AGENCY
RELATIONSHIPS:
AN OVERVIEW
Why do we care about agency
relationships? Because it is the fundamental concept on which other business or
other relationships are built, such as partnerships, corporations, trusts, and
the like!
An Agency
relationship is:
�
[T]he fiduciary relation which results from the manifestation of consent by one person to another that the other person shall act in
his behalf and is
subject to his control; and consent by the other so to act.
RESTATEMENT (SECOND) OF
AGENCY � 1(1).
� In other words, one person (the agent) agrees to do something for
another party (the principal), subject to the control of the other party, and
the other party (the principal) also agrees to the agreement.�
It simultaneously means the principal is bound (normally) by what the
agent does, since� the
agent is acts as if the principal were there him/herself.
It is a fiduciary and consensual relationship
between two �persons� where one person acts on behalf of the other person and
where the agent can form legal relationships on behalf of the principal.
It may be a business or personal
relationship.
It allows the principal the
ability, if you will, to be more than one place at a time, thereby expanding
their potential business opportunities.
� Simply stated, the agent acts for the principal as if it
were the principal acting
-and with the same authority- as
if it were the principal. �
Usually results in the following relationships:[4211.05]
a.
Principal and agent
b.
Employer (master) and employee (servant)
c. Principal
and
More on this later!
Definitions (some not in the text at this juncture):
●� Principal: The person or entity on whose behalf and subject to whose control an
agent acts.�� For
example, your boss at work.
�
Agent: A person who agrees to act on behalf of and
instead of his or her principal, subject to the
principal's control. A good example would be an insurance agent.
Generally, in a business relationship, the principal and
agent relationship requires being either an employee/employer relationship or an
�
Fiduciary: A
person who undertakes to act on behalf of and primarily for the benefit of another.� For example,
a trustee for a trust.
●� Fiduciary Duty: A duty arising from the trust
and confidence placed
in a fiduciary by those on whose behalf and for whose benefit he or she acts.
�
Person:�
a natural person, corporation, partnership or other recognized entity
EMPLOYER-EMPLOYEE or
INDEPENDENT CONTRACTOR RELATIONSHIPS? [4212]
� CONTRAST: Principal/Agent: Agent works for the benefit of
the principal and under its control. Agent has right to represent the principal
and make contracts with 3rd parties on behalf of principal.� HUGE responsibility and duty! More on this
later�
�
Employee: One who works for, and
receives payment from, an employer, whose working conditions and methods are controlled
by the employer, and for whose acts and omissions occurring in the scope of
employment the employer is liable.� A
classic agency relationship!
Now,
lets compare an employee� to an
�
Independent Contractor: One who does work for, and
receives payment from, an employer, but whose working conditions and
methods are not controlled by the employer, and for
whose acts and omissions the employer is not liable.� For example, a CPA is paid by a client whom
the CPA audits, but the CPA is free to review the records in any fashion they
�
Whether a worker is an employee or an independent
contractor may be determined by: (recall the principal is the employer)�� [4212.03]
(1) � How much direction and control the employer exercises over the details of the
person's work;
����������������������� (2)�� Whether
the person is engaged in an occupation or business distinct from that of the employer;
�������� ������������ ��(3)����
Who supplies tools used at
the place of work;
(4)
What degree of skill is required of the worker; and
(5)
the Duration of employment and method of payment.
This often becomes important for
various tax items, such as W-2 or 1099 income reporting.� Usually people like to say an employee is an
SIDEBAR: When
you hit the real world, BE VERY CAREFUL IF YOU DECIDE TO BE AN INDEPENDENT
CONTRACTOR, after all, you then have to come up with the full
social security load (12.4%), Medicare, and income tax!� This can be
devastating particularly when you no longer have the funds!!! (after the $$$ is long since spent)
AGENCY RELATIONSHIPS:
�FORMATION/CREATION� [4213]
� Agency by Agreement/Contract: An agency relationship
based on an express or implied agreement that the agent will act for the
principal.�
� Agency by Ratification: A confirmation by the principal of an act or contract
performed or entered into on his or her behalf by another, who assumed, without
authority, to act as his or her agent. May be oral or written, usually cannot be rescinded, is retroactively applied back to original date the alleged
contract was �made.�
� Agency by Estoppel: If a principal (NOT THE AGENT) holds out
to a third party that another is authorized to act on the principal's behalf,
and the third party deals with the other person accordingly, the principal may
not later deny that the other was the principal's agent for purposes of dealing
with that third party.� RARE!
�
Agency by Operation of Law: Agencies recognized by
courts -- e.g., family relationships, emergency situations -- in the absence of
any formal agreement, confirmation, or act or omission by the principal that
implied the agent's authority.� Usually
deals with necessities.�
�
Note that marriage is not
necessarily considered an agency relationship solely due to
the mere fact the couple is *married*. � �Recall an agency relationship results from manifestation of assent and
direction from one to another (don�t laugh, married folks!) �
�.
