1. Chapter 29 Agency Formation and Termination
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

2. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
The Nature of 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.”
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

3. The Nature of Agency (continued)
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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

4. The Principal-Agent Relationship
Principal’s obligation to perform the contract
Principal
Agency Contract
Third Party
Agent
Contract with third party on behalf of principal
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

5. 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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

6. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

7. Kinds of Employment Relationships
Employer-Employee Relationship
Principal-Agent Relationship
Principal-Independent Contractor Relationship
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

8. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

9. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

10. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

11. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

12. 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.
Principal-Independent Contractor
The principal has no control over the details of the independent contractor’s conduct.
An independent contractor is usually not an agent of the principal.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

13. Formation of the Agency Relationship
Express Agency
Implied Agency
Agency by Ratification
Apparent Agency
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 3

14. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

15. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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 is the implied authority to act.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

16. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

17. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

18. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

19. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

20. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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:
Authorized by the principal.
Within the scope of the agency.
Necessary to discharge the agent’s duties in carrying out the agency.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

21. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

22. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

23. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

24. 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.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

25. 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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

26. 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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

27. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Irrevocable Agency
An agency coupled with an interest:
Special type of agency relationship
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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

28. 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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

29. 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
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman