AGENCY

Agency relationship is a fiduciary relationship in which one person (the agent) acts

for or represents another person (the principal) in engaging in business

transactions

An agency is a consensual relationship but not

necessarily a contractual one

• Consideration need not be given by principal to agent.

• No special formality (such as writing) is necessary.

• Legal capacity is necessary for principal but not agent.

• Legal purpose for agency is required.

Formation of agency relationship

• By agreement.– An express (oral or written) agreement,– An agreement implied from conduct of

parties

• By estoppel (Apparent authority)

• By express or implied ratification

• By operation of law

Agency by Operation of Law

• A court may find that an agency exists in order to lay out a social policy when credit has been extended for the purchases of necessaries by a family member or in emergency situations.

• A statute may provide that a state official will be treated as having been appointed as an agent to receive service of process under certain circumstances.

Types of Agency Relationships

• Master - Servant

• Principal - Independent Contractor

Master-Servant (i.e..., employer-employee)

relationship• The relationships basic characteristic is

that the master controls or has the right to control the servant in the performance of physical tasks.

• Some relevant factors considered by courts in determining if such control exists are the following:

Principal-Independent Contractor

• The relationships basic characteristic is that the principal does not control the details of the independent contractor’s performance.

• An independent contractor engages to bring about some specified end result and is normally paid at the completion of performance in accordance with a contract with the principal.

Agency relationships are fiduciary ones based upon

trust and many of the duties that are owed by one of the parties correspond to duties

owed by the other party.

Agent’s Duties to Principal

• Duty of Performance

• Duty of Loyalty

• Duty of Obedience

• Duty of Notification

• Duty of Accounting

Duty of Performance Requires that an Agent:

• Follow instructions

• Use reasonable diligence and skill in carrying out agency

• Use special skills which the agent possesses if such skills are applicable.

Duty of Loyalty requires that an agent always act in the

best interest of the principal.

Duty of Loyalty• An agent may neither compete with the principal

nor act for another principal unless full disclosure is made to the principal and the principal consents.

• An agent may not disclose trade secrets or other confidential information acquired in the course of the agency.

• Any secret profits or benefits acquired by agent in the course of the agency belong to and are held in constructive trust for the principal.

Duty of Obedience requires that an agent follow all lawful instructions of the principal

• Exception: In an emergency an agent who is unable to contact the principal may deviate from instructions if the situation so warrants so long as agent acts reasonably.

Duty of Notification requires an agent to notify the principal

of material information that relates to the subject matter of

the agency.

Duty of Accounting requires that an agent account to the

principal for money or property that rightfully belongs to the principal but comes into the agent’s hands, and that an agent not commingle such

funds or property with his/her own.

Principal’s Duties to Agent

• Duties specified in the agency agreement• Duties implied by the agency

relationship.

Implied Duties of Principal to Agent

• Duty to compensate

• Duty to reimburse for reasonable and necessary expenses incurred by the agent while acting within the scope of agency

• Duty to indemnify liabilities and losses incurred by the agent while acting within the scope agency.

• Duty of cooperation.

• Duty to provide safe working conditions

Contract Liability to Third Parties

• Is the Principal liable on a contract?

• Is the Agent liable on the contract?

Contract Liability to Third Parties

• Is the Principal liable on a contract?– The principal is liable on the contract if the

agent had authority to act:• Actual Authority

– Express– Implied

• Apparent Authority• Emergency Authority• Authority by Ratification

• Is the Agent liable on the contract?

Contract Liability to Third Parties

• A principal is liable as a party to a lawful contract made for and on behalf of the principal by the agent and for torts committed by his or her agent while the agent is acting within the scope of actual or apparent authority or subsequently ratified by the principal

Express Actual Authority

• Express authority may be given orally unless a writing is required by the statute of frauds or other statute.

When is Written Authority Required?

• In most states when an agent is empowered to enter into contracts that are required to be evidenced by a signed writing under the statute of frauds, the agent’s authority to do so must be granted in a writing signed by the principal (Equal Dignity Rule)

• When corporate executives are acting for corporations in the ordinary course of business, written authorization is not required (Exception to Equal Dignity Rule)

A written appointment of an agent is called “Power of

Attorney” (notarization may be required).

Implied Actual Authority

• Implied authority may be inferred because of the conduct of the principal (called authority through course of dealing).

• Implied authority may be inferred because of custom (called customary implied authority).

• Implied authority may be reasonably necessary to carry out the purpose and express authority of the agent (called incidental implied authority).

