Business Law Notes: Agency Law


course notes from my core business law MBA class covering agency law
Subject: Business Law

Parties agreed that the agent will act on behalf & instead of the principal in negotiating & transacting bus with 3rd persons. 3 types

  • Special: hired for an ltd purpose (CPA, attorney)
  • General: employer/employee relations (wider affairs corporate lawyer)
  • Universal: hired to do everything

Fiduciary: fundamental to agency, means that trust & confidence are involved

  • Employer-Employee Relations: An employee is someone whose physical conduct is not entirely controlled, or subject to control, by the employer. Employees who deal with third parties are typically deemed to be agents.
  • Employer-Independent contractor Relations: an independent contractor is not controlled by another or subject to another’s control with regard to physical conduct. He may or may not be an agent. Main determinant here is how much control is exercised over the contractor.
  • Formation of agency relationship:
    • Consensual
    • Need not be in writing
    • No consideration required
    • Principal must have legal capacity to enter into contracts; not necessary for agent (his power is derived from principal)
    • Agency must be for legal purpose
    • Agency by agreement: can be written or implied by conduct.
    • Power of attorney must be written, can be special (limited) or general
    • Agency by ratification: non-agent cuts deal for principal, principal approves agency by estoppel: if principal causes a 3rd person to believe that another is his agent, & the third person deals with supposed agent, the principal is “estopped to deny” the agency relationship.
    • Agency by operation of law: spouses, emergencies
  • Agent’s Duties:
    • Performance: must use reasonable diligence & skill in performing work required
    • Notification: must notify principal of all matters concerning subject matter of agency
    • Loyalty: actions must be strictly for the benefit of the principal, not in the interest of the agent or a third party
    • Obedience: must follow lawful & clearly stated instructions of the principal
    • Accounting: must maintain separate accounts for the principal’s funds & for the agent’s funds, no intermingling is permitted
  • Principal’s Duties:
    • Compensation: must pay the agent for services rendered, & do so in a timely manner
    • Reimbursement & indemnification: must reimburse agent that disburses money at principal’s request. Must compensate (indemnify) agent for any costs incurred as a result of principal’s failure to perform the contract
    • Cooperation: must cooperate with & assist an agent in performing his duties
    • Provide safe working conditions
    • Agent’s Rights & Remedies: has a corresponding right for every duty of the principal.
    • Normal contract & tort remedies
  • Principal’s Rights & Remedies: has contract remedies for breach of fiduciary duties & tort remedies. Main actions available:
    • Constructive trust: imposed by courts when agent withholds monies that belong to principal, allows principal to get what he deserves
    • Avoidance: principal may avoid any contract entered into with agent if agent breaches agency duties
    • Indemnification: principal can be sued by a third party for an agent’s negligent conduct, & in certain situations the principal can turn around & sue agent for an equal amount of damages
  • Scope of Agent’s Authority:
    • Express: given orally or in writing, embodied in that which the principal has engaged the agent to do
    • Implied: conferred by custom, can be inferred from agent’s position, or is implied as reasonably necessary means to perform duties
    • Apparent: arises when the principal, by either word or action, causes a third party to reasonably believe that an agent has authority to act, even though agent has no “actual” (express or implied) authority.
  • Emergency Powers: agent may take action necessary to protect interests of principal in an emergency without principal’s prior approval
  • Ratification: express or implied, principal’s affirmation of a previously unauthorized contract or act
    • Liability for contracts:
      • Disclosed / Partially disclosed principals: liable to a third party for contract made by the agent
      • Undisclosed principals: agent, not the principal, is liable as a party on the contract. However, if principal has a duty to perform & fails to do so, agent is entitled to indemnification by principal if third party seeks restitution from agent
    • Liability for Agent’s Torts: Principal may be liable for agent’s torts if they result from the following:
      • Principal’s own tortious conduct
      • Principal’s authorization of tortious act
      • Agent’s unauthorized but tortious misrepresentation (if representations were made within scope of the agency)
  • Doctrine of Respondeat Superior: principal-employer is liable for any harm caused to a third party by an agent-employee in the scope of employment. This doctrine imposes vicarious liability on the employer.
    • Scope of employment: is employee doing what is normally expected of him, is employee “on the job” from a time & location standpoint, does the employee’s act benefit the employer
    • Liability for employee’s negligence: act causing the injury must have occurred within the scope of employment, employee going to & from work or to & from meals is usually considered outside the scope of employment
    • Notice of dangerous conditions: employer has assumed knowledge of any dangerous conditions discovered by an employee & pertinent to employment situation
  • Liability for employee’s intentional torts: if torts committed within scope of employment
  • Liability for Independent Contractor’s Torts: General rule is that the employer is not liable.
    • Test: how much control the employer exerts over the contractor. Exceptionally hazardous activities (blasting) that are contracted are an exception in that there is no shield for the employer
  • Liability for Agent’s Crimes: General rule is that a principal or employer is not liable for agent’s or employee’s crime even if agent acted within scope of authority or employment.
  • Termination of an Agency:
    • Lapse of time: agency ends when time period expressed in the agreement comes to a close, or reasonable time & can be terminated at will by either party.
    • Purpose achieved: if agency was for a particular purpose, it ends upon completion occurrence of a specific event: e.g., when I get back from vacation, you no longer handle my affairs
    • Mutual agreement: enough said
    • Termination by one party: either party has the power to terminate, but may not have the right to terminate & could be liable for breach of contract.
    • Agent’s act of termination is renunciation, principal’s is revocation
    • Termination by operation of law: certain events terminate agency automatically (death, insanity)
    • Notice required for termination:
      • Principal’s duty to notify third parties who know of the agency.
      • Must notify directly if third party has dealt with agent.
      • Agent’s actual authority continues until he receives termination notice.
      • Agent’s apparent authority continues until third party has been notified.
      • If agent’s authority is written, it must be revoked in writing.

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