ACTUAL AUTHORITY [4225]
�
Express
Authority: Authority declared in clear, direct, and definite terms, orally or
usually in writing.
� Equal Dignity Rule: If a contract being executed by
an agent on the principal's behalf is in writing, most states require that the
agent's authority must also be in
writing; otherwise, the contract executed by the agent is voidable at the principal's option.
� The
equal dignity rule does not apply when the agent acts in the principal's
presence or when the agent's act is merely perfunctory (ministerial).
�
Power of
Attorney: A written document, usually notarized, authorizing an
agent to act for a principal.� [4211.1a]
����������������� (i)��� conferred by custom (�everyone in the job has
always done this��),
(ii) inferred from the position
the agent occupies (you would expect a vice president to be able to act on
behalf of the company), or
(iii) inferred as being reasonably
necessary
to carry out express authority (sign the contract).
APPARENT
AUTHORITY [4225]
� Apparent Authority:
Authority that arises when a principal, by either words or actions, causes a third party to believe that an agent has
authority to act, even though the agent has no express or implied
authority to act with regard to the particular matter at hand.
�
If the third party changes his or her
position in reliance on the principal's representations regarding the agent's
authority, the principal may be estopped from
denying that the agent had authority to act. Estopped
means �kings x, you can�t go back on the deal�
� Emergency Powers: When an unforeseen situation demands action to protect or preserve the property and rights of the principal, but
the agent is unable to contact the principal, the agent has emergency authority
to act on the principal's behalf.
�
Ratification:��� The express
or implied affirmation of a previously unauthorized
contract made by a purported agent. In summary:
��������� (1)�� The purported agent must have acted on behalf of the principal
who subsequently ratified the action;
��������������� (2)�� The principal must know all material facts involved in the transaction;
��������������� (3)�� The
agent's act must be affirmed in its entirety by the principal;
��������� (4)�� The
principal must have the legal capacity to affirm the transaction both
����������������� (a) at
the time the agent acts, and
����������������� (b) at
the time the principal ratifies;
������ �������� (5) The principal must affirm before
the third party withdraws from the transaction;
and (all of this stuff must exist!)
��������� (6)�� The
principal must observe the same formalities when he or she ratifies the act as
would have been required to authorize it initially.
AGENT'S DUTIES TO THE PRINCIPAL (Principal�s Rights) [4219]
� Loyalty:
An agent has the duty to act solely for
the benefit of his or her principal,
and not in the interest of
the agent or a third party. Moreover, any information or knowledge obtained in
the course of the agency is confidential. THE AGENT CANNOT PROFIT INDIVIDUALLY
WITHOUT
�
Obedience: An agent has the duty to follow all lawful and clearly stated instructions
of the principal. Why else would anyone agree to have an agent/principal
relationship???
�
Accounting: Unless otherwise agreed, an
agent has the duty to keep and make available
to the principal an account of all property and money received and paid out
on the principal's behalf, including gifts received from third persons.
� Performance: An agent impliedly agrees to
use reasonable diligence and skill (except
for a specialist, who is held to a higher degree of skill) in performing the
task in its entirety.� In other words,
due care.
� Notification: An agent is required to notify the principal of all matters that come to the agent's attention concerning the subject
matter of the agency.� As a result, the
principal must be in constant communication with the agent.
PRINCIPAL'S DUTIES� (Agent�s rights)
TO THE AGENT [4220]
� Compensation: When a
principal requests certain services from an agent, the principal has a duty to
pay the agent, in a timely manner, for those services rendered.
� Reimbursement:
Whenever an agent disburses sums of money to fulfill the principal's request or
to pay for necessary expenses incurred in the reasonable performance of his or
her duties, the principal has the duty to reimburse the agent.
�
Indemnification:����� Subject to the terms of the agency
agreement, the principal has a duty to compensate, or indemnify, the
agent for liabilities arising from the agent's lawful and authorized acts on
the principal's behalf.
�
Cooperation: A
principal has the duty to cooperate with the agent and to assist the agent in
performing his or her duties.
� Safe Working Conditions: A
principal has the duties (i) to provide its agents
and employees with safe working premises, equipment, and conditions, and (ii)
to inspect working conditions and warn agents and employees of unsafe areas.
PRINCIPAL'S REMEDIES [4223]
� Most principal-agent
relationships are governed by some actual or implied contract; therefore, most of the remedies available to a principal
are the same available to any plaintiff in a breach of contract case.� In other words, the principal can sue!!!
