Chapter 19 Agency Relationships & Their Termination

Types of Agency Authority Actual authority- the real power a principal gives to an agent to act on his or her behalf Express authority- includes all the orders, commands, or directions a principal directly states to an agent when the agency relationship is first created. Example 1: Perry asks Abe to act as his agent in the sale of Perry’s motorcycle. In a written document, Perry specifically instructs Abe to take no less than $2000 for the motorcycle. He also includes in the agreement a clause instructing Abe to accept cash only. Finally, Perry’s agreement expressly forbids the sale of the motorcycle to a minor. All of these instructions make Abe’s express authority as the agent in the sale of the motorcycle.

Implied authority-powers that are understood from the express terms that create the agency relationship Example 2: In example 1, we saw that Abe had the express authority to sell Perry’s motorcycle for no less that $2000 in cash to anyone offering that cash who had reached the age of majority. From these express powers would come the implied authority to allow a prospective buyer to inspect the motorcycle, take it for a test drive, and have a an impartial mechanic inspect it. All of these powers can be reasonably implied from Abe’s authority to sell the motorcycle.

Going Beyond Implied Authority The court draws the line by saying that implied authority must be “reasonably derived from the express power.” Example 3: Abe decides that in order to sell Perry’s car he needs to purchase a new suit. He does so and sends the bill to Perry. Abe might argue that he needs the suit to impress properly prospective buyers. Such an expense, however, is not customarily part of an agent’s authority in this kind of situation.

Apparent authority- exists when the principal has somehow led a third party to believe that a non agent is an agent or that an agent has a power that in fact he or she does not have Example 4: Pierre told Theresa to come to his jewelry store at 9 A.M. on Tuesday and someone would be there to sell her a diamond ring. At 8:30 A.M. on Tuesday, Pierre had to leave the shop to run a few errands. He left his niece, Amy, who was not one of his employees, at the shop “to keep an eye on things.” When Theresa arrived at 9 A.M., she assumed Amy was a clerk. Amy sold Theresa a unique diamond ring. When Pierre returned and found the ring gone, he became very upset because he had promised that ring to another customer. He called Theresa, who refused to give the ring back. Theresa was within her rights because Pierre had created a situation in which she could reasonably believe that Amy had the authority to sell the ring.

Agent’s Duties to the Principal 1. obedience 2. good faith 3. loyalty 4. accounting for all of the principal’s money handled by the agent 5. exercising judgment and skill in the performance of the assigned work

Obedience Obedience- the agent must obey all reasonable orders and instructions within the scope of the agency agreement Example 5: Mr. Pellas gives Andrew very explicit instructions against purchasing anything for the newspaper while he is gone. First, he instructs Andrew not to purchase anything. Second, he tells Andrew that none of his workers are ever allowed to purchase anything using the newspaper’s cash. Andrew disobeys both orders when he gives Tackett $175 in cash for a fax machine. Andrew is liable for the loss of that money.

Good Faith Good faith- dealing honestly with another party with no intent to seek advantage or to defraud

Loyalty Loyalty- faithfulness or acting in a party’s best interest at all times Example 6: Tom is a former employee of Mr. Pellas. Mr. Pellas entrusted Tom with $300 for the repair of the newspaper’s fax machine. Tom spent only $150 on the repairs and pocketed the balance. When Mr. Pellas asked for the money, Tom not only refused to give it to him, but also kept the fax machine and then resold it to the newspaper by defrauding Andrew. Tom violated his duty of loyalty to Mr. Pellas.

Duty to Account Duty to account- the agent must keep a record of all the money collected and paid out and must report this to the principal Example 7: As we saw in the last example, Mr. Pellas entrusted Tom with $300. Tom spent only $150, and then refused Mr. Pellas’s request to return the balance. Tom clearly obviously violated his duty to account. And there is no question that he owes Mr. Pellas the missing $150.

Judgment and Skill Not held liable for honest mistakes in judgment or for lack of skill when they have done the best they can Example 8: Peggy entrusted Avery with $500,000 and told him to invest in the best stocks possible. Avery decided to invest in the Meader Chemical Company, a new corporation that was clearly one of the best investment opportunities at the time. One week later, a huge chemical gas leak at the Meader plant in Brazil destroyed millions of dollars worth of real estate. The Meader stock fell and Perkins lost her investment in that company. Avery could not be held liable for this loss, because he had done the best that he could.

Principal’s Duties to the Agent 1. compensation 2. reimbursement 3. indemnification 4. cooperation

Compensation compensation- principal must pay the agent salary or wages agreed upon in the contract If no specific amount has been set, a reasonable sum must be paid for any authorized acts performed by the agent for the principal

Reimbursement and Indemnification Reimbursement- repayment when the agent is required to pay their own money for the principal’s benefit Indemnification- if an agent suffers a loss because of the principal’s instructions he or she is entitled to repayment of the amount lost

Cooperation Cooperation- working together toward a common end Example 9: Phoebe told Al that he would have exclusive rights to sell the Curren line of cosmetics door to door in Willowick, a small town with a population of She also told him that, to keep his job, he would need to make a quarterly profit of $10,000. Later, Al learned that Phoebe had hired four other agents to sell the Curren line in Willowick. Since this made it impossible for Al to return $10,000 quarterly, Phoebe had violated her duty to cooperate with Al.

Agent’s Liability to Third Parties when agents do not disclose the identity of the existence of the principal when agents wrongfully exceed their authority

When the Principal is not Disclosed Partially disclosed principal- one whose identity is never revealed, even though the third party knows that the agent is acting for someone else Example 10: Pam, a world-famous chef and author, wanted to buy a home in an exclusive Atlanta suburb. However, because of her fame, she knew that the price would go up should the seller know her identity. Consequently, she hired Axel to act as her agent. Axel told the seller, Terry, that the represented a buyer who wished to conceal her identity. After the contract was entered, Pam defaulted and refused to buy the house. Should Terry uncover Pan’s identity, he can sue her for breach of contract. If not, he can bring the breach of contract suit against Axel. Should Axel lose the suit and be forced to pay Terry damages out of his own resources, however, Pam will have to indemnify him for the money he has paid out to satisfy the award.

Undisclosed principal- if both the identity of the principal and the existence of the agency relationship are not disclosed Example 11: Ann managed a produce stand for Phil. The business was called “Ann’s Produce.” No one who dealt with Ann knew that she was actually Phil’s agent. Acting under instructions from Phil, Ann entered a contract with Terminal Tower Corporation for the purchase of a new storefront. Phil is bound to this contract as if he negotiated it himself.

When Agents Wrongfully Exceed Their Authority Agents bind their principals only when the agents act within the scope of their authority Example 12: People’s printing Company told Anita to buy a word processor for not more than $1200. Anita found one for $1050. She used the remaining $150 to buy a new CD/DVD player for the office. Her employer refused to accept the CD/DVD player, which Anita had no authority to buy. Anita would be required to pay People’s Printing $150. She could then either return the CD/DVD or keep it herself.

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