AGENCY RELATIONSHIPS

Agency: A fiduciary relationship that results when one
person (the principal) manifests her consent that another
person (the agent) will act on her behalf and subject to her
control, and the agent manifests his consent to so act.

Fiduciary: A person who undertakes to act on behalf of
and primarily for the benefit of another.

Fiduciary Duty: A duty arising from the trust and
confidence placed in a fiduciary by those on whose
behalf and for whose benefit she acts.
Ch. 17: Agency - No. 1
Business Law Today: The Essentials (7th ed.)
EMPLOYER-EMPLOYEE RELATIONSHIPS

Employee: A person
(1) who works for, and receives payment from, an
employer,
(2) whose working conditions and methods are controlled
by the employer, and
(3) for whose acts and omissions occurring in the scope of
employment the employer is liable.

Independent Contractor: A person
(1) who works for, and receives payment from, an
employer,
(2) but whose working conditions and methods are not
controlled by the employer, and
(3) for whose acts and omissions the employer is not liable.
Ch. 17: Agency - No. 2
Business Law Today: The Essentials (7th ed.)
DETERMINING EMPLOYEE STATUS

To determine whether a worker is an employee or an
independent contractor, courts consider the following:
(1) how much direction and control the employer exercises
over the details of the person’s work,
(2) whether the person is engaged in an occupation or
business distinct from that of the employer,
(3) whether the work the person performs is usually done
under the employer’s direction or without employer
supervision,
(4) who supplies tools used by the person,
(5) the duration of the person’s employment,
(6) how the person is paid for his work, and
(7) the degree of skill required of the worker.

By contrast, the IRS bases its determination whether a person
is an employee using a single factor: the degree of control the
business exercises over the worker.
Ch. 17: Agency - No. 3
Business Law Today: The Essentials (7th ed.)
AGENCY FORMATION

Agency by Agreement: An agency relationship based on an
express or implied agreement that the agent will act for the
principal.

Agency by Ratification: A confirmation by the principal of
an act or contract performed or entered into on her behalf by
another, who assumed, without authority, to act as her agent.

Agency by Estoppel: If a principal holds out to a third party
that another is authorized to act on the principal’s behalf, and
the third party deals with the other person accordingly, the
principal may not later deny that the other was the principal’s
agent for purposes of dealing with that third party.

Agency by Operation of Law: Agencies recognized by
courts – e.g., family relationships, emergency situations – in
the absence of any formal agreement, confirmation, or act or
omission by the principal that implied the agent’s authority.
Ch. 17: Agency - No. 4
Business Law Today: The Essentials (7th ed.)
AGENT’S DUTIES TO THE PRINCIPAL

Performance: An agent implicitly agrees to use reasonable
diligence and skill (except for a specialist, who is held to a
higher degree of skill) in performing the task in its entirety.

Notification: An agent must notify the principal of all
matters that come to the agent’s attention concerning the
subject matter of the agency.

Loyalty: An agent must act solely for the benefit of his or
her principal, and not in the interest of the agent or a third
party. Moreover, any information or knowledge obtained in
the course of the agency is confidential.

Obedience: An agent must follow all lawful and clearly
stated instructions of the principal.

Accounting: Unless otherwise agreed, an agent must keep
and make available to the principal an account of all
property and money received and paid out on the
principal’s behalf, including gifts received from third
persons.
Ch. 17: Agency - No. 5
Business Law Today: The Essentials (7th ed.)
PRINCIPAL’S DUTIES TO THE AGENT

Compensation: When a principal requests certain services
from an agent, the principal must pay the agent, in a timely
manner, for those services rendered.

Reimbursement: Whenever an agent disburses sums of
money to fulfill the principal’s request or to pay for necessary
expenses incurred in the reasonable performance of his or her
duties, the principal must reimburse the agent.

Indemnification: Subject to the terms of the agency
agreement, the principal must compensate, or indemnify, the
agent for liabilities arising from the agent’s lawful and
authorized acts on the principal’s behalf.

Cooperation: A principal must cooperate with the agent and
assist the agent in performing his or her duties.

