Chapter 21
Agency Law
21-1 Creation and Operation
of Agencies
21-2 Agency Duties
Law for Business and Personal Use
Chapter 21
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Slide 1
21-1 Creation and Operation
of Agencies
GOALS
 Understand the agency concept
 Appreciate the scope of agency authority
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Slide 2
WHAT IS AN AGENCY?
An agency is a relationship between two parties
that allows one of the parties to act so as to
legally bind the other.
The person who authorizes another to enter into
legal relationships on his/her behalf is the
principal. The party so authorized is the agent.
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Slide 3
WHAT IS AN AGENCY?
The most common form of agency occurs when
a salesperson in a store makes a contract with
a customer on behalf of the store’s owner.
Agency is consensual. Both parties have the
power to terminate the agency relationship.
While there may be liability for breach of
contract for ending the agency, no one can be
forced to continue in an agency relationship.
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Slide 4
WHAT IS AN AGENCY?
 Principals – Generally, almost anyone can
be a principal.
 Minors and other who lack contractual capacity
can be principals and act through agents.
 They retain their rights flowing from a lack of contractual
capacity.
 They may disaffirm contracts made by their agents for
non-necessaries.
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Slide 5
WHAT IS AN AGENCY?
 Principals –(cont.)
 The law tries to protect third parties with a
warranty of capacity which is imposed on the
agent. The law assumes that the agent promised
the third party that the principal had capacity. If
the principal lacked capacity, avoided the
contract, and thus injured the third party, the third
party can recover from the agent.
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Slide 6
WHAT IS AN AGENCY?
 Agents – The general requirement to qualify
to be an agent is that an agent must be able
to understand the transaction entered into on
behalf of the principal.
 Minors can often act for and bind adults into
contracts.
 Adult principal cannot later avoid the resulting
contract simply by showing the minority of the
agent.
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Slide 7
WHAT IS AN AGENCY?
 Agents (cont.)
 A principal must show that the individual agent
lacked an ability to understand that particular
transaction.
 All states require that agents in certain
occupations be licensed.
 This usually requires passing a professional examination.
 Licensing is often required for auctioneers, insurance
agents, lawyers, stock brokers, and real estate brokers.
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Slide 8
AGENCY RELATIONSHIPS
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Slide 9
Define the agency relationship.
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Slide 10
SCOPE OF AN AGENT’S
AUTHORITY
An agent must act within the granted scope of
authority (range of acts authorized by the
principal) in order to bind the principal.
Generally, agents are not personally liable for
the contracts they negotiate on behalf of their
principal unless the agent acts outside the
scope of authority and the third party suffers an
injury as a result.
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Slide 11
SCOPE OF AN AGENT’S
AUTHORITY
 Creation of authority – The agency
relationship may arise from a contract
between the agent and the principal. There
may be no contract. One person may simply
agree to help another in altering legal
relationships with third parties. In cases
where the agent receives no consideration
and there is no contract, the agency is called
a gratuitous agency.
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Slide 12
SCOPE OF AN AGENT’S
AUTHORITY
 Creation of authority (cont.)
 Express grant of authority – Express authority is
communicated directly by the principal to the
agent. It may be oral or in writing. Any writing
that appoints someone as an agent is called a
power of attorney. The agent empowered by
such a document is termed an attorney in fact.
Generally, a power of attorney is revoked by law
upon the death of the principal.
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Slide 13
SCOPE OF AN AGENT’S
AUTHORITY
 Creation of authority (cont.)
 Implied grant of authority – Implied authority is
the power to do anything that is reasonably
necessary or customary to carry out the duties
expressly authorized.
 An agent’s implied authority flows out of the express
authority.
 Implied authority may be expanded in an emergency.
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Slide 14
SCOPE OF AN AGENT’S
AUTHORITY
 Creation of authority (cont.)
 Apparent authority – Apparent authority is created
when a principal leads the third party to
reasonably believe that a particular person has
agency authority.
 The apparent authority must always come from the
principal’s words or conduct.
 Apparent authority can never arise from the words or
conduct of the agent alone.
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Slide 15
SCOPE OF AN AGENT’S
AUTHORITY
 Creation of authority (cont.)
 Ratification – If a person acts outside the scope
of his/her authority, the principal is not bound.
