Contents of the CONTRACT.TXT file
NOTE: The purpose of this paper is to provide the layperson some
of the basic concepts underlying contract law. This paper is not
intended to serve as a definitive work in the law of contracts. It
presents the concepts and principles that EVERY person should at
least be aware of when it comes to contracts. Further, it merely
scratches the surface of this highly complex, technical, and com-
prehensive area of business law. In addition, the reader will ob-
serve the rather obvious avoidance of the legalese that has a ten-
dency of creeping into a document such as this. This is inten-
However, this paper is not intended to serve as or substitute for
competent legal advice that is obtainable via consultation with an
attorney in your state.
This paper is presented for information purposes only, and is not
intended nor should it be deemed to be or constitute legal advice.
(c) Copyright 1989, James J. Spinelli
VITRON Management Consulting, Inc.
P.O. Box 723
Yonkers, New York 10710
Activity Bulletin Board Service - ABBS - (914) 779-4273
WHEN YOU MAKE A CONTRACT
People enter into contracts every day. Most are simple af-
fairs, prompt transactions that are soon forgotten. Ordering a
newspaper or magazine creates a contract. Agreeing to buy a new or
used car binds the purchaser to a contract. Credit accounts are
premised on the existence of a contract. Even using the telephone
or turning on a radio implies an acceptance of one's legal obliga-
tion to pay the telephone and electric utilities for the service
Generally defined, a contract is a promise which creates a
legal obligation. A contract seldom presents legal difficulties
and rarely does it require litigation in court. However, an oc-
casional legal problem can arise. These difficult contracts create
the legal cases comprising the law of contracts. The concerned in-
dividual is in a better position to avoid legal problems in his
personal and business affairs if he is aware of these basic con-
Essentially, a contract is a promise that can be enforced by
a court of law. Most often, it is an agreement between two or more
persons in which each promises to do or not to do a certain act.
Once a contract is created, each person has a duty to perform that
act which he promised to do. If one party fails to carry out his
promise, the other has a legal right to go into court and seek one
or two remedies. He can ask to be awarded damages, the monetary
amount equal to the injury he has suffered because the other party
broke his promise, or specific performance, a direct command from
the court ordering the other party to carry out his promise.
The principles and examples given here will explain each of the
elements of an enforceable contract.
Essentials of a Contract
To be valid and enforceable, a contract must be an agreement
made by two or more persons who are legally capable of entering
into a contract. It consists of an offer, an acceptance of that
offer, and promises supported by consideration. In addition, there
must be no law declaring the agreement null and void.
Legal capacity to contract. In order for a contract to be le-
gally binding, the persons making the contract must be capable of
entering into such an agreement. In other words, they must have
the "legal capacity to contract." If they are not legally capable,
the contract in unenforceable, and sometimes null and void. How-
ever, there is an important distinction between the two results.
Of one or both of the parties is legally incapacitated, the con-
tract may in some instances be void; in other instances it may be
voidable. When a person has been declared legally insane, any con-
tract he enters into is void. The agreement is not legally binding
because his guardian has possession and control of all his prop-
erty rights and business interests, including his right and abil-
ity to enter into contract.
In most other instances, the contract is voidable. Thus, if
one of the parties has a partial legal infirmity, he can avoid the
legal effect of a previous agreement. Examples of limited legal
incapacity include minors, drunks, and insane persons who have not
yet been legally determined. The contracts of a minor, in most
states a person under twenty-one, are avoidable at his option.
However, the minor retains his right to hold the adult to his con-
Jimmy, age 17, signs a contract with Tricky Dick's
Used Car Lot to purchase a '55 jalopy. After signing
the contract, he decides against the purchase. He
can legally avoid the contract by telling the salesman
that he is a minor. Suppose, however, that, after the
contract is signed, the salesman determines that the
car is worth twice the value of the amount in the
contract. The salesman cannot avoid the performance
of the contract because Jimmy is a minor. He is bound
by the terms of the agreement which Jimmy can fully
enforce against the used car lot.
