Chapter 31:
Agency Formation
and Duties
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Introduction
• Agency=Principal and Agent.
• Agency is the most common and most
important legal relationship.
• Understanding agency is crucial to
understanding the legal environment of
business.
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Introduction [2]
• Principals use agents to be able to conduct
multiple business operations simultaneously
in various locations.
• The principal has the right to control the
agent in matters entrusted to the agent.
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§ 1: Agency Relationships
• Agency is a “fiduciary” relationship based on trust and
confidence.
• Distinguish Employee vs. Independent Contractor
Relationships.
Employer
Independent
Contractor
Employee
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Employee vs. Independent
Contractor Relationship
Factors Courts Consider:
E’ee
I.C.
Does the Employer exercise a great degree of control over the
details of the work?
Yes
No
Is the worker engaged in an occupation or business distinct from
Employer?
No
Yes
Is the work usually done under Employer’s supervision?
Yes
No
Does Employer provide the tools?
Yes
No
Has the worker been employed a long time?
Yes
No
Is the worker paid at the end of the job?
No
Yes
Is there a great degree of skill required?
No
Yes
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Employer Liability
• Determining whether the worker is an
employee or an independent contract affects
liability of Principal/Employer.
– Tax Liability: Employer liable if employee.
– Contract Liability: Employer not necessarily
liable.
– Tort Liability: Employer liable for torts of
employee within scope of employment.
– Case 31.1: Graham v. James (1998).
– Emerging Trends: Vizcaino v. Microsoft.
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§2: Formation of the
Agency Relationship
• Consensual Agreement.
• No consideration required.
• Principal needs contractual capacity, Agent
does not.
• For any legal purpose.
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Types of Agencies
•
•
•
•
Agency by Agreement.
Agency by Ratification.
Agency by Estoppel.
Agency by Operation of Law.
– Necessaries for family.
– Emergency.
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Agency By Agreement
Formed through express consent (oral or
written) or implied by conduct.
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Agency by Ratification
Principal either by act or by agreement
ratifies conduct of a person who is not in
fact an agent.
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Agency by Estoppel
• Principal causes a third person to believe
that another person is the Principal’s Agent,
and the third person acts to her detriment in
reasonable reliance on that belief.
• Case 31.2: Williams v. Inverness Corp (1995).
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Agency by Operation of Law
• Agency based on social duty is formed in
certain situations when the Agent is unable
to contact the Principal.
– Necessaries.
– Emergencies.
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§ 3: Agent’s Duties to Principal
• Performance: reasonable diligence and skill
(special skills).
• Notification to P.
• Loyalty (no conflict of interest).
– Case 31.3: American Express v. Topel (1999).
• Obedience.
• Accounting.
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Principal’s Duties to Agent
•
•
•
•
Compensation (Express or Implied).
Reimbursement and Indemnification.
Cooperation.
Provide safe working conditions.
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§ 4: Agent’s Rights &
Remedies Against Principal
• Right to compensation, reimbursement,
indemnification and cooperation.
• Agent can withhold performance and
demand an accounting.
• Agent can recover damages for past
services and future damages.
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©2001 West Legal Studies in Business. All Rights Reserved.
Principal’s Rights &
Remedies Against Agent
• Contract remedies for breach of fiduciary
duty and performance.
• Can sue in tort: libel, slander, trespass,
deceit, fraud.
• Constructive Trust – money/ property agent
steals from Principal.
• Avoidance of contract if agent does not do
as told.
• Indemnification
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Law on the Web
• Agency at Cornell U.
• Legal Research Exercises on the Web.
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Emerging Trends
Vizcaino v. Microsoft (1999) Ninth Circuit
Court of Appeals ruled that “temporary”
workers were not independent contractors but
rather employees entitled to all Microsoft
stock option benefits.
Return
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