Safe Working Conditions: A principal must
(1) provide its agents and employees with safe working
premises, equipment, and conditions, and
(2) inspect working conditions and warn agents and
employees of unsafe areas.
Ch. 17: Agency - No. 6
Business Law Today: The Essentials (7th ed.)
ACTUAL AUTHORITY


Express Authority: Authority declared in clear, direct, and
definite terms, orally or in writing.

Equal Dignity Rule: If a contract being executed by an
agent on the principal’s behalf is written, most states
require that the agent’s authority must also be evidenced
by a writing; otherwise, the contract executed by the
agent is voidable at the principal’s option.

The equal dignity rule does not apply when the agent
acts in the principal’s presence or when the agent’s act
is merely perfunctory.

Power of Attorney: A written document, usually
notarized, authorizing an agent to act for a principal.
Implied Authority: Authority that is

conferred by custom,

inferred from the position the agent occupies, or

inferred as being reasonably necessary to carry out
express authority.
Ch. 17: Agency - No. 7
Business Law Today: The Essentials (7th ed.)
APPARENT AUTHORITY

Apparent Authority: Authority that arises when a principal,
by either words or actions, causes a third party to believe that
an agent has authority to act, even though the agent has no
express or implied authority to act with regard to the
particular matter at hand.

If the third party changes his or her position in reliance
on the principal’s representations regarding the
agent’s authority, the principal may be estopped from
denying that the agent had authority to act.

Apparent authority may arise due to

the principal’s course of conduct over time, or

the agent’s possession and apparent ownership
or control of the principal’s property.
Ch. 17: Agency - No. 8
Business Law Today: The Essentials (7th ed.)
RATIFICATION

Ratification: A principal’s express or implied affirmation of
a previously unauthorized act by a purported agent. In
summary:
(1) the agent must have acted on behalf of the principal
who subsequently ratified the action;
(2) the principal must know all material facts;

If the principal ratifies without full knowledge, she
can rescind her ratification, but must reimburse the
third party for any costs incurred as a result of
reasonably relying on the apparent contract.
(3) the principal must affirm the agent’s act in its entirety;
(4) the principal must have the legal capacity to affirm the
transaction both
(a) at the time the agent acts, and
(b) at the time the principal ratifies; and
(5) the principal must affirm before the third party
withdraws from the transaction.
Ch. 17: Agency - No. 9
Business Law Today: The Essentials (7th ed.)
AUTHORIZED CONTRACTS


A disclosed or partially disclosed principal is liable to a third
party for a contract made by an agent who is acting within the
scope of his or her authority.

Disclosed Principal: A principal whose identity is
known to the third party at the time the agent makes a
contract for the principal with the third party.

Partially Disclosed Principal: A principal whose
identity is not known to the third party, but the third
party does know that the agent is representing some
principal at the time the agent makes a contract with the
third party. In many states, the agent is also liable on a
contract with a partially disclosed principal.
Undisclosed Principal: When neither the fact of her agency
nor the identity of the principal is disclosed by an agent to
the third party at the time a contract is made, the agent is
presumed to be acting on her own behalf, and will be liable as
a party to the contract.

If the agent was authorized to act on behalf of the
undisclosed principal, then the principal will generally
also be liable to the third party and will owe the agent
indemnity.
Ch. 17: Agency - No. 10
Business Law Today: The Essentials (7th ed.)
UNAUTHORIZED CONTRACTS

If an unauthorized agent contracts with a third party, the
principal cannot be held liable on the contract, regardless of
whether the principal was disclosed, partially disclosed, or
undisclosed. Rather, the agent will be solely liable.

However, if the third party knows or should know at the time
of the contract that the agent lacks authority – or may lack
authority – to contract on behalf of the principal, the agent
will not be liable to the third party.
Ch. 17: Agency - No. 11
Business Law Today: The Essentials (7th ed.)
E-AGENTS

E-Agent: A semiautonomous computer program capable of
executing specific tasks, including database searches and
retrievals.

