ANSWERS TO PROBLEMS CHAPTER 19

1. Parker, the owner of certain unimproved real estate in Chicago, employed Adams, a real estate agent, to sell the property for a price of $25,000 or more and agreed to pay Adams a commission of 6 percent for making a sale. Adams negotiated with Turner, who was interested in the property and willing to pay as much as $28,000 for it. Adams made an agreement with Turner that if Adams could obtain Parker's signature to a contract to sell the property to Turner for $25,000, Turner would pay Adams a bonus of $1,000. Adams prepared and Parker and Turner signed a contract for the sale of the property to Turner for $25,000. Turner refuses to pay Adams the $1,000 as promised. Parker refuses to pay Adams the 6 percent commission. In an action by Adams against Parker and Turner, what judgment?

Answer: Fiduciary Duty. Decision against Adams. Adams owes an overriding duty of loyalty and good faith to Parker, his principal. The problem presents a flagrant violation of Adams's duty in this regard when he agreed with Turner to attempt to obtain Parker's signature to a contract to sell the property to Turner for $25,000 when Turner was willing to pay $28,000 for it. Even though authorized to sell the property for $25,000 he was under a duty to obtain a higher price if possible or at least inform the principal of Turner's willingness to pay a higher price. Adams's agreement with Turner, for all practical purposes, made him the agent of Turner as well as of Parker. A disloyal agent cannot recover compensation from either party. If permitted to recover the $1,000 from Turner, he would be under the duty of a fiduciary to account for the full $1,000 to Parker. A principal is entitled to recover secret profits from a disloyal agent.
2. Perry employed Alice to sell a parcel of real estate at a fixed price without knowledge that David had previously employed Alice to purchase the same property for him. Perry gave Alice no discretion as to price or terms, and Alice entered into a contract of sale with David upon the exact terms authorized by Perry. After accepting a partial payment, Perry discovered that Alice was employed by David and brought an action to rescind. David resisted on the ground that Perry had suffered no damage for the reason that Alice had been given no discretion and the sale was made upon the exact basis authorized by Perry. Discuss whether Perry will prevail.

Answer: Fiduciary Duty. Decision in favor of Perry. Although Alice had no discretion as to price or terms with respect to the sale of Perry's real estate she was representing two principals; she was a dual agent. In such cases, the interests of one of the principals are likely to suffer, particularly where, as in the problem, the agent represents both the buyer and the seller. Therefore, Alice has breached her fiduciary to both Perry and David. Upon discovery of the double or dual agency either of the principals may repudiate the contract made in their behalf by the common agent. If the contract has been performed, either party may have the transaction set aside. The agent is not entitled to compensation from either party. It appears that neither Perry nor David knew of the double agency. If one of the principals did not know that Alice was also the agent of the other party to the contract he has the absolute right to rescind the transaction upon learning the truth. It is not necessary for the principal to show any injury or intent to deceive.
3. Packer owned and operated a fruit cannery in Southton, Illinois. He stored a substantial amount of finished canned goods in a warehouse in East St. Louis, Illinois, owned and operated by Alden, in order to have goods readily available for the St. Louis market. On March 1, he had 10,000 cans of peaches and 5,000 cans of apples in storage with Alden. On the day named, he borrowed $5,000 from Alden, giving Alden his promissory note for this amount due June 1 together with a letter authorizing Alden, in the event the note was not paid at maturity, to sell any or all of his goods in storage, pay the indebtedness, and account to him for any surplus. Packer died on June 2 without having paid the note. On June 8, Alden told Taylor, a wholesale food distributor, that he had for sale as agent of the owner 10,000 cans of peaches and 5,000 cans of apples. Taylor said he would take the peaches and would decide later about the apples. A contract for the sale of 10,000 cans of peaches for $6,000 was thereupon signed Alden, agent for Packer, seller; Taylor, buyer. Both Alden and Taylor knew of the death of Packer. Delivery of the peaches and payment were made on June 10. On June 11, Alden and Taylor signed a similar contract covering the 5,000 cans of apples, delivery and payment to be made June 30. On June 23, Packer's executor, having learned of these contracts, wrote Alden and Taylor stating that Alden had no authority to make the contracts, demanding that Taylor return the peaches, and directing Alden not to deliver the apples. Discuss the correctness of the contentions of Packer's executor.

