BUSINESS LAW TODAY
Essentials 9th Ed.
Roger LeRoy Miller - Institute for University Studies, Arlington, Texas
Gaylord A. Jentz - University of Texas at Austin, Emeritus
Chapter
17
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Agency
1
Learning Objectives
 What is the difference between an employee




and an independent contractor?
How do agency relationships arise?
What duties do agents and principals owe
to each other?
When is a principal liable for the agent’s
actions? When is the agent liable?
What are some of the ways in which the
agency relationship can be terminated?
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2
Agency Relationships
 Agency= Principal and Agent.
 Understanding agency is crucial to
understanding the legal environment of
business.
 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.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3
Agency Relationships
 Agency is a “fiduciary” relationship
based on trust and confidence.
 Key: Distinguish Employee vs.
Independent Contractor Relationships.
Employer
Employee
Independent
Contractor
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4
Determining Employee Status
Factors Courts Consider: (“X” = Yes)
Does the Employer exercise a great degree of control
over the details of the work?
E’ee
x
Is the worker engaged in an occupation or business
distinct from Employer?
Is the work usually done under Employer’s supervision?
Does Employer provide the tools?
How is the worker paid and how long has he been
employed?
Is there a great degree of skill required?
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
I.C.
x
x
x
?
x
5
Determining Employee Status
 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 17.1 Lopez v. El Palmar Taxi, Inc. (2009). El
Palmar did not exercise control over the cab driver
and was therefore not liable for Lopez’s injuries.
 Employee Status and “Works for Hire.”
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6
How Agency Relationships Are Formed
 Consensual Agreement.
 No consideration required.
 Principal needs contractual capacity,
Agent does not.
 Can be for any legal purpose.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
7
How Agency Relationships are Formed
 Agency by Agreement.
Formed through express consent (oral or
written) or implied by conduct.
 Agency by Ratification.
Principal either by act or by agreement ratifies
conduct of a person who is not in fact an agent.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
8
How Agency Relationships are Formed
 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.
 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 for family.
Emergency.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
9
Agent’s Duties to the Principal
 Performance: reasonable diligence and
skill (special skills).
 Notification to Principal.
 Loyalty (no conflict of interest).
 Obedience.
 Accounting.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10
Principal’s Duties to Agent
 Compensation (Express or Implied).
 Reimbursement and Indemnification.
 Cooperation.
 Provide safe working conditions.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
11
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.
Ratification.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
12
Actual Authority: Express
 Can be oral or written.
“Equal Dignity Rule”: if law requires written
contract, Agent’s authority must be in writing.
Failure to comply with the rule renders contract
voidable. Exceptions:
• Officer acting for Corporation.
• Agent acts in Principal’s presence.
 Power of Attorney (ordinary v durable).
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
13
Actual Authority: Implied
 Inferred or conferred by custom, Agent’s
position or what is reasonably necessary
to carry out Agent’s express authority.
 What the Agent reasonably thinks the
Principal means.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
14
Apparent Authority and Estoppel
 Apparent Authority: Principal, by either word or