The Uniform Electronic Transactions Act (“UETA”)
provides, in part, that
(1) e-agents may enter into binding agreements on
behalf of their principals; and
(2) if the e-agent does not provide the third party with
an opportunity to prevent errors at the time of the
transaction, the third party may avoid the
transaction without liability.
Ch. 17: Agency - No. 12
Business Law Today: The Essentials (7th ed.)
LIABILITY FOR AN AGENT’S TORTS

An agent is liable for her own torts. In addition, a principal
may be liable for its agent’s torts if the agent’s tort resulted
from:
(1) the principal’s own tortious conduct,
(2) a tortious act authorized by the principal, or
(3) the agent’s unauthorized tort committed within the scope
of the agency.
Ch. 17: Agency - No. 13
Business Law Today: The Essentials (7th ed.)
RESPONDEAT SUPERIOR - PT. I

Respondeat Superior: A principal is liable, along with the
agent, for any tort committed by the agent while acting within
the scope of their agency.

To determine whether a tort was within the scope of the
agency, courts look at the following:
(1) whether the principal authorized the act;
(2) the time, place, and purpose of the act;
(3) whether the act was one commonly performed by
agents on behalf of their principals;
(4) whether the act advanced the principal’s interest;
(5) whether the agent’s interests were involved;
(6) whether the principal furnished the means or
instrumentality by which the injury was inflicted;
(7) whether the principal had reason to know the
agent would act as she did; and
(8) whether the act involved a serious crime.
Ch. 17: Agency - No. 14
Business Law Today: The Essentials (7th ed.)
RESPONDEAT SUPERIOR - PT. II

“Frolics”: A principal is not liable for the acts of an
agent who substantially departs from the principal’s
business.

Dangerous Conditions: A principal is charged with
knowledge of any dangerous conditions discovered by
an agent and pertinent to the agency regardless of
whether the agent actually informs the principal of the
condition.

Intentional Torts: Principals are liable only for those
intentional torts that are committed within the course
and scope of the agent’s actions on behalf of the
principal.

Misrepresentations by an Agent: Principals are liable
to third parties who are injured by an agent’s
misrepresentation.

Crimes: As a general rule, a principal is not liable for an
agent’s crime – even if committed while otherwise
acting in the course and scope of the agency – unless the
agent committed the crime at the principal’s direction, or
with the principal’s knowledge and consent.
Ch. 17: Agency - No. 15
Business Law Today: The Essentials (7th ed.)
LIABILITY FOR AN INDEPENDENT
CONTRACTOR’S TORTS

As a general rule, an employer who has no legal power to
control the details of the independent contractor’s
performance is not liable for any torts committed by the
independent contractor, even if committed while performing
the contract.

Exception: Unusually Hazardous Activities – An
employer is strictly liable for injuries caused by those
performing unusually hazardous activities (e.g., blasting,
using poison) on the employer’s behalf, regardless of
whether the person causing the injury is an employee or
an independent contractor.
Ch. 17: Agency - No. 16
Business Law Today: The Essentials (7th ed.)
TERMINATION BY THE PARTIES

An agency may be terminated by
(1) lapse of time,
(2) accomplishing the particular purpose for agency,
(3) the occurrence of a specific event,
(4) mutual agreement of the agent and principal, or
(5) renunciation (by the agent) or revocation (by the
principal) of the agent’s authority.

Notice of Termination: If an agency terminates by any of the
above, the principal must give notice of that fact to (i) any
third party who knows of the agency and (ii) the agent.

No particular form of notification is required, and the
principal’s notice to the agent (but not to third parties
with knowledge) may be either constructive or actual.

Exception: If the agent derives her authority from a
written agreement, the principal must revoke the
agency in writing and show the written revocation to all
third parties who saw the written agency agreement.
Ch. 17: Agency - No. 17
Business Law Today: The Essentials (7th ed.)
TERMINATION BY OPERATION OF LAW

An agency may also terminate as a matter of law due to
(1) death or incompetence of the agent or principal,
(2) impossibility of performance,
(3) materially changed circumstances,
(4) bankruptcy of the principal or agent, or
(5) the outbreak of war between the principal’s country and
the agent’s country.
Ch. 17: Agency - No. 18
Business Law Today: The Essentials (7th ed.)