Arizona Supreme Court Holds That Agent’s Inequitable Conduct May be Imputed To the Principal Whether or Not the Principal Knew of the Agent’s Misconduct.

Daniel Harvey listed land for sale.  Ivo Queiroz, through his agent, Charles Harrison, offered to purchase the land.  Harvey counter-offered and Queiroz accepted.  Harvey and his agent later became concerned because Harrison had not timely sent the $1,000 earnest money as required by the contract, and repeated efforts to reach Harrison were unavailing.  Harvey’s agent, therefore, told the escrow agent that the contract was canceled.  Either that night or the next day, Harrison learned that Harvey had canceled the contract, and on the next Monday morning, Harrison took two money orders amounting to $1,000 to a branch of the escrow company.  Several hours later, Harvey’s written notice of the cancellation arrived at another branch of the escrow agent’s office.  Harvey’s agent returned earnest money, informing him that the contract had been canceled.

Queiroz sued Harvey, seeking specific performance of the contract.  The case was tried to the bench,  The Superior Court found that Harrison acted inequitably and thus denied Quieroz specific performance.  Among other things, the court found that Harrison had not testified truthfully about a variety of issues.  The Court of Appeals reversed and remanded, holding that an agent’s fraudulent or dishonest acts could not be attributed to a principal for purposes of an equitable defense absent personal involvement or knowledge of the principal.   

The Supreme Court, reviewing for abuse of discretion, vacated the Court of Appeals’ opinion and affirmed the judgment of the Superior Court.  Citing the Restatement (Third) of Agency, the Court began its opinion by stating that under “ordinary principles” of agency law, “an agent’s acts bind the agent’s principal.”  The Court also cited two out-of-state cases holding that a principal seeking specific performance may be bound by an agent’s inequitable conduct.  The Supreme Court found inapposite the cases on which the Court of Appeals relied, and rejected Queiroz’s equitable argument that the courts should protect “innocent principals.”  In this regard, the Court found “[a]s between the principal who has retained an unscrupulous agent and innocent third party who relies on the agent’s misrepresentations, it is the third party who deserves protection.”

Finally, Quieroz sought review of whether Harrison’s conduct was actually inequitable.  The Supreme Court deferred to the Superior Court in this regard and concluded that the evidence supported the Superior Court’s finding that Harrison acted inequitably.

Justice Ryan authored the opinion for a unanimous court.