BUSI 3005 Chapter 13

What’s “Agency” at Law?

A relationship that exists when one party represents another in the formation of legal relations

agent

• person who is authorized to act on behalf of another

• legally binding

• insurance agent, sports agent, real estate agent

principal

• person who has permitted another to act on their behalf

• insurance company

Examples of Agency Relationships

• sports agent negotiates a multimillion-dollar deal on behalf of a hockey player

• insurance agent sells fire and theft insurance on behalf of several insurance companies

• real estate agent represents buyers and sellers in real property transactions

outsider party

• party whom the agent does business with

• whatever is decided will bind the principal

How is an “Agency” Created?

• By Agreement (“actual authority”)

  • Contrect

• By Estoppel (“apparent authority”)

• By Ratification

  • Not common

Creating an Agency by Agreement

• Principal and agent enter into a contract that the agent will act on behalf of the principal

• Agent agrees to do so in return for a fee or commission

• “Actual authority”: through agreement, principal gives agent power to do certain things on behalf of the principal

  • Can be express, implied or both

Creating an Agency by Estoppel

• Principal acts in a way to cause to outside party to reasonably conclude the agent is authorized to act on behalf of the principal

• Agent is deemed to have “apparent authority” to bind the principal

• Even if agent doesn’t have authority, principal is bound by agent’s actions

• Principal must notify outside party when agent has no authority to act on their behalf anymore

Creating an Agency by Ratification

• Occurs when one party adopts a contact entered into on their behalf by another who never had authority to do so

  • Accepting a contract on behalf for a friend

• Principal isn’t bound by “agent’s” actions unless/until the principal adopts (“ratifies”) those actions

• Very risky for the purported agent, since principal can choose to ratify or not

Principles to Ratify Agent’s Actions

• Must occur within reasonable time

• Principal must have capacity

• Agent must have identified principal at time of contract

Duties of an Agent

Must perform in accordance with the principal’s instructions, or failing instructions, then performance must meet the standards of the particular trade or industry

Duties

1. Duty of confidence

2. Fiduciary duty

Duty of confidence

Duty of agent to follow instructions or best practices

Fiduciary duty

• Duty imposed on a person who has a special relationship of trust with another

• Not allowed to profit of the fiduciary

• Not allowed to engage in conflict

Fiduciary

• Person who has a duty to always act in the best interest of another (ex. Doctor/patient; lawyer/client; priest/parishioner; parent/child)

• Must always act in the best interest of the person or organization to whom the duty is owed

Duties of the Principal

• Pay the agent a specified fee or % 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

• Compensate against losses incurred in carrying out the agency business

Liability of the Principal to the Outsider

When an agent enters into a contract on behalf of a principal with a 3rd party, it’s the principal who’s liable on the contract.

Liability of the Agent to the Outsider

• An agent may be personally liable on a contract with an outsider when they (the agent) exceed their actual or apparent authority

• Outsider can sue agent for breach of warranty of authority (negligent misrepresentations)

Liability of Agent to Principal

When an agent exceeds their authority, the principal can sue the agent for breach of contract.

Liability of an Undisclosed Principal

• A principal whose identity is unknown to a third party, and the third party has no knowledge that the agent is acting in an agency capacity

• Principal is still liable on the contract so long as the agent is acting within their authority.

Liability for Torts of the Agent

• agent is personally liable for any torts they commit

• principal is vicariously liable for the agent’s actions so long as the agent is acting within express, implied, or apparent authority

  • if an agent negligently misrepresents something, the principal could be vicariously liable

The Termination of the Agency Relationship

agency agreement can come to an end if:

• agency relationship ceases by operation of the law

• most commonly occurs due to the death, dissolution, mental incapacity, or bankruptcy of one of the parties