Answer: Termination of Agency: Death. Packer's executor is incorrect as to the first contract for the sale of the peaches, but correct as to the second contract for the sale of the apples. Death of the principal terminates an agency unless the agency is coupled with an interest of the agent in the subject matter. Packer's grant of authority to Alden to sell the canned goods was an agency coupled with an interest of the agent in the subject matter. Packer's grant of authority to Alden to sell the canned goods was an agency coupled with an interest. Alden had an interest in the prospective proceeds of the execution of the agency in that he could pay himself therefrom the debt owed to him. He also had an interest in the subject matter of the agency, the canned goods, in that he had possession thereof. Since the interest was not only in the proceeds but also in the subject matter he had a true "agency coupled with an interest" and it was irrevocable even by the death of the principal. The result is different with respect to the second contract for the apples. Alden, as a result of the concluded sale of the peaches, had $6,000 which more than covered the indebtedness to him. He therefore had no further interest in the proceeds of the sale of the apples even though he still had possession thereof. At the time he made the contract to sell

the apples, he no longer had an agency coupled with an interest, and hence, no agency because the death of the principal terminated the agency.
4. Green, a licensed real estate broker in Illinois, and Jones, also an Illinois resident, while both were in New York, signed a contract whereby Green agreed to endeavor to find a buyer for certain Illinois real estate owned by Jones, who agreed to pay Green a commission of $10,000 in the event of a sale. Green found a buyer, a resident of New York, to whom the land was sold. Thereafter, when Jones refused to pay the commission, Green commenced an action in Illinois to recover it. Jones defended on the sole ground that the brokerage contract was unenforceable because Green was not a licensed real estate broker in New York. Relevant provisions of the applicable New York statute forbid any person from holding himself out or acting temporarily as a real estate broker or salesman without first procuring a license. A violation is declared to be a misdemeanor, and the commission of a single prohibited act is a violation for which the statute provides a penalty. For whom should judgment be rendered?

Answer: Termination of Agency: Change of law. Judgment for Jones. As a general proposition, a contract in violation of a criminal statute is unenforceable, even though the statute does not by its terms prohibit the act or acts upon which it is based. In Frankel v. Allied Mills, Inc., 17 N.E.2d 570 (Ill.1938), the court stated: "The validity, construction and obligation of a contract must be determined by the law of the place where it is made or is to be performed. The remedy is governed by the law of the forum. If a contract is not valid under the law of the place where it is made, it will not be enforced in another state in which it would have been valid if made there. Where a statute declares that it shall be unlawful to perform an act, and imposes a penalty for its violation, contracts for the performance of such act are void and incapable of enforcement. It is immaterial that the business regulated is carried on by a non-resident. We have not been referred to a New York case which holds expressly that the statute applies to non-residents who negotiate an isolated sale of Illinois real estate in New York, but such contracts as applied to residents of New York are held to be void. (Citations.) The object of the statute is to promote the public welfare by permitting only persons with the necessary qualifications to act as real estate brokers and salesmen. The location of the land outside the state of New York does not affect the policy of the statute, since it is the vendor and the purchaser who sought to be protected. The statute does not in any way seek to regulate the sale of Illinois real estate, but operates only on the brokerage contract. The brokerage contract was invalid in New York, where it was made. It will not be enforced in the courts of Illinois."
5. Palmer made a valid contract with Ames under which Ames was to sell Palmer's goods on commission from January 1 to June 30. Ames made satisfactory sales up to May 15 and was then about to close an unusually large order when Palmer suddenly and without notice revoked Ames's authority to sell. Can Ames continue to sell Palmer's goods during the unexpired term of her contract?

