Chapter Fourteen | Agency

Introduction

Agency is an important area of the law that involves a special relationship between two parties: a principal and the person, who represents the principal, termed the agent. In the Restatement (Third) of Agency, agency is defined as a “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.” In essence, the agent “steps into the shoes” of the principal in a business transaction.

The principal hires an agent to act on his or her behalf who is subject to the principal’s instructions and control. The agent is the individual authorized to act for and on behalf of a principal. This legal arrangement creates a fiduciary relationship (a relationship of trust and confidence) in which the agent has the duty to act primarily for the principal’s benefit. For example, a fiduciary relationship exists between the client (the principal) and an attorney (the agent); or the owner of a piece of property (the principal) and a rental or sales agent (the agent).

Each state enacts its own laws concerning agency, many of which are similar in scope and import. However, some differences do exist. The application of agency law is especially important for U.S. interests doing business in other countries. Numerous American businesses are entering international markets through joint ventures or foreign direct investment activities. To avoid problems that arise from language differences and unfamiliarity with foreign laws and customs, many U.S. companies hire agents who are knowledgeable in these matters resulting in smoother operation of the business in the foreign market.

Creating The Agency Relationship

The extent of the authority in an agency relationship may be governed by an express agreement between the parties or may be implied from the circumstances of the agency. Like any contractual relationship, an agency relationship can only be created for a legal purpose. Further, the formation of an agency must meet two requirements: The principal must not be a minor or be incompetent; likewise, the agent cannot be a minor or be incompetent. If these basic requirements are met, an agency relationship may be created in any of four ways: 1) by agreement; 2) by implied authority; 3) by estoppel (called apparent agency) or 4) by ratification. The agency contract is not required to be found in writing, unless a provision of the Statute of Frauds stipulates that the contract must be written—for example, a real estate broker’s contract to sell real property. The contract need not follow any special format, or even involve payment to the agent.

Agency By Agreement

The relationship that is created pursuant to a written or oral contract is termed an agency by agreement or an express agency, under which the principal gives the agent the authority to act on his or her behalf. If the principal does not hire an additional party to carry out the same or similar duties, the principal and agent have formed an exclusive agency contract.

A specific legal document, called a power of attorney, gives an agent the power to sign legal documents on behalf of the principal. A power of attorney creates an agency relationship. A power of attorney may be general or special. A general power of attorney is very broad in the authority it gives to the agent. A special power of attorney gives an agent limited powers to act in specific ways for specific purposes or for a specified period of time as enumerated in the document creating the agency relationship. The agent is called an attorney-in-fact, although the agent does not have to be an attorney.

A special type of a power of attorney, called a “medical power of attorney” or “advance directive,” is commonly used in relation to health care matters. If the principal is unable to make health-related decisions, the agent will have the legal power to act on his or her behalf.

Agency By Implied Authority

An agency relationship can also be created by the conduct of the parties, similar to the creation of an implied-in-fact contract. The specific circumstances surrounding the relationship determine the extent to which an agent may conduct business on behalf of the principal. In general, an agency by implied authority may not conflict with an agency by agreement. Courts will permit an agent to receive payments owed to the principal, hire and discharge employees, buy equipment and supplies, and enter into contracts. Case law demonstrates how far various courts will allow implied authority to stretch. If the express agency does not provide sufficient details to cover the many contingencies that might arise during the course of the agency relationship, the agent is said to possess certain implied authority to act on behalf of the principal. This implied authority is referred to as incidental authority. In addition, under certain circumstances where the agent is unable to contact the principal for specific instructions, the agent has implied emergency authority to take “all reasonable actions to protect the principal’s property and rights.”

Case Study

Helene A. Gordon Et Al, v. Andrew Tobias

Supreme Court Of Connecticut, 262 CONN. 844; 817 A.2D 683 (2003)

Overview:

Plaintiff landowners filed an action to quiet title on the subject property in their favor. The Superior Court in the Judicial District of New Haven (Connecticut) entered judgment for the landowners after finding that payments made to the original mortgagee on the property constituted payment to defendant assignee, and consequently discharged the landowners’ obligation under the mortgage. The assignee appealed.

