Chapter 31 - Agency Formation and Duties


The key points in this chapter include:

1. The difference between employees and independent contractors.

2. The formation of an agency relationship.

This chapter covers aspects of agency relationships, including how they are formed and the duties involved. An agency relationship involves two parties: the principal and the agent. Agency relationships are essential to a corporation, which can function and enter into contracts only through its agents.

I. AGENCY RELATIONSHIPS
In an agency relationship, the parties agree that the agent will act on behalf and instead of the principal in negotiating and transacting business with third persons.

A. EMPLOYER-EMPLOYEE RELATIONSHIPS
Normally, all employees who deal with third parties are deemed to be agents. Statutes covering workerscompensation and so on apply only to employer-employee relationships.

B. EMPLOYERINDEPENDENT CONTRACTOR RELATIONSHIPS
Those who hire independent contractors have no control over the details of their physical performance. Independent contractors can be agents.

C. CRITERIA FOR DETERMINING EMPLOYEE STATUS
The greater an employers control over the work, the more likely it is that the worker is an employee. Another key factor is whether the employer withholds taxes from payments to the worker and pays unemployment and Social Security taxes covering the worker.

II. FORMATION OF THE AGENCY RELATIONSHIP
Consideration is not required. A principal must have capacity to contract, but anyone can be an agent. An agency can be created for any legal purpose

A. AGENCY BY AGREEMENT
Normally, an agency must be based on an agreement that the agent will act for the principal. Such an agreement can be an
express written contract or can be implied by conduct.

B. AGENCY BY RATIFICATION
A person who is not an agent (or who is an agent acting outside the scope of his or her authority) may make a contract on behalf of another (a principal). If the principal approves or affirms that contract by word or by action, an agency relationship is created by ratification (see Chapter 34).

C. AGENCY BY ESTOPPEL

1. The Principals Actions
When a principal causes a third person to believe that another person is his or her agent, and the third person deals with the supposed agent, the principal is estopped to deny the agency relationship.

2. The Third Partys Reasonable Belief
The third person must prove that he or she reasonably believed that an agency relationship existed and that the agent had authority that an ordinary, prudent person familiar with business practice and custom would have been justified in concluding that the agent had authority.

D. AGENCY BY OPERATION OF LAW
A court may find an agency relationship in the absence of a formal agreement. This may occur in family relationships or in an
emergency, when the agents failure to act outside the scope of his or her authority would cause the principal substantial loss.

III. DUTIES OF AGENTS AND PRINCIPALS
The principal-agent relationship is fiduciary.

A. AGENTS DUTIES TO PRINCIPAL

1. Performance
An agent must use reasonable diligence and skill (the degree of skill of a reasonable person under similar circumstances), unless an agent claims special skills (such as those of an accountant), in which case the agent is expected to use those skills.

2. Notification
An agent must notify the principal of all matters concerning the agency. Notice to the agent is considered to be notice to the principal.

3. Loyalty
An agent must act solely for the benefit of the principal (not in the interest of the agent or a third party).

a. Confidentiality
Any information or knowledge acquired through the agency relationship is confidential. It cannot be disclosed during the agency or after its termination.

b. Agents Loyalty Must Be Undivided
An agent employed by a principal to buy cannot buy from himself or herself, and an agent employed to sell cannot become the
purchaser, without the principals consent.

4. Obedience
When an agent acts on behalf of the principal, the agent must follow all lawful instructions of the principal. Exceptions include emergencies and instances in which instructions are not clearly stated.

5. Accounting
An agent must keep and make available to the principal an account of everything received and paid out on behalf of the principal. An agent must keep separate accounts for the principals funds.

B. PRINCIPALS DUTIES TO AGENT

1. Compensation
A principal must pay an agent for services rendered (unless the agent does not act for money). Payment must be timely. If no amount has been agreed to, the principal owes the customary amount for such services.

2. Reimbursement and Indemnification
A principal must (1) reimburse the agent for money paid at the principals request or for necessary expenses and (2) indemnify an agent for liability incurred because of authorized acts.

3. Cooperation
A principal must cooperate with and assist an agent in performing his or her duties. The principal must do nothing to prevent
performance.

4. Provide Safe Working Conditions
A principal must provide safe working conditions.

IV. REMEDIES AND RIGHTS OF AGENTS AND PRINCIPALS
If one party violates his or her duty to the other, remedies available to the party not in breach arise out of contract and tort law, and include damages, termination of the agency, injunction, and accounting.

A. AGENTS RIGHTS AND REMEDIES AGAINST PRINCIPAL
For every duty of the principal, an agent has a corresponding right. Breach of a duty by the principal follows normal contract and tort remedies. If the relation is not contractual, an agent has no right to specific performance (but can recover for past services and future damages).

C. PRINCIPALS RIGHTS AND REMEDIES AGAINST AGENT

1. Constructive Trust
A court imposes a constructive trust if an agent retains benefits or profits that belong to the principal or takes advantage of the agency to obtain property the principal wants to buy. The court declares that the agent holds money or property on behalf of the principal.

2. Avoidance
If an agent breaches an agency agreement under a contract, the principal has a right to avoid any contract entered into with the agent.

3. Indemnification
A principal can be sued by a third party for an agents negligence, and in certain situations the principal can sue the agent. The same is true if the agent violates the principals instructions.