�
However, in the event that the agent violates her
fiduciary duties to the principal, the following may also apply:
o Constructive Trust: Anything an
agent obtains by virtue of the agency relationship belongs to the principal; therefore, a principal may sue to recover any benefits
retained by the agent.�
This is the reason anything developed in intellectual property while on
the job belongs to the employer, not the employee, although usually, but not
necessarily, �the
employer will allow the employee to share in the royalties.
o Avoidance: In the event that the agent breaches her contract
with the principal, the principal may elect to avoid any contract he entered
into with the agent.
o
Indemnification: To the
extent that the agent's breach causes harm to some third party, who then sues
the principal, the principal may seek indemnification from the agent.
LIABILITY FOR CONTRACTS:
AUTHORIZED
ACTS/CLASSIFICATION
�[4225, 4215, 4216]
A disclosed or partially
disclosed principal is liable to a third
party for a contract made by an agent who is acting within the scope of his or
her authority.
� Disclosed Principal: A principal whose identity is known to the
third party at the time the agent makes a contract for the principal with the
third party. For example, I go in and say I am representing my client, Mr. X,
on his behalf.
�
Partially Disclosed Principal: A principal whose identity is not known to the third party, but the third party does know that the
agent is representing some principal at the time the agent makes a
contract with the third party. In many states, the agent is also liable on a
contract with a partially disclosed principal.�
For example, maybe I am representing someone big, like Disney, and I am
buying some land for a new amusement park.�
If the seller knew it was Disney, the price would skyrocket.
�
Undisclosed Principal: When neither
the fact of agency nor the identity of the principal is disclosed by an agent
to the third party at the time a contract is made, the agent is presumed to be
acting on his or her own behalf, and will be liable as a party to the contract.
NOTICE: If, in fact, the agent was
authorized to act on behalf of the undisclosed principal, then the principal
will also be liable on the contract and subject to
indemnification. Here, I go in and
don�t say a word that I am representing someone else.�
LIABILITY FOR
CONTRACTS: UNAUTHORIZED
ACTS (by Agent) [4225, 4226]
� If an unauthorized agent contracts with a third
party, the principal cannot be held liable on the contract, regardless of
whether the principal was disclosed, partially disclosed, or undisclosed. Rather, the agent will be solely liable.
� However, if the third party knows or should know at the time of the contract
that the agent lacks authority to contract on behalf of the principal, the
agent will not be liable to the third party.
PRINCIPAL�S LIABILITY FOR AGENT'S TORTS [4227]
� Respondeat Superior: The doctrine by which an employer or other principal is liable, along
with the agent or employee, for any tort committed by the agent or employee
while acting within the scope of
their agency or employment.
�
To determine whether a tort was within the scope of
agency or employment, courts look at the following:
(1)
whether the act was authorized;
����������������� (2)�� the time, place, and
purpose of the act;
(3)�� whether the act was one commonly performed by employees on
behalf of their employers;
(4)�� whether the employer's interest was advanced;
����������������� (5)�� whether the
employee's interests were involved;
(6)�� whether the employer furnished the means or instrumentality
by which the injury was inflicted;
(7)�� whether the employer had reason to know; and
����������������� (8)�� whether the act
involved a serious crime.
Generally the principal is not responsible for the
torts of an
�
"Frolics": A
principal is not liable for the acts of an agent
who substantially departs from the
principal's business.� For example,
someone takes the company truck to
� Borrowed
Servants: A
principal may be liable for the acts of an agent "lent" to another if
the principal retained the primary right to control the agent's
activities.
� Dangerous
Conditions: A
principal is charged with know�ledge of any dangerous conditions discovered by
an agent and pertinent to the agency regardless of whether
the agent actually informs the principal of the condition.
� Intentional
Torts: Principals
are liable only for those intentional torts that are committed within the
course and scope of the agent's actions on behalf of the principal.
�
Crimes: A principal is not liable
for an agent's crime if the
agent independently undertook the crime.
�
Subagents: A principal is liable for the acts of
subagents hired by an agent authorized to hire subagents.
AGENCY RELATIONSHIPS: TERMINATION [4229]
�
By Act of
the Parties: An agency may be terminated by any of the
following:
(1)
lapse of time;
(2)
accomplishment of particular purpose for
agency;
(3)
occurrence of a specific event (closed the deal, for example);
����������������� (4)�� mutual agreement of the agent and principal; and
(5) renunciation (by the agent) or revocation (by the
principal) of the agent's authority.
�
By Operation of Law: An agency may also terminate as
a matter of law due to:
(1)
death or
incompetence of the agent or principal;
(2)
impossibility
of performance;
(3)
materially changed circumstances; and/or
(4)
bankruptcy of the principal or agent.
The principal should also
give notice to 3rd parties of the termination of the agency to
anyone that has dealt with the agent, which includes �published� notice.