Agency Formation and Duties


  • Agency=Principal and Agent.
  • Agency is the most common and most important legal relationship.
  • Understanding agency is crucial to understanding the legal environment of business.
  • Principals use agents to be able to conduct multiple business operations simultaneously in various locations.  
  • The principal has the right to control the agent in matters entrusted to the agent.

Agency Relationships

  • Agency is a “fiduciary” relationship based on trust and confidence.
  • Distinguish Employee vs. Independent Contractor  Relationships.

Employer Liability.

Determining whether the worker is an employee or an independent contract affects liability of Principal/Employer.

  • Tax Liability: Employer liable if employee.
  • Contract Liability: Employer not necessarily liable.
  • Tort Liability: Employer liable for torts of employee within scope of employment.
  • Works for Hire.  
  • Case 31.1:  Graham v. James  (1998).

Formation of the Agency Relationship

  • Consensual Agreement.
  • No consideration required.
  • Principal needs contractual capacity, Agent does not.
  • For any legal purpose.

Types of Agencies

  • Agency by Agreement.
  • Agency by Ratification.
  • Agency by Estoppel.
  • Agency by Operation of Law.
  • Necessaries for family.
  • Emergency.

Agency by Agreement

Formed through express consent (oral or written) or implied by conduct.
Case 31.2:  Acordia of Virginia Insurance Agency v. Genito Glenn (2002).
Agency by Ratification
Principal either by act or by agreement ratifies conduct of a person who is not in fact an agent.

Agency by Estoppel

Principal causes a third person to believe that another person is the Principal’s Agent, and the third person acts to her detriment in reasonable reliance on that belief.

Agency by Operation of Law

Agency based on social duty is formed in certain situations when the Agent is unable to contact the Principal.

  • Necessaries.
  • Emergencies.

Agent’s Duties to Principal
Performance: reasonable diligence and skill (special skills).
Notification to P.
Loyalty (no conflict of interest).
Case 31.3:  American Express v. Topel (1999)

Principal’s Duties to Agent

  • Compensation (Express or Implied).
  • Reimbursement and Indemnification.
  • Cooperation.
  • Provide safe working conditions.

Rights and Remedies of Agents andPrincipals

Rights of Agents:

  • Right to compensation, reimbursement, indemnification and cooperation.
  • Agent can withhold performance and demand an accounting.
  • Agent can recover damages for past services and future damages.

Principal’s Rights and Remedies:

  • Contract remedies for breach of fiduciary duty and performance.
  • Can sue in tort: libel, slander, trespass, deceit, fraud.
  • Constructive Trust – money/ property agent steals from Principal.
  • Avoidance of contract if agent does not do as told.
  • Indemnification 


Liability, Defenses, and Discharge


There are two kinds of liability associated with negotiable instruments:

  • Signature liability.
  • Warranty Liability.

Signature Liability

Relates to signatures on instruments.
Signers of negotiable instruments are potentially liable for amount stated on instrument.

  • Primary Liability: Makers/Acceptors.
  • Secondary Liability: Drawers/Indorsers.

Primary versus Secondary Liability


  • Promises to pay the note.
  • Obligated to pay terms of instrument at time of signing.
  • Acceptors.

  • Drawee promises to pay an instrument when presented for payment.
  • Secondary Liability

    Proper Presentment.

  • Must be timely (checks w/in 30 days).
  • Dishonor.
    Case 26.1: Messing v. Bank of America (2002).

Proper Notice.

  • Manner of Notice in any Reasonable manner.
  • Notice to Indorsers.
  • Accommodation Parties

    Signs instrument to lend name as credit to another party on the instrument.

  • Makers v. Indorsers.
  • Authorized Agents’ Signatures

  • Agent agrees to act for Principal.
  • Agents can hold Principal liable if authorized to sign.
  • Principal must be clearly named.
  • Agent is personally liable when Principal is not named or disclosed, unless check is drawn on Principal’s account.
  • Case 26.2: Caraway v. Land Design Studio (2001).

Unauthorized Signatures

Forgery does not bind owner but Bank is liable.
If Agent has no authority, Agent is personally liable, but Principal is not, unless ratified.

