19 - 129 - 1 © 2007 prentice hall, business law, sixth edition, henry r. cheeseman chapter 29...

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 129 - 1

Chapter 29Agency Formation and Termination


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.”


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.


The Principal-Agent Relationship

PrincipalPrincipal

AgentAgent

Third PartyThird PartyAgency Agency ContractContract

Contract with third Contract with third party on behalf of party on behalf of

principalprincipal

Principal’s Principal’s obligation to obligation to perform the perform the contractcontract


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


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.


Kinds of Employment Relationships

Employer-Employee Employer-Employee RelationshipRelationship

Principal-Agent Principal-Agent RelationshipRelationship

Principal-Independent Principal-Independent Contractor RelationshipContractor Relationship


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.


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.


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.


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.


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.


Formation of the Agency Relationship

Express Express AgencyAgency

Implied Implied AgencyAgency

Apparent Apparent AgencyAgency

Agency by Agency by RatificationRatification


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.


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.


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.


Agency by Ratification

An agency that occurs when:1. A person misrepresents himself

or herself as another’s agent when in fact he or she is not, and

2. The purported principal ratifies (accepts) the unauthorized act.


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.


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.


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:1. Authorized by the principal.2. Within the scope of the agency.3. Necessary to discharge the agent’s

duties in carrying out the agency.


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.


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.


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.


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.


Termination by Acts of the Parties

An agency may be terminated by the following acts of the parties:

1. Mutual agreement2. Lapse of time3. Purpose achieved4. Occurrence of a specified

event


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


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


Termination by Operation of Law

An agency is terminated by operation of law, including:

1. Death of the principal or agent2. Insanity of the principal or

agent3. Bankruptcy of the principal4. Impossibility of performance5. Changed circumstances6. War between the principal’s

and agent’s countries


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

19 - 129 - 1 © 2007 prentice hall, business law, sixth edition, henry r. cheeseman chapter 29...

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