There are some exceptions that alleviate the harshness of
this one-sided rule. For example, a minor will be held liable for
the necessaries furnished him. To illustrate: Jimmy, in need of
essential clothing, signs a contract for several outfits. If these
items are necessary, he cannot later avoid liability by pleading
that he is a minor. He will still be liable for the reasonable
value of the clothing. In many states a minor is also held respon-
sible for his contracts when he misrepresents to the other party
that he is an adult, and his appearance supports the statement.
Jimmy goes into Acme Jeweler's and states that he is twenty-two
years old. The owner decides that he looks at least twenty-three.
They then sign a contract for the purchase of a $200 ring. Since
the owner reasonably relied on the minor's statements, Jimmy may
not be permitted to avoid liability by pleading that he is a mi-
nor. Jimmy may be held to his contract although he is under the
legal age to contract.
An insane person who enters into a contract can avoid its
performance after he has regained his reasoning powers. He can
also avoid liability while he is temporarily insane if his legal
representative files a notice that the contract will not be per-
A person who enters a contract while drunk or high on drugs
also has a power of avoidance. This is based on the theory that
his drunkenness rendered him incapable of understanding the nature
and effect of a contract. Therefore, he is permitted, at his op-
tion, to avoid the terms of an otherwise legal and binding con-
Offer. The person who makes the offer to contract is called
the "offeror." The person to whom it is addressed us called the
"offeree." An offer is a promise, but it is a promise conditioned
by the acceptance of the offeree. An offer must promise the per-
formance or nonperformance of a specific act. The essential terms
of the offer must be stated, and the offeree must be aware of the
Jones says to Smith, "If you promise to write a
book, I promise to give you $10,000." Smith makes
that promise. Jones's statement is an offer. Smith's
acceptance creates a legally enforceable contract.
It must be remembered that an offer is not the same as a
"preliminary negotiation." If Sam's Sport Shop has a tennis racket
with a ten dollar price tag in its window, this does not consti-
tute an offer to sell. It is merely an "invitation" to come in and
negotiate further. In this case, it would be the customer who ac-
tually makes the offer by saying, in effect, "If you give me that
tennis racket, I shall give you ten dollars."
Another requirement for a valid offer is that the terms of
the offer be stated definitely. If the terms are too indefinite,
there can be no acceptance and therefore no contract. Of Abbey
says to Babe, "Work for me, and I will give you a share of the
profits of the business," Abbey has not made a valid offer because
the terms of employment are too vague. No objective standard can
be used to determine a "share" of the profits. Therefore, any at-
tempted acceptance of that statement would not create an enforce-
An offer is not valid forever. If it is withdrawn before
someone accepts, a later attempted acceptance will not create a
contract. However, the notice of withdrawal must be made known to
the same people as was the offer. Once they are aware of its with-
drawal, they can no longer legally accept the offer.
The offer usually terminates upon the expiration of a reason-
able time, normally three months, or upon the expiration of its
express terms. For example: "This offer is valid through December
31, 1989." The offer may be terminated before either of these
times under the following conditions:
- Express withdrawal by the offeror;
- Express rejection by the offeree;
- The death of the offeror;
- Passage of a law that makes the proposed contract
Occasionally, the offeror will unearth new facts that in-
crease the value of the property he has offered to sell. As a re-
sult, he may withdraw his offer:
Jones offers to sell his farm for $500 per acre
to Murphy. Before Murphy has decided whether or not
to accept the offer, Jones discovers oil on the
property and decides that he does not want to sell
the property at the earlier price. Once Murphy is
aware of this fact, he can no longer legally accept
Jones's previous offer. The offer has been withdrawn.
The offer would also be terminated if Jones died before
Murphy was able to accept the terms of the offer. No contract
would be created because the offer was automatically terminated
upon the death of Jones.