Question?Henderson is the vice‑president of purchasing for ABC Corp. He has authority to

enter into purchase contracts on behalf of ABC provided that the price under a contract does not exceed $2 million. Bruceton, who is the president of ABC, is required to approve any contract that exceeds $2 million. Henderson entered into a $2.5 million purchase contract with Wanamaker, Inc., without Bruceton's approval. The representatives of Wanamaker with whom Henderson dealt were unaware that he had exceeded his authority. What is the most likely result of this transaction?

a. ABC Corp. will be bound because of Henderson's apparent authority.

b. ABC Corp. will not be bound because Henderson exceeded his authority.

c. ABC Corp. will only be bound up to $2 million, the amount of Henderson's authority.

d. ABC Corp. may avoid the contract if it gives written notice to Wanamaker within 10 days after its agent unauthorized

act.

Apparent Authority (also called authority by estoppel or

ostensible authority)• Apparent authority exists when a principal

manifests (“or holds out”) to a third party that an agent has authority and the third party reasonable relies upon the principal’s statement or conduct, deals with the agent , and incurs a loss or is otherwise injured.

• The principal is estopped from asserting that the agent lacked authority.

Emergency Authority

• In an unforeseen emergency situation when an agent is unable to communicate with the principal, it is inferred that the agent has power to take necessary appropriate action in order to protect or preserve the property or other interest of the principal.

Authority by Ratification• A principal may expressly or impliedly

(by accepting the benefits of or failing to repudiate the contract) affirm a previously unauthorized contact of act by an agent.

• The effect of the ratification is on bind the principal as if the act or contract had been originally authorized

Requirements of Effective Ratification:

– the principal must have knowledge of all material facts surrounding the transaction,

– the entire transaction must be ratified,– the principal must have had capacity at the

time the act was performed and at the time the act was ratified, and,

– the third party did not withdrawal, die or otherwise lose capacity before ratification.

Contract Liability to Third Parties

• Is the Principal liable on a contract?– The principal is liable on the contract if the

agent had authority to act.

• Is the Agent liable on the contract?– Whether the agent is liable depend on

whether the principal is• Disclosed• Partially disclosed• Undisclosed

Question?

When a principal is undisclosed, which of the following is correct?a. The principal may be liable to the third party due to apparent authority.b. The principal may be liable to the third party due to ratification.c. A third party may hold the agent personally liable.d. The principal owes no fiduciary duties to the agent.

Liability for contracts---An agents liability on a contract

which the agent made for and on behalf of the principal is dependent on whether the

principal is a Disclosed, Partially Disclosed or

Undisclosed

Disclosed Principal is one whose identity is known by the

third party with whom the agent made a contract

Disclosed Principal

• When the agent was authorized to contract by the principal, the parties to the contract are the third party and the principal---not the agent.

• When the agent lacked authority and the contract is not ratified by the principal:– The principal and third party are not liable to one another as parties on the

contract.– The agent is not a party to the contact---but may be liable to the third party for

breach of the implied warranty of authority.

Partially Disclosed Principal is one whose existence, but not

identity, is known • Assuming the agent had authority to

contract, both the principal and agent are liable as parties to the contract unless the contract provides otherwise.

• The third party is liable on the contact.• In most states the third party has the right to

elect to hold either the principal or the agent liable---but not both (i.e., Several Liability).

Undisclosed Principal is a principal whose existence and

identity are completely unknown

• Assuming the agent had authority to contract, both the principal and agent are liable as parties to the contract.

• The third party is liable on the contract.

In most states the third party has the right to elect to hold

either the principal or the agent liable---but not both (i.e....., several liability).

Exceptions to Undisclosed Rule• The undisclosed principal was expressly

excluded as a party.

• The contract is a negotiable instrument.

• The performance of the agent is personal to the contract.

• The agent or principal knew that the third party would not have entered into a contract with the principal had the third party known the principal’s identity, and the third party rescinds the contract.

Implied warranty of authority is made by an agent to the third

party with whom the agent contracted on behalf of her/his

principal.

Tort Liability to Third Party

• When is an agent liable for his/her own torts?

• When is the principal liable to an injured party for a tort committed by an agent?

Tort Liability to Third Party

• When is an agent liable for his/her own torts?– An agent is personally liable for his/her

own torts, even if the torts were authorized.

• When is the principal liable to an injured party for a tort committed by an agent?

Tort Liability to Third Party

• When is an agent liable for his/her own torts?• When is the principal liable to an injured party for a

tort committed by an agent?– If principal authorized the conduct – If misrepresentations were made by the agent who was

acting within the scope of such authority.– If principal committed a the tort– If principal is vicarious liability under the doctrine of

Respondeat Superior

Examples of Tortious Conduct by Principal

• giving improper instructions;

• providing improper or unsafe material, tools or equipment;

• negligent supervision;

• negligent hiring;

• authorizing ultrahazardous activities for which strict.

