PowerPoint Slides to Accompany
CONTEMPORARY BUSINESS AND
ONLINE COMMERCE LAW
5th Edition
by Henry R. Cheeseman
Chapter 24
Agency
Slides developed by
Les Wiletzky
Wiletzky and Associates
Copyright © 2006 by Pearson Prentice-Hall. All rights reserved.
Agency
 Agency relationships are formed by the
mutual consent of a principal and an
agent
 Agency is the 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.”
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Agency: Key Terms
 Agency Law – The large body of common
law that governs agency

A mixture of 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
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The Principal-Agent Relationship
Principal
Principal’s
obligation to
perform the
contract
Agency
Contract
Agent
Contract with third
party on behalf of
principal
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Third Party
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Persons Who Can Initiate an Agency
Relationship (1 of 2)
 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
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Persons Who Can Initiate an Agency
Relationship (2 of 2)
 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
 Some agency relationships are prohibited
by law
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Principal-Agent Relationship
 An employer hires an employee and gives
that employee authority to act and enter
into contracts on his or her behalf
 The extent of this authority is governed by
any express agreement between the
parties and implied from the
circumstances of the agency
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Employer-Employee Relationship
 A relationship that results when an
employer hires an employee to perform
some form of physical service
 An employee is not an agent unless he or
she is specifically empowered to enter into
contracts on the principal employer’s behalf
 Employees may only enter into contracts
that are within the scope of their
employment
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Summary: Kinds of Employment
Relationships
Type of
Relationship
Description
Employer-Employee
The employer has the right to control the physical
conduct of the employee.
Principal-Agent
The agent has the authority to act on behalf of the
principal as authorized by the principal and implied
from the agency.
An employee is often the agent of his employer.
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Formation of an Agency Relationship
 An agency and the resulting authority of
an agent can arise in any of these four
ways:
1. Express agency
2. Implied agency
3. Apparent agency
4. Agency by ratification
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Express Agency
 An agency that occurs when a principal
and an agent expressly agree to enter into
an agency agreement with each other
Exclusive agency contract
 Power of attorney

 Express agency contracts can be either
oral or written unless the Statute of
Frauds stipulates that they must be written
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Implied Agency
 An agency that occurs when a principal
and an agent do not expressly create an
agency
 The agency is implied from the conduct of
the parties
 The extent of the agent’s authority is
determined from the particular facts and
circumstances of the particular situation

