Academic journal article Fordham Journal of Corporate & Financial Law

Evidentiary Surrogacy and Risk Allocation: Understanding Imputed Knowledge and Notice in Modern Agency Law

Academic journal article Fordham Journal of Corporate & Financial Law

Evidentiary Surrogacy and Risk Allocation: Understanding Imputed Knowledge and Notice in Modern Agency Law

Article excerpt

There are powerful benefits available to a principal who enters into an agency relationship. The law allowing authorized agents to act as legal representatives of another permits the person on whose behalf the agent is acting to extend her legal personality beyond its natural limits and to do business on a scale far beyond her personal capacity. The law of agency also makes the world of purely legal persons, such as corporations and governments, possible.

Problems with agents acting on behalf of principals, especially corporate principals, have attracted serious and sustained attention in the last few years. Simply to say the names of Tyco, Enron, WorldCom, Arthur Andersen, and Waste Management now conjures up an image of agent misbehavior on a grand and costly scale. This recent history has served to focus popular and political attention on the possibilities for renewed reform of corporate governance and more aggressive regulation of the agents that serve corporations. Inevitably, such an effort must engage, and build upon, the most basic doctrines of agency law. Are such doctrines ready to provide the necessary support?

Along with the powerful benefits available through agency, so too comes significant risk and exposure. An agent may bind a principal to an unwanted contract with another.1 The principal may be liable to third parties for torts inflicted upon them by the agent.2 Also, a principal may be deemed to have legally received certain knowledge or notice that has, in fact, been received only by the agent.3 This last possible consequence of an agency relationship resides at the very heart of agency law, and it is the focus of this article.4

Generally known as the "imputed knowledge rule" this aspect of agency law legally charges the principal with information obtained by the agent within the scope of the agent's service for the principal.5 The law will treat the principal as having actually received the information in question, even if it is clear from the facts of the case that the agent failed to transmit the information to the principal, and therefore clear that the principal never actually possessed it.6

For example, imagine an owner of an apartment building who has engaged a property manager to operate the leasing of the apartment units on her behalf. Standard leases for the units in the building provide to the tenant an opportunity to extend the current leasehold on the unit for an additional year with a rent increase of no more than 5% if the tenant formally notifies the landlord of her intention to extend the lease no later than two months prior to the end of the current lease term. A particular tenant delivers to the property manager the proper notification of her intent to extend her current lease before the deadline. The property manager carelessly loses the notification prior to making a record of its receipt and thus incorrectly informs the landlord that the unit is available for re-lease at a rent increase of more than 5%. When the landlord offers to the tenant a new lease at a rent increase of 10%, the tenant could effectively bind the landlord to the 5% limit promised by the prior lease, even if the landlord did not ever personally possess any knowledge of the tenant's exercise of the lease provision. This result would be the same no matter how blameless the landlord was in her failure to receive the tenant's prior notice.

This is the imputed knowledge rule in action. Receipt of the notice by the authorized agent results in the legal receipt by the principal, regardless of whether or not the principal actually received the notice from the agent.7

There are two well recognized exceptions in agency law to the imputed knowledge rule. One is that a principal will not be imputed with knowledge possessed by an agent when the agent obtained the information from a third party to which the agent owes a duty of confidentiality.8 For example, suppose that a certain physician works as an employee for a particular hospital. …

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