CHAPTER 35: THE AGENCY RELATIONSHIP
I.
II.
Definitions
A. Agency: a two-party relationship where one party is permitted to act on
behalf of, and under the control of, another party
B. Agent: the party authorized to act on behalf of, or under the control of,
someone else
C. Principal: the party who permits another to act on his or her behalf
Characteristics of an Agency
A. Created by the appearance of an agreement between two parties that one
will act on the other’s behalf
1. The test for the existence of an agency is objective, i.e., would a
reasonable person believe that a relationship exists based on the
parties’ behavior and the surrounding facts and circumstances
2. Consequently, an agency may exist even if neither party knows of
the existence or subjectively desires the existence
3. An agency, however, is often created by contract, which can be
written or oral unless otherwise prohibited by state law
4. Euclid Plaza Associates, LLC v. African American Law Firm,
LLC:
a. Creation of an agency relationship requires three
characteristics:
i.
Agent possesses power to alter legal relations
between the principal and third parties and between
the principal and him or herself
ii.
Agent acts a fiduciary regarding matters within
the agency’s scope
iii.
Principal has the right to control the agent’s
conduct
b. Court finds no agency exists because the third party did not
know of the principal’s existence as apparent authority
develops solely from the acts of the principal
B. If principals or agents lack the necessary mental capacity when the agency
is formed, they can generally release themselves from the agency at their
option
C. Some duties are nondelegable and cannot be performed by the agent, such
as
1. Making statements under oath
2. Voting in public elections
3. Signing a will
III.
Concepts and Types of Agency
A. Authority: an agent’s ability to affect his principal’s legal relations
1. Generally, an agent can bind his principal only when the agent has
authority to do so
2. Types of authority
a. Actual: created by communication to the agent either
through:
i.
Express authority: the actual words of the
principal, indicating the extent of the agent’s
authority
ii.
Implied authority: whatever is reasonable to
assume that the principal wanted the agent to do,
given the principal’s express statements and
surrounding circumstances
b. Apparent: created by communication to a third party
i.
Agents cannot give themselves apparent
authority
ii.
Does not exist where an agent creates an
appearance of authority without the principal’s
consent
iii.
The third party must reasonably believe in the
agent’s authority
B. Types of Agents
1. General agent: continuously employed to conduct many
transactions
2. Special agent: employed to conduct a single transaction or a small,
simple group of transactions
3. Gratuitous agent: agent who receive no compensation for services
a. Have the same power to bind their principals as paid agents
b. Sometimes owe less duties to the principal due to
gratuitous nature of relationship
4. Subagents: an agent of an agent
a. Created by an agent who has authority to make a subagent
his or her own agent for conducting the principal’s business
b. The agent creating the subagency then becomes a principal
with respect to the subagent
c. The subagent is also the original principal’s agent
5. Employees v. independent contractors
a. Differentiated by the principal’s right to control the
physical details of the work
i.
Employees are subject to control of the physical
details of the work
ii.
Independent contractors generally are hired to
produce a result and determine on their own how
the result will be achieved
IV.
b. The distinction is often crucial in determining the
principal’s liability or responsibility for torts (civil wrongs)
c. Eisenberg v. Advance Relocation & Storage, Inc.:
i.
The Reid factors determine whether an
individual is an employee v. an independent
contractor
a) Hiring party’s right to control the manner
and means by which the product is
accomplished
b) Skill required
c) Source of instrumentalities and tools
d) Location of the work
e) Duration of the relationship
f) Whether the hiring party has the right to
assign additional projects
g) Extent of the hiring party’s discretion over
when and how long to work
h) Method of payment
i) Hired party’s role in hiring and paying
assistants
j) Whether the work is part of the regular
business of the hiring party
k) Whether the hiring party is in business
l) The provision of employee benefits; and
m) The tax treatment of the hired party
ii.
The greatest emphasis should be placed on the
first factor
Fiduciary Duties of Agent
A. Duty of Loyalty
1. Avoid conflicts of interest with principal
a. Agent is forbidden to deal with himself when conducting
the principal’s business
i.
Exception is if the principal consents
b. Agent cannot compete with the principal
c. Agent cannot act on behalf of another party without the
principal’s consent
2. Avoid disclosure of confidential information acquired through the
agency
a. Includes information entrusted by the principal to the agent,
such as facts that are valuable to the principal because they
are not widely known
b. ABKCO Music Inc. v. Harrisongs Music, Ltd.:
i.
