Agency

Formation and Termination

FOCUS

• Do you need an agent?

• List situations that you would want an agent to deal for you.

Qui facit per alium facit per se.

• He who acts through another, acts himself.

• Agency relationships are fiduciary relationships formed by mutual agreement between the principal and an agent.

The Principal -Agent Relationship

PrincipalPrincipal

AgentAgent

Third PartyThird PartyAgency Agency ContractContract

Contract with third Contract with third party on behalf of party on behalf of

principalprincipal

Principal’s Principal’s obligation to obligation to perform the perform the contractcontract

AGENCY RELATIONSHIPS

Formation of the Agency Relationship

Express Express AgencyAgency

Implied Implied AgencyAgency

Apparent Apparent AgencyAgency

Agency by Agency by RatificationRatification

Summary: Formation of Agency Relationships (1 of 2)

Type of Agency

Definition Enforcement of the Contract

Express Authority is expressly given to the agent by the principal.

Principal and third party are bound to the contract.

Implied Authority is implied from the conduct of the parties, custom and usage of trade, or act incidental to carrying out the agent’s duties.

Principal and third party acts are bound to the contract.

Summary: Formation of Agency Relationships (2 of 2)

Type of Agency

Definition Enforcement of the Contract

Apparent Authority created when the principal leads a third party into believing that the agent has authority.

Principal and third party are bound to the contract.

By Ratification Acts of the agent committed outside the scope of his authority.

Principal and third party are not bound to the contract unless the principal ratifies the contract.

Persons Who Can Initiate an Agency Relationship

• 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

Persons Who Can Initiate an Agency Relationship (continued)

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.

• Voting• Serving a criminal sentence.

Kinds of Employment Relationships

Employer-Employee Employer-Employee RelationshipRelationship

Principal-Agent Principal-Agent RelationshipRelationship

Principal-Independent Principal-Independent Contractor RelationshipContractor Relationship

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.

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.

Principal - Independent Contractor Relationship

• Principals employ persons or businesses who are not employees to perform certain tasks on their behalf.– These persons and

businesses are called independent contractors.

Principal-Independent Contractor Relationship (continued)

• A principal can authorize an independent contractor to enter into contracts.– Principals are bound by the

authorized contracts of their independent contractors.

• 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.

FOCUS

• Refer to the list of times you would want agents to deal for you.

• Make a list of the duties that you would have expected these agents to fulfill.

Agent’s Duties to the Principal

PerformancePerformance NotificationNotification

LoyaltyLoyaltyAccountabilityAccountability

WHAT ARE AN AGENT’S DUTIES?• Duties owed the principal

– Loyalty and obedience– Reasonable care and skill– Confidentiality– Accounting

• Duties owed to third parties– Exceeding the scope of authority– Principal’s lack of capacity– Liability due to an undisclosed principal

Agent’s Duties

• An agent who enters into a contract with a principal has two distinct obligations.

• Collectively, these are referred to as the agent’s duty of performance. – Performing the lawful duties expressed in the

contract– Meeting the standards of reasonable care,

skill, and diligence implicit in all contracts.

Agent’s Duties (continued)

• Duty of notification– The agent’s has a duty to notify the principal

of any information that is important,– Imputed knowledge

• Duty of accountability– Agent has duty to maintain accurate

accounting of all transactions undertaken on the principal’s behalf.

Tort Liability of Principals and Agents to Third Parties (1 of 2)

Agent’s Conduct

Agent Liable

Principal Liable

Misrepre-sentation

Yes The principal is liable for the intentional and innocent misrepresentations made by an agent acting within the scope of his or her authority.

Negligence Yes The principal is liable under the doctrine of respondeat superior if the agent’s negligent act was committed within his scope of employment.

Tort Liability of Principals and Agents to Third Parties (2 of 2)

Agent’s Conduct

Agent Liable

Principal Liable

Intentional Tort

Yes Motivation Test: The principal is liable if the agent’s motivation in committing the intentional tort was to promote the principal’s business.

Intentional Tort

Yes Work-Related Test: The principal is liable if the agent committed the intentional tort within work-related time and space.

WHAT ARE THE PRINCIPAL’S DUTIES?• Duties owed the agent

• Duties owed third parties

Principal’s Duties• The principal has a duty to compensate an

agent for services provided within a mutually agreeable time.

• If the agent spends his or her own money, on the principal’s behalf, the principal owes a duty to reimburse the agent for all such expenses if they were:1. Authorized by the principal.

2. Within the scope of the agency.

3. Necessary to discharge the agent’s duties in carrying out the agency.

Principal’s Duties (continued)

• A principal owes a duty to indemnify the agent for any losses the agent suffers because of the principal. Such duty arises when the agent is held liable for the principal’s misconduct.

• The principal owes a duty to cooperate with and assist the agent in the performance of the agent’s duties and accomplishments of the agency.

HOW IS AN AGENCY TERMINATED?• By unilateral action of a party

• By agreement

• By operation of law

Independent Contractor

• Principals often employ outsiders (persons or businesses who are not employees) to perform certain tasks on their behalf.

Principal

Independent

Contractor

Contract

Liability for Independent Contractor’s Torts

• A principal is generally not liable for the tortious conduct of independent contractors it hires.

• Independent contractors are personally liable for their own torts.

• The rationale behind this rule is that principals do not control the means by which the results are accomplished.

Liability for Independent Contractor’s Torts (continued)

• A principal is, however, liable for the tortious conduct of an independent contractor involving:– Inherently dangerous activities.– The negligent selection of the independent

contractor• Crucial factor is degree of control

Termination of an Agency• An agency contract is similar to other contracts

in that it can be terminated by:– Acts of the 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.

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

Notification Required

• The principal is responsible to give certain third parties notification of the agency termination. – Parties who dealt with the agent must be

given direct notice– Parties who have knowledge of the agency

must be given direct or constructive notice– Parties who have no knowledge of the agency

are owed no notice

Termination by Operation of Law

An agency is terminated by operation of law, including:

1. Death of the principal or agent2. Insanity of the principal or agent3. Bankruptcy of the principal4. Impossibility of performance5. Changed circumstances6. War between the principal’s and agent’s

countries

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.– Revocation of authority– Renunciation of authority