The landowners purchased a condominium subject to a mortgage in favor of the original mortgagee. The mortgage was later assigned, but the landowners continued to make payments to the original mortgagee. The original mortgagee received full payment from the landowners but continued to make periodic payments to the assignee until the original mortgagee’s president died, after which the assignee refused to release the mortgage. On appeal, the assignee claimed that there was insufficient evidence in the record to support the trial court’s finding that the original mortgagee was an agent of the assignee for the purposes of collecting payments on the mortgage that he held on the subject property. The supreme court held that the trial court properly found that the mortgagee had apparent authority to collect the mortgage payment due on the mortgage held by the assignee. The assignee collected payments for more than two years knowing that the loan had matured, yet he neither objected to nor demanded full payment on the amount due. Rather, the assignee requested invocation of a higher interest rate to provide the landowners incentive to pay off the loan. 

Outcome:

The trial court’s judgment was affirmed.

Regarding whether the agency relationship that was created was an implied agency, the court stated, “Implied authority is actual authority circumstantially proved. It is the authority which the principal intended his agent to possess. . . Implied authority is a fact to be proven by deductions or inferences from the manifestations of consent of the principal and from the acts of the principal and [the] agent.” Connecticut National Bank v. Giacomi, 242 Conn. 17, 70, 699 A.2d 101 (1997). The court found that the defendant had authorized Mutual to collect monthly payments on the note secured by the mortgage on the plaintiffs’ property and remit those payments to him. The court stated, “Apparent authority is that semblance of authority which a principal, through his own acts or inadvertences, causes or allows third persons to believe his agent possesses. . . Consequently, apparent authority is to be determined, not by the agent’s own acts, but by the acts of the agent’s principal. . . The issue of apparent authority is one of fact to be determined based on two criteria. . . First, it must appear from the principal’s conduct that the principal held the agent out as possessing sufficient authority to embrace the act in question, or knowingly permitted [the agent] to act as having such authority. . . Second, the party dealing with the agent must have, acting in good faith, reasonably believed, under all the circumstances, that the agent had the necessary authority to bind the principal to the agent’s action” Tomlinson v. Board of Education, 226 Conn. 704, 734-35, 629 A.2d 333 (1993).

Agency By Estoppel (Apparent Agency)

Agency by estoppel or apparent agency arises when the principal creates the “appearance of an agency” that in actuality does not exist in fact. When an apparent agency is created, the principal will be estopped from denying the existence of the agency relationship and will be bound to any contracts entered by the apparent agent while acting within the scope of the apparent agency.

Case Study

Robert M. Bailey v. Richard Worton D/B/A Worton Asphalt & Paving

752 SO.2D 470 (2000)

Procedural Posture:

Appellant developer appealed from ruling of the DeSoto County (Mississippi) Chancery Court deeming appellee’s construction lien enforceable against appellant on grounds appellant’s agent had the apparent authority to act for appellant in dealings with appellee.

Overview:

Appellant developer, Bailey, hired general contractor Ray and Associates to build and sell a house on appellant’s property (with the proceeds divided between them); in the course of building the house, the contractor hired appellee, Worton – an asphalt company – to pave the driveway. When financial problems resulted in the contractor being unable to pay appellee for services rendered, appellee (Worton) sought and was granted a construction lien on appellant’s property. Appellant objected, arguing he had not entered into any agreement with appellee, but to no avail in trial court. On appeal, the state intermediate appellate court affirmed; the court reasoned that application of three-prong test for an agent’s apparent authority – acts or conduct of the principal indicating the agent’s authority, reliance thereon by a third person, and a change of position by the third person to his detriment – showed that contractor, Ray Associates, appeared to be acting on appellant’s behalf, and thus his (Ray’s) contract with appellee bound appellant. 

Outcome:

Judgment affirmed; application of three-prong test governing apparent authority by an agent established that appellant was bound by agent’s agreement with appellee, and thus was liable for payment.

The court noted, looking at the facts in a light most favorable to the decision of the court below, it is not unreasonable to conclude that Worton relied on Ray and no one else because of her apparent authority. So far as third persons are concerned, the apparent powers of an agent are his real powers. The power of an agent to bind his principal is not limited to the authority actually conferred upon the agent, but the principal is bound if the conduct of the principal is such that persons of reasonable prudence, ordinarily familiar with business practices, dealing with the agent might rightfully believe the agent to have the power he assumes to have. The agent’s authority as to those with whom he deals is what it reasonably appears to be. Where the relationship of principal and agent exists, if the principal places his agent in a position where he appears, with reasonable certainty, to be acting for the principal, and his acts are within the apparent scope of his authority, such acts bind the principal. On principles of estoppel, a principal, having clothed an agent with semblance of authority, will not be permitted, after others have been led to act in reliance on appearances thus produce, to deny, to the prejudice of such others, what he has theretofore tacitly affirmed as to the agent’s powers. Where an agent, with the knowledge and consent of his principal, holds himself out as having certain powers and transacts business with a third person, the principal is estopped from denying the authority of the agent. Under Mississippi agency law, a principal is bound by the actions of its agent within the scope of that agent’s real or apparent authority. Finding no error, we affirm the judgment of the chancellor.

