Cross-8e: Question with Sample Answer
Chapter 20: Agency
20–2. Question with Sample Answer: Duty of Loyalty.
Peter hires Alice as an agent to sell a piece of property he owns. The price is to be at least $30,000. Alice discovers that the fair market value of Peter’s property is actually at least $45,000 and could be higher because a shopping mall is going to be built nearby. Alice forms a real estate partnership with her cousin Carl, and she prepares for Peter’s signature a contract for the sale of the property to Carl for $32,000. Peter signs the contract. Just before closing and passage of title, Peter learns about the shopping mall and the increased fair market value of his property. Peter refuses to deed the property to Carl. Carl claims that Alice, as agent, solicited a price above that agreed on when the agency was created and that the contract is therefore binding and enforceable. Discuss fully whether Peter is bound to this contract.
Sample Answer:
Upon creation of an agency, the agent owes certain fiduciary duties to the principal. Two such duties are the duty of loyalty and the duty to inform or notify. The duty of loyalty is a fundamental concept of the fiduciary relationship. The agent must act solely for the benefit of the principal, not in the agent’s own interest or in the interest of another person. One of the principles invoked by this duty is that an agent employed to sell cannot become a purchaser without the principal’s consent. When the agent is a partner, contracting to sell to another partner is equivalent to selling to oneself and is therefore a breach of the agent’s duty. In addition, the agent has a duty to disclose to the principal any facts pertinent to the subject matter of the agency. Failure to disclose to Peter the knowledge of the shopping mall and the increased market value of the property also was a breach of Alice’s fiduciary duties. When an agent breaches fiduciary duties owed to the principal by becoming a recipient of a contract, the contract is voidable at the election of the principal. Neither Carl nor Alice can hold Peter to the contract, and Alice’s breach of fiduciary duties also allows Peter to terminate the agency relationship.