PM652: Project Selection and Initiation

Learning Module 9: Regulatory Compliance and Agency Relationships

Agency Relationships

Perhaps you are aware that you can incur liability for your company and that you can create legally binding
relationships for your company. The question becomes:
- Do you know how and why this happens?
- How do you create liability for your company?
- Do your actions have to be intentional - or can unintended results of your actions result in liability?
- To legally commit your company, do you have to have a written document or can you make a verbal
statement to your contractors and/or subcontractors that make legal commitments on behalf of your
company?
The answers to these questions can be found in the Law of Agency. A short and non-comprehensive but much
simplified (and therefore much less painful) summary of agency is described below.
Law of Agency
Practically every type of business transaction can be created or conducted through a legal entity called an agent.
You too are probably an agent; not a real estate agent, an insurance agent, or a theatrical agent (although they
too are agents of the person they are representing – the seller or buyer of a house, an insurance company, the
actor looking for a part). An agent is a person who is acting on behalf of his or her principal within the authorized
scope of his/her employment. As a general rule, a principal can use an agent to do whatever he or she may legally
do; conversely, whatever a person cannot legally do, he or she cannot authorize an agent to do. Of course, as is
the usual case in the law, there is an exception to this statement: if the service of the principal is so personal in
nature, that principal cannot delegate those services to an agent to perform in his/her stead.
By using agents, a business may enter into many transactions as though the owner (the principal) of that
business had personally carried out the activity thus expanding and multiplying the business activities. The
agency relationship involves three persons:
1. the principal,
2. the agent, and
3. the third party with whom the agent is dealing.
When the agent is dealing with the third party, in legal effect, it is as if the principal had dealt directly with that
third party, if the principal is known (disclosed) to the third party, the agent is simply an intermediary.
Additional Layers to the Law of Agency
The agency relationship overlaps two other legal relationships: employer-employee and principal-independent
contractor.
Normally, all employees who deal with third parties are deemed to be agents, but the agent relationship can
exist outside the employer/employee relationship and thus have a broader reach. In an employer-employee
relationship, the employer has the right to control the physical conduct of the employee – the tasks to be
performed, when they are to be performed, and the manner in which they are to be performed. There is a high
level of employer liability for the acts of the employee under employment laws. Both agency and employment
law are based on common law principles; many of the employment law doctrines have been replaced with
statutory laws and government regulations governing the employment relationship.
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In the independent contractor relationship, the employer does not have the right to control the manner or the
method in which the job is performed. There is very little liability for the person employing an independent
contractor. For those of you interested in pursuing more information on the legal aspects of agency, the
Restatement, Second, of Agency or The Legal Information Institute (LII) at Cornell University web page:
www.law.cornell.edu/topics/agency.html.
It will provide more information on the topic than you ever wanted to know.
- Exactly who is an agent?
- How is an agency relationship created?
- How does an agent legally commit his or her organization?
- Is an organization always legally responsible for the acts of its agents?
- How does an organization terminate an agency relationship?
The following outline may help answer these questions.

Creation of the Agency Relationship

Agency is a consensual relationship that the principal and the agent form by contract or by verbal agreement.
There is no legal document required to establish this relationship and it may exist without consideration. An
unpaid agent (gratuitous agency) has the ability to affect relations between the principal and the third parties
just as a paid agent. A contract may be used to establish the relationship: It may be an express contract (written
or verbal) or may be implied from the acts (or failure to act under circumstances where action would constitute
denial of the agency relationship) of the principal. The best-known formal written document creating an agency
relationship is the power of attorney, which gives a person express authority to act on behalf of another in a
specific transaction or types of transaction as specified in the document itself.
Duties of the Agent
The Agent has duties to the principal and conversely, the principal has duties toward the Agent. The duty
of the agent to the principal include:
- Duty of obedience (obey all reasonable instructions and directions),
- Duty of diligence (reasonable care and skill in performing the work),
- Duty to inform (to provide relevant information),
- Duty to account (maintain and provide a true and complete account of money or property received or
expended on the principal's behalf) and
- Fiduciary duty – a duty imposed by law on the agent to the principal, employee to employee - a duty that
arises when the law authorizes one person to place trust and confidence in another.
- Conflict of interest - agent must act solely in the best interests of the principal
- Duty not to compete - an agent cannot compete with the principal or act on behalf of the principal's
competitor.
- Confidential information - duty not to disclose confidential information obtained during the course of the
agency relationship for his/her own benefit or contrary to the interest of the principal.
- Account for financial benefits - any financial benefit received as a direct result of transactions conducted on
behalf of the principal (kickbacks, bribes, gifts, etc.
Authority
An agent has two types of authority in carrying out the business of the principal:
- Actual authority - the principal confers the agent actual authority by expressed or implied instructions.
(Actual implied authority) includes any reasonable steps taken by an agent in carrying out the expressed
instructions of the principal).
- Apparent authority - the authority an agent would seem to have when that agent's actions are viewed by a
reasonably prudent, disinterested third party in the same circumstances.