Agency By Ratification

In a case where a person misrepresents him or herself to be an agent when in fact he or she is not, and the purported principal later accepts the benefits of or ratifies the unauthorized acts, the principal is said to have ratified the agency relationship. The ratification is tantamount to the principal authorizing the agent’s acts on the principal’s behalf in the first instance. In order for ratification to occur, the principal must have complete knowledge of the agent’s action. In addition, at the time the agent’s unauthorized acts occur, the third party with whom the agent dealt must know of the existence of the principal.

Duties Created by the Agency Relationship

Extensive case law on the subject and the Restatement 3rd of Agency recognize that an agency relationship creates duties, or legal obligations, on the part of both the principal and the agent. If either the principal or the agent breaches the agency agreement, the non-breaching party can sue to enforce these duties, seek monetary damages for breach of the agreement, or seek suitable remedies in a Court of Equity.

Duties Of An Agent To A Principal

An agent owes certain duties to the principal. The duties of the agent to the principal may be set forth in the agency agreement itself or may be implied by law. On the most basic level, the agent has a duty to notify the principal of information that the agent learns from a third party or from another source that will help effect the purposes of the relationship. This is known as the duty of notification.

An agent owes the principal certain duties of performance in which the agent must meet the standards of “reasonable care, skill, competence, and diligence.” An agent who does not perform his or her express duties, or who fails to exercise the standard of care, diligence, and skill, or who acts in a negligent or intentional manner will be liable to the principal for breach of the agency contract.

The primary duty the agent owes the principal arises from the agent’s fiduciary duty to act loyally for the principal’s benefit in all matters connected to the agency relationship and not to act adversely to the interests of the principal.

An agent might breach this duty of loyalty by acting in the following ways:

Undisclosed self-dealing;
Usurping an obligation that belongs to the principal;
Competing with the principal without the consent of the principal during the course of the agency relationship;
Improperly disclosing or misusing confidential information;
Engaging in a dual agency relationship without consent of all parties.

In normal circumstances, the agent owes a duty to the principal to maintain a complete and accurate record of all transactions undertaken on behalf of the principal. This is referred to as the duty of accountability, which encompasses the following:

Keeping records of all property and money received and expended during the course of the agency relationship;
Maintaining a separate account (no commingling) for the principal; and
Using the property of the principal is a manner authorized by the agency contract.

If an agent breaches the agency agreement, the principal may seek monetary damages, including asking a court to impose a constructive trust on any profits the agent earned as a breach of the duty of loyalty. A principal may also seek to rescind a transaction entered into with third parties because of the breach of loyalty by an agent.

Case Summary

Carl Shen v. Leo A. Daly Company

222 F.3D 472 (2000)

Carl Shen, was a former employee and designated agent of Leo A. Daly Company’s (Daly) Republic of China (Taiwan) office. When Daly refused to pay taxes assessed by the Taiwanese government, the government restricted Shen’s travel, forbidding him from leaving the country. Shen then sued Daly on multiple theories of liability for damages and injunctive relief. Shen prevailed in part in the district court. Both he and Daly appeal the judgment. We affirm in part and reverse in part.

BACKGROUND

Shen, a United States citizen with dual Taiwanese citizenship moved to Taiwan in 1989 to become managing director of Daly’s operation there. To conduct business in Taiwan, Daly was required to designate a “responsible person,” or legal representative in the country, and Shen was so designated. In November 1992, Daly decided to withdraw from Taiwan because of business setbacks. As a result, Daly terminated Shen, but Shen chose to remain in Taiwan. Daly, however, failed to remove Shen as its responsible person and failed to inform Shen that he was still registered as the company agent.

