2. P A R T P A R T Agency Law The Agency Relationship Third-Party Relations of the Principal and the Agent 8 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. The Agency Relationship PA E TR HC 35 “I’ve got an ego and all that, but I know I need help. So I go and hire the very best people.” H. Ross Perot, EDS founder, Inc. (Jan. 1989)

4. Learning Objectives  Creation of an agency relationship  Agency concepts, definitions, and types  Duties of agent to principal  Duties of principal to agent  Termination of an agency 35 - 4

5.  Agency is a two-party relationship in which one party ( agent ) is authorized to act on behalf of, and under control of, another party ( principal )  Anybody may be an agent or principal, but the agreement is voidable by minors and the mentally incapacitated  All employees are agents, but not all agents are employees Overview 35 - 5

6.  Actual authority for an agent’s acts is:  Express – created by principal’s written or oral words to agent about agent’s duties  Implied – principal’s acts and surrounding circumstances give rise to reasonable belief about scope of agent’s duties  Apparent authority arises when principal’s conduct leads third party to believe an agent with no actual authority is authorized to act Agency Authority 35 - 6

7.  If dispute arises, resolution may depend on whether a person who works for a principal is an employee or independent contractor  Factors that aid in determination include:  Right to control physical details of work, skill required, source of tools, location, schedule control, payment method, benefits, tax treatment of hired party  See Eisenberg v. Advance Relocation & Storage, Inc., Employee v. Independent Contractor 35 - 7

8.  Agency is a fiduciary relationship, so agent has a duty of loyalty to principal  Agent must (1) avoid conflicts of interest with the principal, (2) maintain confidentiality of information received from the principal  Duty of confidentiality survives agency  See ABKCO Music Inc. v. Harrisongs Music, Ltd. Duties of Agent to Principal 35 - 8

9.  Agents must obey principal’s reasonable instructions for agency business, exercise the degree of care and skill standard for the job, communicate to principal relevant matters  No duty to obey illegal or unethical orders  Principal’s duties are to: compensate agent, reimburse agent for expenses, and indemnify agent for losses suffered in conducting principal’s business Other Agent & Principal Duties 35 - 9

10.  Termination of agency may be by the act of the parties or operation of law  Exception: limited right of termination if agent’s power coupled with an interest  After agency terminates, agent’s express and implied authority ends  Ex-agents may retain apparent authority that could bind former principal Termination of Agency 35 - 10

11. Test Your Knowledge  True=A, False = B  Agency is a contract in which an agent is authorized to act on behalf of, and under the control of, a principal.  All employees are agents, and all agents are employees.  Agents may bind a principal on the basis of apparent authority.  Agency may be created unintentionally. 35 - 11

12. Test Your Knowledge  True=A, False = B  All duties are delegable.  An agent’s duty of confidentiality continues after the agency ends.  To be considered actual authority, the authority must be expressed in words orally or in writing.  Agency is a fiduciary relationship. 35 - 12

13. Test Your Knowledge  Multiple Choice  Principals have the following duties to agent:  (a) Duty to compensate  (b) Duty to reimburse for reasonable expenses for doing agency business  (c) Duty to indemnify the agent for losses suffered due to agency’s business  (d) Both A and B  (e) All of the above 35 - 13

14. Test Your Knowledge  Multiple Choice  Manuel asked his friend Sunil, a good salesman, to sell his car and Sunil agreed. Does an agency relationship exist?  (a) Yes, Sunil is an agent for Manuel  (b) Yes, but only if there is a written contract describing the agency’s purpose  (c) No, since friends cannot engage in an agency relationship  (d) No, unless Sunil sells Manuel’s car 35 - 14

15. Thought Questions  Have you been an agent or a principal?  Do you think the agency rules of liability are fair?  What are the ethical issues involved in an agency relationship? 35 - 15