Chapter 19
Agency Relationships & Their
Termination
Types of Agency Authority
• Actual authority- the real power a principal gives to an agent to
act on his or her behalf
• Express authority- includes all the orders, commands, or
directions a principal directly states to an agent when the
agency relationship is first created.
• Example 1: Perry asks Abe to act as his agent in the sale of
Perry’s motorcycle. In a written document, Perry specifically
instructs Abe to take no less than $2000 for the motorcycle. He
also includes in the agreement a clause instructing Abe to
accept cash only. Finally, Perry’s agreement expressly forbids
the sale of the motorcycle to a minor. All of these instructions
make Abe’s express authority as the agent in the sale of the
motorcycle.
• Implied authority-powers that are understood from
the express terms that create the agency relationship
• Example 2: In example 1, we saw that Abe had the
express authority to sell Perry’s motorcycle for no
less that $2000 in cash to anyone offering that cash
who had reached the age of majority. From these
express powers would come the implied authority to
allow a prospective buyer to inspect the motorcycle,
take it for a test drive, and have a an impartial
mechanic inspect it. All of these powers can be
reasonably implied from Abe’s authority to sell the
motorcycle.
Going Beyond Implied
Authority
• The court draws the line by saying that
implied authority must be “reasonably
derived from the express power.”
• Example 3: Abe decides that in order to sell
Perry’s car he needs to purchase a new suit.
He does so and sends the bill to Perry. Abe
might argue that he needs the suit to impress
properly prospective buyers. Such an
expense, however, is not customarily part of
an agent’s authority in this kind of situation.
•
•
Apparent authority- exists when the principal has somehow led a third
party to believe that a non agent is an agent or that an agent has a
power that in fact he or she does not have
Example 4: Pierre told Theresa to come to his jewelry store at 9 A.M.
on Tuesday and someone would be there to sell her a diamond ring.
At 8:30 A.M. on Tuesday, Pierre had to leave the shop to run a few
errands. He left his niece, Amy, who was not one of his employees, at
the shop “to keep an eye on things.” When Theresa arrived at 9 A.M.,
she assumed Amy was a clerk. Amy sold Theresa a unique diamond
ring. When Pierre returned and found the ring gone, he became very
upset because he had promised that ring to another customer. He
called Theresa, who refused to give the ring back. Theresa was within
her rights because Pierre had created a situation in which she could
reasonably believe that Amy had the authority to sell the ring.
Agent’s Duties to the
Principal
1.
2.
3.
4.
obedience
good faith
loyalty
accounting for all of the principal’s
money handled by the agent
5. exercising judgment and skill in the
performance of the assigned work
Obedience
• Obedience- the agent must obey all reasonable
orders and instructions within the scope of the
agency agreement
• Example 5: Mr. Pellas gives Andrew very explicit
instructions against purchasing anything for the
newspaper while he is gone. First, he instructs
Andrew not to purchase anything. Second, he tells
Andrew that none of his workers are ever allowed to
purchase anything using the newspaper’s cash.
Andrew disobeys both orders when he gives Tackett
$175 in cash for a fax machine. Andrew is liable for
the loss of that money.
Good Faith
• Good faith- dealing honestly with
another party with no intent to seek
advantage or to defraud
Loyalty
• Loyalty- faithfulness or acting in a party’s best
interest at all times
• Example 6: Tom is a former employee of Mr. Pellas.
Mr. Pellas entrusted Tom with $300 for the repair of
the newspaper’s fax machine. Tom spent only $150
on the repairs and pocketed the balance. When Mr.
Pellas asked for the money, Tom not only refused to
give it to him, but also kept the fax machine and then
resold it to the newspaper by defrauding Andrew.
Tom violated his duty of loyalty to Mr. Pellas.
Duty to Account
• Duty to account- the agent must keep a
record of all the money collected and paid
out and must report this to the principal
• Example 7: As we saw in the last example,
Mr. Pellas entrusted Tom with $300. Tom
spent only $150, and then refused Mr.
Pellas’s request to return the balance. Tom
clearly obviously violated his duty to account.
And there is no question that he owes Mr.
Pellas the missing $150.
Judgment and Skill
•
Not held liable for honest mistakes in judgment or for lack of
skill when they have done the best they can
• Example 8: Peggy entrusted Avery with $500,000 and told him
to invest in the best stocks possible. Avery decided to invest in
the Meader Chemical Company, a new corporation that was
clearly one of the best investment opportunities at the time.
One week later, a huge chemical gas leak at the Meader plant
in Brazil destroyed millions of dollars worth of real estate. The
Meader stock fell and Perkins lost her investment in that
company. Avery could not be held liable for this loss, because
he had done the best that he could.
Principal’s Duties to the
Agent
1.
2.
3.
4.
compensation
reimbursement
indemnification
cooperation
Compensation
• compensation- principal must pay the
agent salary or wages agreed upon in
the contract
• If no specific amount has been set, a
reasonable sum must be paid for any
authorized acts performed by the agent
for the principal
Reimbursement and
Indemnification
• Reimbursement- repayment when the
agent is required to pay their own
money for the principal’s benefit
• Indemnification- if an agent suffers a
loss because of the principal’s
instructions he or she is entitled to
repayment of the amount lost
Cooperation
• Cooperation- working together toward a common
end
• Example 9: Phoebe told Al that he would have
exclusive rights to sell the Curren line of cosmetics
door to door in Willowick, a small town with a
population of 5000. She also told him that, to keep
his job, he would need to make a quarterly profit of
$10,000. Later, Al learned that Phoebe had hired
four other agents to sell the Curren line in Willowick.
Since this made it impossible for Al to return $10,000
quarterly, Phoebe had violated her duty to cooperate
with Al.
Agent’s Liability to Third
Parties
•
•
when agents do not disclose the
identity of the existence of the
principal
when agents wrongfully exceed their
authority
When the Principal is not
Disclosed
•
•
Partially disclosed principal- one whose identity is never revealed,
even though the third party knows that the agent is acting for someone
else
Example 10: Pam, a world-famous chef and author, wanted to buy a
home in an exclusive Atlanta suburb. However, because of her fame,
she knew that the price would go up should the seller know her
identity. Consequently, she hired Axel to act as her agent. Axel told
the seller, Terry, that the represented a buyer who wished to conceal
her identity. After the contract was entered, Pam defaulted and
refused to buy the house. Should Terry uncover Pan’s identity, he can
sue her for breach of contract. If not, he can bring the breach of
contract suit against Axel. Should Axel lose the suit and be forced to
pay Terry damages out of his own resources, however, Pam will have
to indemnify him for the money he has paid out to satisfy the award.
• Undisclosed principal- if both the identity of the
principal and the existence of the agency
relationship are not disclosed
• Example 11: Ann managed a produce stand for Phil.
The business was called “Ann’s Produce.” No one
who dealt with Ann knew that she was actually Phil’s
agent. Acting under instructions from Phil, Ann
entered a contract with Terminal Tower Corporation
for the purchase of a new storefront. Phil is bound to
this contract as if he negotiated it himself.
When Agents Wrongfully
Exceed Their Authority
• Agents bind their principals only when the agents act
within the scope of their authority
• Example 12: People’s printing Company told Anita
to buy a word processor for not more than $1200.
Anita found one for $1050. She used the remaining
$150 to buy a new CD/DVD player for the office. Her
employer refused to accept the CD/DVD player,
which Anita had no authority to buy. Anita would be
required to pay People’s Printing $150. She could
then either return the CD/DVD or keep it herself.
• Page 423 #1-4 and CT