PowerPoint Slides to Accompany

CONTEMPORARY BUSINESS AND

ONLINE COMMERCE LAW
5th Edition
by Henry R. Cheeseman

Chapter 24
Agency

Slides developed by
Les Wiletzky
Wiletzky and Associates Copyright © 2006 by Pearson Prentice-Hall. All rights reserved.
 Agency
 Agency relationships are formed by the
mutual consent of a principal and an
agent
 Agency is the fiduciary relationship “which
results from the manifestation of consent
by one person to another that the other
shall act in his behalf and subject to his
control, and consent by the other so to
act.”
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 Agency: Key Terms
 Agency Law – The large body of common
law that governs agency
 A mixture of contract law and tort law

 Principal – The party who employs

another person to act on his or her behalf

 Agent – The party who agrees to act on

behalf of another
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 The Principal-Agent Relationship

Principal
Principal’s
obligation to
Agency perform the
Contract contract

Agent Third Party

Contract with third
party on behalf of
principal
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 Persons Who Can Initiate an Agency
Relationship (1 of 2)
 Any person who has the capacity to
contract can appoint an agent to act on
his or her behalf

 Persons who lack contractual capacity

cannot appoint an agent
 e.g., insane persons and minors

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 Persons Who Can Initiate an Agency
Relationship (2 of 2)
 An agency can be created only to
accomplish a lawful purpose

 Agency contracts that are created for

illegal purposes or are against public
policy are void and unenforceable

 Some agency relationships are prohibited

by law
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 Principal-Agent Relationship
 An employer hires an employee and gives
that employee authority to act and enter
into contracts on his or her behalf

 The extent of this authority is governed by

any express agreement between the
parties and implied from the
circumstances of the agency

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 Employer-Employee Relationship
 A relationship that results when an
employer hires an employee to perform
some form of physical service
 An employee is not an agent unless he or
she is specifically empowered to enter into
contracts on the principal employer’s behalf
 Employees may only enter into contracts
that are within the scope of their
employment
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 Summary: Kinds of Employment
Relationships
Type of Relationship Description

Employer-Employee The employer has the right to control the physical

conduct of the employee.
Principal-Agent The agent has the authority to act on behalf of the
principal as authorized by the principal and implied
from the agency.
An employee is often the agent of his employer.

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 Formation of an Agency Relationship

 An agency and the resulting authority of

an agent can arise in any of these four
ways:
1. Express agency
2. Implied agency
3. Apparent agency
4. Agency by ratification

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 Express Agency
 An agency that occurs when a principal
and an agent expressly agree to enter into
an agency agreement with each other
 Exclusive agency contract
 Power of attorney

 Express agency contracts can be either

oral or written unless the Statute of
Frauds stipulates that they must be written

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 Implied Agency
 An agency that occurs when a principal
and an agent do not expressly create an
agency
 The agency is implied from the conduct of
the parties
 The extent of the agent’s authority is
determined from the particular facts and
circumstances of the particular situation
 Incidental authority
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 Apparent Agency
 Agency that arises when a principal
creates the appearance of an agency that
in actuality does not exist
 When an apparent agency is established,
the principal is estopped from denying the
agency relationship
 It is the principal’s actions that create an
apparent agency

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 Agency by Ratification
 An agency that occurs when:
A person misrepresents himself or herself as
1.
another’s agent when in fact he or she is not,
and
2. The purported principal ratifies (accepts) the
unauthorized act
 In such cases, the principal is bound to
perform and the agent is relieved of any
liability for misrepresentation
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 Summary: Formation of Agency
Relationships (1 of 2)
Type of Agency Definition Enforcement of the Contract

Express Authority is expressly given Principal and third party are

to the agent by the bound to the contract.
principal.

Implied Authority is implied from the Principal and third party acts
conduct of the parties, are bound to the contract.
custom and usage of trade,
or act incidental to carrying
out the agent’s duties.

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 Summary: Formation of Agency
Relationships (2 of 2)
Type of Agency Definition Enforcement of the Contract

Apparent Authority created when the Principal and third party are
principal leads a third party bound to the contract.
into believing that the agent
has authority.

By Ratification Acts of the agent Principal and third party are not
committed outside the bound to the contract unless
scope of his authority. the principal ratifies the
contract.

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 Principal’s Duties (1 of 2)
 Duty to compensate
 A duty that a principal owes to pay an agreed-upon
amount to the agent either upon the completion of the
agency or at some other mutually agreeable time
 Duty to reimburse
 A duty that a principal owes to repay money to an agent
if the agent spent his or her own money during the
agency on the principal’s behalf

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 Principal’s Duties (2 of 2)
 Duty to indemnify
 A duty that a principal owes to protect the agent for
losses the agent suffered during the agency because of
the principal’s misconduct
 Duty to cooperate
 A duty that a principal owes to cooperate with and
assist the agent in the performance of the agent’s duties
and accomplishment of the agency

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 Agent’s Duties (1 of 3)
 Duty of performance
An agent’s duty to a principal that includes:
1. Performing the lawful duties expressed in the
contract; and
2. Meeting the standards of reasonable care, skill, and
diligence implicit in all contracts

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 Agent’s Duties (2 of 3)
 Duty of notification
 An agent’s duty to notify the principal of information he
or she learns from a third party or other source that is
important to the principal
 Imputed Knowledge – most information learned by an
agent in the course of the agency is imputed to the
principal