act, causes 3rd party to reasonably believe that
Agent has authority to act for Principal.
Estoppel: If 3rd party changes legal position by
relying on Principal’s representations, Principal is
estopped from denying Agent had authority to
contract.
CASE 17.2 Ermoian v. Desert Hospital (2007).
Physicians working at clinic were “ostensible agents” of
the hospital based on clinic’s actions which created the
appearance the hospital was the provider of care.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15
Ratification
1. Agent must act on behalf of Principal.
2. Principal must affirm entire deal.
3. Principal must affirm before 3rd party
withdraws from transaction.
4.Principal and 3rd party must have legal
capacity to contract when Agent made the
deal.
5. Principals must know all the material facts
involved in the transaction.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
16
Liability for Contracts
 Principals are classified as:
Disclosed: identity known to 3rd party.
Partially Disclosed: 3rd party knows he is
dealing with Agent, but doesn’t know
Principal’s identity.
Undisclosed: 3rd party does not know he is
dealing with an Agent, and Principal’s
identity is totally unknown.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
17
Liability: Authorized Acts
 A disclosed or partially disclosed
Principal is liable to 3rd party if Agent
acts within scope of authority.
 Agent has no liability to 3rd P for
disclosed Principal’s non-performance.
(Agent may be liable if Principal is
partially disclosed).
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
18
Liability: Authorized Acts
 If undisclosed Principal, Principal is
liable for the contract unless:
Principal expressly excluded.
Contract is a negotiable instrument.
Agent’s performance is personal.
3rd party would not have contracted if he knew
the Principal’s identity.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
19
Liability: Unauthorized Acts
 Unauthorized acts occur outside of
Agent’s express, implied or apparent
authority.
 If Agent has no authority, Principal is
not liable, but Agent is personally
liable.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
20
Liability for E-Agents
 Authorized versus Unauthorized Acts.
 The Uniform Electronic Transactions Act.
E-Agents may enter into binding agreements on
behalf of the principal.
An E-Agent must provide confirmation of order
to prevent errors.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21
Liability for Torts and Crimes
 Agent is liable to 3rd party for his own
torts.
 Principal may be liable for Agent’s torts
if they result from:
Principal’s own tort.
Principal’s authorization of tortious conduct.
Agent’s unauthorized but fraudulent conduct
made within scope of agency.
Liability for Negligence: Respondeat Superior.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
22
Liability for Agent’s Negligence
 Applies only to Employer-Employee


relationships.
Principal/Employer is vicariously liable for
Agent/Employee’s negligent torts if
committed within the Agent’s “course and
scope of employment.” 
CASE 17.3 Warner v. Southwest Desert
Images, LLC. (2008). The agent (Hogatt) is not
excused from sharing liability with principal-employer
(SDI) when he disregards instructions given by employer.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
23
Determining the ‘Scope of Employment’
Factors: For Principal to Be Liable, Agent’s
Act must have occurred within the Course
and Scope of Employment. (X = Yes)
Employer
Liable
Was Employee’s act authorized by Employer?
X
The Time place and purpose of act (factually based)
?
Was act commonly performed by Employees?
X
Did act advance Employer’s interests?
X
Did Employer furnish instrumentality (tools)?
X
Did Employer have reason to know Employee
would do the act?
X
Did the act involved a serious crime?
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Employer
NOT
Liable
?
X
24
Respondeat Superior Issues
 Detour vs. Frolic (Fact-Based).
Principal will generally not be liable with a
“detour” in the scope of employment.
Frolic is purely personal.
 Employee Travel Time.
 Notice of Dangerous Conditions.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
25
Liability for Agent’s Intentional Torts
 Principal liable for intentional torts
committed within the scope of
employment.
 Employee is a tortfeasor as well.
 Employer is liable for Employee’s acts
which Employer knew or should have
known the Employee had a propensity
to commit.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
26
Liability for Contractor’s Torts
 First determine whether worker is
employee or independent contractor.
 General rule: Employer is not liable for
acts of independent contractors because
Employer no right to control.
 Exception: hazardous activities
 Independent Contractor is liable for her
own torts.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
27
Liability for Agent’s Crimes
General Rule: Agent is liable, Principal is
not, unless:
Principal authorized or participated in crime.
Some jurisdictions hold Principal liable for
violating statutes.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
28
Principal Liability: Review
P Generally Not Liable
(unless strict liability)
Independent
Contractor
Worke
r
Outside CSE-P Not Liable
Employee
Factors
(p. 490)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Within CSE -P Liable
“Scope of Employment”
(p.504)
29
How Agency Relationships
Are Terminated
 Agency can be terminated by:
An Act of the Parties; or 
By Operation of Law. 
 Once agency terminated Agent has no
actual authority to bind the Principal, but
may have apparent authority to bind
Principal.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
30
Termination by Parties
 Lapse of Time.
 Purpose Achieved.
 Occurrence of a Specific Event.
 Mutual Agreement.
 Termination by One Party.
 Notice of Termination.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
31
Termination by Law
 Death or Insanity of either Principal or
Agent: automatic.
 Impossibility.
 Changed Circumstances.
 Bankruptcy.
 War.
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted
in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
32