold. After

receiving P’s letter, A lacks actual authority to sell the property

because it is not reasonable for A to believe that P wishes A to

sell itTTTT

§ 2.02 Scope of Actual Authority

(1) An agent has actual authority to take action designated or

implied in the principal’s manifestations to the agent and acts necessary

or incidental to achieving the principal’s objectives, as the agent reason-

ably understands the principal’s manifestations and objectives when the

agent determines how to act.

(2) An agent’s interpretation of the principal’s manifestations is

reasonable if it reflects any meaning known by the agent to be ascribed

by the principal and, in the absence of any meaning known to the agent,

as a reasonable person in the agent’s position would interpret the

manifestations in light of the context, including circumstances of which

the agent has notice and the agent’s fiduciary duty to the principal.

(3) An agent’s understanding of the principal’s objectives is reason-

able if it accords with the principal’s manifestations and the inferences

that a reasonable person in the agent’s position would draw from the

circumstances creating the agency.

Comment TTT

e. Agent’s reasonable understanding of principal’s manifesta-

tion. An agent does not have actual authority to do an act if the

agent does not reasonably believe that the principal has consented to

its commission. Whether an agent’s belief is reasonable is deter-

mined from the viewpoint of a reasonable person in the agent’s

situation under all of the circumstances of which the agent has

notice. Lack of actual authority is established by showing either that

the agent did not believe, or could not reasonably have believed, that

the principal’s grant of actual authority encompassed the act in

question. This standard requires that the agent’s belief be reason-

able, an objective standard, and that the agent actually hold the

belief, a subjective standard.

Illustration:

4. P, a photographer, employs A as a business manager. P

authorizes A to endorse and deposit checks P receives from

publishers of photographs taken by P. Based on P’s statements

to A, A believes A’s authority is limited to endorsing and

depositing checks and does not include entering into agreements

that bind P in other respects. A endorses and deposits a check

from T, a magazine publisher, made payable to P. Printed on

the back of the check is a legend: ‘‘Endorsement constitutes a

release of all claims.’’ It is beyond the scope of A’s actual

authority to release claims that P has against T.

The context in which principal and agent interact, including the

nature of the principal’s business or the principal’s personal situa-

tion, frames the reasonableness of an agent’s understanding of the

principal’s objectives. An agent’s actual authority encompasses acts

necessary to accomplish the end the principal has directed that the

agent achieve. In exigent circumstances not known to the principal,

the agent may reasonably believe that the principal would wish the

agent to act beyond the specifics detailed by the principal.

Illustrations:

5. P Corporation employs A as the Facilities Manager at

an amusement park owned by P Corporation. A reports to B, P

Corporation’s Vice President for Leisure Activities. B directs A

to arrange for the reseeding of the badly deteriorated lawn

adjacent to the park’s entrance. B also directs A to complete the

reseeding by the end of the week. A purchases grass seed and

directs groundskeepers to schedule time for reseeding. A then

learns that the park location is in the path of a forecasted

hurricane. A has actual authority to postpone the reseeding.

6. Same facts as Illustration 5, except weather conditions

do not interrupt the reseeding. A knows that the lawn could be

reseeded either at much higher cost to achieve turf conditions

suitable for a golf course, or at lower cost to achieve conditions

that are visually attractive but not suitable for use as a golf

course. Absent other manifestations from B, or other knowledge

of P Corporation’s practices, A lacks actual authority to reseed

to achieve the golf-course standard. In light of the use P

Corporation will make of the lawn, it is not reasonable for A to

believe that P Corporation’s objectives require that the lawn be

usable as a golf course.

Factors relevant to the reasonableness of an agent’s under-

standing of the principal’s manifestation include the fiduciary char-

acter of the agent’s relationship with the principal and the agent’s

inability to react to the principal’s unexpressed interests or wishes.

