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.