1. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Chapter 37 Agency Twomey Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e

2. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 An agency relationship is created by an express or implied agreement whereby one person, the agent, is authorized to make contracts with third persons on behalf of and subject to the control of another person, the principal. Nature of the Agency Relationship

3. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 The Agency Relationship Parties to the contract(s) deals with third person and makes contracts on behalf of principal

4. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 Purpose of Agency The effect of a proper exercise of authority by an agent is to bind the principal and third person to a contract. The agent, not being a party to the contract, is not liable in any respect under the contract.

5. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 Employee vs. Contractor An employee differs from an independent contractor in that the principal, who controls the acts of his employee, does not have control over the details of performance of work by the independent contractor. Likewise, an independent contractor does not have authority to act on behalf of the other contracting party.

6. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 Classification of Agents A special agent is authorized by the principal to handle a specific business transaction. A general agent is authorized by the principal to transact all business affairs of the principal at a certain place. A universal agent is authorized to perform all acts that can be lawfully delegated to a representative.

7. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 Agency Coupled with an Interest Agency has an interest in the authority when consideration has been given or paid for the right to exercise the authority. Agent has an interest in the subject matter when, for consideration, she is given an interest in the property with which she is dealing.

8. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 AGENCY BY APPOINTMENT AGENCY BY CONDUCT AGENCY BY OPERATION OF LAW AGENCY BY RATIFICATION Express authorization — appointed to act for or on behalf of another Power of Attorney Conduct of principal as to agent and third person consistent with the existence of an agency relationship Apparent Authority With knowledge of an agent’s act, the principal accepts or retains the benefit of the act, or brings an action to enforce legal rights based on the act, or defends the action, or fails to repudiate the act. Courts create or find an agency when there is none. Creating the Agency

9. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 Express Authority Actual Authority Incidental Authority Customar y Authority Express Authority: Principal tells agent to perform a certain act. Buy new office furniture and sell specified used furniture. Incidental Authority: An act reasonably necessary to perform the act expressly authorized. Buy furniture on credit when funds not made available to pay for items. Customary Authority: An act that, according to the custom of similar businesses in the community, usually accompanies the act performed under express authority. Issue receipts for used furniture sold. Apparent Authority No Authority Apparent Authority: Principal leads third party to believe that agent has authority. Principal was present when third party purchased furniture from agent and did not stop the unauthorized transaction. Types of Agent’s Authority

10. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 Creating the Agency Agency created by express conduct. Agency created by conduct creates apparent authority. A person, who is not an agent, attempts to do an unauthorized act the principal may later approve. –Intention to Ratify. –Conditions of Ratification. Agent must have purported to act on behalf of the principal. Principal must have been capable of authorizing the act. Principal must have full knowledge of material facts. –Effect of Ratification.

11. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 Scope of Agent’s Authority The usual method of creating an agency is by express authorization. Apparent (Appearance) Authority: agency relationship is be found to exist when the principal causes or permits a third person to reasonably believe that an agency relationship exists.

12. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 12 Scope of Agent’s Authority The third person cannot claim that apparent authority existed when that person knows that the agent’s conduct is adverse to the interests of the principal or that the agent is exceeding the limits of his authority. An unauthorized transaction by an agent for a principal may be ratified by the principal, giving it enforceability.

13. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 13 Agent’s Authority An agent acting with authority has the power to bind the principal. The scope of an agent’s authority may be determined from the express words of the principal to the agent; this is called express authority. An agent has incidental authority to perform any act reasonably necessary to execute the authority given the agent.

14. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 14 Agent’s Authority An agent’s authority may be implied so as to enable the agent to perform any act in accordance with the general customs or usage's in a business or an industry. This authority is often referred to as customary authority.

15. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 15 Scope of Agent’s Authority A third party has a duty to ascertain the agent’s authority. –Agent’s acts adverse to principal. Third parties should ask the principal. Limitations on Agent’s Authority. –“Obvious” Limitations.

16. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 16 While the agency relationship exists, the agent owes the principal the duties of: –(1) being loyal, –(2) obeying all lawful instructions, –(3) exercising reasonable care, –(4) accounting for all property or money belonging to the principal, and –(5) informing the principal of all facts relating to the agency that are relevant to the principal’s interests. Duties and Liabilities of Principal and Agent

17. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 17 Termination of Agency An agency relationship can be terminated by act of either the principal or the agent. –The terminating party may be liable for damages to the other if the termination is in violation of the agency contract. An agency is automatically terminated upon: –(1) the death of the principal or agent; –(2) insanity of the principal or agent; –(3) bankruptcy of the principal or agent; –(4) impossibility of performance; or –(5) war.

18. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 18 Notice of Termination When the law requires the giving of notice in order to end the power of the agent to bind the principal, individual notice must be given or mailed to all persons who had prior dealings with the agent. Notice to the general public can be given by publishing the announcement in a newspaper of general circulation in the affected geographic area.

19. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 19 Effect of Termination Agency is revoked when agent receives notification. –Agent looses the right to bind the principal. –Termination is effective without giving notice to third persons. Termination of Agency. –Notice to Third Parties. –Agent may still have apparent authority.

20. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 20 Power of Attorney Under the Uniform Durable Power of Attorney Act (UDPAA), an agency may be created that is not affected by subsequent disability or incapacity of the principal. The agency may also come into existence upon the “disability or incapacity of the principal.” The designation of an attorney in fact under the UDPAA must be in writing.