An agent’s fiduciary position obliges the agent to act loyally to serve

the principal’s interests and objectives that the agent knows or

should know. See § 8.01. The relevant interests and objectives are

those with respect to the agency and do not encompass other

objectives or interests that a principal may have. A principal’s

situation, if known to the agent at the time the agent acts, may

affect the agent’s authority to do a particular act. Additionally, the

principal may revoke or limit authority subsequent to granting it.

An agent’s understanding at the time the agent acts is controlling. If

an agent knows that the principal’s reason for previously authoriz-

ing the agent to do an act is no longer operative, the agent does not

have actual authority to do the act. An agent’s actual authority is

not affected by changes in the principal’s situation that are not

known to the agentTTTT

Illustrations:

7. The directors of P Corporation approve a plan to up-

grade a plant that is suitable for the manufacture of one

product line. P Corporation’s Executive Vice President tells M,

the plant manager, to contract with an engineering firm for a

redesign of the production process that must precede the up-

grade work. After adopting the resolution, the directors aban-

don the upgrade plan and so notify the Executive Vice Presi-

dent. No one tells M, who on behalf of P Corporation enters into

a contract with T, an engineering firm, to do the redesign. P

Corporation is bound by the contract. M had actual authority to

make the contract.

8. Same facts as Illustration 7, except that M reads in the

newspaper that P Corporation’s directors have discontinued the

sole product line manufactured in the plant. M no longer has

actual authority to make the contract with T. M may have

apparent authority as defined in § 2.03 if T reasonably believes

M has authority to make the contract. T’s belief will not be

reasonable if T is also aware that the product line has been

discontinued.

9. Same facts as Illustration 7, except that the upgrade

plan depends on using a particular building technology. M is

aware of this fact. After the directors adopt the resolution and

M is directed to contract for the redesign work, M learns that

regulatory restrictions will prevent P Corporation from using

the particular technology on which the plan depends. M no

longer has actual authority to make the contract with T. M may

have apparent authority as defined in § 2.03 if T reasonably

believes that M has authority to make the contract.

10. Same facts as Illustration 7, except that P Corpora-

tion’s Chief Financial Officer tells M that the upgrade plans

have been abandoned. M no longer has actual authority even

though M does not report to the Chief Financial Officer.

The nature of actual authority means that the relevant inquiry

always focuses on the time the agent acts. In Illustrations 8, 9, and

10, the temporal focus, which is the time the agent acts, is not the

time of the principal’s initial manifestation to the agent. An alterna-

tive formulation, which would reach the same outcomes on these

Illustrations, is to say that M had actual authority but that subse-

quent developments terminated it. This formulation unnecessarily

adds two elements, the initial presence of authority and its subse-

quent termination, to the determinative inquiry, which is the rea-

sonableness of M’s belief at the time of determining the action to

takeTTTT

An agent’s understanding of the principal’s interests and objec-

tives is an element of the agent’s reasonable interpretation of the

principal’s conduct. If a literal interpretation of a principal’s com-

munication to the agent would authorize an act inconsistent with

the principal’s interests or objectives known to the agent, it is open

to question whether the agent’s literal interpretation is reasonable.

Illustration:

11. P, a toy designer, employs A as an agent to present P’s

designs to toy manufacturers. P says to A, ‘‘Before you show the

design, sign whatever forms the manufacturer requires.’’ A

knows that P’s practice is to retain all copyright and other

intellectual-property interests in P’s designs. It may not be

reasonable for A to interpret P’s instruction to authorize A to

sign a form that assigns or releases all of P’s interests in the

design to T, a toy manufacturer. If T, an important presence in

the industry, always demands that such a release be executed,

when feasible A should contact P for further instructions. When

not feasible, it is a question of fact whether A acted reasonably

in signing the form presented by T. A has apparent authority as

defined in § 2.03 only if based on P’s conduct it is reasonable

for T to believe that A has authority to sign the form.

