2. Principal-Agent Relationships
19-2
Principal-Agent Relationships
It is often necessary for a person or firm to be represented by another in business or personal dealings with third parties.
This relationship is called a principal-agent relationship.
Agent: The person who represents another.
Principal: The person the agent represents or performs duties for.
Contract of agency: An agreement between a principal and an agent by which the agent is vested with authority to represent the principal.
Learning Outcome 19-1: Describe the principal-agent relationship.
Page: 304

3. Who May Appoint an Agent
19-3
Who May Appoint an Agent
Any competent party (a person or a corporation) who has the legal right to perform an act may delegate his or her performance to another by appointing an agent.
Exceptions - Voting, serving on juries, holding public office, delegation of personal services.
Learning Outcome 19-1: Describe the principal-agent relationship.
Page: 304

4. Who May Appoint an Agent (Cont.)
19-4
Who May Appoint an Agent (Cont.)
A minor who has appointed an agent may avoid the contract of agency in some states, just as he or she may avoid other kinds of contracts.
In some instances, courts have held that minors operating businesses are bound by contracts they enter.
Learning Outcome 19-1: Describe the principal-agent relationship.
Page: 304

5. Who May Be Appointed as an Agent
19-5
Anyone legally competent to act for himself or herself may serve as an agent of another.
Minors and others who lack contractual capacity may still be competent to represent others as agents if they are capable of carrying out duties of an agency relationship.
Organizations, such as partnerships or corporations, may act as agent.
Learning Outcome 19-1: Describe the principal-agent relationship.
Page: 304

6. 19-6
Classes of Agents
Agents are classified according to nature of their relationship with principals.
General Agent
A person authorized to assume complete charge of principal’s business or entrusted with general authority to act for principal in all business matters.
Special Agent
A person delegated to act only in particular transaction, under definite instructions, and specific limits on scope of authority.
Learning Outcome 19-2: Classify the two major kinds of agents.
Page: 305

7. Creation of Agency Agency by Agreement
19-7
Creation of Agency
Agency by Agreement
The most common method of creating an agency is by contract, or agreement.
A contract of agency usually states:
The rights and duties of principal and agent.
The agency duration.
Any other agreements made between parties.
Learning Outcome 19-3: Discuss the four ways in which an agency may be created.
Page: 305

8. Creation of Agency(Cont.)
19-8
Creation of Agency(Cont.)
An agency contract may be oral or written, and express or implied.
Note – Statute of Frauds (discussed Chapter 13) which requires certain types of contracts to be in writing to be enforceable also applied to contracts of agency pertaining to same contract types.
Attorney in fact: Legal term for person appointed as agent
Learning Outcome 19-3: Discuss the four ways in which an agency may be created.
Page: 305

9. Creation of Agency(Cont.)
19-9
Creation of Agency(Cont.)
Power of attorney: Legal document that formally creates agency.
Note - If principal becomes incompetent after agent appointed, power of attorney may be invalidated.
A durable power of attorney should be executed if principal intends for agent’s authority to remain intact if principal becomes incompetent.
Learning Outcome 19-3: Discuss the four ways in which an agency may be created.
Page: 305

10. Creation of Agency (cont.)
19-10
Creation of Agency (cont.)
Agency by Ratification
Occurs when principal:
Approves agent’s unauthorized act.
Approves unauthorized person’s act in principal’s name.
Ratification apples to entire act.
Principal cannot accept transaction benefits and not accept transaction obligations.
Ratification occurs after the fact where authorization occurs before the fact.
Learning Outcome 19-3: Discuss the four ways in which an agency may be created.
Page: 306

11. Creation of Agency (cont.)
19-11
Creation of Agency (cont.)
Agency by Necessity
When circumstances make such agency necessary.
Although family relationship does not give family members right to act as agents for each other some states recognize agency by necessity when a spouse fails to support the other or minors.
Learning Outcome 19-3: Discuss the four ways in which an agency may be created.
Page: 306

12. Creation of Agency (cont.)
19-12
Creation of Agency (cont.)
Agency by Operation of Law
When court finds need for agency to achieve desired social policy.
Court may appoint agent, called a guardian ad litem, with authority to purchase necessities parent has failed to provide.
Under court-directed agency, parent bound by reasonable contracts made by agent.
Learning Outcome 19-3: Discuss the four ways in which an agency may be created.
Page: 306

13. 19-13
Authority of an Agent
An agent may perform only acts that are authorized by principal or court.
If agent exceeds authority, he or she can be personally liable unless unauthorized act reasonably assumed by third party to be within powers delegated.
Learning Outcome 19-4: Explain the various forms of an agent’s authority.
Page: 307

