AGENCY FORMATION AND TERMINATION Agency Relationships

AGENCY FORMATION AND TERMINATION

Agency Relationships § Formed by the mutual consent of principal and agent. § Agency is a 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. ”

Agency § Agency Law – Body of common law that governs agency. – 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.

Principal-Agent Relationship Principal Agency Contract Principal’s obligation to perform the contract Third Party Agent Contract with third party on behalf of principal

Who Can Initiate 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. – Court may appoint guardian who may act as agent of such persons.

Purpose of Agency Relationship § 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. – E. g. , contract to hire agent to commit crime.

Kinds of Employment Relationships Principal-Agent Relationship Employer-Employee Relationship Principal-Independent Contractor Relationship

Independent Contractor and Agency Status § Principal can authorize independent contractor to enter into contracts. – E. g. , authorize attorney to enter into settlement agreement on client’s behalf. § Principal liable for authorized contracts of independent contractors.

Summary: Kinds of Employment Relationships Type of Relationship Description Principal-Agent The agent has the authority to act on behalf of the principal as authorized by the principal and implied from the agency. Employer. Employee The employer has the right to control the physical conduct of the employee. An employee is often the agent of his employer. Principal. Independent 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.

Formation of the Agency Relationship Express Agency by Ratification Implied Agency Apparent Agency

Summary: Formation of Agency Relationships (1 of 2) Type of Agency Express Implied Definition Authority is expressly given to the agent by the principal. Authority is implied from the conduct of the parties, custom and usage of trade, or act incidental to carrying out the agent’s duties. Enforcement of the Contract Principal and third party are bound to the contract.

Summary: Formation of Agency Relationships (2 of 2) Type of Agency Apparent Definition Authority created when the principal leads a third party into believing that the agent has authority. By Acts of the agent Ratification committed outside the scope of his authority. Enforcement of the Contract Principal and third party are bound to the contract. Principal and third party are not bound to the contract unless the principal ratifies the contract.

Principal’s Duties § Principal compensates agent for services provided, unless is gratuitous agent. § Principal indemnifies agent for authorized expenses or losses suffered because of the principal. § Principal cooperates with and assists agent in performance of agent’s duties.

Agent’s Duties § Agent must perform. – Performing the lawful duties expressed in the contract. – Meeting the standards of reasonable care, skill, and diligence implicit in all contracts. § Agent must notify principal of relevant information. § Agent must maintain accurate accounting of all transactions and money received. – Money or other benefits belong to principal; held in constructive trust.

Termination of Agency by Act of Parties § Parties may terminate agency by agreement or by their actions. – Mutual agreement. – Lapse of time. – Purpose achieved. – Occurrence of specified event.

Notification Required § If agency terminated by agreement of parties, principal must notify third parties of termination of agency. – Parties who dealt with the agent given direct notice. – Parties who have knowledge of the agency given direct or constructive notice. E. g. , legal notice in newspaper. – Parties who have no knowledge of the agency owed no notice. § If proper notice not given, agent continues to have apparent authority.

Agency Coupled with an Interest § Agency created for agent’s benefit. – E. g. , if debtor fails to pay debt, creditor/agent authorized to sell debtor’s property. § Irrevocable by principal. § Not terminated by death or incapacity of either principal or agent. § Terminates only when agent’s obligations are performed.

Termination of Agency or Employment Contract § Contracts that do not specify a definite time for termination may be terminated at will by either party without liability. – Principal revokes authority. – Agent renounces authority.

Wrongful Termination of Agency or Employment Contract § Termination of agency contract in violation of its terms. § Nonbreaching party may recover damages. § Critical distinction between power and right to terminate an agency.

Termination by Operation of Law § § § Death of principal or agent. Insanity of principal or agent. Bankruptcy of principal. Changed circumstances. War between principal’s and agent’s countries. Impossibility • • • Loss or destruction of subject matter of agency. Loss of required qualification by agent. Change in law making agency illegal.