Interactions between principal and agent do not occur in a

vacuum. Prior dealings between them are relevant to the reason-

ableness of the agent’s understanding of the principal’s manifesta-

tion. If a principal and an agent share an idiosyncratic under-

standing of what is meant by the principal’s manifestation, that

understanding controls the scope of the agent’s actual authority,

not the understanding that a reasonable person would have. Un-

like a party dealing at arm’s length with another, the focus for an

agent is interpreting the principal’s manifestations so as to further

the principal’s objectives.

Illustrations:

12. P, who owns a number of residential rental properties,

retains A to manage them. P directs A, ‘‘Install smoke detectors

in each room.’’ Based on A’s prior dealings with P, A knows

that by ‘‘each room,’’ P means ‘‘each room in which the housing

code requires a smoke detector.’’ A also knows that P views

compliance with the housing code as a business necessity. A’s

actual authority to install smoke detectors is limited to rooms in

which the housing code requires their installation.

13. Same facts as Illustration 12, except that after P’s

directive to A, the housing code is amended to require the

installation of smoke detectors in hallways as well as rooms. A

has actual authority to install smoke detectors in hallways as

well as rooms.

In determining whether an agent’s action reflected a reasonable

understanding of the principal’s manifestations of consent, it is

relevant whether the principal knew of prior similar actions by the

agent and acquiesced in them.

Illustration:

14. Same facts as Illustration 12, except that P knows

that, given the same directive in the past, A has installed smoke

detectors in all rooms. P has not objected or complained. A has

actual authority to install smoke detectors in all rooms.

The context in which principal and agent interact will often

include customs and usages that are particular to a type of business

or a geographic locale. A person carrying on business has reason to

know of such customs and usages and thus has notice of them as

defined in § 1.04(4). If an agent has notice that the principal does

not know of a custom or usage, the agent is not authorized to act in

accordance with it if doing so would result in a transaction different

from that which the agent has notice is desired by the principal.

If a principal states the agent’s authority in terms that contem-

plate that the agent will use substantial discretion to determine the

particulars, it is ordinarily reasonable for the agent to believe that

following usage and custom will be acceptable to the principal. In

contrast, if a principal’s express statement of authority is highly

detailed, it is not reasonable for the agent to believe the principal

intended that the agent should follow a custom or usage that is at

odds with the terms of the principal’s express authorization. When a

practice is common in a particular industry, it will be difficult for

the principal credibly to claim no notice of it. Cases addressing the

relevance of usage and custom reflect some division whether it is

necessary to show that the principal had notice of the existence of

the customs, usages, or practices at issue. This issue should be

treated as an aspect of a broader inquiry into the reasonableness of

the agent’s belief that the agent had authority.

f. Interpretation by agent. In order to determine with specifici-

ty what a principal would wish the agent to do, the agent must

interpret the language the principal uses or assess the principal’s

conduct or the situation in which the principal has placed the agent.

An agent’s position requires such interpretation regardless of the

circumstances under which the principal created actual authority.

Thus, interpretation by the agent is necessary whether the agent

has received explicit instructions from the principal, has received a

general directive, or has been appointed to a position in an organiza-

tion with delegated powers. The benchmark for interpretation re-

flects the agent’s fiduciary position. If the principal gives imperative

instructions using clear and precise language and the instructions do

not demand illegal conduct and do not appear to have been issued in

error, the agent should follow the instructions even if they conflict

with industry usage or custom. A reasonable agent would under-

stand the principal’s choice of precise language, imperatively stated,

as an accurate reflection of the principal’s wishes. An industry

custom or practice contrary to the principal’s definite instructions

does not excuse the agent’s violation of the principal’s instructions.

A principal’s ability to communicate with the agent is a basic

component of the principal’s exercise of the right of control. In

particular, a principal has the opportunity to state instructions to

the agent with clarity and specificity. Moreover, much that underlies

the occurrence of the risk that the agent will depart from instruc-

tions is within the principal’s control. The principal’s instructions

may be insufficiently clear in their import to enable the agent to

discern what acts the principal wishes the agent to do or to refrain

from doing. The principal’s instructions, albeit clear as far as they

go, may be incomplete in some significant respect, or the instruc-

tions may reasonably be understood by the agent to authorize the

agent to exercise discretion. Moreover, an agent may depart from

instructions because the agent interprets the instructions from a

perspective that differs in significant respects from the perspective

from which the principal would interpret the identical language.