Acceptance. An acceptance is the manifestation of agreement
to the terms of the offer. This consent can be accomplished by
word or deed. For example, if the offer was "I promise to pay you
$200 if you promise to paint my house," the acceptance is made by
promising to paint the house. The contract comes into existence at
the time the promise to paint the house is made. On the other
hand, if the offer was, "I promise to pay you $200 if you paint my
house," the acceptance is made by the actual painting of the
house. The contract comes into existence at the time the house is
actually painted. These examples illustrate the principle that the
means of acceptance is conditioned by the terms of the offer.
Since the offeror will be legally bound by a contract, this rule
permits him to name the conditions under which he will contract.
Any other rule would permit the offeree to change the terms of the
contract without the offeror's consent to additional or different
Another important rule of contract law prevents a person from
accepting the terms of an offer if he is not aware of its exist-
ence. The classic example of this rule is the "wanted poster" ad-
vertising a bounty for the return of a fugitive from justice. If
the person who returns the outlaw is unaware of the reward, he
cannot create an enforceable contract to have the reward money
paid to him.
Another special rule regulating the acceptance of contracts
stems from our heavy dependence on modern methods of communica-
tions. The acceptance of the offer is valid at the time the assent
is deposited for communication, not when the assent is actually
communicated to the offeror. For example:
Baker writes Caroll and offers to pay fifty-seven
cents per carton of widgets. Two days later, Caroll
sends a letter to Baker in which he agrees to sell him
the widgets at that price. The contract comes into
existence at the time the letter of acceptance is
deposited in the mailbox. There is no requirement that
the acceptance be received by the offeror (Baker)
before a contract comes into existence.
Another important rule to remember is that silence, by it-
self, never constitutes acceptance of a contract. A person cannot
create a contract by making the following offer: "I promise to
sell you membership in the ABC Book Club. If you desire to join,
do nothing, and you will automatically be enrolled." In this
situation, the recipient's silence would not create a contract. A
person making an offer to contract cannot unilaterally impose upon
the offeree the duty to reply in order to reject the offer. This
is an important rule to remember when dealing with slick-selling
artists who are attempting to impose a contractual obligation upon
Consideration. This is often a confusing term. It is defined
as the act or forbearance from an act that constitutes the induce-
ment for the contracting party to enter into a contract. Since a
contract is essentially a promise, something should be given in
return to hold the promisor to his promise. That which is given in
return is called "consideration." The following examples illus-
trate what is meant by this term:
Thomas says to Jones: "I promise to pay you $200
if you fix my car." If Jones fixes the car, a valid
contract is created and Thomas will be held to the
terms of his promise. In this case, the act of fixing
the car constitutes the "consideration."
Thomas says to Jones: "I promise to pay you $200 if you
promise to fix my car." If Jones promises to fix the
car, there is a valid contract and Thomas will be held
to the terms of his promise. Jones's promise binds
Thomas to the terms. Thus, Jones's promise is the
"consideration" for the contract.
Notice that consideration can be a promise or an act. It can
also be a forbearance from acting, as in the following example:
Thomas says to Jones: "I promise to pay you $200 if you
do not build a 'grudge wall' between our respective
properties for the next two years." If during that
period Jones refrains from building the wall, a valid
contract will be created and Thomas will be held to
the terms of his promise. Jones's forbearance from
construction a wall to which he is legally entitled
constitutes the consideration for this contract.
According to the law, consideration must have two essential
elements: It must have value, and it must be bargained for and
given in exchange for the promise. There is no contract if the act
is not bargained for, as in those situations in which the promisor
is merely asking the other person to do what that person already
must do. Suppose Powell promises Roberts $100 if Roberts "tells
the truth" at a trial in which he is a witness for Powell. This
would not be an enforceable agreement because it lacks consider-
ation. Since everyone has the duty to tell the truth, Roberts
would not be performing any act for which Powell has bargained.
Because no consideration is present, there is no contract
when Alice's grandfather tells her: "I promise to give you
$1,000." This is a bare promise. Alice does not have to promise
anything, do anything, or refrain from doing anything. Therefore,
since nothing is to be given in return for the grandfather's prom-
ise, there is no enforceable contract.