  • Ratification of signature.
  • Negligence of party.
  • Holder in Due Course.

Special Rules for Unauthorized Indorsements

Unauthorized indorsement does not bind maker/drawer except:

  • “Imposter Rule”: imposter induces maker/drawer to issue check to imposter.
  • When imposter signs as/on behalf of maker/drawer intending payee has no interest in the instrument.
  • Fictitious Payee.

Warranty Liability

Extends to both signers and non-signers.
Breach of warranty can occur when the instrument is transferred or presented for payment.
Transferors make certain implied warranties regarding instruments they negotiate.
Liability not subject to dishonor, presentment, notice.
Liabilities: Transfer or Presentment.

Transfer Warranties

Following transfer warranties extend to all subsequent holders:

  • Transferor is entitled to enforce the instrument.
  • Signatures are authentic and authorized.
  • Instrument has not been altered.
  • Instrument not subject to defense.
  • Transferor has no notice of insolvency.

Presentment Warranties

Person who presents an instrument makes the following presentment warranties:

  • No missing or unauthorized indorsement.
  • Instrument has not been altered.
  • Person obtaining payment has no knowledge signature is unauthorized.

Case 26.3: First National Bank of Chicago v. MidAmerica Federal Savings (1999).


Universal or Real – can be used to defeat a holder and a HDC. Personal – can be used to defeat a holder but not a HDC.

Universal Defenses

Forgery of maker’s or drawer’s signature.

  • Or if an authorized agent exceeds his authority to the amount which exceeds his authority.

Fraud in the execution – the”autograph” situation, not fraud in the inducement.

Material Alteration.

  • Do not have to pay the altered amount ($8 to $800), only a personal defense to the original amount ($8).
  • Not a real defense if instrument left blank, (.. filled in $800), then have to pay all ($800).

Discharge in Bankruptcy.

Infancy (Minority).
Illegality – severe enough to make contract void.
Mental Incapacity (adjudicated by court).
Extreme Duress. If instrument signed under threat of immediate force or violence.

Personal Defenses

Valid against holders but not HDC’s.

  • Breach of contract or warranty.
  • Lack of consideration.
  • Fraud in the inducement.
  • Illegality – not severe enough to make void.

Mental incapacity – not severe enough to make void.


  • By payment or cancellation.
  • Unauthorized completion.
  • Non-delivery of instrument.
  • Ordinary duress or undue influence rendering contract voidable.

Federal Limits on HDC Rights

FTC Rule 433 (1976) abolished the HDC doctrine in consumer credit transactions.

  • Allows Buyer to assert any defense she might have against the Seller of goods or services (Car Dealer), against the subsequent HDC (Bank) as well.
  • So Buyer’s duty to pay is conditional on Seller’s full performance under contract.
  • Discharge from liability on an instrument can occur by:

  • Payment.
  • Cancellation or Surrender.
  • Reacquisition.
  • Impairment of Recourse.
  • Impairment of Collateral.

Transferability and Holder in Due Course


Negotiable instruments can be transferred to others by negotiation or by assignment.


Transfer by negotiation creates a holder, who at the very least receives the rights of a previous possessor.
A holder in due course (HDC) acquires more rights in the instrument than the previous possessor. This means defenses that can be raised against the transferor may or may not be able to be raised against the transferee.

Two Ways to Negotiate

Negotiating Order Instruments endorsement and delivery required.
Negotiating Bearer Instruments—delivery only.

  • Converting Order to Bearer and vice versa.
  • Converting Order Instruments to Bearer Instruments, and Vice Versa.

  • Must be done at the time of negotiation.


Signature with or without additional words or comments:

  • Blank Indorsements.
  • Special Indorsements.
  • Qualified Indorsements.
  • Restrictive Indorsements.

Miscellaneous Indorsement Problems

Misspelled Names. Indorsement should generally be identical to name on instrument.

  • Misspelled name OK.
  • Instruments Payable to Legal Entities.

  • Negotiable by authorized representative of the entity.
  • Alternative or Joint Payees.

  • In the alternative – either may indorse.
  • Jointly – both must indorse.
  • Case 25.1: GMAC v. Abington Casualty (1992).

