Nov 14. Chapter 13 - Agency

Chapter 13 – Agency and Agency Relationships
The textbook takes the view that the agency relationship is a fundamental and critical aspect of
business and as such devotes a full chapter to its treatment. Placement at the beginning of the
unit on business associations helps inform and facilitate the discussion of partnership and
corporation law, which follows in Chapters 14, 15, and 16.
Specifically, the chapter attempts to show that it would be virtually impossible to conduct
business on any significant scale without the legal recognition of the agency. The chapter begins
with an examination of the prevalence of the relationship within business organizations (i.e.,
between the organization and its employees) and between business organizations and
outsiders. The agency relationship is not, however, without risks. The chapter illustrates the
risks inherent in agency and how these risks can be managed.
Objectives
After studying this chapter, you should have an understanding of
• the agency relationship and its relevance to business
• how an agency relationship comes into being
• agency duties and liabilities
• how the agency relationship ends
The Nature of Agency

• Agency: A relationship that exists when one party (the agent) represents another party
(the principal) in the formation of legal relations.
• Agent: A person who is authorized to act on behalf of another.
• Principal: A person who has permitted another to act on her or
his behalf.
• Legal relationships are binding.
Examples of Agency Relationships

• A sports agent negotiates a multimillion-dollar deal on behalf of a hockey player.
• An insurance agent sells fire and theft insurance on behalf of several insurance
companies.
• A travel agent sells tickets, cruises, and vacation packages on behalf of carriers and
hotels.
Agency Defined
• There are two key relationships at play in an agency situation:
• Agent-principal relationship
• Outsider-principal relationship
• Relationship between the principal and the party with whom the agent
does business (outsider, or third-party)
• Law of agency: The law governing the relationship where one party, the agent, acts on
behalf of another, the principal. It addresses complications resulting from these
relationships.
• It is derived largely from tort and contract law.
Creation of the Agency Relationship
• An agency relationship usually arises by contract between the parties.
• A contract involves a principal authorizing an agent to act on their behalf and an
agent agreeing to do so in return for remuneration.
• A contract is usually created only for that single purpose.
• It can also arise as part of a larger contract—for example, when one is acting as
an agent on behalf of an employer.
• Sometimes a relationship arises by conduct—not agreed to, but outsiders are led to
believe the relationship is one of agency.
• Agency agreement can be express, implied, oral, in writing, or in writing under seal.
• Power of attorney: A special type of express agency agreement. It grants authority
under seal to an agent to sign documents on behalf of the principal under seal.
Authority of Agent
• Authority of the agent determines whether there is a contract between the principal and
the outsider.
• The principal is bound by the contract.
• Actual authority: The power of an agent that derives from either express or implied
agreement.
• Express authority: Written or oral authority granted by a principal to an agent.
• Implied authority: An agent’s authority that is present by implication only.
• Apparent authority: The power that an agent appears to have to an outsider because of
conduct or statements of the principal.
Agent’s Authority to Enter Agreement to Share Prize

• Finalists agreed to share a
$100 000 prize when one won.
• The winner’s wife had been present
to agree with the plan, and signed a
document agreeing to share.
• When the winner was named, they did
not share—other finalists claimed their amount.
• The court found that the winner’s wife was acting as her husband’s agent to be present
at the location, but did not have apparent authority.
Agency by Estoppel
• An agency relationship created when the principal acts such that third parties
reasonably conclude that an agency relationship exists.
• An agency relationship can be created by estoppel when the principal indicates another
is his agent when no such agency relationship exists.
• An agency relationship has been terminated or an agent’s authority reduced.
• In agency by estoppel, the agent does not have the authority to do
what they do.
Agency by Ratification
• An agency relationship created when one party adopts a contract entered into on his
behalf by another who at the time acted without authority.
• A person represents themselves as another’s agent.
• In agency by ratification, the agent does not have the authority to do what they do.
Real Estate Agents

• Unlike most other agents,
Usually, a real estate agent has
no authority to make a binding contract.
of sale on behalf of his or her principal.
• A principal could grant actual authority.
to a real estate agent to enter a contract
on his or her behalf.
Creation of Agency and Agent’s Authority
Duties of the Agent

• If agents fail to perform duties imposed on them by an agency relationship, they are in
breach of the contract.
• Without express instructions, an agent’s performance must meet the standard of the
industry.
• An agent may be able to delegate responsibility.
• Fiduciary: A person who has a duty of good faith toward another because of their
relationship.
• An agent owes fiduciary duty to the principal, not personally profit from it (“profit
rule”), and not be in a conflict of interest (“conflict rule”).
An Insurance Agent’s Duty of Care

• Insurance agents have a duty of care to the insurance company.
• They also have a duty of care to the customer.
1. If a customer asks for specific coverage, the agent has a duty to get that type of
coverage, or tell the client if they cannot.
2. If a customer asks for full coverage, the agent must inform themselves about the
customer’s business, assess foreseeable risks, and insure against them. If coverage that
would have protected the customer was available and the agent did not obtain it, the
agent would be responsible for any loss that ensued.
Duties of the Principal

• Pay the agent a specified fee or percentage for services rendered.
• Assist the agent in the manner described in the contract.
• Reimburse the agent for reasonable expenses associated with carrying out the agency
duties.
• Indemnify against losses incurred in carrying out the agency business.
Compensation of Life Insurance Brokers

• Insurance broker: An intermediary who
represents several insurance companies
at the same time and advises clients on the
appropriate insurance coverage.
• Insurance companies provide incentives
to brokers to sell their policies,
including commissions, deluxe trips
to exotic locales.
Contract Liability in the Agency Relationship

• When an agent enters into a contract on behalf of a principal with
a third party, it is the principal, not the agent, who ordinarily is liable on the contract.
• An agent who acts without authority and contracts with an outsider is liable to the third
party for breach of warranty of authority.
• Warrant of authority: A representation of authority by a person who purports to be an
agent.
Liability of an Undisclosed Principal

• An agent may incur liability when he contracts on behalf of an undisclosed principal.
• Undisclosed principal: A principal whose identity is unknown to a third party who has no
knowledge that the agent is acting in an agency
capacity.
• The third party does not know they are dealing with an agent.
• The general rule is that the principal is still liable on the contract so long as the agent is
acting within his or her authority.
Liability of the Agent to the Principal

• An agent will be personally liable on a contract with an outsider when
he or she (the agent) exceeds his or her actual or apparent authority.
Tort Liability in the Agency Relationship

• As a general rule, an agent is personally liable for any torts that he or she commits.
• The principal is vicariously liable for the agent’s actions so long as the agent is acting
within express, implied, or apparent authority.
Termination of Agency Agreements

• An agency agreement can come to an end in a number of ways:
• The agency relationship ceases by operation of the law; this most commonly
occurs due to the death, dissolution, insanity, or bankruptcy of one of the
parties.
• The parties agree to bring their relationship to an end.
• One party gives notice of termination to the other.
• The principal should give notice to third parties.

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Nov 14. Chapter 13 - Agency

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Chapter 13 – Agency and Agency Relationships

The Nature of Agency

Examples of Agency Relationships

Agent’s Authority to Enter Agreement to Share Prize

Real Estate Agents

Creation of Agency and Agent’s Authority

Duties of the Agent

An Insurance Agent’s Duty of Care

Duties of the Principal

Compensation of Life Insurance Brokers

Contract Liability in the Agency Relationship

Liability of an Undisclosed Principal

Liability of the Agent to the Principal

Tort Liability in the Agency Relationship

Termination of Agency Agreements

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