In December 1993, Shen received a notice from the Taiwan Tax Authority that it wanted to audit Daly’s 1992 Taiwan tax returns. Shen, in turn, notified Daly’s accounting firm in Taiwan and informed them he was concerned he could be held responsible for any deficiency because his “chop,” the Taiwanese equivalent of a signature, was affixed to the returns. Daly responded that it was “inconceivable” any tax could be owed because Daly had suffered large losses in Taiwan. In January 1994 through mid-October 1995, Shen requested Daly to indemnify him should the Taiwan Tax Authority impose the tax liability on him directly, to resolve the tax dispute and remove him as the responsible person. In May 1994, the Taiwan Tax Authority assessed a tax liability of approximately $80,000 against Daly for 1991 and 1992. Daly did not appeal the assessment, and it became final in June 1995. In October 1995, the Taiwan Ministry of Finance and the Bureau of Entry and Exit forbid Shen from leaving the country until resolution of the Daly tax issue. Daly’s attempt to extricate Shen through diplomatic channels failed. Shen sued for a declaratory judgment in Taiwan to remove himself as Daly’s responsible person. Although the court recognized Shen was no longer an employee of Daly, it denied relief because Daly had not replaced him as the responsible person. The Ministry of Finance also denied an appeal by Shen.

In 1997, Shen sued Daly in the United States District Court for the District of Nebraska. He requested a preliminary injunction to force Daly to pay the taxes. The district court entered such an injunction on December 31, 1997. We assume Daly then paid the taxes because Taiwan lifted the travel restriction. The district court held a bench trial in February 1999 on the issue of a permanent injunction and damages. The district court found a violation of the implied covenant of good faith and fair dealing and granted a permanent injunction. Shen was also awarded attorney’s fees and $4,760 in damages on his contractual claims. Both sides now appeal and we affirm in part and reverse in part.

The district court held that Daly breached the implied covenant of good faith and fair dealing based on the agency relationship between Daly and Shen. We agree. Under Nebraska law, whether a person is an agent is a question of fact. The existence of an agency relationship does not depend on the terminology the parties use to characterize their relationship, but depends on the facts underlying the relationship. An agency relationship can be implied from words, conduct or circumstances that evidence an intent to create on. For example, under agency principles, an agent can be given apparent or ostensible authority to act if the “alleged principal affirmatively, intentionally, or by lack of ordinary care causes third persons to act upon the apparent authority.” That is what happened in this case. After Daly terminated Shen in December 1992, Daly did not remove Shen as its responsible person.

A principal and an agent are in a fiduciary relationship. Because of the fiduciary relationship, the principal owes the agent a duty of good faith and fair dealing in the incidents of their relationship. Moreover, “‘[c]orrelative with the duties of the agent to serve loyally and obediently are the principal’s duties of compensation, indemnity, and protection.’ ” Daly breached its duty as a fiduciary in the following ways: (1) Daly did not pay the tax when it was assessed; (2) it chose not to appeal the assessment through proper channels; and (3) Daly did not find a replacement for Shen as responsible person.

Duties Of A Principal To An Agent

The principal likewise owes duties to an agent arising either from the agency contract or which are implied by law. These duties include:

A duty to cooperate and to deal with the agent fairly and in good faith;
A duty to provide the agent with information about risks of physical harm or pecuniary loss that the principal knows, has reason to know, or should know are present in the agent’s work, but which are unknown to the agent.
A duty to compensate the agent for services provided either according to the terms of the agency contract or, in the absence of an express agreement, a customary fee ordinarily paid, reflecting the reasonable value of the agent’s services based on a theory of quantum meruit;
A duty to reimburse the agent for all expenses, provided they were authorized by the principal, were incurred “within the scope of the agency relationship,” and were necessary to carry out the purpose of the agency relationship;
A duty to indemnify the agent for any losses the agent might suffer because of the actions of the principal.

Principal And Agent – Liability To Third Parties

Liability For Contracts

A major purpose of the agency relationship is to provide a principal with the means to conduct or perhaps expand their business dealings. An agent is authorized to contact third parties on behalf of their principal, enter into contracts on behalf of the principal with third parties, and figuratively put the principal in several places at one time.

While generally a principal who authorizes an agent to enter into a contract with a third party is liable on the contract, the agent may be held liable on the contract under certain circumstances, depending upon whether the agency is classified as fully disclosed, partially disclosed, or undisclosed. The status of the principal will determine the extent of any liability.

