Imputation, the Adverse Interest Exception, and the Curious Case of the Restatement (Third) of Agency

62 Pages Posted: 18 May 2013

See all articles by Mark Loewenstein

Mark Loewenstein

University of Colorado Law School

Date Written: February 9, 2013

Abstract

The imputation doctrine in the common law of agency provides that knowledge of an agent acquired in the course of the agency relationship is imputed to the principal. An important exception to the imputation doctrine, known as the adverse interest exception, provides that knowledge is not imputed if it is acquired by the agent in a course of conduct that is entirely adverse to the principal. These doctrines play an important role in sorting out liability when senior management of a corporation engages in a financial fraud that harms the company. Typically, new management is brought in and it sues the company’s outside service providers (auditors, attorneys, and investment bankers), alleging that their negligence (or, in some cases, intentional wrongdoing) was a proximate cause of the fraud’s success. The defense invokes the imputation doctrine — senior management’s knowledge of the fraud should be imputed to the company — and in pari delicto. The plaintiff responds that the adverse interest exception makes imputation inappropriate and, therefore, in pari delicto is inapplicable. At this point, the issue is joined and, historically, the outside service providers have prevailed. This settled law may have been altered by the recently adopted Restatement (Third) of Agency. This article explores the history of imputation and the adverse interest exception, the evolution and stance of the Restatement (Third) of Agency as it relates to these issues, and how various policy considerations should inform the legal doctrines at issue.

Keywords: agency, adverse interest exception, imputation

JEL Classification: K10, K12, K19, K22, K29

Suggested Citation

Loewenstein, Mark J., Imputation, the Adverse Interest Exception, and the Curious Case of the Restatement (Third) of Agency (February 9, 2013). University of Colorado Law Review, Vol. 84, No. 2, 2013, Available at SSRN: https://ssrn.com/abstract=2266640

Mark J. Loewenstein (Contact Author)

University of Colorado Law School ( email )

Campus Box 401
Boulder, CO 80309
United States
303-492-7102 (Phone)
303-492-1200 (Fax)

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