The other requirement is that the consideration have some
value. It does not have to be a fair bargain, however, since the
law guarantees a person's right to contract whatever terms he de-
sires. If the interested parties agree to the terms, the law is
not permitted to rewrite or negate the intentions of the contrac-
tors in an attempt to make a "fair" contract.
Most people are aware that many contracts which they sign
contain a phrase "in consideration of $1.00 and other valuable
considerations." Normally, the law will uphold contracts where one
dollar is the consideration -- no matter what it is exchanged for.
This is based on the theory that one dollar has some value. Al-
though it may not be a fair exchange, the law will not ordinarily
inquire into the "fairness" of the contract. An exception to this
law is in the exchange of fixed values.
Jones promises to pay Williams $200 if Williams
promises to pay Jones $1.00. In this case, the
exchange is inadequate on the face of the agree-
ment. Therefore, the law will not enforce this
This area of consideration is one of the most confusing as-
pects of the law of contracts since there are many exceptions and
additions to the simple principles which have been outlined above.
Once a person is familiar with these principles, he will be able
to recognize a problem in this area when one arises in his per-
sonal or business affairs. Then he can secure competent legal ad-
vice to help him find a satisfactory solution to the problem.
Types of Contracts
There are many types of contracts. They can be written or
oral, express or implied, valid, void or voidable. Some contracts
include several types. For example, there can be a voidable ex-
Written and oral. The old saying that it has to be in writing
to be of any legal value had its origin in the Statute of Frauds.
The rule was first enacted in England, later adopted in the United
States, and still later partially modified by the Uniform Commer-
cial Code, which is not in effect in every state but Louisiana.
Many people believe that an oral agreement is not valid. On
the contract, most oral contracts are valid and fully enforceable.
Their sole disadvantage is that they are more difficult to prove.
The only contracts which must be in writing are those specifically
enumerated by the law.
Thus, the following contracts must be written:
- A contract for the sale of land or for the transfer of an
interest in land; for example, a lease of land for more than one
- Any contract that is not to be performed within one year of
making the contract. For example, "A" and "B" contract that "B"
will store "A's" property for two years. This contract can be
fully performed only in two years; it cannot be performed within
- A contract to guarantee the payment of a debt. Able owes
Baker $200, but he refuses to pay. Baker is prepared to sue Able
for the money. Crow (Able's good friend) visits Baker and asks him
not to sue Able. Crow says that of Able does not pay the debt
within one month, then he (Crow) will pay it. This is a valid con-
tract, but it must be in writing to be enforceable.
- Any contract made by an executor or administrator of an es-
tate in which he promises to pay a debt of the deceased with his
own money is subject top the Statute of Frauds. This contract must
be in writing in order to be legally enforceable.
- A contract for the sale of goods for the price of $500 or
more must be in writing. Also, it must have been signed by the
person against whom the enforcement is made. For instance, Andy
agrees to buy a sailboat from Don's Boat Sales for $2,000. This
contract must be in writing. It either Don or Andy hopes to re-
cover in the event that the other backs out of the deal, he must
insist upon a signed written contract.
The Statutes of Frauds has spawned an enormous amount of
litigation involving both the applicability of the law to specific
situations and the legitimacy of particular types of written con-
tracts. Courts often regard the Statute as a necessary evil and
attempt to bypass it if possible. By doing so, the court gives le-
gal effect to the parties' agreement or contract.
Formal contract. This type of contract essentially has been
bypassed by the modernization of law and commerce. Its bases was
the promisor's seal imprinted on wax. These contracts were called
formal because of the great solemnity or formality which tradi-
tionally attended the attaching of a man's seal to the document.
Today, most states have abolished the legal efficacy of formal
contracts. However, if the contract is subject to the Statute of
Frauds, it still must be in writing.
Express and implied contracts. In an express contract the
terms of the contracting parties' promises are clearly outlines.