    Holder vs. HDC

    Holder is one in possession of order or bearer paper and the instrument is drawn or indorsed to the holder.
    Holder in Due Course (HDC) results if the holder also meets the following requirements:

    • Takes for Value.
    • Takes in Good Faith.
    • Takes without Notice of a Defense to Payment.

    HDC: Taking for “Value”

    No value if gift or inheritance. Not the same as consideration.
    Holder can take for value by:

    • Performing the instrument’s promise.
    • Acquiring a security interest or other lien in the instrument.
    • Taking instrument in payment for an antecedent debt.
    • Giving a negotiable instrument as payment.
    • Giving irrevocable commitment as payment.

    HDC: Taking in “Good Faith”

    Good faith is honesty in fact and the observance of reasonable commercial standards of fair dealing.”
    Only applies to holder, not transferor.
    Case 25.2: Maine Family Federal Credit Union v. Sun Life Assurance (1999).

    HDC: “Taking With Notice”

    Holder takes the instrument with notice if he knows/has reason to know:

    • Instrument is overdue.
    • Instrument has been dishonored.
    • Actual knowledge or any suspicious event.
    • That a claim or defense exists.
    • So irregular, incomplete, or bears such evidence of forgery.
    • Case 25.3: Travelers Casualty and Surety v. Wells Fargo Bank (2002).

    Holder through an HDC

    “Shelter Principle”: Person is not an HDC but derives title through HDC.
    Limitations on the shelter principle: no fraud, illegality, claim or defense.

    HDC in International Context

    Good Faith and Protected-Holder Status.
    UN approved Convention on International Bills of Exchange and International Promissory Notes (CIBN)
    CIBN affords Greater Protection for Protected Holders. .posttext h4 { margin-bottom: 5px; }

The Function and Creation of Negotiable Instruments

Articles 3 and 4 of the UCC

A “negotiable instrument” is a signed writing containing an unconditional promise to pay an exact sum of money. History of negotiable instruments began in England “bills of exchange” so that merchants were able to exchange money while keeping their money safe in the banks.
Today, UCC Article 3.

The Function of Instruments

To function as a substitute for money or credit device.
In order for an instrument to operate practically, it has to be easily transferable.
Laws of assignment did not allow for ease of transfer because the assignee was always subject to the defenses that could be used against the assignor. Article 3 provided that some defenses could not be used against certain assignees.

Types of Negotiable Instruments

Drafts and checks are 3 party instruments: Drawer, Drawee and Payee.

  • Checks (cashier’s, teller’s and traveler’s) are drafts on a bank.
  • Trade acceptances seller is drawer and payee.
  • Case 24.1: Flatiron Linen v. First American State Bank (2001).
    Promissory Notes are two party instruments:

  • Maker (Promisor) and
  • Bearer (Promisee).
  • Certificates of deposit (CDs): two party instruments.
    Case 24.2: U.S. v. Durbin (1999).

Requirements for Negotiability

Writing signed by the maker or the drawer. Unconditional promise or order to pay a fixed amount of money.
Payable on demand or at a definite time.
Acceleration and Extension clauses.
Be payable to order or to bearer, unless it is a check. Case 24.3: Barclay’s Bank v. Johnson (1998).

Factors Not Affecting Negotiability

  • Omission of date.
  • Postdating or antedating.
  • No place for payment: address or Drawee or maker or, if none, place of business or, if none, residence.

Factors Not Affecting Negotiability

  • Handwritten over typewritten or printed.
  • Words over numbers.
  • With interest = judgment rate.
  • Mention of collateral.

Sales and Lease Warranties


    A warranty is an assurance of fact upon which a party may rely.

  • Warranty of Title.
  • Express Warranty.
  • Implied Warranty of Merchantability.
  • Implied Warranty of Fitness for a Particular Purpose.
  • Implied warranty arising from the course of dealing or trade usage.

Warranty of Title

Automatically arises in most commercial sales transactions.
UCC-312 creates 3 warranties:

  • Good Title.
  • No Liens.
  • No Infringements.

Warranty Title Disclaimer

Title warranty can generally be disclaimed only with specific language in contract.
Circumstances may be obvious to clearly indicate disclaimer of title, such as a sheriff’s sale.

