Creating an Agency Relationship: Understanding Roles and Responsibilities in Agency Law

1. Chapter 16 Agency Law

2. Quote of the Day “If you want something done right, do it yourself.” “Many hands make light work.” Anonymous folk sayings

3. 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: • Principal: Person who has someone else acting on him • Agent: Person who acts for someone else • Who mutually consent that the agent will act on behalf of the principal • Be subject to the principal’s control • Creating a fiduciary relationship

4. Creating an Agency Relationship • Consent – Principal must ask the agent to do something: • Agent must agree • Control – Principals are liable for the acts of their agents • They exercise control over the agents • Fiduciary relationship – Trustee acts for the benefit of the beneficiary • Agents have a fiduciary duty to their principals

5. Creating an Agency Relationship • Elements not required for an agency relationship include: • A written agreement • Equal dignities rule: If an agent is empowered to enter into a contract that must be in writing, then: • The appointment of the agent must also be written • Formal agreement • Compensation

6. Duties of Agents 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

7. Duties of Agents to Principal • Duty of loyalty - The agent: • 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

8. Other Duties of an Agent • An agent must obey the 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 he/she is expected to use those skills • Agent must provide 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

9. 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 a disloyal agent

10. Duties of Principal to Agent • Duty to reimburse the agent for reasonable expenses – Three categories • Principal must indemnify an agent for expenses reasonably incurred in carrying out his agency responsibilities • Principal must indemnify an agent for tort claims brought by a third party if: • Principal authorized the agent’s behavior and the agent did not realize he was committing a tort

11. Duties of Principal to Agent • Duty to reimburse the agent for reasonable expenses – Three categories • Principal must indemnify the agent for any liability she incurs from third parties as a result of: • Entering into a contract on the principal’s behalf, including attorney’s fees and reasonable settlements

12. Duties of Principal to Agent • Duty to cooperate • Principal must furnish the agent with the opportunity to work • Principal cannot reasonably interfere with the agent’s ability to accomplish his task • Principal must perform his/her part of the contract

13. Terminating an Agency Relationship • Termination by agent or principal • Three choices in terminating the relationship • Term agreement • Time • Achieving a purpose • Mutual agreement • Agency at will • Wrongful termination

14. Terminating an Agency Relationship • Principal or agent can no longer perform required duties • Failure to obtain license • Bankruptcy • Death or incapacity of the principal or agent • Disloyalty of agent • Change in circumstances • Change of law • Loss or destruction of subject matter

15. Terminating an Agency Relationship • 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

16. Principal’s Liability for Contracts • The principal is bound by the acts of an agent if: • The agent had authority • The principal ratifies the acts of the agent

17. Authority • A principal is bound by the acts of an agent if the agent has authority • There are three types of authority • Express - Granted by words or conduct that: • Reasonably interpreted, cause the agent to believe the principal desires her to act • Implied - Authority to conduct a transaction includes: • Authority to do acts that are reasonably necessary to accomplish it

18. Authority • Apparent - Principal can be liable for the acts of an agent who is not acting with authority if: • Principal’s conduct causes a third party reasonably to believe that the agent is authorized

19. Ratification and Subagents • 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 • Subagents • Intermediary agent – Someone who hires subagents for the principal • When an agent is authorized to hire a subagent: • Principal is as liable for the acts of subagent as he is for the acts of regular agent

20. Agent’s Liability for Contracts • Fully disclosed principal • An agent is not liable for any contracts • Unidentified principal • Third party can recover from either the agent or the principal

21. Agent’s Liability for Contracts • Undisclosed principal • Third party can recover from either the agent or the principal • Third party is not bound to the contract with an undisclosed principal if: • Contract provides that the third party is not bound to anyone other than the agent • Agent lies about the principal because she knows the third party would refuse to contract with him

22. Agent’s Liability for Contracts • Unauthorized agent • The principal is not liable and the agent is

23. Principal’s Liability for Torts • Employer is liable for a tort committed by its employee acting within the scope of employment or acting with the authority • Two kinds of agents • Employees • Independent contractors • Principal may be liable for the torts of an employee but generally is not liable for the torts of an independent contractor

24. Employee or Independent Contractor • Courts consider whether: • Principal supervises details of the work • Principal supplies the tools and place of work • Agents work full time for the principal • Agents receive a salary or hourly wages • Work is part of regular business of the principal • Principal and agents believe they have employer-employee relationship • Principal is in business

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

26. Difference in Liability between an Employee and an Independent Contractor

27. Scope of Employment • Principals are liable only for torts that an employee commits • An employee is acting within the scope of employment if the act: • Is one that employees are responsible for • Takes place during hours that employee is employed • Is part of the principal’s business • Is similar to the one the principal authorized • Is one for which the principal supplied the tools • Is not seriously criminal

28. Scope of Employment • Authorization • An act is within the scope of employment if: • Expressly forbidden • It is of the same general nature as that authorized • It is incidental to the conduct authorized • Abandonment • The principal is liable: • For the actions of the employee that occur while the employee is at work • Not for actions that occur after the employee has abandoned the principal’s business

29. Intentional Torts • Principal is not liable for the intentional torts of an employee unless: • Employee is intended to serve some purpose of the employer • Employer was negligent in hiring or supervising this employee

30. Physical or Non-Physical Harm • Physical torts – Principal is liable for the negligent conduct of an employee that occurs within the scope of employment • Nonphysical torts – Principal is liable if the employee if the employee acted with express, implied, or apparent authority

31. Agent’s Liability For Torts • Agents are always liable for their own torts, even if the principal is also liable • Principal and the agent are jointly and severally liable • Injured party can sue either one or both

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