Each side states what he will do. For example, "A" agrees to pay
"B" twenty dollars if "B" caters a dinner party. An implied con-
tract is one in which the terms are filled in by the conduct of
the parties. Thus, a person who goes to a dentist implies that he
promises to pay for the work, although there is no express mention
of fees or any other terms. It is important to remember that there
is no difference in the legal efficacy of express contracts and
contracts implied in fact.
Unilateral and bilateral. There is no difference in the legal
effect of a unilateral or a bilateral contract. It is the content
that differentiates the two. In a unilateral contract, the promise
of one person is given in exchange for an ACT of the other person.
Jones promises to pay Smith if Smith paints Jones's house. States
differ on whether there is a legally binding contract before the
house is painted.
In a bilateral contract, the promise of one person is given
in exchange for the promise of the other person. Jones promises to
pay Smith if Smith promises to paint Jones's house. The legally
binding obligation arises as soon as the promise to paint is made,
not when the house is actually painted.
The difference between these two contracts is very important
in the conduct of one's daily affairs. Important legal questions
are determined by whether there is an actual creation of a con-
tract. The existence of the contract will be determined by the
terms of the promise and whether the act or promise was actually
Void, voidable, and valid. A void contract is one which the
law will not uphold. In fact, in the eyes of the law, the "con-
tract" does not exist. Neither party to the contract can change
this. A voidable contract is valid, but its validity can be
avoided by one of the parties to the contract. Voidable contracts
include those of infants, minors, drunks, or insane persons.
Valid contracts are those which contain all the essential el-
ements of a contract: offer, acceptance, legally capable parties,
and consideration. Not all valid contracts are enforceable in a
court of law, however. Contracts which are required to be in writ-
ing under the Statute of Frauds are still valid even if they are
not written. The Statute of Frauds merely provides that no legal
action can be taken upon that type of contract if it is not writ-
Executory and executed. These terms refer to the time
relative to the completion of the contract. A contract in which
the respective acts have not yet been performed is called an
executory contract. Once the acts have been completed, it is re-
ferred to as an executed contract.
The importance in knowing the different types of contracts
lies not in their intrinsic worth; rather, it lies in the fact
that a person who is untrained in the law can use a basic knowl-
edge of contract principles to recognize a legal problem when he
is confronted by one. With the information presented here, you may
also avoid legal problems by utilizing, beforehand, the rules of
Interpretation of Contracts
Contracts are not always clear-cut. Disputes may arise as to
a contract's meaning or its terms of enforcement. Sometimes these
arguments result in attempts to have the contract enforced in
court. The purpose of any contract litigation is to interpret what
the parties originally put in writing. To provide uniform guide-
lines for interpretation, the law has developed many rules for
courts and lawyers to follow.
One of these rules is the parol evidence rule. In contract
law, "parol" refers to oral and written statements. If two persons
have signed a written contract and intended it to express the full
terms of their agreement, no court, in interpreting that contract,
will admit as evidence any written or oral statements made prior
to the signing of the written contract. Thus, a person cannot con-
tradict or vary the terms of a written contract by introducing for
the court's consideration evidence of discussions that occurred
before the written agreement was signed.
John goes to Ace Auto Sales to buy a car. After finding
a car he likes, he and the salesman negotiate an oral
contract. Part of their presale discussion concerns
John's desire to remove the radio from the old car that
he is trading in. Believing in the salesman's good
faith, John signs the sales agreement, although it does
not mention the radio. When it is time for the actual
transfer, the auto company refuses to let him remove
the radio. Consequently, the deal falls through. Some-
time later, in a suit brought over the contract, John
attempts to convince the court that he should have
been permitted to take out the radio prior to the actual
trade-in. Since no mention of this discussion was made
in the contract, the court will not permit this parol
evidence to be considered in interpreting the contract's
There are exceptions to the parol evidence rule. The law al-
lows the introduction of parol evidence if there is some indica-
tion that a purported contract is the result of fraud, duress, or
illegality. In any of these circumstances, a binding contract does
not exist. Second, parol evidence is admissible to show that the
written agreement does not include all terms of the contract. The
third exception arises when the terms of a contract are vague or
ambiguous. In this case oral evidence can be introduced to help
clarify the meaning of the contract. For example, it may include
the term "barrel." In the oil industry, a barrel means forty gal-
lons. However, in the beer industry, a barrel refers to thirty
gallons. In this situation oral evidence would be permitted to ex-
plain the usage of the term in the contract.