However, a principal who later agrees to the
transaction can be bound. This approval of a
previously unauthorized act is called ratification.
 A principal impliedly ratifies an agency transaction by
knowingly accepting its benefits.
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Slide 16
SCOPE OF AN AGENT’S
AUTHORITY
 Creation of authority (cont.)
 Ratification (cont.) – For a valid ratification, the
following must be met:
 Third party must have believed that by dealing with the
principal’s agent, he/she was making a contract with the
principal.
 Before ratification, principal must have full knowledge of
all material facts.
 Principal must show an intent to ratify.
 Principal must ratify the entire act.
 Principal must ratify before third person withdraws.
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Slide 17
List the ways in which agency authority
can be created.
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Slide 18
21-2 Agency Duties
GOALS
 List the duties of an agent
 List the duties of a principal
 Identify when an agency is terminated
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Slide 19
WHAT ARE AN AGENT’S DUTIES?
The agent’s duties to the principal are the same
as those of an ordinary employee. However, the
agent has the additional ability to bind the
principal in dealings with third parties. The law
encourages agents to be honest and to show
good faith by requiring fiduciary duties of the
agent. These duties require an agent to adhere
to the highest standard of duty implied by law
by subordinating his/her own personal interests
in order to act for the benefit of the principal.
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Slide 20
WHAT ARE AN AGENT’S DUTIES?
 Duties owed the principal
 Loyalty and obedience – These are the agent’s
core duties.
 Duty of loyalty means that the agent may not secretly
benefit from the agency transaction.
 Duty of obedience means that the agent must carefully
obey the instructions of the principal provided the
instructions are not illegal or immoral.
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Slide 21
WHAT ARE AN AGENT’S DUTIES?
 Duties owed the principal (cont.)
 Reasonable care and skill – The duty of
reasonable care and skill requires the agency to
exercise the degree of care and skill that a
reasonable person would use in a similar
situation.
 Failing to satisfy this fiduciary duty renders the agent
liable to the principal for the resulting loss or injury.
 At a minimum, reasonable care and skill requires the
agent to communicate to the principal any information
that would affect the principal’s decision.
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Slide 22
WHAT ARE AN AGENT’S DUTIES?
 Duties owed the principal (cont.)
 Confidentiality – The duty of confidentiality
requires the agent to treat information about the
principal with great caution.
 Information that is obviously confidential must be kept
confidential.
 Anything the principal requests to be treated as
confidential must be kept confidential by the agent.
 The duty of confidentiality survives the agency
relationship and may bind the agent years after the
agency relationship has ended.
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Slide 23
WHAT ARE AN AGENT’S DUTIES?
 Duties owed the principal (cont.)
 Accounting – The duty of accounting requires an
agent to account to the principal for all money
and property of the principal that comes into the
agent’s possession.
 This duty prohibits the agent from commingling, or mixing
the funds or property of a fiduciary such as an agent with
those of his/her client, employer, or principal. If
commingling occurs and there is a loss, the agent must
bear the loss.
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Slide 24
WHAT ARE AN AGENT’S DUTIES?
 Duties owed the principal (cont.)
 Accounting (cont.)
 Money of the principal held by the agent usually must be
deposited in a bank, in an account separate from that of
the agent. The separate accounts for the funds of
principals are called trust accounts.
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Slide 25
WHAT ARE AN AGENT’S DUTIES?
 Duties owed to third parties
 Exceeding the scope of authority – If the agent
acts without authority from the principal, the agent
becomes personally liable to the third party for
resulting injury.
 Principal’s lack of capacity – If a principal does
not exist or is able to avoid the contract for lack of
contractual capacity, the agent will be liable.
 To bind the principal and to avoid personal liability, the
agent will sign the name of the principal to a contract or
commercial paper and add words to indicate that the
signature is by an agent.
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Slide 26
WHAT ARE AN AGENT’S DUTIES?
 Duties owed to third parties (cont.)
 Liability due to an undisclosed principal –
Sometimes under the terms of the agency an
agent is not allowed to reveal the principal’s
existence or identity. The principal in this case is
known as an undisclosed principal. The agent is
liable for contracts entered in this situation.
 When the third party learns the identity of the principal,
the third party generally may elect to hold either the
principal or the agent to the agreement. The third party
may not enforce the agreement against both, however.
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Slide 27
What are the duties of an agent to
the principal?
