Chapter 16: Agency
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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
 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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Agency Relationships
 Agency is a “fiduciary” relationship
based on trust and confidence.
 Employer-Employer Relationships.
• Generally, all employees who deal with
third parties are agents.
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Agency Relationships
 Employer -Independent Contractor
Relationships.
• Employers have ‘no control’ over the
details of their work performance.
 Determination of Employee Status.
Key is control. 
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Agency Relationships
 Employer -Independent Contractor
Relationships.
• Employers have ‘no control’ over the
details of their work performance.
 Determination of Employee Status.
Key is control. 
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Agency Relationships
Determining Employee Status.
A “Yes” Tends to Show Employee Status
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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Agency Relationships
 Determination of Employee Status.
• CASE 16.1 LOPEZ V. EL PALMAR TAXI, INC.
(2009). What factors would have
helped El Palmar avoid liability?
• Criteria Used by the IRS.
• Employee Status and “Works for Hire”: any
copyrighted work created during scope of
employment is owned by employer.
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How Agency Relationships
Are Formed
 Generally, agency relationships:
• Are consensual.
• Require no consideration.
• Require principal to have contractual
capacity (agent does not).
• Can be created for any legal purpose. 
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How Agency Relationships
Are Formed
 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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How Agency Relationships
Are Formed
 Agency By Agreement.
• Formed through express consent (oral
or written) or implied by conduct.
• CASE 16.2 LAUREL CREEK HEALTH CARE
CENTER V. BISHOP (2010). When was the
agency created between Bishop and his
wife?
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How Agency Relationships
Are Formed
 Agency By Ratification.
• Principal either by act or by agreement
ratifies conduct of a person who is not in fact
an agent.
 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.
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How Agency Relationships
Are Formed
 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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Duties of Agents and Principals
 Agent’s Duties to the Principal:
• Performance: implied condition to use
reasonable diligence and skill. If agent
fails, possible breach of contract.
• Gratuitous Agent: only liable for torts. 
• Notification: to principal of all matters
concerning subject matter of agency.
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Duties of Agents and Principals
 Agent’s Duties to the Principal:
• Notification: to principal of all matters
concerning subject matter of agency.
• Loyalty: fundamental duty as fiduciary
(no conflict of interest).
• Obedience.
• Accounting.
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Duties of Agents and Principals
 Principal’s Duties to the Agent:
• Compensation (Express or Implied).
• Reimbursement and Indemnification.
• Cooperation.
• Safe Working Conditions.
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Agent’s Authority
 Principal is liable for acts entered
into by Agent when she gives Agent
either actual or apparent authority:
• Actual Authority: express or implied.
• Apparent Authority: estoppel,
emergency and ratification.
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Agent’s Authority
 Principal is liable for acts entered
into by Agent when she gives Agent
either actual or apparent authority:
• Actual Authority: express or implied. 
• Apparent Authority: estoppel,
emergency and ratification. 
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Agent’s Authority
 Actual Authority (Express or Implied).
• Can be oral or written.
• Equal Dignity Rule: if law requires written
contract, agent’s authority must be in
writing, or contract voidable.
• Exceptions: Executive Officer acting for
Corporation, OR Agent acts in Principal’s
presence. 
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Agent’s Authority
 Actual Authority (Express or Implied).
• Power of Attorney gives agent express
authority.
• POA is a written document and usually
notarized.
• Special: specified acts only.
• General: all business for principal.
• Terminates on principal’s death or
incapacity.
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Agent’s Authority
 Actual Authority (Express or Implied).
• Implied Authority.
• Agent has implied power to do what is
reasonably necessary to carry out express
authority.
• Inferred or conferred by custom, or agent’s
position
• Test is whether agent reasonably believed
she had authority to do the act.
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Agent’s Authority
 Apparent Authority.
• Arises based on what principal causes
a THIRD party (not agent) to believe.
• Agent has apparent authority when
principal, by either word or act, causes 3rd
party to reasonably believe that Agent has
authority to act for Principal. 
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Agent’s Authority
 Apparent Authority.
• Pattern of Conduct: usually comes into
existence through a principal’s pattern
of conduct over a period of time.
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Agent’s Authority
 Ratification.
• Occurs when principal accepts
responsibility for an agent’s
unauthorized act (express or implied).
• Requirements:
1. Agent must act on behalf of Principal.
2. Principal must know material facts.
3. Principal must affirm agents actions. 
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Agent’s Authority
 Ratification.
• Requirements.
4.
5.
6.
Principal must affirm before 3rd party
withdraws from transaction.
Principal and 3rd party must have legal
capacity to contract when Agent made
the deal.
Principals must know all the material
facts involved in the transaction.
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Liability in Agency Relationships
 Liability for Contracts.
• Principals are classified as:
• Disclosed: identity known to 3rd party.
• Partially Disclosed: 3rd party knows he is
dealing with an agent, but doesn’t know
principal’s identity.