Other rules of interpretation state that words be given their
plain and usual meaning, except when customary business usage in-
dicates a special meaning, or when a technical word is defined.
Obvious mistakes of grammar or punctuation are corrected by the
courts. However, ambiguous words will generally be construed more
unfavorably against the party who used them. If there is a con-
flict between a printed word and a written word, the written word
will govern. So also, when there is a conflict between a figure
numeral and a written numeral, the written version will prevail.
Although these rules seem unyielding, their purpose is to
help the court interpret the contract in a manner that best ex-
presses the intent of those who made it.
Breach of Contract
A contract us not usually taken to court unless one of the
parties has refused to honor it terms or has performed only part
of his obligation. Appropriately, this area of law is known as
breach of contract law. Legally it is defined as the unjustified
failure to perform any part or all of what was promised in the
contract. To compensate for this failure, the injured party is en-
titled to relief from the courts.
A breach of contract can be entire or partial. If entire, the
injured person is entitled to recover in money damages the value
of the contract.
ABC Construction Company agrees to build an addition
to John's home for $3,000 and to build it by June 1,
1989. The construction company, on June 1, has not
started construction and indicates that it will not
start construction. This is a total breach of contract
by ABC. John will be able to sue the company for the
damages he suffered die to its nonperformance of the
terms of the contract.
That is an example of total breach. If the contract is not
carried out entirely or is performed defectively, the result is a
partial breach of contract. The injured party is entitled to a
partial recovery dependent on the portion of the contract that has
actually been completed.
ABC Construction Company agrees to build an addition
to John's home at a cost of $3,000 and to have it com-
pleted by June 1, 1989. The construction is ostensibly
completed on June 1; but, on inspection, John dis-
covers that a number of the bricks used in the addi-
tion are crumbling. This action results in a partial
breach of contract. Because the contract was sub-
stantially fulfilled, the terms of the contract will
be enforced. However, because of the slight defect in
the company's performance of the contract, John is
entitled to that portion of the money which represents
compensation for the company's use of defective
In contract law, an injured party is generally entitled to
two different remedies: damages or specific performance.
Damages. Damages means money. It is the sum of money awarded
to the injured party as a compensation for the losses he sustained
due to a breach of contract. This sum is called the measure of
damages. The court measures the damages in an attempt to put the
injured party in as good a position as he would have been had the
other person fulfilled his obligations under the contract.
Acme enter into a contract by which Road-Runner Company
will sell it 10,000 items for $0.60 per item -- a total
cost of $6,000. Thereafter, the seller, Road-Runner,
repudiates the entire contract, refusing to perform at
all. Since Acme needs the items, it is forced to go to
Wiley Company to buy the same goods. However, the
market forces Acme to pay $0.80 per item, or a total
cost of $8,000. When Acme sues Road-Runner, it is
entitled to damages equal to the extra amount it paid
when forced to make a new contract with Wiley. Thus,
if the first contract had been fully executed, Acme
would have spent $2,000 less. In court, Acme is
entitled to recover the $2,000 difference.
Specific performance. Specific performance consists of a
court order commanding the party who violated the contract to
carry out its terms. This extraordinary remedy is applied only
when an award of money is insufficient to compensate the injured
party for his loss.
Jones contracts to sell Smith a valuable ten acres of
land overlooking a river valley. After the contract is
signed, Jones suddenly decides that he does not want to
sell the land. Smith takes Jones to court and asks the
court to order Jones to sell the land to him; in other
words, to specifically perform the terms of the con-
tract. Because land is unique -- Smith cannot buy that
land anywhere else -- and because a sum of money is
inadequate to validly compensate him for the loss of
land, the court will order Jones to sell the land to
This is an extremely powerful remedy, and courts have some-
times been reluctant to grant the request for specific perfor-
mance. Consequently, they have restricted its use to those situa-
tions in which a sum of money cannot adequately compensate the
injured person for not having the contract performed. Normally,
the subject matter of the contract is unique, such as land, valu-
able painting, or antiques.