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Slide 28
WHAT ARE THE PRINCIPAL’S
DUTIES?
 Duties owed the agent
 Principals main duty is to pay what was promised
for the agency service.
 If an agent properly incurs expenses, principal
must reimburse the agent.
 If the agent suffers any loss because of the
principal’s instructions, the principal must
indemnify, or repay, the agent the amount lost.
 Principal has a duty to cooperate with the agent
so that the tasks can be performed.
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Slide 29
WHAT ARE THE PRINCIPAL’S
DUTIES?
 Duties owed third parties
 Principals are bound by the agreements as long
as the agent acted within the scope of authority or
if they ratify unauthorized acts.
 Principals have a duty not to authorize or permit
improper acts in carrying out the agency.
 If torts or fraud are committed by the agent, the agent is
liable.
 The principal will also be liable if he/she directed the
agent to engage in illegal activity or if the agent was
acting to advance the interests of the principal.
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Slide 30
WHAT ARE THE PRINCIPAL’S
DUTIES?
 Duties owed third parties (cont.)
 Principals have a duty not to authorize or permit
improper acts in carrying out the agency. (cont.)
 Usually, the principal is not liable for an agent’s crime
unless the crime itself has been authorized or ratified.
 Exception: The principal generally is liable for the illegal sale
by the agent of intoxicating liquor or adulterated foods.
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Slide 31
What is a principal’s main duty?
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HOW IS AN AGENCY
TERMINATED?
 By unilateral action of a party – Generally,
both the agent and the principal have the
power, but not the right, to terminate the
agency at any time.
 The principal terminates by revoking the agent’s
authority. If the termination violates the agency
agreement and the agent is injured, the principal
may have to pay damages as a consequence.
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Slide 33
HOW IS AN AGENCY
TERMINATED?
 By unilateral action of a party (cont.)
 The agent has the power to quit at any time.
However, he/she may lack the right to do so
unless the principal has breached the contract. If
an agent wrongfully terminates the agency before
the contract expires, the principal may sue for
damages.
 In a gratuitous agency, the agent cannot recover
any damages if the authority is revoked nor can a
principal normally recover any damages if the
agency is abandoned.
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Slide 34
HOW IS AN AGENCY
TERMINATED?
 By agreement – Normally an agency expires
at the time or under the circumstances
provided in the contracts that created it. This
may be after a particular length of time, upon
occurrence of an event, or at the completion
of certain tasks. When nothing is specified,
the agency continues for a reasonable time.
Both the principal and agent can agree to
terminate the agency at any time.
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Slide 35
HOW IS AN AGENCY
TERMINATED?
 By operation of law – An agency ordinarily is
terminated upon the death, insanity, or
bankruptcy of either the principal or agent. If
it becomes impossible to perform the
agency, the agency is ended.
 When the authority of an agent is terminated by
the principal’s voluntary act, the principal should
notify promptly each individual third party who
has previously dealt with the agent to prevent the
creation of apparent authority.
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Slide 36
Name the three general ways in
which an agency may be terminated.
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Slide 37
PREVENT LEGAL DIFFICULTIES
 If you are a third person dealing with an
agent you should verify the extent of the
agent’s authority directly from the principal. If
you are uncertain about the authority or
honesty of the agent, make payment by a
check payable to the principal.
Continued on the next slide
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PREVENT LEGAL DIFFICULTIES
 If you are an agent, when you sign anything
for your principal, make it unmistakably clear
that you are signing as an agent. Always
write the name of the principal first, and then
add “by” and your signature followed by the
word “agent.” If you exceed the scope of
your authority and that injures the third party,
you may be liable for that injury.
Continued on the next slide
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Slide 39
PREVENT LEGAL DIFFICULTIES
 If you are a principal, remember that your
agent’s acts become your acts. Use care in
selecting agents. If you discharge your
agent, protect yourself against apparent
authority by notifying those the agent dealt
with in your name and publicizing the
discharge in newspapers of general
circulation in the area.
Continued on the next slide
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Slide 40
PREVENT LEGAL DIFFICULTIES
 As an agent, you must be loyal to your
principal, maintain confidentiality, exercise
reasonable care and skill in obeying all
proper instructions, and provide accountings
as required.
 If you handle your principal’s money or other
assets, you should keep them separate from
your own.
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Slide 41