PowerPoint Slides to accompany The Legal Environment of Business and Online Commerce 5E, by Henry R. Cheeseman Chapter 19 Agency Law Prentice Hall © 2007

The Agency Relationship Agency relationships are formed by the mutual consent of a principal and an agent. 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 Agency The principal-agent relationship Any person who has capacity to contract can appoint an agent. Prentice Hall © 2007

Employment Relationships Employer-employee A relationship that results when an employer hires an employee to perform some form of physical service Principal-agent A relationship that results when an employer hires an employee and gives that employee authority to act and enter into contracts on his or her behalf Prentice Hall © 2007

Principal-Independent Contractor A relationship that results when a person or business that is not an employee is hired by a principal to perform a certain task on his or her behalf Prentice Hall © 2007

Formation of an Agency Express agency Implied agency An agency that occurs when a principal and an agent expressly agree to enter into an agency agreement with each other A power of attorney is a formal type of agency agreement. Implied agency An agency that occurs when a principal and an agent do not expressly create an agency, but it is implied from the conduct of the parties Incidental authority Prentice Hall © 2007

Formation of an Agency Apparent agency (agency by estoppel) Agency that arises when a principal creates the appearance of an agency that in actuality does not exist Agency by ratification Agency that occurs when A person misrepresents himself or herself as another’s agent when in fact he or she is not. The purported principal ratifies (accepts) the unauthorized act. Prentice Hall © 2007

Duties of Principals Duty of compensation Duty of reimbursement and indemnification Reimburse expenses Indemnify for losses suffered Duty of cooperation Prentice Hall © 2007

Agent’s Duties Duty of performance Duty of notification Duty of accountability Prentice Hall © 2007

Agent’s Duties Duty of loyalty Self-dealing Usurping an opportunity Competing with the principal Misuse of confidential information Dual agency Prentice Hall © 2007

Contract Liability to Third Parties Fully disclosed agency Principal is liable Agent is not liable Partially disclosed agency Third party is aware of agency status but does not know the identity of the principal. Both principal and agent are liable. Prentice Hall © 2007

Contract Liability to Third Parties Undisclosed agency Third party is unaware of the agency. Both principal and agent are liable. Agent exceeding scope of authority Agent breaches the implied warranty of authority. Principal is not liable unless he or she ratifies the contract. Prentice Hall © 2007

Tort Liability to Third Parties Principal and agent are each liable for their own torts. Principal is liable for agent’s torts while agent is acting within the scope of authority. Agent is not liable for principal’s torts unless he or she participates in or aids and abets principal’s conduct. Prentice Hall © 2007

Liability for Negligence Principal is liable for agent’s negligence if agent is acting within the scope of employment. Respondeat superior – principal is vicariously liable for agent’s negligence. Prentice Hall © 2007

Frolic and Detour When an agent does something during the course of his or her employment to further his or her own interests rather than the principal’s Principal is generally relieved of liability if the detour is substantial. Prentice Hall © 2007

“Coming and Going” Rule A principal is generally not liable for injuries caused by its agents and employees while they are on their way to or from work. Prentice Hall © 2007

Dual-Purpose Mission An errand or other act that a principal requests of an agent while the agent is on his or her own personal business Most jurisdictions hold both principal and agent liable if agent injures a third party while on dual-purpose mission. Prentice Hall © 2007

Liability for Intentional Torts Principal is not liable for agent’s intentional torts that are committed outside the scope of business. Principal may be vicariously liable for intentional torts committed by agent acting within the scope of business. Motivation test Work-related test Prentice Hall © 2007

Misrepresentation Principal is liable for agent’s intentional or innocent misrepresentation made by agent acting in the scope of employment. Third party’s options Rescind the contract and recover consideration. Affirm the contract and recover damages. Prentice Hall © 2007

Independent Contractor Degree of control that principal has over agent is the crucial factor in determining status. Other factors for determining independent contractor status include: Distinct operation or independent business Length of time employed by principal Amount of time agent works for principal Whether principal or agent supplies tools used in the work Prentice Hall © 2007

Liability for Independent Contractor’s Contracts Principal is liable on contracts entered into by an independent contractor under principal’s authority. Principal is not liable if a contract is entered by an independent contractor without express or implied authority. Prentice Hall © 2007

Liability for Independent Contractor’s Torts A principal is generally not liable for the torts of its independent contractors, with the following exceptions: Inherently dangerous activity Negligence in the selection of an independent contractor Prentice Hall © 2007

Termination of an Agency By acts of the parties Mutual agreement Lapse of time Purpose achieved Occurrence of a specified event Prentice Hall © 2007

Termination of an Agency By operation of law Death of either party Insanity of either party Bankruptcy of the principal Impossibility Loss or destruction of subject matter Loss of required qualification Change in the law Prentice Hall © 2007

Termination of an Agency By operation of law, continued Changed circumstances War between principal’s country and agent’s country Prentice Hall © 2007

Notification of Termination Termination of agency ends agent’s actual authority. If notice is not given, agent may still have apparent authority. Notice must be given to Parties who have dealt with the agent Parties who have knowledge of agency Parties who have no knowledge – principal may need to give constructive notice if agent has had written authority. Prentice Hall © 2007

Wrongful Termination Most agencies may be terminated at will Termination by principal – revocation of authority Termination by agent – renunciation of authority If a termination breaches the contract between principal and agent, it is a wrongful termination. Prentice Hall © 2007