Click your mouse anywhere on the screen to advance the
text in each slide. After the starburst appears, click a
blue triangle to move to the next slide or previous slide.
28
Business Law and the Legal Environment for a New Century
Alternate Edition
Quotes of the Day
“If you want something done right,
do it yourself.”
“Many hands make light work.”
-- Anonymous folk sayings
28
Business Law and the Legal Environment for a New Century
Alternate Edition
Creating an Agency
Relationship
 Agency is a relationship in which the
agent agrees to perform a task for, and
under the control of, the principal.
 To create an agency, there must be:
• A principal,
• An agent,
• Who mutually consent that the agent will
act on behalf of the principal, and
• Be subject to the principal’s control,
• Thereby creating a fiduciary relationship.
28
Business Law and the Legal Environment for a New Century
Alternate Edition
Requirements for Agency
 Consent, control and a fiduciary
relationship are required.
 Elements not required for an agency
relationship include:
• A written agreement (unless the business of
the agent requires a written contract).
• A formal agreement (acting like agent and
principal is enough to establish agency).
• Consideration (an agent does not have to
be paid).
28
Business Law and the Legal Environment for a New Century
Alternate Edition
Duties of Agent to Principal
 Duty of Loyalty-- The agent:
• must act for the benefit of the principal.
• may not receive outside benefits without
approval of the principal.
• can neither disclose nor use for her own benefit
any confidential information.
• is not allowed to compete with his principal
within the scope of the agency business.
• may not act for two principals whose interests
conflict.
• may not become a party to a transaction
without the principal’s permission.
• may not engage in inappropriate behavior that
reflects badly on the principal.
28
Business Law and the Legal Environment for a New Century
Alternate Edition
Other Duties of an Agent
 An agent must obey her principal’s
instructions, unless illegal or unethical.
 Agent must act with reasonable care.
• An agent with special skills is held to a
higher standard because she is expected to
use those skills.
 Agent must give accurate information.
• An agent has a duty to provide the principal
with all information in her possession that
she has reason to believe the principal
wants to know.
28
Business Law and the Legal Environment for a New Century
Alternate Edition
Principal’s Remedies When
the Agent Breaches a Duty
 The principal can recover damages
caused by the agent’s breach.
 The agent must refund any profits made
from the agency, if he breaches his duty
of loyalty.
 The principal may rescind a transaction
with an disloyal agent.
28
Business Law and the Legal Environment for a New Century
Alternate Edition
Duties of Principal to Agent
 Duty to Reimburse the Agent for
Reasonable Expenses
• A principal must also indemnify an agent for
an unauthorized purchase if the agent
reasonably believed he was authorized and
the principal received a benefit.
 Torts Committed by the Agent
• A principal must indemnify an agent for tort
claims brought by a third party if the
principal authorized the agent’s behavior
and the agent did not realize he was
committing a tort.
28
Business Law and the Legal Environment for a New Century
Alternate Edition
Duties: Principal to Agent
(cont’d)
 Contracts Entered into by the Agent
• The principal must indemnify the agent for
liability she incurs as a result of a contract
on the principal’s behalf, including
attorney’s fees and reasonable settlements.
 Duty to Cooperate
• Cannot unreasonably interfere with the
agent’s ability to accomplish his task.
• Unless the contract provides otherwise, the
principal may compete with her agent.
• Principal must perform her part of the
contract.
28
Business Law and the Legal Environment for a New Century
Alternate Edition
Terminating Agency
 There are five basic ways an agency
relationship is terminated by the parties:
• By completion of the agreed term.
• By completion of the agreed purpose.
• Mutual agreement, no matter what the
previous agreement was.
• In an agency at will, either party can
terminate at any time, for any reason.
• Wrongful termination – either party can
terminate relationship, but the wrongful
party may have to pay damages.
28
Business Law and the Legal Environment for a New Century
Alternate Edition
Other Causes of Agency
Termination
 Principal or Agent Can No Longer
Perform Required Duties
• Loss of Qualification, Bankruptcy, Death or
Incapacity of the Principal or Agent,
Disloyalty of Agent
 Change of Circumstances
• Loss or Destruction of Subject Matter,
Change of Law
28
Business Law and the Legal Environment for a New Century
Alternate Edition
Effect of Termination
 Termination of the agency ends the
agent’s power to act on behalf of the
principal.
 Principal’s duty to reimburse expenses
of the agent ends with the end of the
agency.
 Confidential information remains
confidential and unusable, even after
the end of the agency.
28
Business Law and the Legal Environment for a New Century
Alternate Edition
“Once again, the subject is
tradeoffs. You can accomplish
more if other people do things for
you. On the other hand, you may
face liability for their actions.”
28
Business Law and the Legal Environment for a New Century
Alternate Edition