Although not all factors that underlie such differences in perspective

are always within the principal’s control, in significant respects the

principal makes decisions that shape the viewpoint from which the

agent interprets instructions.

Occasionally, it may be open to doubt what a principal’s instruc-

tions mean, even when they are interpreted literally. As a result, the

agent may interpret them differently from the interpretation the

principal would have preferred. The agent’s fiduciary duty to the

principal obliges the agent to interpret the principal’s manifesta-

tions so as to infer, in a reasonable manner, what the principal

desires to be done in light of facts of which the agent has notice at

the time of acting. Within this basic framework, however, it is not

surprising that more than one reasonable interpretation of instruc-

tions might be possible. Not all agents are equally gifted in their

capacity for reasonable interpretation, especially when the instruc-

tions themselves are not specific or when the principal has not

furnished the agent with a separate instruction that specifies how to

resolve doubtful cases.

A principal may take steps that, by reducing ambiguity or other

lack of clarity, reduce the risk that the agent’s actions will deviate

from the principal’s wishes, interests, or objectives. Giving an agent

a formal written set of instructions reduces the agent’s discretion

and potential to err in determining what actions to take. A principal

may also reduce the risk of deviation by monitoring the agent, for

example by requiring prompt checks on the agent’s actions by a

superior coagent or an external auditor. How an organizational

principal structures itself, including titles given to individuals and

habitual patterns of interaction among them, may also reduce the

risk of deviation by orienting individuals to defined roles and organi-

zationally specified constraints on action.

An organizational principal, like any principal, is at risk of

misunderstanding and misinterpretation. Detailed instructions may

be so complex that lapses occur because an agent’s attentiveness

slips. Prolix instructions may cause some agents to decide that

certain instructions may be ignored as trivial or as unwittingly

imposed obstacles to achieving what the agent perceives to be the

principal’s overriding objective. An agent is not privileged to disre-

gard instructions unless the agent reasonably believes that the

principal wishes the agent to do so. If third parties with whom the

agent interacts reasonably believe the agent to be authorized, the

doctrine of apparent authority, defined in § 2.03, may apply to

protect the third party. It does not protect an agent who departs

from instructions. See § 8.09(2) on an agent’s duty to comply with

all lawful instructions received from the principal.

Interactions among coagents within an organization often in-

volve superior agents giving instructions to junior or subordinate

agents. See § 1.04(9). A subordinate agent may realize correctly that

the superior agent is not the principal. Whether correctly or mistak-

enly, the subordinate agent may believe that the principal’s interests

would best be served by disregarding the superior agent’s instruc-

tions. Each separate occasion for the communication and interpreta-

tion of instruction downward within a sequential chain of agents

enhances the likelihood of miscommunication, misunderstanding,

and departure from instructions.

A principal may believe when initially giving instructions to the

agent that the principal’s best interests will be served by investing

the agent with a large measure of discretion, a decision later

regretted by the principal when reviewing the agent’s actual use of

discretion. Regardless of any later regret, the principal is bound by

the agent’s acts so long as the agent’s interpretation was reasonable.

Illustrations:

15. A is the manager of a retail clothing store owned by P,

who owns several such stores. P authorizes store managers to

buy, from vendors specified by P, inventory of items specified by

P for their stores up to limits specified in dollar amount. P

identifies ‘‘men’s dress shirts’’ as an inventory type that A has

authority to buy. A knows that by ‘‘dress shirts’’ P means

‘‘shirts suitable for wearing with a tuxedo.’’ A does not have

actual authority to buy dress shirts not suitable for tuxedo

wear.

16. Same facts as Illustration 15, except that P ascribes no

unusual meaning to ‘‘men’s dress shirts’’ that is known to A. P

provides A with no directions as to the color assortment of

shirts. At the time A places the order, a particular color is

fashionable and A orders many shirts in that color, believing

that the fashion will continue. The shirts fail to sell. A had

actual authority to buy the shirts.