A disclosed principal is one whose identity a third party knows at the time he or she enters into an agreement; i.e., the third party knows the agent with whom he or she is dealing is acting on behalf of a known principal. A disclosed principal operates in a fully disclosed agency. In a fully disclosed agency, the contract is between the principal and the third party; thus, the fully disclosed principal and not the agent is liable on the contract unless the agent has guaranteed that the principal will perform on the contract in what is sometimes known as a suretyship.

A partially disclosed principal is an individual whose identity is unknown to the third party at the time an agreement is reached; however, the third party does know the agent is representing some principal. A partially disclosed principal operates in a partially disclosed agency. Under Section 321 of the Restatement (Second) of Agency, in a partially disclosed agency, both the principal and the agent are liable on third-party contracts. In this case, the third party is relying on the reputation, integrity and credit of the agent because the principal is unidentified. If an agent is required to “pay on the contract,” the agent can seek indemnification from the principal.

An undisclosed principal operates in an agency relationship when a third party is unaware of either the existence of the agency or the identity of the principal. An undisclosed principal operates in an undisclosed agency. In an undisclosed agency, both the principal and the agent are liable on the contract with a third party. In essence, by not divulging that he or she is acting as an agent, the agent has become a principal to the contract. The third party is essentially relying exclusively on the reputation and credit of the agent in entering into the contract. However, should an agent be held liable and be required to “pay on the contract,” the agent can seek indemnification from the principal.

Tort Liability

In general, the principal and the agent are each personally liable for their own tortuous conduct. However, a principal may be held liable for the negligent or intentional acts their agent if the actions of the agent are committed within the scope of the agent’s employment under a doctrine known as Respondeat Superior, providing for what is termed as vicarious liability.

The following are factors a court will employ in order to determine whether an agent’s conduct occurred “within the scope of employment”:

Was the act specifically requested or authorized by the principal?
Was the act the kind of act that the agent was employed to perform?
Did the act occur substantially within the time period of employment authorized by the principal?
Did the act take place substantially within the location of employment authorized by the principal?
Was the agent “advancing the principal’s purpose” when the act took place?

In analyzing these factors, Restatement Third of Agency Sec. 7.07 provides the following practical guidelines:

“the extent of control that the agent and the principal have agreed the principal may exercise over details of the work; whether the agent is engaged in a distinct occupation or business; whether the type of work done by the agent is customarily done under a principal’s direction or without supervision; the skill required in the agent’s occupation; whether the agent or the principal supplies the tools and other instrumentalities required for the work and the place in which to perform it; the length of time during which the agent is engaged by a principal; whether the agent is paid by the job or by the time worked; whether the agent’s work is part of the principal’s regular business; whether the principal and the agent believe that they are creating an employment relationship; and whether the principal is or is not in business. Also relevant is the extent of control that the principal has exercised in practice over the details of the agent’s work.”

Example

Joe, a mechanic for ABC Transmissions, owned by Mr. Carville, goes to Bob’s house on behalf of Mr. Carville to pick up Bob’s car and return it to the shop. On the way back to the shop, Joe stops at a bar, has two drinks and then hits another car parked legally in the bar’s parking lot. Bob sues ABC Transmissions and Joe for damages to his car. Are either or both ABC Transmissions and Bob liable?

Example

Joe, while on a sales trip to South Dakota for his employer, ABC Transmission, gets into a car accident when he stops at Mount Rushmore to sightsee. Might either or both ABC Transmissions liable under these circumstances? Might a court apply what is known as the “frolic and detour” doctrine to determine liability?

Criminal Liability

A principal is not generally liable for the criminal conduct of an agent for such crimes as murder, robbery, bribery, etc. It may be too difficult or even impossible to prove the requisite intent (“mens rea”) on the part of a principal. Several exceptions exist. If a principal participates directly in an agent’s crime, or if a principal knows or has reason to know his agent or employee is violating a law, the principal may incur criminal liability as an abettor to the criminal activity. Several environmental statutes or actions under the Foreign Corrupt Practices Act have provided for the criminal responsibility of “responsible parties” under limited circumstances as a matter of public policy.

Termination Of An Agency Relationship

The agency relationship may end in two ways, by agreement or by operation of law.

