Business Organization

8.06 Principal's Consent

(1) Conduct by an agent that would otherwise constitute a breach of

duty as stated in 8.01, 8.02, 8.03, 8.04, and 8.05 does not constitute a

breach of duty if the principal consents to the conduct, provided that

(a) in obtaining the principal's consent, the agent

(i) acts in good faith,

(ii) discloses all material facts that the agent knows, has

reason to know, or should know would reasonably affect the

principal's judgment unless the principal has manifested that

such facts are already known by the principal or that the

principal does not wish to know them, and

(iii) otherwise deals fairly with the principal; and

(b) the principal's consent concerns either a specific act or

transaction, or acts or transactions of a specified type that could

reasonably be expected to occur in the ordinary course of the agency

relationship.

(2) An agent who acts for more than one principal in a transaction

between or among them has a duty

(a) to deal in good faith with each principal,

(b) to disclose to each principal

(i) the fact that the agent acts for the other principal or

principals, and

(ii) all other facts that the agent knows, has reason to

know, or should know would reasonably affect the principal's

judgment unless the principal has manifested that such facts

are already known by the principal or that the principal does

not wish to know them, and

(c) otherwise to deal fairly with each principal.

Comment TTT

b. In general. This section defines the circumstances under

which conduct of a principal is effective as consent to conduct by an

agent that would otherwise constitute a breach of the agent's duties

of loyalty.

Common-law agency does not accord effect to all manifestations

of assent by a principal that purport to eliminate or otherwise affect

the fiduciary duties owed by an agent. This is so for two distinct

reasons: (1) the law, and not the parties, determines whether a

particular relationship is one of agency as defined in 1.01; and (2)

the law imposes restrictions on the efficacy of a principal's manifes-

tations of assent in the interest of safeguarding the principal's

intention in creating a relationship of common-law agencyTTTT

Moreover, although a person may empower another to take

action without regard to the interests of the person who grants the

power, the law applicable to relationships of agency as defined in

1.01 imposes mandatory limits on the circumstances under which

an agent may be empowered to take disloyal action. These limits

serve protective and cautionary purposes. Thus, an agreement that

contains general or broad language purporting to release an agent in

advance from the agent's general fiduciary obligation to the princi-

pal is not likely to be enforceable. This is because a broadly sweep-

ing release of an agent's fiduciary duty may not reflect an adequate-

ly informed judgment on the part of the principal; if effective, the

release would expose the principal to the risk that the agent will

exploit the agent's position in ways not foreseeable by the principal

at the time the principal agreed to the release.

n contrast, when a principal consents to specific transactions or

to specified types of conduct by the agent, the principal has a

focused opportunity to assess risks that are more readily identifi-

able. Likewise, when a principal consents after-the-fact to action

taken by an agent that would otherwise breach the agent's fiduciary

duty to the principal, the principal has the opportunity to assess

what the agent has done with a degree of specificity not available

before the agent takes action.

QUESTION: What is the most reasonable explanation for why conflict-of-interest transactions are legal if disclosed?