CH8 Principal Agent-Relationship

- principal-agent relationship: is created when one person, called the principal, grants
authority to another person, called the agent, to act in place of and for the principal’s
benefit and bind the latter in dealing with third parties.
 Principal: one a who authorizes another to act for him or her in business transactions.
 Agent: one who represents another in making business transactions.
 Authority: power to act for someone else
 Competencies of Agents: Agents make independent decisions and exercise judgment
as if they were making the transactions themselves except for too personal acts
 Third-party: A person who the agent deals with on behalf of the princal.
- Classification of agents:-
1. General Agents : has the authority to perform acts that relate to all business matters of
the principal. The general agent is considered to be in complete charge of the
principal’s business affairs.
2. Special Agents : has the authority to perform one type of act or a limited number of
acts relating to the principal’s business.
 Broker: A type of special agents: is an agent whose job is to bring a willing seller and
a willing buyer together to form a contract.
3. Gratuitous Agents : dont receive pay for the services they perform or a compensation
- Other similar relationships:-
1. Employer –Employee: difference is the degree of control exercised
2. Independent contractor: hired to perform a specific task and has complete control over
the manner in which the work will be conducted, but does not represent the other
party.
- Creation of the Principal Agent-Relationship:-
1. Contract -> by means of an oral or written contract.
2. Appearance -> agency by estoppel: If third parties are led to believe that a person is an
agent because an appearance of a principal-agent relationship exists
3. Ratification (approval)-> If one person attempts to act as an agent for another and this
other person approves the unauthorized act of the assumed agent
4. Necessity -> An emergency situation may require a person to act as an agent and thus
may create a principal-agent relationship by necessity.
- Obligations of the agent to the principle:-
A. Obedience
B. Loyalty
C. Reasonable Skill
D. Accurate Accounting
E. Communication
- Obligations of the principal to the agent:-
A. Compensation
B. Reimbursement (Repay)
C. Indemnification
D. Safe Working Conditions
E. Cooperation
- Termination of the principal agent-relationship:-
1. Fulfillment of Purpose or Lapse of Time: if the task assigned is accomplished.
2. Mutual Agreement: agree to end their relationship at any time.
3. Revocation of Authority: principal may revoke an agent’s authority and thus terminate
the principal agent relationship with or without cause at any time
4. Renunciation by The Agent: agent may refuse to continue to work for the principal.
5. Operation of Law (ex. The death/insanity of either the principal or the agent, bankruptcy
of the principal).
6. Subsequent Destruction or Illegality: end if the purpose becomes illegal, or prohibited by
law
- Notifying third parties of the termination:-
 Third parties, unless otherwise notified by the principal, may presume that a
principal-agent relationship continues to exist. The principal will continue to be
bound by any acts that the agent performs in the apparent scope of authority until the
principal gives notice of termination