Chapter 25 Agency Relationships PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 6th Edition by Henry R. Cheeseman Chapter 25 Agency Relationships Copyright © 2009 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.” Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

The Principal-Agent Relationship Principal’s obligation to perform the contract Agency Contract Agent Third Party Contract with third party on behalf of principal Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. i.e., insane persons and minors Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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 Copyright © 2009 by Pearson Prentice Hall. All rights reserved. 3

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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 Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Agency by Ratification An agency that occurs when: A person misrepresents himself or herself as another’s agent when in fact he or she is not, and 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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Agent’s Duties (1 of 3) Duty of performance An agent’s duty to a principal that includes: Performing the lawful duties expressed in the contract; and Meeting the standards of reasonable care, skill, and diligence implicit in all contracts Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Agent’s Duties (3 of 3) Duty of accountability Duty of loyalty 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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Breaches of Loyalty Self-dealing Usurping an opportunity Competing with the principal Misuse of confidential information Dual agency Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Contract Liability of Principals and Agents to Third Parties (1 of 2) Fully Disclosed Agency The principal is liable to the third party The agent is not liable An agent is liable on the contract if he or she guarantees that the principal will perform the contract Partially Disclosed Agency Both the principal and the agent are liable to the third party if the principal fails to perform the contract This is because the third party must rely on the agent’s reputation, integrity, and credit because the principal is unidentified Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Contract Liability of Principals and Agents to Third Parties (2 of 2) Undisclosed Agency The third party is unaware of either the existence of an agency or the principal’s identity Both the principal and the agent are liable to the third party if the principal fails to perform the contract Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Agent Exceeding the Scope of Authority An agent who enters into a contract on behalf of another party impliedly warrants that he or she has the authority to do so. If the agent exceeds the scope of his or her authority, the principal is not liable on the contract unless the principal ratifies it. The agent is liable to the third party for breaching the implied warranty of authority. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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 Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Intentional Tort Motivation Test – promoting principal’s business Work-Related Test – work-related time and space Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Termination by Acts of the Parties An agency may be terminated by the following acts of the parties: Mutual agreement Lapse of time Purpose achieved Occurrence of a specified event Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Termination by Operation of Law An agency is terminated by operation of law, including: Death of the principal or agent Insanity of the principal or agent Bankruptcy of the principal Impossibility of performance Changed circumstances War between the principal’s and agent’s countries Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Termination by Impossibility Loss or destruction of the subject matter Loss of required qualification Change in the law Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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 Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Independent Contractor Persons and businesses often employ independent contractors to perform certain tasks on their behalf The party that employs an independent contractor is called a principal PRINCIPAL – INDEPENDENT CONTRACTOR RELATIONSHIP Principal Contract Independent Contractor Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

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. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.

Liability for Independent Contractor’s Torts Principal employs a person who is not an employee of the principal. The independent contractor has authority only to enter into contracts authorized by the principal. Generally, principals are not liable for the tortious conduct of independent contractors. Independent contractors are personally liable for their own torts. Copyright © 2009 by Pearson Prentice Hall. All rights reserved.