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 Agent’s Duties (3 of 3)
 Duty of accountability
 A duty that an agent owes to maintain an accurate
accounting of all transactions undertaken on the
principal’s behalf
 Duty of loyalty
 An agent owes a fiduciary duty not to act adversely to
the interests of the principal
 If this duty is breached, the agent is liable to the
principal

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 Contract Liability of Principals and
Agents to Third Parties (1 of 2)
Fully
FullyDisclosed
DisclosedAgency
Agency Partially
PartiallyDisclosed
DisclosedAgency
Agency
 The
 Theprincipal
principalisisliable
liabletoto  Both
 Boththetheprincipal
principaland
andthethe
the
thethird
thirdparty
party agent
agentareareliable
liabletotothe
thethird
third
 The
 Theagent
agentisisnot
notliable
liable party
partyififthe
theprincipal
principalfails
failstoto
perform
performthe thecontract
contract
 An
 Anagent
agentisisliable
liableon onthe
the
contract
contractififhe
heor orshe
she  This
 Thisisisbecause
becausethe thethird
third
guarantees
guaranteesthat thatthe
the party
partymust
mustrelyrelyon
onthe
the
principal
principalwill
willperform
performthethe agent’s
agent’sreputation,
reputation,
contract
contract integrity,
integrity,andandcredit
credit
because
becausethe theprincipal
principalisis
unidentified
unidentified
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 Contract Liability of Principals and
Agents to Third Parties (2 of 2)
Undisclosed
UndisclosedAgencyAgency
 The
 Thethird
thirdparty
partyisisunaware
unaware
ofofeither
eitherthetheexistence
existenceofof
an
anagency
agencyor orthe
the
principal’s
principal’sidentity
identity
 Both
 Boththe theprincipal
principalandandthethe
agent
agentare areliable
liabletotothe
thethird
third
party
partyififthe
theprincipal
principalfails
failstoto
perform
performthe thecontract
contract

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 Agent Exceeding the Scope of
Authority
An
 An agent
agent who
who enters
enters into
into aa contract
contract on
on behalf
behalf ofof
another party impliedly
another party impliedly warrants
warrants that that he
he oror she
she has
has
the
the authority
authority toto dodo so
so
IfIf the
 the agent
agent exceeds
exceeds the the scope
scope ofof his
his or
or her
her
authority,
authority, the
the principal
principal isis not
not liable
liable on
on the
the contract
contract
unless
unless the principal ratifies
the principal ratifies itit
The
 The agent
agent isis liable
liable toto the
the third
third party
party for
for breaching
breaching
the
the implied
implied warranty
warranty ofof authority
authority

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 Tort Liability to Third Parties
 The principal and the agent are each
personally responsible for their own
tortious conduct
 The principal is liable for the tortious
conduct of an agent who is acting within
the scope of his or her authority
 The agent is liable for the tortious conduct
of the principal if he or she directly or
indirectly participates in or aids and abets
the principal’s conduct
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 Sources of Tort Liability for
Principals and Agents
 Misrepresentation
 Intentional misrepresentation
 Innocent misrepresentation

 Negligence
 Respondent superior
 Frolic and detour
 “Coming and going” rule
 Dual-purpose mission

 Intentional Torts

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 Termination of an Agency
 An agency contract is similar to other
contracts in that it can be terminated by:
 Acts of the parties,
parties or
 Operation of law

 Once an agency relationship is

terminated, the agent can no longer
represent the principal or bind the
principal to contracts

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 Termination by Acts of the Parties
An agency may be terminated by the
following acts of the parties:
1. Mutual agreement
2. Lapse of time
3. Purpose achieved
4. Occurrence of a specified event

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 Termination by Operation of Law
An agency is terminated by operation of
law, including:
1. Death of the principal or agent
2. Insanity of the principal or agent
3. Bankruptcy of the principal
4. Impossibility of performance
5. Changed circumstances
6. War between the principal’s and agent’s
countries
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 Irrevocable Agency
 An agency coupled with an interest:
 Special type of agency relationship
 This type of agency is irrevocable by the
principal
 Not terminated by the death or incapacity of
either the principal or the agent
 Terminates only when the agent’s obligations
are performed

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 Wrongful Termination of an Agency
or Employment Contract
 The termination of an agency contract in
violation of the terms of the agency
contract
 The nonbreaching party may recover
damages from the breaching party
 The distinction between the power and the
right to terminate an agency is critical

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 Independent Contractor
 Persons and businesses PRINCIPAL – INDEPENDENT
CONTRACTOR RELATIONSHIP
often employ independent
contractors to perform Principal
certain tasks on their
behalf
 The party that employs an
Contract
independent contractor is
called a principal
Independent
Contractor

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 Determining Independent Contractor
Status
 The crucial factor in determining whether a
person is an employee or an independent
contractor is the degree of control that the
principal has over that person

 Substantial control indicates an employer –

employee relationship

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 Liability for Independent
Contractor’s Torts
Principal
 Principal employs
employs aa person
person who
who isis not
not an
an employee
employee
ofof the
the principal
principal
The
 The independent
independent contractor
contractor has
has authority
authority only
only toto
enter
enter into
into contracts
contracts authorized
authorized by by the
the principal
principal
Generally,
 Generally, principals
principals are
are not
not liable
liable for
for the
the tortious
tortious
conduct
conduct ofof independent
independent contractors
contractors
Independent
 Independent contractors
contractors are
are personally
personally liable
liable for
for
their
their own
own torts
torts

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