Termination by Agreement

Either a principal or an agent may terminate the agency relationship. Termination may occur mutually by agreement; upon notice by either the principal or the agent to the other party; upon expiration (lapse) of the time period stated in the agency agreement time; or upon completion of the purpose of the agency relationship. When the relationship is terminated, the principal should provide actual notice to all third parties who dealt with the agent that the termination has occurred. Constructive notice may be provided to other parties by placing appropriate advertisements in publications located where the agency relationship operated; or otherwise providing notice to “the world” that the agency relationship was terminated by appropriate means.

Termination By Operation Of Law

An agency relationship may also be terminated by operation of law. Circumstances include the death of either the principal or agent; insanity of either the principal or the agent; bankruptcy of the principal; impossibility of performance of the agency relationship (such as through a change in the law; absence of qualification through a failure to obtain a regulatory-type license required to perform duties or the revocation of a required regulatory license; or the loss or destruction of the subject matter of the relationship); and the outbreak of war, where the principal or agent is located in a nation at war and where the agent’s country terminates the agency relationship between the parties.

Certain types of agency relationships created for the benefit of an agent are termed “an agency coupled with an interest.” An “agency coupled with an interest” typically occurs in a security interest to secure a loan. The principal may not legally terminate the agency relationship during the term of the agency relationship without the consent of the agent if the agent has provided the security (funding) to effectuate the loan. Should the principal terminate the agency unlawfully, the principal may be required to pay damages to an agent that has been wrongfully terminated.

Ethical Considerations

Limiting Compensation

In the arena of sports, agents are often limited in their compensation to an amount determined by the League’s collective bargaining agreement. At the same time, a lawyer’s compensation may be four to five times higher. Should a collective bargaining agreement between players and their sports league have the ability to limit the compensation of a sports agent who is not a party to that agreement?

Dancing

Maria Aripova runs a dance studio and frequently acts as an agent for booking recitals in the field of modern dance. She has two “up-and-coming” dancers in her studio. Should Maria be permitted to represent both dancers at the same time even though their interest may be quite different and even adverse on occasion? Upon what showing?

Questions

How is an agency relationship created?
Explain the legal principle of agency by estoppel.
What are the duties of a principal to an agent? An agent to a principal?
Under what circumstances might an agent be liable to a third party?
What is the difference between a disclosed and undisclosed principal?
Describe how an agency relationship may terminate or be terminated?
Give an example of an “agency coupled with an interest.”
Research Questions
What is an independent contractor?
What is CERCLA?
What are the two most important aspects of the Foreign Corrupt Practices Act?

Chapter Eight | Contractual Capacity

Contractual capacity is the third element of a valid contract. A contract entered into by a party who lacks the requisite capacity may be either void or voidable. If one of the parties to a contract has been adjudged incompetent or insane by a court after a competency hearing, that contract will normally be judged “void” by the court. In other cases, a party may allege and will have to prove that he or she lacked the ability to enter into a contract for one or more of the following reasons: the contract was entered into under the influence of drugs or alcohol; mental incompetence (perhaps the onset of senility or Alzheimer’s disease); mental retardation; intoxication; the side effects of medication; temporary delirium deriving from physical injuries sustained in an accident; extreme confusion; etc.

Generally, unless there has been an adjudication of incompetency, contractual capacity is a question of fact for a jury, rather than a question of law to be decided by a judge. In order to set aside a contract on grounds of lack of capacity, it is necessary to show that a party did not “understand the nature or consequences of the transaction” or that “by reason of mental illness or defect… [a party] is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of this condition.” Thus, upon such a showing, a party may exercise its option to disaffirm or remove him or herself from a contract. The contract is voidable.

One major topic of in the discussion of contractual capacity is a contract entered into by a party considered by the legal system to be a minor or an “infant.”

Minor’s Contracts

Some preliminary considerations are in order. A minor is any person who has not yet attained the required “age of majority” as determined by a given state. This age (usually 18, but in some states the age may still be 21) may or may not be the same age as is the age for voting, getting married, or purchasing or consuming alcoholic beverages. Each state by statute determines its own “age of majority” for entering into a contract.

The word “minor” may be synonymous legally with the word “infant.” In some states, if a minor becomes emancipated (that is, the minor is considered to be “on his own”) that minor will be treated legally as an adult for the purposes of entering into a contract. Minors who might be considered emancipated are those who are married, who are serving in the armed forces, who make significant incomes (i.e., child stars, like Gary Coleman or Shirley Temple), or who live on their own. Unless adjudicated by a court, emancipation is likewise a question of fact for a jury.