17. Same facts as Illustration 16, except that A believes P

has set the dollar limit at an unnecessarily low level. A also

believes that the limit will result in an inadequate range of

selections for P’s customers. A purchases men’s dress shirts in a

quantity that exceeds the dollar limit set by P. A does not have

actual authority to exceed P’s limit.

18. Same facts as Illustration 17, except that A purchases

shirts in a quantity exceeding the limit set by P because A does

not notice the limit, failing carefully to read the written state-

ment that A received from P. A lacks actual authority to buy

beyond the limit.

19. P Corporation, a financial firm, employs A as a trader

in financial instruments on P Corporation’s own account. P

Corporation imposes no express limits on the type of financial

instrument in which A may take trading positions. Additionally,

P Corporation awards bonuses to A based on the overall profita-

bility of the portfolio that A manages. A commits P Corporation

to a series of risky and unusual investments that result in a

substantial loss sustained by the portfolio as a whole. A had

actual authority to make the risky and unusual investments. P

Corporation imposed no explicit limits on A, and P Corpora-

tion’s prior treatment of A’s investment decisions would not

give A a basis for inferring a limit.

An agent who knowingly contravenes or exceeds the principal’s

instructions may believe that to do so best serves the principal’s

interests. The agent may believe that circumstances have changed

since the initial instructions and that, were the principal to recon-

sider the matter, different instructions would be given. Unless it is

reasonable for the agent to believe that the principal wishes the

agent to construe the instructions in light of changed circumstances,

the agent lacks actual authority to violate instructions.

Illustrations:

20. P retains A, directing A to buy Blackacre but to offer

no more than $250,000. A then learns that Blackacre has

increased substantially in value and, if purchased for $300,000,

would represent a bargain. As A knows, it is financially feasible

for P to pay $300,000 for Blackacre. A does not have actual

authority to offer more than $250,000 for Blackacre.

21. Same facts as Illustration 20, except that Blackacre is

to be sold at an auction in which the successful bidder will be

required to deposit a check in an amount equal to 10 percent of

the bid. P gives A a blank check to use in making the deposit. A

does not have actual authority to bid more than $250,000 for

Blackacre.

22. Same facts as Illustration 20, except that P owns and

operates a golf course on land that almost entirely surrounds

Blackacre. A has notice of P’s long-term business plan to

enhance the aesthetic and athletic qualities of the course and

thereby make it more profitable. At the auction of Blackacre, A

learns for the first time that there will be one other bidder, B. A

also learns that B’s plan for using Blackacre is to construct a

cement factory on it. A is unable to contact P to relay this

information and receive further instructions. A succeeds in

purchasing Blackacre for P by bidding $260,000. A acted with

actual authorityTTTT

It is often feasible for an agent to contact the principal to

inquire what the principal now wishes to be done. In an era of rapid

electronic communication, it is often cheap and easy for an agent to

inquire before proceeding. The agent’s inquiry gives the principal

the opportunity to clarify or supplement the prior instructions.

However, an agent may believe that it is infeasible to contact the

principal for clarification or that the advantage promised by the

transaction will be lost if the agent does not conclude it promptly.

Unless the agent has a basis reasonably to believe that the principal

does not wish to resolve the question, the agent should attempt to

contact the principal prior to exercising discretion to disregard prior

instructions. If the principal does not respond to the agent’s inquiry

and viewed objectively the action then taken by the agent reasonably

serves the principal’s interests as the agent could best discern them,

the agent acted with actual authority.

A principal’s instructions may not address prior occasions on

which the agent has contravened instructions. On prior occasions

the principal may have affirmatively approved of the agent’s unau-

thorized act or silently acquiesced in it by failing to voice affirmative

disapproval. The history is likely to influence the agent’s subsequent

interpretation of instructions. If the principal’s subsequent instruc-

tions do not address the history, the agent may well infer from the

principal’s silence that the principal will not demand compliance

with the instructions to any degree greater than the principal has

done in the past. It is a question of fact whether the agent is

reasonable in drawing such an inference. It will probably not be

reasonable if the principal has recently renewed the instructions or

newly emphasized the importance of complying with them.