• Undisclosed: 3rd party does not know he is
dealing with agent and therefore the
principal’s identity is totally unknown.
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Liability in Agency Relationships
 Liability for Contracts.
• Authorized Acts.
• Disclosed or Unidentified Principal: liable if
agent acts within scope of authority.
–Agent has no liability to 3rd party for
disclosed principal’s non-performance.
Agent may be liable if principal is
partially disclosed. 
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Liability in Agency Relationships
 Liability for Contracts.
• Authorized Acts.
• Undisclosed Principal: no liability unless:
–Principal expressly excluded.
–Contract is a negotiable instrument.
–Agent’s performance is personal.
–3rd party would have contracted if he
knew the principal’s identity. 
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Liability in Agency Relationships
 Liability for Contracts.
• Authorized Acts.
• Undisclosed Principal.
–CASE 16.3 WILLIAMS V. PIKE (2011).
What was Henderson’s relationship to
the buyer?
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Liability in Agency Relationships
 Liability for Contracts.
• Unauthorized Acts.
• Unauthorized acts are outside the agent’s
express, implied, or apparent authority.
• If agent has no authority, principal is not
liable, but agent is personally liable.
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Liability in Agency Relationships
 Liability for Contracts.
• E-Agents.
• An “e-agent” is a semi-autonomous
computer program capable of executing
specific tasks on behalf of a principal.
• Principals and agents can be liable for acts
of an authorized e-agent.
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Liability in Agency Relationships
 Liability for Torts and Crimes.
• Principal’s Tortious Conduct.
• Principal liable for harm resulting from P’s
own negligence or recklessness.
• Principal’s Authorization of Agent’s
Tortious Conduct.
• Principle liable. 
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Liability in Agency Relationships
 Liability for Torts and Crimes.
• Liability for Agent’s Misrepresentation.
• Apparent Implied Authority.
• Innocent Misrepresentation.
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Liability in Agency Relationships
 Liability for Agent’s Negligence.
• Doctrine of Respondeat Superior:
employer is vicariously liable for
employee’s negligent torts committed
within the agent’s “course and scope of
employment.” 
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Liability in Agency Relationships
 Determining the Scope of Employment.
Factors Courts Consider
Employer
Liable
Employer
NOT Liable
Yes
No
?
?
Was act commonly performed by Employees?
Did act advance Employer’s interests?
Yes
No
Yes
No
Did Employer furnish instrumentality (tools)?
Did Employer have reason to know Employee would
do the act?
Did the act involved a serious crime?
Yes
No
Yes
No
No
No
Was Employee’s act authorized by Employer?
The Time place and purpose of act (factually based)
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Liability in Agency Relationships
 Liability for Agent’s Negligence.
• Scope of Employment.
• Distinction Between “Detour” and “Frolic”:
if detour, principal is liable, if frolic principal is not
liable.
• Employee Travel Time: to or from meals is
outside scope of employment.
• Notice of Dangerous Conditions.
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Liability in Agency Relationships
 Liability for Agent’s Negligence.
• Liability for Intentional Torts.
• Principal is liable for intentional torts
committed within the scope of
employment.
–Employer is also liable for employee’s acts,
which employer knew or should have known
the Employee had a propensity to commit.
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Liability in Agency Relationships
 Liability for Agent’s Negligence.
• Liability for Independent Contractor’s
Torts.
• General Rule: Employer is not liable for acts
of independent contractors because
employer has no right to control.
–Must determine whether worker is
employee or independent contractor.

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Liability in Agency Relationships
 Liability for Agent’s Crimes.
• Agent is liable for her own crimes.
• Principal is not liable, even if the crime
was committed within the scope of
employment, unless:
• Principal participated in the crime.
• Some states, principals may be liable for
agent violation of regulations.
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Liability in Agency Relationships
 Liability for Agent’s Crimes.
• Agent is liable for her own crimes.
• Principal is not liable, even if the crime
was committed within the scope of
employment, unless:
• Principal participated in the crime.
• Some states, principals may be liable for
agent violation of regulations.
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Determining Principal Liability
P Generally Not Liable
(unless strict liability)
Independent
Contractor
Outside Scope -P Not Liable
Worker
Employee
Within Scope -P Liable
Factors
p.474
“Course and Scope of
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Employment” p. 489-490
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How Agency Relationships
are Terminated
 Once the agency is terminated,
Agent has no actual authority to bind
the Principal, but may have apparent
authority to bind Principal.
 Agency can be terminated by:
• An Act of the Parties; 
• By Operation of Law. 
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How Agency Relationships
are Terminated
 Termination by Act of the Parties.
• Lapse of Time.
• Purpose Achieved.
• Occurrence of a Specific Event.
• Mutual Agreement.
• Termination by One Party.
• Notice of Termination.
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How Agency Relationships
are Terminated
 Termination by Operation of Law.
• Death or Insanity of either Principal or
Agent: automatic.
• Impossibility.
• Changed Circumstances.
• Bankruptcy.
• War.
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