Express Warranties

Can be oral or written– don’t have to use the words “warrant” or “guarantee.”

  • Any Affirmation or Promise.
  • Any Description.
  • Any Sample or Model.
  • To create an express warranty, the affirmation of fact must become the “basis of the bargain.”
    And Buyer must rely on warranty when he enters into contract.
    Case 23.1: Genetti v Caterpillar Inc (1999).
    Statements of Opinion and Value.
    Generally excludes “puffing” – “Best car in town”, not an express warranty.
    However, expert opinion is not puffery.

Implied Warranties

Warranty inferred at law based on the circumstances or nature of the transaction.
Under the UCC, merchants warrant the goods they sell are “merchantable”, i.e., fit for ordinary purpose for which such goods are sold.

Implied Warranty of Merchantability

  • Automatically arises from merchants.
  • Goods are of average, fair, or medium-grade.
  • Adequately packaged and labeled.
  • Conform to promises on label.
  • Have a consistent quality and quantity among the commercial units.

Case 23.2: Webster v. Blue Ship Tea Room (1964).

Implied Warranty of Fitness for a Particular Purpose

Arises by any Seller who:

  • Knows the particular purpose for which the goods are being bought; and
  • Knows the buyer is relying on seller’s skill and judgment to select suitable goods.

Implied Warranty Arising from Course of Dealing or Trade Usage

Arises when both parties to a contract have knowledge of a well-recognized trade custom. Courts infer that both meant this custom to apply to their transaction.

Overlapping Warranties

Occurs when two or more warranties made in a single transaction:

  • If warranties are consistent, they are construed as cumulative.
  • If inconsistent:
  • First: implied warrant of fitness for a particular purpose.
  • Then: express.

Warranties and Third Parties

At common law only the Buyer could sue the Seller because she is the one in privity of contract with the Seller.
UCC 2-318 provides 3 alternatives from which the states may choose.

Warranty Disclaimer

Express Warranties can be disclaimed:

  • If they were never made (evidentiary matter).
  • If a clear written disclaimer in contract with specific, unambiguous language and called to Buyer’s attention (BOLD CAPS UNDERLINED).
  • Implied Warranties:

  • Merchantability: “As Is,” “With All Faults.”
  • Fitness for a Particular Purpose: must be in writing and conspicuous.
  • If Buyer has the right to fully inspect and either: does so or refuses to do so, warranties are disclaimed as to defects that could reasonably be found.
  • Case 23.3: International Turbine Services v. Vasp Brazilian Airlines (2002).

Statute of Limitations

Action for Breach of Warranty:

  • Begins to toll at tender.
  • Buyer must notify Seller within a reasonable time.
  • Buyer must sue within four years after cause of action accrues.
  • If warranty is for future performance, action accrues when performance happens and breach is discovered.

Magnuson-Moss Warranty Act

FTC enforces; Attorney general or consumer can bring action.
Modifies UCC for consumer sales.
Only applies when written warranties are made by Seller (including a service contract).

  • If goods > $10 label “full” or “limited.”
  • If goods > $15 Seller must make additional disclosures.
  • Full Warranty: Seller must repair or replace.
    Limited Warranty must be conspicuous.

  • If limit of time only must say, e.g., “full twelve-month warranty.”
  • UCC Implied Warranties:

  • May not be disclaimed, but can be limited, but must correspond with time of express warranty.

Warranties under the CISG

Art. 35: uses the word “conformity” instead of warranty, but very similar to UCC.

Remedies for Breach of Sales and Lease Contracts

Contractual Provisions Affecting Remedies

Parties to a contract can vary their rights and duties that preempt UCC provisions. Parties can stipulate whether contractual provisions are “exclusive”. However, provisions limiting consumer rights may be unconscionable.

Lemon Laws

Automobile under warranty possesses significant defect that affects vehicles use or value that cannot be fixed within statutory period.
Buyer’s remedies include:

  • A new car;
  • Replacement of defective parts;
  • Or full refund

Remedies for Breach of International Sales

CISG provides remedies similar to the UCC:

  • Monetary damages that are foreseeable, consequential damages.
  • Damages are difference between contract price and market price.