Doctrine of Respondeat Superior

• An employer is vicariously liable for torts committed by an employee within the scope of the authority/employment under doctrine of respondeat superior

Vicarious Liability

• A principal is vicariously liable for tortious harm done to a third party– If the tort was committed by an employee

(not by an independent contractor)• and

– If the employee committed the tort while acting within the scope of the employment.

Question?Garrison was employed as a carpenter by the Zobo Construction Company. He negligently constructed a scaffold at one of Zobo's construction sites. The scaffold collapsed and injured Dirks (a fellow employee), Roosevelt (a supplier) and Garrison. Under these circumstances which of the following statements is correct?a. Zobo Construction Company is not liable to Roosevelt if

Garrison disobeyed specific instructions regarding construction of the scaffold.b. Zobo Construction Company is liable to Roosevelt even if

Garrison was grossly negligent.c. Garrison is not personally liable to Dirks or Roosevelt,

because he is a servant ( i.e., employee).d. Garrison cannot recover Workers Compensation benefits

since his own negligence caused the accident.

Types of Agency Relationships

• Master - Servant

• Principal - Independent Contractor

Master-Servant (i.e..., employer-employee)

relationship• The relationships basic characteristic is

that the master controls or has the right to control the servant in the performance of physical tasks.

• Some relevant factors considered by courts in determining if such control exists are the following:

Principal-Independent Contractor

• The relationships basic characteristic is that the principal does not control the details of the independent contractor’s performance.

• An independent contractor engages to bring about some specified end result and is normally paid at the completion of performance in accordance with a contract with the principal.

Scope of Employment

– The time, place and purpose of the act;– Whether the act was one commonly performed by employees;– The extent to which the employer’s interest was advanced by the

act.– Whether the employer furnished the means or instrumentality by

which an injury was inflicted.– Whether the act was authorized by the employer;– Whether the employer had reason to know that the employee

would do the act in question and whether the employee had done the act before;

A substantial departure or deviation from the employer’s

business (i.e., a frolic) is outside the scope.

Tort Liability to Third Party

• If both principal and agent are liable to an injured third party for a tort committed by an agent, they are JOINTLY AND SEVERALLY LIABLE.

The principal/employer cannot contractually disclaim vicarious liability of a subordinate’s torts.

Borrowed Servant Rule• An employee who has the primary right

to control a “borrowed” employee is vicariously liable for the torts of the borrowed employee.

Imputed Knowledge• Notice of material facts relating to an

employer’s business received by an employee will be imputed to the employers.

Principal’s Responsibility for Agent’s Crimes

• A principal or employer is not liable for the criminal action of an agent or employee unless:– The employer participated in or expressly

directed or authorized the crime’s commission.

– A specific statute imposes liability on the employer.

Liability for Subagent’s Acts• If an agent is authorized to employ subagents (or

sub-employees) for a disclosed principal, the principal is responsible for compensating the subagent and is liable for the acts of the subagent.

• If an agent is authorized to employ subagents (or sub-employees) for an undisclosed principal, the agent is responsible for compensating the subagent but the undisclosed principal is liable for the acts of the subagent.

Termination of an Agency

An agency can be terminated By Act of the Parties

• The Agent and Principal may mutually agree to terminate at any time

• Either the Principal or Agent may terminate unilaterally– Revocation by Principal– Renunciation by Agent

• The agency may be terminated by operation of law

Mutual agreement to terminate.

• Agency will terminate at the end of a contractually specified time, accomplishment of purpose or occurrence of specific event.

• Agency will terminate after the expiration of a reasonable period of time if no time, etc., is specified.

Unilateral termination.

• If the agency is an agency at will (not for a stated term or for a particular purpose), either party has the power and right terminate.

• If the agency is not an agency at will, a party may have the power but not the right to terminate, and is, therefore, liable for wrongful termination (a breach of contract)

• An agency may be terminated for cause.

Termination By Operation of Law

• Death or mental incompetency (adjudicated) of either party..

• Impossibility

• Unforeseen change in circumstances such that the agent could reasonable infer that the principal would not want the agency to continue

• Bankruptcy of principal---but generally not of agent

Notice Required for Termination

• If termination is by act of a party, the agency continues between the principal and agent until notice is given.

• Notice must be given to third parties in order to terminate apparent authority of agent.– Actual notice must be given to third parties who

dealt with the agent.– Constructive notice (by reasonable publication)

must be given to those who knew of the agency.

Notice is generally not required if the agency is

terminated by operation of law.