Chapter 18
Agency Law
The Agency Relationship

Agency relationships are formed by the mutual
consent of a principal and an agent.
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Principal
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Agent
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The party who agrees to act on behalf of another
Agency
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The party who employs another person to act on his or her
behalf
The principal-agent relationship
Any person who has capacity to contract can
appoint an agent.
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Employment Relationships

Employer-employee
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A relationship that results
when an employer hires an
employee to perform some
form of physical service
Principal-agent

A relationship that results
when an employer hires an
employee and gives that
employee authority to act
and enter into contracts on
his or her behalf
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Formation of an Agency

Express agency
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An agency that occurs when a principal and an agent
expressly agree to enter into an agency agreement
with each other
A power of attorney is a formal type of agency
agreement.
Implied agency

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An agency that occurs when a principal and an agent
do not expressly create an agency, but it is implied
from the conduct of the parties
Incidental authority
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18-4
Formation of an Agency
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Apparent agency (agency by estoppel)
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Agency that arises when a principal creates the
appearance of an agency that in actuality does not
exist
Agency by ratification

Agency that occurs when
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A person misrepresents himself or herself as another’s agent
when in fact he or she is not.
The purported principal ratifies (accepts) the unauthorized
act.
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Duties of Principals

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Duty of compensation
Duty of reimbursement
and indemnification
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Reimburse expenses
Indemnify for losses
suffered
Duty of cooperation
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18-6
Agent’s Duties
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Duty of performance
Duty of notification
Duty of accountability
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Agent’s Duties
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Duty of loyalty
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Self-dealing
Usurping an opportunity
Competing with the principal
Misuse of confidential information
Dual agency
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18-8
Tort Liability to Third Parties


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Principal and agent are each liable for
their own torts.
Principal is liable for agent’s torts while
agent is acting within the scope of
authority.
Agent is not liable for principal’s torts
unless he or she participates in or aids
and abets principal’s conduct.
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18-9
Liability for Negligence


Principal is liable for
agent’s negligence if
agent is acting within
the scope of
employment.
Respondeat superior –
principal is vicariously
liable for agent’s
negligence.
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18-10
Frolic and Detour

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When an agent does
something during the
course of his or her
employment to further
his or her own interests
rather than the
principal’s
Principal is generally
relieved of liability if the
detour is substantial.
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18-11
“Coming and Going” Rule

A principal is generally not liable for
injuries caused by its agents and
employees while they are on their way
to or from work.
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18-12
Dual-Purpose Mission

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An errand or other act that a principal
requests of an agent while the agent is on
his or her own personal business
Most jurisdictions hold both principal and
agent liable if agent injures a third party
while on dual-purpose mission.
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18-13
Liability for Intentional Torts


Principal is not liable for agent’s
intentional torts that are committed
outside the scope of business.
Principal may be vicariously liable for
intentional torts committed by agent
acting within the scope of business.


Motivation test
Work-related test
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18-14
Misrepresentation


Principal is liable for agent’s intentional
or innocent misrepresentation made by
agent acting in the scope of
employment.
Third party’s options


Rescind the contract and recover
consideration.
Affirm the contract and recover damages.
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18-15
Contract Liability to Third Parties
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Fully disclosed agency
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Principal is liable
Agent is not liable
Partially disclosed agency
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Third party is aware of
agency status but does not
know the identity of the
principal.
Both principal and agent are
liable.
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18-16
Contract Liability to Third Parties
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Undisclosed agency
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Third party is unaware of the agency.
Both principal and agent are liable.
Agent exceeding scope of authority
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Agent breaches the implied warranty of
authority.
Principal is not liable unless he or she ratifies
the contract.
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18-17
Independent Contractor
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Degree of control that principal has over
agent is the crucial factor in determining
status.
Other factors for determining independent
contractor status include:
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Distinct operation or independent business
Length of time employed by principal
Amount of time agent works for principal
Whether principal or agent supplies tools used in
the work
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18-18
Liability for Independent
Contractor’s Torts
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A principal is generally not liable for the
torts of its independent contractors, with
the following exceptions:
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Inherently dangerous activity
Negligence in the selection of an independent
contractor
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18-19
Liability for Independent
Contractor’s Contracts
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Principal is liable on contracts entered into
by an independent contractor under
principal’s authority.
Principal is not liable if a contract is
entered by an independent contractor
without express or implied authority.
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18-20
Termination of an Agency

By acts of the parties
Mutual agreement
 Lapse of time
 Purpose achieved
 Occurrence of a specified event
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18-21
Termination of an Agency
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By operation of law
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Death of either party
Insanity of either party
Bankruptcy of the
principal
Impossibility
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Loss or destruction of
subject matter
Loss of required
qualification
Change in the law
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18-22
Termination of an Agency
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By operation of law, continued
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Changed circumstances
War between principal’s country and
agent’s country
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18-23
Notification of Termination
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Termination of agency ends agent’s actual
authority.
If notice is not given, agent may still have
apparent authority.
Notice must be given to

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Parties who have dealt with the agent
Parties who have knowledge of agency
Parties who have no knowledge – principal may
need to give constructive notice if agent has had
written authority.
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18-24
Wrongful Termination
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Most agencies may be terminated at will
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Termination by principal – revocation of
authority
Termination by agent – renunciation of
authority
If a termination breaches the contract
between principal and agent, it is a
wrongful termination.
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