Chapter 31
Agency Formation and Duties
© 2004 West Legal Studies in Business
A Division of Thomson Learning
1
Introduction
Agency=Principal and Agent.
Agency is the most common and most important
legal relationship.
Understanding agency is crucial to understanding
the legal environment of business.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
2
Introduction [2]
Principals use agents to be able to conduct
multiple business operations simultaneously in
various locations.
The principal has the right to control the agent in
matters entrusted to the agent.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
3
§ 1: Agency Relationships
 Agency is a “fiduciary” relationship based on trust and
confidence.
 Distinguish Employee vs. Independent Contractor
Relationships.
Employer
Employee
© 2004 West Legal Studies in Business
A Division of Thomson Learning
Independent
Contractor
4
Factors: Employee or Independent
Contractor Status
Factors Courts Consider:
E’ee
I.C.
Does the Employer exercise a great degree of control over the
details of the work?
Yes
No
Is the worker engaged in an occupation or business distinct from
Employer?
No
Yes
Is the work usually done under Employer’s supervision?
Yes
No
Does Employer provide the tools?
Yes
No
Has the worker been employed a long time?
Yes
No
Is the worker paid at the end of the job?
No
Yes
Is there a great degree of skill required?
No
Yes
© 2004 West Legal Studies in Business
A Division of Thomson Learning
5
Employer Liability
Determining whether the worker is an
employee or an independent contract affects
liability of Principal/Employer.
 Tax Liability: Employer liable if employee.
 Contract Liability: Employer not necessarily liable.
 Tort Liability: Employer liable for torts of employee
within scope of employment.
 Works for Hire. Case 31.1: Graham v. James
(1998).
© 2004 West Legal Studies in Business
A Division of Thomson Learning
6
§2: Formation of the
Agency Relationship
Consensual Agreement.
No consideration required.
Principal needs contractual capacity, Agent does
not.
For any legal purpose.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
7
Types of Agencies
Agency by Agreement.
Agency by Ratification.
Agency by Estoppel.
Agency by Operation of Law.
 Necessaries for family.
 Emergency.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
8
Agency By Agreement
 Formed through express consent (oral or
written) or implied by conduct.
Case 31.2: Acordia of Virginia Insurance
Agency v. Genito Glenn (2002).
© 2004 West Legal Studies in Business
A Division of Thomson Learning
9
Agency by Ratification
Principal either by act or by agreement ratifies
conduct of a person who is not in fact an agent.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
10
Agency by Estoppel
Principal causes a third person to believe that
another person is the Principal’s Agent, and the
third person acts to her detriment in reasonable
reliance on that belief.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
11
Agency by Operation of Law
Agency based on social duty is formed in certain
situations when the Agent is unable to contact the
Principal.
 Necessaries.
 Emergencies.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
12
Agent’s Duties to Principal
Performance: reasonable diligence and skill
(special skills).
Notification to P.
Loyalty (no conflict of interest).
 Case 31.3: American Express v. Topel (1999).
Obedience.
Accounting.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
13
Principal’s Duties to Agent
Compensation (Express or Implied).
Reimbursement and Indemnification.
Cooperation.
Provide safe working conditions.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
14
§ 4: Rights and Remedies of
Agents and Principals
Rights of Agents:
 Right to compensation, reimbursement,
indemnification and cooperation.
 Agent can withhold performance and demand an
accounting.
 Agent can recover damages for past services and
future damages.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
15
Rights and Remedies of
Agents and Principals
Principal’s Rights and Remedies:
 Contract remedies for breach of fiduciary duty and
performance.
 Can sue in tort: libel, slander, trespass, deceit, fraud.
 Constructive Trust – money/ property agent steals
from Principal.
 Avoidance of contract if agent does not do as told.
 Indemnification
© 2004 West Legal Studies in Business
A Division of Thomson Learning
16
Law on the Web
Agency at Cornell U.
Legal Research Exercises on the Web.
© 2004 West Legal Studies in Business
A Division of Thomson Learning
17