CHAPTER 29
AGENCY: CREATION AND TERMINATION
DAVIDSON, KNOWLES & FORSYTHE
Business Law: Cases and Principles
in the Legal Environment (8th Ed.)
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
AGENCY LAW AND AGENCY RELATIONSHIPS

Agency law concerns relationships between
employees and employers.
 Agency law involves duties/responsibilities
to each other, and the public at large.
 Agency law places significance reliance on
state law and precedent.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
2
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
AGENCY LAW AND AGENCY RELATIONSHIPS

Restatement explains key terms:
– Agency is a fiduciary relationship resulting
from consent of one person to another that the
other shall act on his/her behalf.
– Principal one whom action is taken for.
– Agent one who is to act.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
3
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
AGENCY LAW AND AGENCY RELATIONSHIPS

Agency relationship is consensual in nature.
 Based on concept that parties mutually
agree:
– Agent will act on behalf of principal.
– Agent will be subject to principal’s direction
and control.

Agreement can be expressed or implied.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
4
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
AGENCY LAW AND AGENCY RELATIONSHIPS

Analysis of Agency Relationships:
– Was dispute between principal and agent?
– Agency formed voluntarily by principal and
agent, or is there other relationship?
– Did parties have capacity to perform roles as
principal and agent?
– What authority did principal vest on agent?
– Did agent enter into contract or commit a tort?
© 2004 West Legal Studies in Business
A Division of Thomson Learning
5
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
RESTRICTIONS ON CREATING
AN AGENCY RELATIONSHIP

Agency law affects broad range of
situations.
 Few restrictions on who can form agency
relationship.
 One restriction is agency agreement require
agent to perform legal acts.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
6
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
RESTRICTIONS ON CREATING
AN AGENCY RELATIONSHIP

Capacity to Be a Principal.
– With exception of minors and incompetents,
any person can appoint an agent.
– Generally any person having capacity to
contract can employ servant or nonservant
agent.

Capacity to Be an Agent.
– Anyone can be an agent.
– It is capacity of the principal that controls.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
7
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
RESTRICTIONS ON CREATING
AN AGENCY RELATIONSHIP

Duties an Agent Can Perform.
– Agents authorized to do almost any legal task.
– There are some non-delegable duties:
 Employer’s duty to provide safe working conditions.
 Person’s duty under certain contracts.
 Landlord duties to tenants.
 Common carrier’s duty to passengers.
 Duty of person engaged in inherently dangerous
work to take precautions.
– Non-delegable duties defined by state statutes.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
8
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
TYPES OF AGENCY RELATIONSHIPS

General and Special Agents.
– Special agent: employed to complete one
transaction or simple series of transactions, the
relationship covers limited period and is not
continuous.
– General agent: conduct series of transactions,
has more discretion to carry out employers’
business.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
9
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
TYPES OF AGENCY RELATIONSHIPS

General and Special Agents.
– Factors that determine agent’s status:
Number of acts agent must complete to
obtain an authorized result.
 Number of people that must be dealt with.
 Length of time necessary to obtain the
desired result.

© 2004 West Legal Studies in Business
A Division of Thomson Learning
10
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
TYPES OF AGENCY RELATIONSHIPS

Gratuitous Agents.
– Person volunteers services without an
agreement or expectation of payment.
– Requirements:


Person volunteered to help another.
Person being helped accepted this assistance.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
11
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
SERVANTS AND INDEPENDENT
CONTRACTORS

Most workers are servants or independent
contractors.
 Servants and employees are synonymous.
 Servants (Employees):
– Physically work for Master; and
– Master (employer) has right to control how task
accomplished.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
12
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
SERVANTS AND INDEPENDENT
CONTRACTORS

Servants:
– Distinction between servant and independent
contractor in determining liability for
employee’s conduct.
– Employer liable for physical acts of servant.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
13
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
SERVANTS AND INDEPENDENT
CONTRACTORS

Independent Contractors:
– Hired by employer to accomplish a task for
someone else.
– Hiring party does not control or subject to
control physical acts of independent contractor.
– Independent contractors who are agents have
fiduciary duties and can bind their principals of
contracts.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
14
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
SERVANTS AND INDEPENDENT
CONTRACTORS

Responsibility for Independent Contractors.
– Contract Liability: principals who engage
independent contractors as agents will be liable
on contract if contract was authorized.
– Tort Liability: independent contractor who is
injured while working generally can’t recover
from hiring party. Employees of independent
contractors have been permitted to recover from
independent contractor.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
15
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
SERVANTS AND INDEPENDENT
CONTRACTORS

Responsibility for Independent Contractors.
– Employer not liable for physical acts of
independent contractors unless hiring party:






Reserves right to supervise/control work.
Directs independent contractor to do something
wrong.
Knew about activity and did nothing to stop it.
Does not supervise independent contractor.
Careless in selecting independent contractor.
Independent contractor hired to commit crime and
engage in ultrahazardous activities.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
16
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DUTIES OF THE AGENT TO THE PRINCIPAL

Agent must protect interests of principal.
 Requires agent to perform certain duties:
– Duty of Good Faith (a fiduciary duty).
– Duty of Loyalty.
– Duty to Obey All Lawful Instructions.
– Duty to Act with Reasonable Care.
– Duty to Segregate Funds.
– Duty to Account for Funds.
– Duty to Give Notice .
© 2004 West Legal Studies in Business
A Division of Thomson Learning
17
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
DUTIES OF THE PRINCIPAL TO THE AGENT

Principal duties may be specified in the
contract between principal and agent.
 In general, principal has following
obligations to the agent:
– Pay agent per the agreement.
– Maintain proper accounts so compensation and
reimbursement will be correct.
– Provide agent with means to do the job.
– Continue employment for time period specified.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
18
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
TERMINATION OF THE AGENCY RELATIONSHIP

Agreement of Parties.
– Contract between principal and agent state
when it will end.

Agency at Will.
– Terminable at any time by either party after
notice.

Fulfillment of the Agency Purpose.
– Completion of work terminates.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
19
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
TERMINATION OF THE AGENCY RELATIONSHIP

Revocation.
– Principals revoke authority of agents to act on
their behalf.

Renunciation.
– Agent notifies principal they quit.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
20
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
TERMINATION OF THE AGENCY RELATIONSHIP

Operation of Law.
– Termination occurs automatically:
 Upon death of agent or principal.
 Either party becomes insane.
 Principal becomes bankrupt.
 Agent becomes bankrupts, if bankruptcy affects the
agency.
 Agency cannot be performed.
 Unforeseen events destroy the agency relationship.
 Change in law makes agency illegal.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
21
BUSINESS LAW: Cases & Principles
Davidson • Knowles • Forsythe 8th Ed.
TERMINATION OF THE AGENCY RELATIONSHIP

Importance of Notice.
– Early termination by either party, except by
operation of law, requires notice.
– Actual or constructive notice may be
acceptable.

Breach of Agency Agreement.
– If principal wrongfully revokes agent’s
authority, agent can sue for breach of express or
implied contract.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
22