LIABILITIES OF PRINCIPALS, AGENTS, AND INDEPENDENT CONTRACTORS © 2010 Pearson Education, Inc. , publishing as Prentice-Hall

Agent’s Duty of Loyalty § Fiduciary duty not to act adversely to the interests of the principal. § Common breaches – – – Self-dealing Usurping an opportunity Competing with principal Misuse of confidential information Undisclosed dual agency

Tort Liability to Third Parties § Principal and agent each personally liable for their own tortious conduct. § Principal liable for tortious conduct of agent acting within the scope of authority. § Agent liable for tortious conduct of principal only if agent directly or indirectly participates in or aids and abets the principal’s conduct.

Scope of Authority § Was act specifically requested or authorized by principal? § Was it kind of act agent employed to perform? § Did act occur within time period of employment? § Did act occur at place of employment? § Was agent advancing principal’s purpose?

Negligence § Principals liable for negligent conduct of agents acting within the scope of their employment. – Principal derives benefits from acting through agent, and therefore should also bear liability. – Liability based on the common law doctrine respondeat superior.

Negligence (continued) § Frolic and Detour: Principal may not be liable. § Coming and Going: Principal generally not liable for injuries caused by agents and employees on their way to or from work. § Dual-Purpose Mission: Principal generally liable.

Intentional Torts § Principal not liable for intentional torts of agents and employees that are committed outside the principal’s scope of business. § Two tests determine scope of employment boundaries: – Motivation Test – Work-Related Test

Misrepresentation § Principal is liable for intentional and innocent misrepresentations made by agent within scope of employment. – Intentional misrepresentation occurs when an agent makes statements that he or she knows are untrue. – Innocent misrepresentation occurs when an agent negligently makes misrepresentation.

Contract Liability to Third Parties § Principal who authorizes agent to enter into a contract with third party is liable on the contract. § Third party can enforce and recover damages from principal. § Agent also can be held liable in some circumstances.

Fully Disclosed Agency § Third party entering into the contract knows: – That agent is acting as an agent for a principal, and – Actual identity of the principal. § Principal is liable to the third party. § Agent is not liable.

Partially Disclosed Agency – Agent discloses agency status but does not reveal the principal’s identity, and – Third party does not know the principal’s identity from another source. – Both principal and agent are liable to the third party if principal fails to perform the contract.

Undisclosed Agency § Third party is unaware of: – Existence of an agency, and – Principal’s identity § Both principal and agent are liable to the third party if the principal fails to perform.

Agent Exceeding Scope of Authority § Agent who enters into a contract on behalf of another party impliedly warrants that he or she has the authority to do so. § If agent exceeds the scope of his or her authority, principal is not liable on the contract unless the principal ratifies it. § Agent is liable to the third party for breaching implied warrant of authority.

Tort Liability of Principals and Agents to Third Parties (1 of 2) Agent’s Conduct Agent Principal Liable Misrepresentation Yes Negligence Yes Principal is liable for the intentional and innocent misrepresentations made by agent acting within the scope of his or her authority. Principal is liable under doctrine of respondeat superior if agent’s negligent act was committed within scope of employment.

Tort Liability of Principals and Agents to Third Parties (2 of 2) Agent’s Conduct Agent Principal Liable Intentional Tort Yes Motivation Test: Principal is liable if agent’s motivation in committing the tort was to promote the principal’s business. Intentional Tort Yes Work-Related Test: Principal is liable if agent committed the tort within work-related time and space.

Independent Contractor § Person not subject to principal’s control. – E. g. , outside counsel, building contractor. § Factors in determining independent contractor status: – Worker engaged in distinct occupation or independent business. – Worker engaged only for short time. – Worker supplies own tools. – Etc.

Liability for Independent Contractor’s Contracts § Principal liable if contractor authorized to act as agent. § Principal bound on authorized contracts. § Contractor not liable for authorized contracts.

Liability for Independent Contractor’s Torts § Principal generally not liable for torts of independent contractors. § Principal may be liable for: – Contractor’s inherently dangerous activities; E. g. , repossessing cars. – Negligent selection of contractor. § Independent contractors personally liable for their own torts.