Incidental authority
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Apparent Agency
 Agency that arises when a principal
creates the appearance of an agency that
in actuality does not exist
 When an apparent agency is established,
the principal is estopped from denying the
agency relationship
 It is the principal’s actions that create an
apparent agency
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Agency by Ratification
 An agency that occurs when:
1. A person misrepresents himself or herself as
another’s agent when in fact he or she is not,
and
2. The purported principal ratifies (accepts) the
unauthorized act
 In such cases, the principal is bound to
perform and the agent is relieved of any
liability for misrepresentation
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Summary: Formation of Agency
Relationships (1 of 2)
Type of
Agency
Definition
Express
Authority is expressly given Principal and third party are
to the agent by the
bound to the contract.
principal.
Implied
Authority is implied from the Principal and third party acts
conduct of the parties,
are bound to the contract.
custom and usage of trade,
or act incidental to carrying
out the agent’s duties.
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Enforcement of the Contract
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Summary: Formation of Agency
Relationships (2 of 2)
Type of
Agency
Definition
Apparent
Authority created when the Principal and third party are
principal leads a third party bound to the contract.
into believing that the agent
has authority.
By Ratification
Acts of the agent
committed outside the
scope of his authority.
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Enforcement of the Contract
Principal and third party are not
bound to the contract unless
the principal ratifies the
contract.
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Principal’s Duties (1 of 2)
 Duty to compensate
 A duty that a principal owes to pay an agreed-upon
amount to the agent either upon the completion of the
agency or at some other mutually agreeable time
 Duty to reimburse
 A duty that a principal owes to repay money to an agent
if the agent spent his or her own money during the
agency on the principal’s behalf
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Principal’s Duties (2 of 2)
 Duty to indemnify
 A duty that a principal owes to protect the agent for
losses the agent suffered during the agency because of
the principal’s misconduct
 Duty to cooperate
 A duty that a principal owes to cooperate with and
assist the agent in the performance of the agent’s
duties and accomplishment of the agency
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Agent’s Duties (1 of 3)
 Duty of performance
An agent’s duty to a principal that includes:
1. Performing the lawful duties expressed in the
contract; and
2. Meeting the standards of reasonable care, skill, and
diligence implicit in all contracts
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Agent’s Duties (2 of 3)
 Duty of notification
 An agent’s duty to notify the principal of information he
or she learns from a third party or other source that is
important to the principal
 Imputed Knowledge – most information learned by an
agent in the course of the agency is imputed to the
principal
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Agent’s Duties (3 of 3)
 Duty of accountability
 A duty that an agent owes to maintain an accurate
accounting of all transactions undertaken on the
principal’s behalf
 Duty of loyalty
 An agent owes a fiduciary duty not to act adversely to
the interests of the principal
 If this duty is breached, the agent is liable to the
principal
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Contract Liability of Principals and
Agents to Third Parties (1 of 2)
Fully Disclosed Agency
 The principal is liable to
the third party
 The agent is not liable
 An agent is liable on the
contract if he or she
guarantees that the
principal will perform the
contract
Partially Disclosed Agency
 Both the principal and the
agent are liable to the third
party if the principal fails to
perform the contract
 This is because the third
party must rely on the
agent’s reputation,
integrity, and credit
because the principal is
unidentified
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Contract Liability of Principals and
Agents to Third Parties (2 of 2)
Undisclosed Agency
 The third party is unaware
of either the existence of
an agency or the
principal’s identity
 Both the principal and the
agent are liable to the third
party if the principal fails to
perform the contract
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Agent Exceeding the Scope of
Authority
 An agent who enters into a contract on behalf of
another party impliedly warrants that he or she has
the authority to do so
 If the agent exceeds the scope of his or her
authority, the principal is not liable on the contract
unless the principal ratifies it
 The agent is liable to the third party for breaching
the implied warranty of authority
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Tort Liability to Third Parties
 The principal and the agent are each
personally responsible for their own
tortious conduct
 The principal is liable for the tortious
conduct of an agent who is acting within
the scope of his or her authority
 The agent is liable for the tortious conduct
of the principal if he or she directly or
indirectly participates in or aids and abets
the principal’s conduct
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Sources of Tort Liability for Principals
and Agents
 Misrepresentation
 Intentional misrepresentation
 Innocent misrepresentation
 Negligence
 Respondent superior
 Frolic and detour
 “Coming and going” rule
 Dual-purpose mission
 Intentional Torts
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Termination of an Agency
 An agency contract is similar to other
contracts in that it can be terminated by:
Acts of the parties, or
 Operation of law

 Once an agency relationship is
terminated, the agent can no longer
represent the principal or bind the
principal to contracts
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Termination by Acts of the Parties
1.
2.
3.
4.
An agency may be terminated by the
following acts of the parties:
Mutual agreement
Lapse of time
Purpose achieved
Occurrence of a specified event
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Termination by Operation of Law
1.
2.
3.
4.
5.
6.
An agency is terminated by operation of
law, including:
Death of the principal or agent
Insanity of the principal or agent
Bankruptcy of the principal
Impossibility of performance
Changed circumstances
War between the principal’s and agent’s
countries
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Irrevocable Agency
 An agency coupled with an interest:
 Special type of agency relationship
 This type of agency is irrevocable by the
principal
 Not terminated by the death or incapacity of
either the principal or the agent
 Terminates only when the agent’s obligations
are performed
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Wrongful Termination of an Agency
or Employment Contract
 The termination of an agency contract in
violation of the terms of the agency
contract
 The nonbreaching party may recover
damages from the breaching party
 The distinction between the power and the
right to terminate an agency is critical
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Independent Contractor
 Persons and businesses
often employ independent
contractors to perform
certain tasks on their
behalf
 The party that employs an
independent contractor is
called a principal
PRINCIPAL – INDEPENDENT
CONTRACTOR RELATIONSHIP
Principal
Contract
Independent
Contractor
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Determining Independent Contractor
Status
 The crucial factor in determining whether a
person is an employee or an independent
contractor is the degree of control that the
principal has over that person
 Substantial control indicates an employer –
employee relationship
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Liability for Independent Contractor’s
Torts
 Principal employs a person who is not an employee
of the principal
 The independent contractor has authority only to
enter into contracts authorized by the principal
 Generally, principals are not liable for the tortious
conduct of independent contractors
 Independent contractors are personally liable for
their own torts
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