Parties can agree to what law they will use.

Seller- Goods in Seller’s Possession

Seller may withhold delivery of the goods:

  • If material breach by Buyer, Seller can withhold delivery of all goods.
  • If non-material breach, Seller can withhold delivery of this installment. Seller can withhold delivery of all goods if Buyer is insolvent.
  • Seller may rescind the contract.
  • Seller may identify the goods to the contract.
  • Seller may sell raw materials for scrap or finish production.
  • Seller may resell the goods; and Recover damages: the difference between the contract price and the resale price + incidental damages+ damages = the market price at the time & place of tender + incidental damages – expenses saved.
  • If No Damages, Seller can sue for lost profits.
  • Case 22.1: Brandeis Machinery v. Capital Crane Rental (2002).
  • Seller may sue Buyer for breach of contract.
  • Recover Damages = the market price at the time & place of tender + incidental damages.
  • If there are no damages, Seller can sue for lost profits.

Seller-Goods in Transit

Goods are “in transit” when Seller has tendered goods to Carrier.
Goods are in transit until:

  • Buyer is given negotiable document of title to goods.
  • Buyer is given non-negotiable document of title or Bailee has acknowledged
  • Buyer’s right to have the goods.

  • Buyer has had a reasonable time to pick up the goods.
  • Seller has the right to stop the goods in transit if:

  • Buyer is insolvent – Seller can stop entire shipment of goods.
  • Buyer is in breach – Seller may stop a whole truckload or whole container.

Seller-Goods in Buyer’s Possession

  • Seller may sue for the purchase price.
  • Seller may also sue Buyer if goods were “specially-made” which Seller cannot resell.
  • Seller may also sue for the purchase price if the goods were destroyed and the risk had already passed to the Buyer.
  • Seller can reclaim goods received by an insolvent Buyer if demand made within 10 days of receipt.

Buyer-Goods in Seller’s Possession

    Buyer Wants Goods

  • Specific performance or replevin
  • Recover goods from Seller if Seller becomes insolvent within 10 days after receiving first payment.
  • Buyer Does Not Want Goods

  • Rescind contract.
  • Cover or do not cover and sue for breach of contract.
  • Case 22.2: KGM Harvesting v. Fresh Network (1995).

Buyer-Seller Delivers Nonconforming Goods

    If Seller does not make perfect tender Buyer has the right to reject all or part of goods.

  • Buyer must timely notify Seller of rejection and reasons and follow Seller’s directions.
  • Buyer is entitled to commission for selling perishable goods.
  • Buyer may store the goods and retain a security interest in the goods for his costs.
  • If Buyer has accepted non-conforming goods, she may:

  • Sue for breach of warranty.
  • Sue for ordinary damages.
  • Deduct damages from purchase price.
  • Case 22.3: China National Metal Products v. Apex Digital (2001).

Contractual Provisions Affecting Remedies

  • Limitation of Damages.
  • Limitation of Remedies.
  • Waiver of Defenses.

Lemon Law

The majority of the states have enacted lemon laws in regard to automobile sales.
Seller’s limitations were too “good.”

    Buyer must:

  • Give notice.
  • Seller gets four chances to fix.
  • Arbitration: decision binding on manufacturer, not on Buyer.

Remedies for Breach of International Sales Contracts

CISG provides remedies similar to the UCC.
Article 74 provides for money damages, foreseeable consequential damages.
Damages are difference between contract price and market price.
Article 28 provides for specific performance where a country would normally grant it in their own law.
Parties can agree to what law they will use.

Performance of Sales and Lease Contracts

Introduction of Sales and Lease Contracts

Seller must transfer and deliver conforming goods.
Buyer must accept and pay for conforming goods.
In the absence of an agreement between Seller and Buyer, UCC Article 2 controls as set out below.

Good Faith Requirement

Good Faith is the foundation of every UCC commercial contract. Good faith means honesty in fact. For a merchant, it means honesty in fact and observance of reasonable commercial standards of fair dealing in the trade.
Merchants are held to a higher standard of care than non-merchants.