An adult who enters into a contract with a minor has no right to terminate the contract. Only the minor enjoys the right to disaffirm the contract. If both parties to a contract are minors, then each of the minor parties will have the right to disaffirm the contract.

A contract entered into by a minor is thus an example of a voidable contract.

Three Rules of Minor’s Contracts

There are three rules that generally apply to minors’ contracts: the Majority Rule; the New York Rule; and the Third Rule.

Majority Rule

Under the majority rule, still applicable to more than two-thirds of the states, a minor may, at any time prior to reaching his/her age of majority, and for a reasonable time thereafter (usually no more than 30 days), disaffirm a contract, return the consideration in his/her possession or under his/her custody control at the time of disaffirmance in whatever form it is currently in, and receive back his/her full consideration. The majority rule provides maximum protection to a minor who has entered into a contract during the period of his or her minority.

New York Rule

Under the New York rule, a minor may disaffirm the contract, but is responsible in either quasi-contract or under a theory of restitution for the depreciation, wear and tear, damage, fair use, or reasonable rental value of the items under his/her care, custody, or control pursuant to the contract. This approach seeks to balance the rights of both parties to the contract.

Third Rule

Under the “third rule,” a minor may only disaffirm a contract if he/she can return the consideration in its exact original form. The third rule will normally apply to so-called “lay away” contracts, where goods remain with the seller until they have been fully paid for.

In all cases, no particular form of language or conduct is required to effectuate a disaffirmance as long as the minor makes his or her intention clear.

Read the following case, Harvey v. Hadfield, carefully. Note especially the reasoning cited behind the minors’ contract rules discussed in this case. How do you know which rule a given state will apply to a contract entered into by a minor?

Case Summary

Harvey v. Hadfield

372 P.2d 985 (Utah, 1962)

Plaintiff, a minor, sues by his guardian ad litem to recover $1000 he had advanced under a proposed contract to buy a house trailer. He appeals from an adverse judgment.

Plaintiff, a student attending college turned 19 on October 13, 1959. A few days after his birthday, he quit school and got a job. In the latter part of October, he went to the defendant’s lot and selected a trailer he liked. He told the defendant of the above facts, of his plans to be married and of his desire to buy the trailer. The defendant advised him that he would have to get his father’s signature to get financing through the defendant.

Plaintiff responded that he thought he could arrange financing and that he could arrange to raise a thousand dollars as a down payment. He paid $500 on November 13 after having paid $500 on November 6, 1959 and applied to the bank for financing. The bank refused to accept his application for a loan because of his minority and because his father would not sign with him.

After the plaintiff’s plans failed to materialize, he asked the defendant to return his money. Defendant refused but finally did agree to a statement which the plaintiff typed up and which both signed. It released the trailer in question for sale and granted plaintiff $1000 (plus interest) credit on a trailer of his choice next Spring. About February 1, 1960, plaintiff’s attorney sent a letter to the defendant disaffirming the contract and demanding the return of his money. Upon refusal, this suit was commenced.

Since time immemorial, Courts have quite generally recognized the justice and propriety of refusing to grant enforcement to contracts against minors except for necessities. It is fair to assume that because of their immaturity, they may lack the judgment, experience and will power which they should have to bind themselves to what may turn out to be burdensome and long lasting obligations. Consequently, courts are properly solicitous of their rights and afford them protection from being taken advantage of by designing persons, and from their own imprudent acts, by allowing them to disaffirm contracts entered into during minority which upon more mature reflection, they conclude are undesirable. * * *

Accordingly, adults dealing with minors must be deemed to do so in an awareness of the privilege the law affords the minor of disaffirming his contracts. * * *

* * * A minor is bound not only for the reasonable value of necessaries but also for his contracts, unless he disaffirms them before or within a reasonable time after he attains his majority and restores to the other party all money or property received by him by virtue of said contracts and remaining in his control at any time after attaining majority.

Defendant advances the following proposition. * * * That even if the contract is disaffirmed, he is entitled to an offset of the actual damages he has sustained from the loss of sale of the trailer from the $1000.

Defendant urges that from the fact that plaintiff was “on his own,” working and contemplating marriage, he could reasonably regard him as “engaged in business as an adult” and that he was therefore capable of entering into a binding contract.

