Chapter 29
Agency Formation and Termination
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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The Nature of Agency
• Agency relationships are formed
by the mutual consent of a
principal and an agent.
• Agency is the fiduciary
relationship “which results from the
manifestation of consent by one
person to another that the other
shall act in his behalf and subject
to his control, and consent by the
other so to act.”
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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The Nature of Agency
(continued)
• Agency Law – The large body of
common law that governs
agency.
– A mixture of contract law and
tort law.
• Principal – The party who employs
another person to act on his or her
behalf.
• Agent – The party who agrees to
act on behalf of another.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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The Principal-Agent
Relationship
Principal’s
obligation to
perform the
contract
Principal
Agency
Contract
Agent
Third Party
Contract with third
party on behalf of
principal
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Persons Who Can Initiate an
Agency Relationship
• Any person who has the capacity
to contract can appoint an agent
to act on his or her behalf.
• Persons who lack contractual
capacity cannot appoint an
agent.
– e.g., insane persons and minors
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Persons Who Can Initiate an
Agency Relationship (continued)
• An agency can be created only
to accomplish a lawful purpose.
• Agency contracts that are
created for illegal purposes or are
against public policy are void and
unenforceable.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Kinds of Employment Relationships
Employer-Employee
Relationship
Principal-Agent
Relationship
Principal-Independent
Contractor Relationship
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Employer-Employee
Relationship
• A relationship that results when an
employer hires an employee to
perform some form of physical
service.
• An employee is not an agent
unless he or she is specifically
empowered to enter into
contracts on the principal
employer’s behalf.
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Principal-Agent Relationship
• An employer hires an employee
and gives that employee authority
to act and enter into contracts on
his or her behalf.
• The extent of this authority is
governed by any express
agreement between the parties
and implied from the
circumstances of the agency.
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Principal-Independent
Contractor Relationship
• Principals employ persons or
businesses who are not employees
to perform certain tasks on their
behalf.
– These persons and businesses
are called independent
contractors.
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Principal-Independent
Contractor Relationship (continued)
• A principal can authorize an independent
contractor to enter into contracts.
– Principals are bound by the authorized
contracts of their independent
contractors.
• The crucial factor in determining
whether a person is an employee or
an independent contractor is the
degree of control that the principal
has over that person.
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Summary: Kinds of Employment Relationships
Type of
Relationship
Description
EmployerEmployee
The employer has the right to control the
physical conduct of the employee.
Principal-Agent
The agent has the authority to act on behalf
of the principal as authorized by the
principal and implied from the agency.
An employee is often the agent of his
employer.
PrincipalIndependent
Contractor
The principal has no control over the details
of the independent contractor’s conduct.
An independent contractor is usually not an
agent of the principal.
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Formation of the Agency
Relationship
Express
Agency
Agency by
Ratification
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
Implied
Agency
Apparent
Agency
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Express Agency
• An agency that occurs when a
principal and an agent expressly
agree to enter into an agency
agreement with each other.
– Exclusive agency contract
– Power of attorney
• Express agency contracts can be
either oral or written unless the
Statute of Frauds stipulates that
they must be written.
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Implied Agency
• An agency that occurs when a
principal and an agent do not
expressly create an agency.
• The agency is implied from the
conduct of the parties.
• The extent of the agent’s authority
is determined from the particular
facts and circumstances of the
particular situation.
– Incidental authority is the
implied authority to act.
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Apparent Agency
• Agency that arises when a
principal creates the appearance
of an agency that in actuality
does not exist.
• When an apparent agency is
established, the principal is
estopped from denying the
agency relationship.
• It is the principal’s actions that
create an apparent agency.
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Agency by Ratification
An agency that occurs when:
1. A person misrepresents himself or
herself as another’s agent when
in fact he or she is not, and
2. The purported principal ratifies
(accepts) the unauthorized act.
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Summary: Formation of Agency Relationships
(1 of 2)
Type of
Agency
Definition
Enforcement of the
Contract
Express
Authority is
expressly given to
the agent by the
principal.
Principal and third
party are bound to the
contract.
Implied
Authority is implied
from the conduct of
the parties, custom
and usage of trade,
or act incidental to
carrying out the
agent’s duties.
Principal and third
party acts are bound to
the contract.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Summary: Formation of Agency Relationships
(2 of 2)
Type of
Agency
Definition
Enforcement of the
Contract
Apparent
Authority created
when the principal
leads a third party
into believing that
the agent has
authority.
Principal and third
party are bound to the
contract.
By
Acts of the agent
Ratification committed outside
the scope of his
authority.
Principal and third
party are not bound to
the contract unless the
principal ratifies the
contract.
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Principal’s Duties
•
•
The principal has a duty to
compensate an agent for services
provided within a mutually
agreeable time.
If the agent spends his or her own
money, on the principal’s behalf, the
principal owes a duty to reimburse
the agent for all such expenses if
they were:
1. Authorized by the principal.
2. Within the scope of the agency.
3. Necessary to discharge the agent’s
duties in carrying out the agency.
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Principal’s Duties
(continued)
• A principal owes a duty to
indemnify the agent for any losses
the agent suffers because of the
principal. Such duty arises when
the agent is held liable for the
principal’s misconduct.
• The principal owes a duty to
cooperate with and assist the
agent in the performance of the
agent’s duties and
accomplishments of the agency.
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Agent’s Duties
• An agent who enters into a
contract with a principal
has two distinct obligations.
• Collectively, these are
referred to as the agent’s
duty of performance.
–
–
Performing the lawful duties
expressed in the contract
Meeting the standards of
reasonable care, skill, and
diligence implicit in all
contracts.
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Agent’s Duties
(continued)
• Duty of notification
– The agent’s has a duty to notify
the principal of any information
that is important,
– Imputed knowledge
• Duty of accountability
– Agent has duty to maintain
accurate accounting of all
transactions undertaken on the
principal’s behalf.
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Termination of an Agency
• An agency contract is similar to
other contracts in that it can be
terminated by:
– Acts of the parties, or
– Operation of law
• Once an agency relationship is
terminated, the agent can no
longer represent the principal or
bind the principal to contracts.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Termination by Acts of the
Parties
1.
2.
3.
4.
An agency may be terminated
by the following acts of the
parties:
Mutual agreement
Lapse of time
Purpose achieved
Occurrence of a specified
event
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Notification Required
• The principal is responsible to
give certain third parties
notification of the agency
termination.
– Parties who dealt with the
agent must be given direct
notice
– Parties who have knowledge of
the agency must be given
direct or constructive notice
– Parties who have no
knowledge of the agency are
owed no notice
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Irrevocable Agency
• An agency coupled with an
interest:
– Special type of agency
relationship
– Irrevocable by the principal
– Not terminated by the death or
incapacity of either the
principal or the agent
– Terminates only when the
agent’s obligations are
performed
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Termination by Operation of
Law
1.
2.
3.
4.
5.
6.
An agency is terminated by
operation of law, including:
Death of the principal or agent
Insanity of the principal or agent
Bankruptcy of the principal
Impossibility of performance
Changed circumstances
War between the principal’s
and agent’s countries
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Wrongful Termination of an
Agency or Employment Contract
• The termination of an agency
contract in violation of the terms
of the agency contract.
• The nonbreaching party may
recover damages from the
breaching party.
• The distinction between the
power and the right to terminate
an agency is critical.
– Revocation of authority
– Renunciation of authority
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