14. Authority of an Agent (Cont.)
19-14
Authority of an Agent (Cont.)
While courts have interest in protecting property and interests of principal, they also have interest in protecting property and interests of third parties who have good reason to rely on apparent authority of agent.
Authority of agent can be express, implied, or apparent.
Learning Outcome 19-4: Explain the various forms of an agent’s authority.
Page: 307

15. Express, Implied, and Apparent Authority
19-15
Express, Implied, and Apparent Authority
Express Authority - Authority of agent to perform duties specifically stated in contract of agency.
Implied Authority - Authority agent reasonably assumes he or she has that relates to express authority granted by principal.
Apparent Authority - Authority third party reasonably assumes agent possesses that agent does not actually possess .
Learning Outcome 19-4: Explain the various forms of an agent’s authority.
Page: 307

16. Agent’s Torts and Crimes
19-16
Agent’s Torts and Crimes
A principal is liable for torts and crimes of agent if committed at direction of principal or while agent performing authorized duties during ordinary course of agency.
If agent makes fraudulent statement in contract within scope of authority, principal is responsible.
Learning Outcome 19-4: Explain the various forms of an agent’s authority.
Page: 308

17. Agent’s Torts and Crimes (Cont.)
19-17
Agent’s Torts and Crimes (Cont.)
Principal is liable for agent’s torts or crimes whether agent commits act willfully, recklessly, or negligently.
Both principal and agent may be held liable for agent’s torts or crimes committed while agent is acting within the scope of his or her authority.
Learning Outcome 19-4: Explain the various forms of an agent’s authority.
Page: 308

18. Agent’s Torts and Crimes (Cont.)
19-18
Agent’s Torts and Crimes (Cont.)
Example - Mamnani, a sales agent for store owned by Fischer, purchased, and intended to resell, merchandise Mamnani knew was stolen.
Because Fischer knew merchandise stolen, both Mamnani (agent) and Fischer (principal) subject to criminal prosecution.
Note If only Mamnani knew merchandise stolen, Fischer not subject to prosecution as selling stolen goods not within scope of Mamnani’s authority.
Learning Outcome 19-4: Explain the various forms of an agent’s authority.
Page: 308

19. Duties of Agents, Principals, and Third Parties
19-19
When an agency is created, three parties are affected:
Agent
Principal
Third-party agent
Each of these parties have duties to one another.
Learning Outcome 19-5: Describe the duties of an agent to a principal, a principal to an agent, a principal and a third party to each other, and an agent and third party to each other, in light of whether the principal is disclosed, partially disclosed, or undisclosed.
Page: 308

20. Duties of Agent to Principal
19-20
Duties of Agent to Principal
An agent must obey all the principal’s reasonable and lawful orders and instructions within the scope of the agency contract.
An agent may not perform any act that would betray the principal’s trust.
An agent may not act for two parties to a contract without the consent of both.
Learning Outcome 19-5: Describe the duties of an agent to a principal, a principal to an agent, a principal and a third party to each other, and an agent and third party to each other, in light of whether the principal is disclosed, partially disclosed, or undisclosed.
Page: 309

21. Duties of Agent to Principal (cont.)
19-21
Duties of Agent to Principal (cont.)
An agent may not buy his or her own property for the principal, sell the principal’s property to himself or herself, or compete with the principal in any way, without the principal’s knowledge and consent.
An agent must possess the qualifications needed to carry out the work of the agency as agreed.
Learning Outcome 19-5: Describe the duties of an agent to a principal, a principal to an agent, a principal and a third party to each other, and an agent and third party to each other, in light of whether the principal is disclosed, partially disclosed, or undisclosed.
Page: 309

22. Duties of Agent to Principal (cont.)
19-22
An agent is liable for losses to the principal resulting from the agent’s incompetence.
An agent must keep accurate accounts of his or her transactions conducted as part of the agency agreement.
An agent must remit to the principal all profits from contracts made by the agent unless other provisions are made in the agency agreement.
Learning Outcome 19-5: Describe the duties of an agent to a principal, a principal to an agent, a principal and a third party to each other, and an agent and third party to each other, in light of whether the principal is disclosed, partially disclosed, or undisclosed.
Page: 309

23. Duties of Principal to Agent
19-23
Duties of Principal to Agent
Principal must pay agent compensation.
If Person acts as agent for more than one party with their knowledge, agent entitled to receive compensation from each principal.
Principal must reimburse agent for money advanced in carrying out principal’s instructions and for debts paid on principal’s behalf.
Principal must reimburse agent for loss or damage suffered in performance of duties.
Learning Outcome 19-5: Describe the duties of an agent to a principal, a principal to an agent, a principal and a third party to each other, and an agent and third party to each other, in light of whether the principal is disclosed, partially disclosed, or undisclosed.
Page: 309

