P A R T
8
Agency Law
The Agency Relationship
Third-Party Relations of the
Principal and the Agent
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
C H A P T E R
35
The Agency Relationship
“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)
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
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Overview
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

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Agency Authority

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
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Employee v. Independent
Contractor
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.,
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Duties of Agent to Principal
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.
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Other Agent & Principal Duties

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
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Termination of Agency

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

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Ex-agents may retain apparent authority that
could bind former principal
Test Your Knowledge

True=A, False = B




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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.
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.

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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

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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

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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?

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