Duty not to use confidential information exists
after employment as well as during employment
ii.
Court found that the defendant used confidential
information, gained during his employment by the
V.
plaintiff to assist a third party, i.e., the economic
potential of George Harrison’s songs
B. Duty to Obey Instructions
1. Agents have a duty to obey the principal’s reasonable instructions
2. There is no duty to obey orders to behave illegally or unethically
3. If a principal’s instructions are unclear, the agent has a duty to
communicate and clarify
C. Duty to Act with Care and Skill
D. Duty to Notify the Principal
1. Must tell the principal about matters that are reasonably relevant or
material
2. No duty to notify where the agent receives privileged or
confidential information
3. Olsen v. Vail Associates Real Estate, Inc.:
a. A real estate broker breaches a fiduciary duty by
concealing material facts from the seller (information that
bears on the transaction in question)
b. Knowledge of the sale price of nearby property, after the
contract was signed, would not have affected the
principal’s decision-making, and therefore was not material
– no duty to disclose
E. Duty to Account
1. The agent must give the principal any money or property received
in the course of the agency business
2. Agents must keep accurate records and accounts of all transactions
and disclose them to the principal upon request
3. Agents should not commingle the principal’s property with his or
her own property (such as combining funds in the agent’s own
bank account)
Duties of the Principal to the Agent
A. Duty to Compensate the Agent
1. If compensation is due but the amount has not been expressly
stated, the amount is the market price or the customary price for
the agent’s services
2. Compensation may depend on the achievement of a specific result,
i.e., a lawyer’s agreement to be paid based on a certain percentage
of recovery if a suit or settlement is successful
3. The principal must cooperate with the agent in achieving the
desired result
4. A principal generally need not compensate an agent who has
materially breached the agency contract or committed a serious
breach of fiduciary duty
B. Duty of Reimbursement and Indemnity
1. Principal must pay an agent back for expressly or impliedly
authorized expenditures
VI.
2. Principal must indemnify an agent for any losses incurred in
carrying out the agency, unless the losses resulted from the
following and the principal did not benefit
a. Unauthorized acts
b. Losses due solely to the agent’s negligence or other fault
Termination of Agency
A. By Act of the Parties
1. At a time or upon the happening of an event stated in the agency
agreement
2. When a specific result is accomplished, provided the agency was
created to achieve the result
3. By mutual agreement of the parties, at any time
4. At the option of either party
a. Revocation: at the principal’s option
b. Renunciation: at the agent’s option
c. Parties can revoke or renounce even if they violate their
agreement by doing so, but they may be liable for damages
to the other party (they have the power to terminate, but
not necessarily the right)
B. By Operation of Law
1. Death of the principal
2. Death of the agent
3. Principal’s permanent loss of capacity, such as insanity
a. Trepanier v. Bankers Life & Casualty Co.
i.
A principal in a comatose state is deemed to be
only temporarily incapacitated
ii.
Agency contracts involving temporary
incapacitation are at most voidable and do not
automatically terminate
4. Agent’s loss of capacity to perform the agency business
5. Changes in the value of the agency property or subject matter
6. Changes in business conditions
7. The loss or destruction of the agency property or subject matter or
the termination of the principal’s interest therein
8. Changes in the law that make the agency business illegal
9. The principal’s bankruptcy
10. The agent’s bankruptcy (if the financial condition affects the
agent’s ability to perform)
11. Impossibility of performance by the agent
12. Serious breach in the agent’s duty of loyalty
13. The outbreak of war
C. Exception: Agency coupled with an interest
1. The agent has an interest in the subject matter of the agency,
independent from the principal, such as a secured loan agreement
authorizing a lender to sell property used as security if the debtor
defaults
2. Not terminated by
a. The principal’s revocation
b. The principal’s or the agent’s loss of capacity
c. The agent’s death; and
d. Generally the principal’s death
3. Does terminate when the principal performs his or her obligation
D. Effect
1. Agent’s express and implied authority come to an end
2. Ex-agents may, however, still retain apparent authority, unless the
termination was caused by
a. The principal’s death
b. The principal’s loss of capacity; or
c. Impossibility
3. Apparent authority also ends when the third party receives
appropriate notice
a. Actual notice is required if the third party has previously
dealt with the agent
i.
Direct personal statement to the third party
ii.
Writing delivered to the third party personally,
to his or her place of business, or to some other
reasonable location.
b. Constructive notice (advertising the termination in a
newspaper of general circulation or any other means likely
to inform third parties) is sufficient for all other parties