An agent may believe, whether correctly or erroneously, that

the agent knows the principal’s best interests better than the

principal does. What appears to be hubris on the agent’s part may be

present when the agent in fact has greater expertise or knowledge

than does the principal as to matters within the scope of the agency

relationship. Agents are often said to depart from their instructions

due to an ‘‘excess of zeal.’’ One explanation for this phenomenon is

the agent’s belief in a superior understanding of the principal’s best

interests. Additionally, agents sometimes exhibit an ‘‘excess of zeal’’

because they have information about the principal’s situation that

differs from the principal’s own information and beliefs based upon

it. Matters that seem urgent or imperative to the agent may seem

less so to the principal, whose knowledge will often be broader in

scope and whose time horizon will often extend farther into the

future than will the agent’s.

The incentive structure embedded in an agent’s relationship

with the principal may aggravate differences in perspective. Lapses

from instructions may well follow if the agent’s compensation de-

pends on the volume of transactions concluded by the agent or on

their dollar value, or if the agent fears the principal will terminate

the agency relationship if the agent does not achieve success. Re-

gardless of the explanation for the lapse, the agent does not have

actual authority to disregard instructions unless it is reasonable for

the agent to believe that the principal wishes the agent to do so.

Illustrations:

23. VP, the vice president of P Corporation in charge of P

Corporation’s information technology, enters into negotiations

with T Corporation to buy a new computer system. Before VP

begins negotiations with T Corporation, the board of directors of

P Corporation authorizes the expenditure of up to $5 million on

a new computer system. The CEO of P Corporation then directs

VP not to buy a computer system from T Corporation because

the CEO has been told by other CEOs that T Corporation’s

products demand a high level of user sophistication. Believing

that the CEO has underestimated the computer skills of P

Corporation’s work force, VP enters into a contract with T

Corporation to buy a computer system for $4 million. VP did

not have actual authority to enter into a transaction specifically

forbidden by the CEO.

24. Same facts as Illustration 23, except that VP, addition-

ally, has good reason to believe that the computer system is a

bargain at the $4 million price. VP does not have actual authori-

ty to contract to buy it.

g. Explicit instructions. A principal may direct an agent to do

or refrain from doing a specific act. The agent’s fiduciary duty to the

principal obliges the agent to interpret the principal’s instructions

so as to infer, in a reasonable manner, what the principal would

wish the agent to do in light of the facts of which the agent has

notice at the time of acting.

Although an agent’s task of interpretation is often straightfor-

ward when given specific instructions, the principal’s language does

not interpret itself. Circumstances may require the agent to exercise

discretion in ascertaining the principal’s wishes. Suppose the princi-

pal (P), the owner of a menagerie, makes a statement that P believes

directs the general manager of the menagerie (A) to buy no more

horses. If A enters into an agreement to buy another horse for the

menagerie, A did not act with actual authority unless A reasonably

believed that P wished the purchase to be made.

Consider the variety of explanations for A’s purchase of the

horse on P’s account despite what appears to be P’s direction to the

contrary. First, P’s statement might not have expressed P’s wishes

clearly. Perhaps P said, ‘‘I’m not into horses anymore,’’ which is not

a categorical statement of an instruction to A. If A sought clarifica-

tion from P, P might have responded, ‘‘What I meant was, buy no

more horses.’’ A’s purchase of the additional horse would be unau-

thorized. A might, however, reasonably believe that no clarification

was necessary. Perhaps A believed that P meant to discontinue P’s

private use of horses, separate from the menagerie business. A’s

belief is not reasonable, though, in the absence of some reason to

ascribe that interpretation to P’s statement. A might fail to seek

clarification from P if logistics make it difficult or impossible to do

so or if P seems too rushed or distracted to explain further. It is a

question of fact whether A’s failure to seek clarification is reason-

able under the circumstances.