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The duties of Principal to the Agent

- Duty to compensate
- Duty to reimburse - for authorized payments agent makes on behalf of the principal for authorized expenses
- Duty to indemnify - to pay the agent for any losses the agent incurs while acting on behalf of or as directed
by the principal
Termination
The agency relationship can be terminated in several ways:
- Acts of the parties
- Lapse of time - an agency created for a specific period of time terminates when that time period expires.
- Fulfillment of purpose - an agency created for a specific purpose is terminated when that purpose is
accomplished.
- Mutual agreement of the parties
- Revocation of authority by the principal - a principal may terminate an agent's authority at any time -
expressly or implicitly (by conduct that would indicate revocation - agent can recover damages is so provided
in a contract.)
- Renunciation by the agent - the agent can give notice to the principal (no agent liability in a gratuitous
agency)
- Operation of Law - the law will automatically terminate an agency relationship when any of the following
occur:
- Bankruptcy terminates all agency relationships
- Death of either the principal or the agent
- Incapacity of the principal (exception - a Durable Power of Attorney survives the incapacity of the
principal - the agent may continue to act on behalf of the incompetent principal)
- Change in business conditions of the principal - so drastic that the agent should reasonably infer that
the principal would not wish the agent to continue to exercise the authority given.
- Loss or destruction of the subject matter of the agency
- Loss of qualification of either principal or agency; i.e. loss of license to do business
- Disloyalty of the agent
- Change in the law impacting the business/project
- Outbreak of war
With all this information now firmly in your head, the most important questions remain:
- As a project manager, am I an agent on behalf of my principal? (Probably, yes) and
- Am I creating legally binding relationships for my company as an agent? The following assignment will assist
you in determining the answers to this question.

Regulatory Agencies

Federal agencies range in size and complexity from large, complex federal bureaucracies to midsize state
agencies. State agencies can be more stringent in their rules and regulations than their federal counterparts.
Local city or county agencies (such as municipal zoning board) often contribute an additional regulatory layer
that can either conflict with state and federal requirements or impose more harsh rules.

Governmental agencies are established with the goal of concentrating a body of professional expertise in a
specific area: IRS in tax, USCIS in immigration and naturalization, EPA in environmental issues, OSHA in interior
facility safety and health issues, to name but a few. Each agency is empowered with the ability to adopt rules
and regulations and to implement and enforce the laws enacted by the other branches of the government. Many
agencies are authorized to request information before granting licenses to operate. They investigate businesses
and individuals to determine compliance. They can revoke licenses or levy fines for violations of the applicable

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statutes, administrative rules, regulations, or orders. They can require voluntary reporting of any violation of
rules and regulations. In turn, the agency has the power to adjudicate the cases it brings as a result of
investigations or reports. When this happens, the case is tried within the agency itself using administrative
procedures. These actions are presided over by an administrative law judge within the agency who is guided by
the procedures defined in the Administrative Procedure Act.

A business charged with a violation must exhaust its administrative remedies by going through the
administrative decision-making processes and the appeal procedures, before an appeal can be made to the
judicial branch of the government. When an appeal is filed, the court will usually attribute wide discretion to the
agency based on its expertise in the field. The courts mainly determine whether or not the agency has: (1)
exceeded its scope of authority; (2) failed to take into consideration all facts and circumstances in a cause of
action; or (3) failed to provide an administrative review through the appropriate administrative procedures.

PM652 Learning Module 9 Assignments

Reading Assignment

- Chapter 18 on Agency in Gayton

- Schwierking & Anantatmula: Project management and Regulatory Compliance: The missing ingredient.
- Contracting Authority-“Trust Me, I Work for the Government” October 27, 2001:
http://www.attny.com/gci09972.html
This article emphasizes agency principles – the distinction between apparent and actual authority of an agent.

9a

In no more than 500 words, analyze an on-going project or past project, and answer the 7 questions below:

1. Is the project manager of this project an agent of his/her company?

2. If so, how was the agency created?
3. Is the agent's authority actual or apparent?
4. What legal commitments can this project manager make on behalf of the company?
5. What happens if the agent exceeds his/her authority? What should the company do in this case? (ratified
the action?)
6. Are there any other issues concerning the duties of either the agent, the principal or, the contractor in
this project?
7. Have any other legal issues or concerns surfaced in this analysis of this project?

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As a team
9b

Collaborate with your teammates to produce a Regulatory Impact Summary Chart using the chart format
provided below. The chart should summarize your team discussion and list federal, state and local administrative
agencies that impact your team projects and any other projects with which any team member has experience.
Please provide the names of the projects you considered for this assignment. Note the research and reading
requirement in the last column of the table shown below.

Agencies Agency Impact on the When does Specific activities Current article from any
Regulating the Projects involvement of during the project source giving information
class projects: an agency begin? selection due to the on the impact of the
agency regulations agency on managing
List by agency in Note the type of impact How do you projects in this area.
descending this agency has on the plan for this
order - federal project - cost, schedule, involvement? Please give the link or
to state to local - etc. site for the article and a
for the projects. one paragraph executive
If both the federal and summary of that article.
state agency impact
the project, list both
together and
distinguish the two;
which is stricter?

Produce a lessons-learned document (300 words) that discusses:

- What lessons were learned vis-à-vis administrative agency impact on projects in your analysis?
- How will these lessons learned affect the way you select projects in future?

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