The defendant’s position is not sound. * * *

Our statute cannot be construed to support the defendant’s contention that the disaffirming party must compensate him for damages he may have incurred.

The code only requires that the minor restore “to the other party all money or property received by him by virtue of said contracts and remaining within his control at any time after attaining his majority.” The trailer was left in the possession of the defendant. That fulfills the requirement of the statute.

The plaintiff minor having disaffirmed the contract is entitled to the return of his money.

REVERSED.

The Necessaries Doctrine

It is now well settled that a minor is liable for the reasonable value of necessaries furnished him or her under the theory of quasi-contract. While there is no one universally accepted definition, necessaries generally include those items furnished to a minor for his/her “life, health, or safety.” A list of necessaries (often termed as “necessities” under the common law) might include such items as food, clothing, shelter, medical, and educational expenses.

Two special aspects of the necessaries doctrine must be considered. First, there has been a tendency by courts to expand the category of items that would be considered as necessaries (i.e., items such as life or health insurance, automobiles, sporting goods, audio equipment, a college loan; etc., may be considered as necessaries if these items are used in connection with one of the traditional categories). Second, a court will often look to the value or price of the item in question and the station or status in life of the minor to determine if a contract is for necessaries. Thus, a $25 cloth coat may be a necessary item for all minors; but a $5,000 mink jacket is only likely to be a necessity for someone of unusual means.

Finally, most courts will apply the New York rule to contracts where the minor has been furnished a personal service (i.e., dance or karate lessons; babysitting jobs; employment assistance), on the theory that the minor cannot return the service already rendered to him or her.

Ratification

Ratification is an act or an expression in words by which a minor, after having reached his or her age of majority, indicates an intention to be bound by the contract entered into during minority. An effective ratification cannot take place prior to the attainment of majority.

Ratification may be express, that is, a minor may give actual notice that he or she will be bound to the contract. The notice may come in the form of a letter, a telegram, or a phone call.

Ratification may also be implied from conduct, such as making a payment on account after reaching the age of majority, or retaining or continuing to use property after attaining majority.

Ratification might also result from a minor literally doing nothing after reaching his/her age of majority, although courts remain divided on the issue of silence and its effect on the issue of ratification.

A Minor’s Misrepresentation of Age

Suppose a minor is asked about his/her age. The minor lies (also known as making a misrepresentation) and states that he/she is over the age of majority and is no longer a minor.

According to the majority rule, a minor may still disaffirm the contract, even though he/she has misrepresented his/her age. There are several other rules or variations of the rule that individual jurisdictions may follow. These include:

If a minor misrepresents his or her age, he/she may not disaffirm. Period. This represents the extreme view on the matter and seeks to punish a minor for their misrepresentation.

If a minor misrepresents, he/she will be prohibited (estopped) from using minority as a defense. This view affords practically no protection at all to the minor who has misrepresented his or her age, unless he/she can return the consideration “as delivered,” in its exact original form.

Some courts will permit a minor who has misrepresented his/her age to disaffirm, but will then allow the minor to be sued in tort for fraud, resulting in an effective “set-off” of any amount of disaffirmance.

As was noted before, it is important to determine the views of an individual jurisdiction on these matters.

Ethical Considerations

Disaffirmance By A Minor

Larry Derry, who is 16, purchases a car from Cruiser Motors. Larry one night is invited to a party where is has a bit too much to drink. On the way home, he cracks up the car. It is now worthless. Larry now attempts to get his money back, claiming minority as a defense. Should courts continue to protect minors from the consequences of their conduct by relying on common law rules relating to disaffirmance of contracts?

Disaffirmance By Adults

Should the “other party” to a contract (not the minor) be afforded the same opportunity to disaffirm a contract as now possessed by the minor? Under what circumstances?

Entertainment And Sports

Do “minors” who work in show business or sports deserve more protection than others relating to contracts they might enter into?

Questions

How can you determine an individual state’s view of necessaries and of the principle of ratification?

Harvey v. Hadfield

What is a guardian ad litem? When might one be used?
Why do courts refuse to grant enforcement to minors’ contracts?
What happens if an adult claims that he did not know a party was a minor?
When and under what circumstances is a minor liable for a contract?
What rule did the defendant propose? Was it accepted by the courts?
Why did the defendant urge that the court adopt the view that the plaintiff was “on his own?”
What does it mean to be emancipated?