Suppose P said to A originally (or in response to A’s request for

clarification): ‘‘Buy no more horses.’’ This instruction, clear on its

face, might nonetheless leave A in doubt in some circumstances. P’s

language does not itself define the word ‘‘horse’’ and does not

eliminate A’s need to interpret P’s language to determine whether P

intends to prohibit A’s purchase of a pony or a zebra or toy horses

for sale in the menagerie’s gift shop. A’s interpretation will not be

reasonable unless it takes into account A’s prior experience with P

which is likely to reveal how P uses language when referring to the

menagerie.

Moreover, A might wonder how absolutely or unconditionally to

interpret P’s instruction. Would it contravene the instruction to buy

an additional horse after the death of one of the horses on display in

the menagerie? Should A understand P to mean that the value of an

additional horse, relative to the sale price, is totally irrelevant? Must

A pass on the opportunity to buy an especially valuable horse at a

very low price? A may believe that P’s best interests would be served

by ignoring the literal interpretation of P’s instruction. Unless A has

reason to believe that P wishes A to do so, however, it is not

reasonable for A to disregard the instruction rather than contacting

P, if feasible, for further clarification.

A might decide to contravene P’s instruction if A believes it to

be a mistake from the standpoint of the business interest of the

menagerie itself. Although A’s departure from P’s instructions may

well be understandable, it is not consistent with A’s duty of loyalty,

which is owed to P and not to the menagerie itself. A lacks authority

to depart from P’s instructions to serve A’s perception of what is

required to further the interests of the menagerie.

Regardless of the breadth or narrowness with which a principal

has conveyed authority to the agent, an agent’s actual authority

extends only to acts that the agent reasonably believes the principal

has authorized or wishes the agent to perform. The fiduciary charac-

ter of the agency relationship shapes the agent’s permissible inter-

pretation of authority, disallowing an interpretation that is inconsis-

tent with interests of the principal that the agent knows or should

knowTTTT

TOPIC 2. APPARENT AUTHORITY

§ 2.03 Apparent Authority

Apparent authority is the power held by an agent or other actor to

affect a principal’s legal relations with third parties when a third party

reasonably believes the actor has authority to act on behalf of the

principal and that belief is traceable to the principal’s manifestations.

TOPIC 3. RESPONDEAT SUPERIOR

§ 2.04 Respondeat Superior

An employer is subject to liability for torts committed by employees

while acting within the scope of their employment.

§ 2.05 Estoppel to Deny Existence of Agency Relationship

A person who has not made a manifestation that an actor has

authority as an agent and who is not otherwise liable as a party to a

transaction purportedly done by the actor on that person’s account is

subject to liability to a third party who justifiably is induced to make a

detrimental change in position because the transaction is believed to be

on the person’s account, if

(1) the person intentionally or carelessly caused such belief, or

(2) having notice of such belief and that it might induce others to

change their positions, the person did not take reasonable steps to notify

them of the facts.

§ 2.06 Liability of Undisclosed Principal

(1) An undisclosed principal is subject to liability to a third party

who is justifiably induced to make a detrimental change in position by an

agent acting on the principal’s behalf and without actual authority if the

principal, having notice of the agent’s conduct and that it might induce

others to change their positions, did not take reasonable steps to notify

them of the facts.

(2) An undisclosed principal may not rely on instructions given an

agent that qualify or reduce the agent’s authority to less than the

authority a third party would reasonably believe the agent to have under

the same circumstances if the principal had been disclosed.

§ 2.07 Restitution of Benefit

If a principal is unjustly enriched at the expense of another person

by the action of an agent or a person who appears to be an agent, the

principal is subject to a claim for restitution by that person.

Under what situations an agent may be held personally liable?

What does gratuitous Agency mean?

What is the relationship between an agent and the principal?

In which of the following situation is the agent the only liable party for the contract?