Seller-Lessor Obligations

Seller has a duty to “tender” delivery of “conforming goods.”
Tender means “delivery” to agreed place: With reasonable notice, At a reasonable hour, In a reasonable manner.
Exactly, unless otherwise agreed, Place of Delivery-Non-Carriers.
Buyer picks up at Seller’s place of business or, if Buyer has no place of business, then Buyer’s residence.
If both parties know the goods are elsewhere (at a warehouse), then place of delivery is where the goods are.

Place of Delivery—Carriers

Shipment contracts.
Seller has a duty to:
Put goods into hands of independent carrier.
Make contract for transportation.
Obtain and promptly deliver or tender to the Buyer any documents necessary.
Promptly notify Buyer that shipment has been made.
Destination contracts. Seller has duty to:
Tender the goods at a reasonable hour and hold conforming goods at the Buyer’s disposal for a reasonable period of time.

The Perfect Tender Rule

If goods, or tender of delivery, fail in any respect to conform to the contract, the Buyer has the right to:Accept the goods;
Reject the entire shipment; or
Accept part and reject part.
Exceptions to the Perfect Tender Rule

Agreement of the Parties.

Cure, Substitution of Carriers.
Installment contracts.
Commercial Impracticability.
Destruction of Identified goods.
Partial Performance, Proceede

Buyer-Lessee Obligations

Furnish facilities reasonably suited for receipt of the goods.
Make payment at the time and place the Buyer receives the goods.
Credit has to be prearranged.
Credit period begins on the date of shipment.
Pay with cash, credit card, and check.
But if Seller asks for cash, Seller has to give Buyer time to get cash.

Buyer’s Obligations.

  • Buyer has right to inspection before paying:
  • Costs of inspection borne by Buyer.
  • However, C.O.D., C.I.F. and C&F give Buyer no right to inspect.


Buyer can accept goods:
By words or conduct.
If Buyer had reasonable amount of time and failed to reject.
Buyer performs an act which indicates he thinks he is the owner.
Partial Acceptance.
Revocation of Acceptance
Notify Seller of breach.
Revoke only if substantial nonconformity; and
Buyer accepted on the reasonable assumption that the Seller would cure the non-conformity OR Buyer did not discover the nonconformity because defect was latent or hard to discover.
Anticipatory Repudiation
Party communicates he will not perform by time of contract performance.
No breaching party may suspend performance and:
Treat the A.R. as material breach and pursue a remedy; or
Wait a reasonable time.
Case 21.3:  Banco International v. Goody’s Family Clothing (1999).

International Contracts and Letters of Credit Parties.

Account: Buyer.
Issuer: Bank.
Beneficiary: Seller.
Issuer is bound to pay the beneficiary who has complied with the terms and conditions of the letter of credit, usually requiring a bill of lading to the issuer to prove shipment has been made.

Agreement of the Parties

Parties agree that some defective goods will be acceptable.
Parties agree that defective goods can be replaced or repaired within a certain time.

Seller’s Cure

Seller has the right to “Cure” (ship conforming goods to Buyer) if:
Agreed time of performance has not yet expired; or
If Seller had reasonable grounds to expect that Buyer would accept non-conforming goods, i.e., these goods are better than goods ordered, or Buyer has accepted non-conforming goods in the past.

Substitution of Carriers

If a carrier becomes impracticable or unavailable through no fault of either party, a commercially reasonable substitute is acceptable.

Commercial Impracticability

Occurrence of an unforeseen contingency that makes performance impracticable.
Nonoccurrence was a basic assumption on which the contract was made.
If only partial impracticability, Seller must allocate what he/she has.
Case 21.1: Maple Farms v. City School District of Elmira (1974).

Installment Contracts

Installment Contracts can be rejected if:
Installment is substantially non-conforming and can’t be cured.
Non-conforming installment substantially impairs the entire contract.
Destruction of Goods

If no fault of either party and it occurs,
Before risk passes to Buyer then,
Both Seller and Buyer are excused from performance.

Partial Performance

Sometimes unforeseen event only partially affects Seller’s capacity to perform.
In that event, Seller has duty to reasonably allocate any remaining production capacity to fulfilling contractual performance.
Buyer has the right to reject.
Case 21.2: Kock Materials Co. v. Shore Slurry Seal, Inc.  (2002).