24. Duties of Principal to Agent (cont.)
19-24
In cases where agent owed money by principal and is in possession of principal’s property/goods, agent may place a lien and refuse to surrender property/goods to principal until payment made.
Not necessary for agent to receive compensation for services in order for agency relationship to exist.
A gratuitous agent is one who acts on behalf of principal without being paid.
Learning Outcome 19-5: Describe the duties of an agent to a principal, a principal to an agent, a principal and a third party to each other, and an agent and third party to each other, in light of whether the principal is disclosed, partially disclosed, or undisclosed.
Page: 309

25. Duties of Principal and Third Party to Each Other
19-25
A principal is responsible to third parties for agreements made by agent on behalf of principal if agent acted within scope of express or implied authority.
If agreement not authorized by principal, and outside the scope of agent’s employment, principal not liable.
A third party is liable to principal for lawful contracts made by his or her agent.
Learning Outcome 19-5: Describe the duties of an agent to a principal, a principal to an agent, a principal and a third party to each other, and an agent and third party to each other, in light of whether the principal is disclosed, partially disclosed, or undisclosed.
Page: 310

26. Duties of Agent and Third Party to Each Other
19-26
Duties of Agent and Third Party to Each Other
The relationship between agents and third parties, and whether agents can be held personally liable, is influenced by number of factors.
Disclosed Principal:
When agent informs third party that he/she is acting on behalf of another, and makes third party aware of principal’s identity, principal is a “disclosed principal”.
Partially Disclosed Principal:
When the agent informs third party that he/she acting on behalf of another, but identity of principal unknown to third party, principal known as “partially disclosed principal”.
Learning Outcome 19-5: Describe the duties of an agent to a principal, a principal to an agent, a principal and a third party to each other, and an agent and third party to each other, in light of whether the principal is disclosed, partially disclosed, or undisclosed.
Page: 310

27. Duties of Agent and Third Party to Each Other (cont.)
19-27
Duties of Agent and Third Party to Each Other (cont.)
Undisclosed Principal:
When agent does not inform third party he/she acting on behalf of another, the unidentified principal is known as an “undisclosed principal”.
Because third party does not know identity of principal, agent can be held personally liable to third party.
Similarly, if agent acts with authority (either actual or apparent), and third party later learns of agency and principal’s identity, third party may hold principal liable.
Learning Outcome 19-5: Describe the duties of an agent to a principal, a principal to an agent, a principal and a third party to each other, and an agent and third party to each other, in light of whether the principal is disclosed, partially disclosed, or undisclosed.
Page: 311

28. 19-28
Termination of Agency
Agency is a type of contract and, like other contracts, may be terminated by agreement, by performance, or by operation of law.
An agency contract is terminated by an act of the parties when:
The principal and the agent have mutually agreed on termination.
The principal has dismissed the agent.
The agent has given up the position.
The purpose of the agency relationship is fulfilled.
Learning Outcome 19-6: Explain how an agency may be terminated.
Page: 311

29. Termination of Agency (cont.)
19-29
Termination of Agency (cont.)
If agency exists “at will,” principal has right to revoke agency agreement and discharge agent for a reason or for no reason at all.
A principal who dismisses an agent must give termination notice to all third parties who are accustomed to doing business with agent or have knowledge of appointment.
Failure to do so will render principal liable on further contracts.
Learning Outcome 19-6: Explain how an agency may be terminated.
Page: 311

30. Termination of Agency (cont.)
19-30
Termination of Agency (cont.)
A principal may not revoke agency contract if agent has interest in subject matter of agency in addition to the remuneration (salary, commissions) he/she receives for services.
An irrevocable agency is agency coupled with an interest.
An agency agreement authorizing agent to sell specific property, deduct commissions, and apply proceeds toward outstanding debt principal owes agent is example of irrevocable agency.
Learning Outcome 19-6: Explain how an agency may be terminated.
Page: 311

31. 19-31
Differences between Principal-Agent and Employer-Employee Relationships
The main difference between principal- agent and employer-employee relationships is an employer’s power to control the activities of a non-agent employee.
Whereas an agency agreement brings about a relationship between a principal and a third party that results in a contract, an employee who is not also an agent has no such rights or powers.
Learning Outcome 19-7: Differentiate between the principal-agent and employer-employee relationship.
Page: 312

32. 19-32
Differences between Principal-Agent and Employer-Employee Relationships (cont.)
The employer controls not only what an employee must do but also how it is done.
If an employee is required to perform duties for the employer that necessitate the exercise of judgment and discretion and results in establishing a contract between the employer and a third party, then the employee has the status of an agent even without a formal agency contract.
Learning Outcome 19-7: Differentiate between the principal-agent and employer-employee relationship.
Page: 312