Law of Agency
Many contracts are created, executed, or terminated through
the use of an agent. Real estate agents, rental agents, insurance
brokers -- even gas station attendants are classified as agents.
Agency is essentially a relationship created by law in which
one person, the principal, grants a second person, the agent, the
power to act on his behalf. For example, Tom hires John to handle
his investments. Tom has given John the power to buy and sell
stocks and bonds in Tom's name. Although John executes the order
to buy 100 shares of IBM stock, it is Tom who is legally respon-
sible for the purchase price. As an agent, John is not liable for
Types of agents. The authority of an agent ranges from a nar-
row and defined duty to a broad power of action. A general agent
has the authority to handle a wide range of activities or to con-
duct a series of transactions. A developer, Acme Real Estate,
hires Wilson to promote the sale of the subdivision. Wilson is a
general agent. A special agent has a limited grant of authority.
He is generally hired to handle a specific transaction. Kane is a
special agent. A subagent is employed by the agent to aid him in
performing his job. If Kane hires Able to help him sell the lawn
mower, Able is a subagent. An apparent agent, or an agent with ap-
parent authority, is one who, through his own actions or those of
the principal, leads a third person to reasonably believe that he
has the authority to act for the principal. For example, Brown
gives White the title to his automobile, but gives him no author-
ity to sell the car. Brown approaches Blue and offers to sell him
the automobile. Seeing the title in Brown's hand, Blue reasonably
concludes that Brown is White's agent and therefore possess the
authority to sell the car. Brown is an agent with apparent author-
Principals. There are also different types of principals:
disclosed, undisclosed, and partially disclosed. If the agent is
allowed to disclose the identity of the person for whom he is act-
ing, he is working for a disclosed principal. The principal is un-
disclosed is the third party is unaware that the agent is an
agent. In other words, he does not know that the agent is actually
representing another individual. If the third person knows that he
is dealing with an agent but does not know the identity of the
principal, he is confronted with a situation involving a partially
Power of Attorney. A formally executed legal document grant-
ing an individual the power to act "generally" or for some spe-
cifically limited purpose is known as a power of attorney. For ex-
ample, an individual might grant another individual a power of
attorney to register his car in another state, to sign a lease, or
to sell a house. A written power of attorney is usually prepared
when the third party is either unfamiliar with the agent or can-
not, by law or custom, accept the agent's word that he has been
granted this authority by the principal. A power of attorney is
terminated upon the death of the principal, on the date specified
in the document, or upon the revocation of the power. In the lat-
ter case, all copies of the document must be destroyed.
Responsibilities of Agent and Principal. An agent's responsi-
bilities include the following obligations:
- He must use reasonable care in performing his duties.
- He must inform the principal of all information that is
relevant to the transaction.
- He must act solely for the principal and not for his
- He cannot act beyond the scope of his authority.
- He must render a full accounting of his actions.
In return, the principal owes the agent a reasonable or
agreed-upon compensation for his services. In addition, if the
principal wrongfully terminates the agency, he is liable to the
agent for breach of contract.
Termination of Agency. An agency is generally terminated in
the same manner as a power of attorney. It can be ended by a
pre-expressed agreement or by mutual consent. It is also termi-
nated by the death of either the principal or the agent or by de-
struction of the subject matter of the agency. To illustrate the
latter case, suppose Kane was authorized to sell Able's race
horse. Before the sale was completed, the horse fell ill and died.
The death of the horse -- the subject matter of the agency rela-
tionship -- terminated the agency agreement.
If applied with full knowledge of their implications, the
concepts of agency can be particularly helpful when used in execu-
tion of some contracts.