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Quotes of the Day

“If you want something done right, do it yourself.”

“Many hands make light work.”

-- Anonymous folk sayings

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.

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).

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.

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.

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.

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.

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.

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.

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

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.

Principal’s Liability for Contracts

The principal is bound by the acts of an agent if:

the agent has authority, or

the principal, for reasons of fairness, is estopped from denying that the agent had authority, or

the principal ratifies the acts of the agent.

Authority

A principal is bound by the acts of an agent if the agent has authority.
A principal is also bound by the acts of subagents – those hired by his agent.
There are three types of authority: express, implied, and apparent.

Only express and implied are actual authority.

In apparent authority, the agent seems to be authorized, but is not. The principal is still bound by the agent’s actions.

Actual Authority

Express Authority

Granted by words or conduct that, reasonably interpreted, cause the agent to believe the principal desires her to act.

In ambiguity about the principal’s intent, the courts look at the principal’s objective manifestation not his subjective intent.

Implied Authority

Unless otherwise agreed, authority to conduct a transaction includes authority to do acts that are reasonably necessary to accomplish it.

Apparent Authority

A principal can be liable for the acts of an agent who is not, in fact, acting with authority if the principal’s conduct causes a third party reasonably to believe that the agent is authorized.
An agent with actual authority may perform an act beyond the scope of that authority. If the action appears to the third party to be within the scope of the authority, the principal will be bound.

Estoppel and Ratification Defined

Estoppel

No one may claim that a person was not his agent, if he knew that others thought the person was acting on his behalf, and he failed to correct their belief.

Ratification

If a person accepts the benefit of an unauthorized transaction or fails to repudiate it, then he is as bound by the act as if he had originally authorized it.

Estoppel and Ratification Distinguished

Estoppel and ratification are easy to confuse.

Ratification applies when the principal accepts the benefits of the contract.

Estoppel applies when the principal does not want the benefit of the contract, but delays in telling the innocent third party of the mistake.

Agent’s Liability: Contracts

Fully Disclosed Principal

An agent is not liable for any contracts.

Partially Disclosed Principal

Third party can recover from either the agent or the principal.

Undisclosed Principal

Third party can recover from either the agent or the principal.

Unauthorized Agent

The principal is not liable and the agent is.

Exceptions to the Rule on Undisclosed Principals

A third party is not bound to the contract with an undisclosed principal if:

The contract specifically provides that the third party is not bound to anyone other than the agent, or

The agent lies about the principal because she knows the third party would refuse to contract with him.

Principal’s Liability for Torts

A principal may be liable for the torts of a servant but generally is not liable for the torts of an independent contractor.

A master (principal) is liable for physical harm caused by the negligent conduct of servants (agent) within the scope of employment.

The principal is liable for the physical torts of an independent contractor only if the principal has been negligent in hiring or supervising.

Principals are only liable for torts that a servant commits within the scope of employment.

Servant vs. Independent Contractor

“Yes” responses to these questions may indicate a servant, or employee, relationship:

Does the principal control details of the work?

Does the principal supply tools and place of work?

Does the agent work full-time for the principal?

Is the agent paid by time, rather than by job?

Is the work part of the regular business of the principal?

Do the parties believe they have an employee-employer relationship?

Negligent Hiring

The principal is liable for the torts of an independent contractor if the principal has been negligent in hiring or supervising her.

Scope of Employment

Authorization

An act is within the scope of employment, even if expressly forbidden, if it is of the same general nature as that authorized or if it is incidental to the conduct authorized.

Abandonment

The master is liable for the actions of the servant that occur while the servant is at work, but not for actions that occur after the servant has abandoned the master’s business.

Negligent & Intentional Torts

The master is liable if the servant commits a negligent tort that causes physical harm to a person or property.
A master is not liable for the intentional torts of the servant unless the servant was motivated, at least in part, by the desire to serve the master, or the conduct was reasonably foreseeable.

Physical & Non-Physical Harm

A master is liable for negligent conduct of a servant that causes physical harm, if it is within the scope of employment.
With negligent conduct of a servant that causes non-physical harm (harm to reputation or finances), the principal is liable only if the servant acted with actual or apparent authority.
Misrepresentation and defamation are treated differently from other non-physical harms. (See next slides.)

Misrepresentation

A principal is liable if:

The agent makes misrepresentation,

The agent has express, implied, or apparent authority,

The third party relies on the misrepresentation; and

The third party suffers harm.

Defamation

A principal is liable if:

The agent makes a defamatory statement;

The agent has express, implied, or apparent authority; and

The third party is harmed by the statement.

Agent’s Liability For Torts

Agents are always liable for their own torts, even if the principal is also liable.

Agents and principals are jointly and severally liable, which means that the injured party may sue either one or both, as she chooses.

The injured party may not recover twice, but may recover partially from both parties.

The principal can sue the agent, if the injured party recovers from the principal.

“It is virtually impossible to run a business without using agents. But using an agent dramatically increases the risk of liability.”