Answer: Termination of Agency: Revocation of Authority. No. Although Palmer did not have the right to terminate the agency before June 30 he had the power. Since the authority of an agent is based upon the consent of the principal, the agency is terminated upon the withdrawal of such consent. Therefore, upon Palmer's revocation of Ames's authority to sell, Ames no longer had the actual authority to sell Palmer's goods during the unexpired term of the contract. Ames, however may sue Palmer and recover damages for breach of the agency contract.
6. Piedmont Electric Co. gave a list of delinquent accounts to Alexander, an employee, with instructions to discontinue electric service to delinquent customers. Among those listed was Todd Hatchery, which was then in the process of hatching chickens in a large, electrically heated incubator. Todd Hatchery told Alexander that it did not consider its account delinquent, but Alexander nevertheless cut the wires leading to the hatchery. Subsequently, Todd Hatchery recovered a judgment of $5,000 in an action brought against Alexander for the loss resulting from the interruption of the incubation process. Alexander has paid the judgment and brings a cause of action against Piedmont Electric Co. What may he recover? Explain.

Answer: Duties of Principal to Agent: Indemnification/Reimbursement. Judgment for Alexander. In collecting the accounts and discontinuing service Alexander was acting within his actual authority. A principal is under a duty to indemnify and reimburse his agent for expenses incurred by or resulting from authorized acts of the agent if not illegal or not known by the agent to be wrongful. Accordingly, Alexander has a right of reimbursement from Piedmont Electric Co. for $5,000.
7. In October 2003, Black, the owner of the Grand Opera House, and Harvey entered into a written agreement leasing the Opera House to Harvey for five years at a rental of $300,000 per year. Harvey engaged Day as manager of the theatre at a salary of $1,175 per week plus 10 percent of the profits. One of Days duties was to determine the amount of money taken in each night and, after deducting expenses, to divide the profits between Harvey and the manager of the particular attraction that was playing at the theatre. In September 2008, Day went to Black and offered to rent the opera house from Black at a rental of $37,500 per year, whereupon Black entered into a lease with Day for five years at this figure. When Harvey learned of and objected to this transaction, Day offered to assign the lease to him for $600,000 per year. Harvey refused and brought an appropriate action against Day. Should Harvey recover? If so, on what basis and to what relief is he entitled?

Answer: Fiduciary Duty. Decree in favor of Harvey. An agent owes the principal a duty of loyalty which includes an obligation not to compete. The agent is precluded from using information acquired in the course of the agency

relationship for her own benefit or contrary to the interest of the principal. In this case Day engaged in business activity with Black, and this activity would be characterized as being in conflict with the interests of Day's principal, Harvey.
8. Timothy retains Cynthia, an attorney, to bring a lawsuit upon a valid claim against Vincent. Cynthia fails to make herself aware of recently enacted legislation that shortens the statute of limitations for this type of legal action, and, consequently, she files the complaint after the statute of limitations has run. As a result, the lawsuit is dismissed. What rights, if any, does Timothy have against Cynthia?

Answer: Duties of Agent to Principal: Duty of Diligence. An agent is expected to act on behalf of the principal using reasonable care and skill in addition to any special skill that she may have. The standard is established based on the community or locality in which the employment takes place. Judgment would be for Timothy assuming that a lawyer acting reasonably would have had opportunity to discover the revised statute of limitations period.
9. Wilson engages Ruth to sell Wilson's antique walnut chest to Harold for $2,500. The next day, Ruth learns that Sandy is willing to pay $3,000 for Wilson's chest. Ruth nevertheless sells the chest to Harold. Wilson then discovers these facts. What are Wilson's rights, if any, against Ruth?

Answer: Duty to Inform. An agent is liable for any loss resulting from failure to give the principal information that is relevant to the authorized activity and that the principal would desire to have. Restatement, Section 381. However, if Ruth has reason to believe that Wilson desired only to sell the chest to Harold at the agreed upon price, then she fulfilled the terms of the agency. The problem may be interpreted either way.