Chapter 32: Agency Formation and Duties

In deciding whether a worker is categorized as an employee or an independent contractor, courts often consider the following questions:

1. How much control does the employer exercise over the details of the work? A lot - employee 2. Is the worker engaged in an occupation or business distinct from that of the employer? Yes - independent contractor 3. Is the work usually done under the employer's direction or by a specialist without supervision? Without - contractor 4. Does the employer supply the tools at the place of work? Yes - employee 5. For how long is the person employed? A long time - employee 6. What is the method of payment - by time period or completion of job? Time period - employee 7. What degree of skill is required of the worker? Great - contractor

Agency by ratification:

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

Cooperation:

A principal has a duty to cooperate with the agent and to assist the agent in performing his or her duties.

Disclosed principal:

A principal whose identity is known to a third party at the time the agent makes a contract with the third party. Is liable to the third party for a contract made by the agent.

Undisclosed principal:

A principal whose identity is unknown by a third person, and the third person has no knowledge that the agent is acting for a principal at the time the agent and the third person form a contract. When an agent is forced to pay by the third party, the agent is entitled to be indemnified (compensated) by the principal.

Partially disclosed principal:

A principal whose identity is unknown by a third person, but the third person knows that the agent is or may be acting for a principal at the time the agent and the third person form a contract. Is liable to the third party for a contract made by the agent. In most states the agent is also treated as a party to this kind of contract.

Notary public:

A public official authorized to attest to the authenticity of signatures.

Power of attorney:

A written document, which is usually notarized, authorizing another to act as one's agent; can be special (permitting the agent to do specified acts only) or general (permitting the agent to transact all business for the principal).

Unauthorized acts:

Acts committed by an agent that are outside the scope of his or her express, implied, or apparent authority. Principal and third party are NOT bound in contract - UNLESS the principal ratifies prior to the third party's withdrawal. Principal cannot be held liable, regardless of their disclosure.

Apparent authority:

Actual authority (express or implied) arises from what the principal makes clear to the agent. Apparent authority, in contrast, arises from what the principal causes a third party to believe. An agent has apparent authority when the principal, by either word or action, causes a third party reasonably to believe that the agent has authority to act, even though the agent has no express or implied authority. Principal and third party are bound in contract.

Agency by estoppel:

An agency that arises when a principal negligently allows an agent to exercise powers not granted to the agent, thus justifying others in believing that the agent possesses the requisite agency authority.

The agent has the right to be compensated, to be reimbursed and indemnified, and to have a safe working environment.

An agent also has the right to perform agency duties without interference by the principal.

Demand for an accounting:

An agent can also withhold further performance and demand that the principal give an accouting.

Exception to equal dignity rule:

An executive officer of a corporation normally is not required to obtain written authority from the corporation to conduct ordinary business transactions.

Performance:

An implied condition in every agency contract is the agent's agreement to use reasonable diligence and skill in performing the work. When an agent fails to perform his or her duties, liability for breach of contract may result. A gratuitous agent cannot be liable for breach of contract, because there is no contract; he or she is subject only to tort liability.

A personal must have contractual capacity to be a principal.

Any person can be an agent, however, regardless of whether he or she has the capacity to contract.

Constructive trust:

Anything that an agent obtains by virtue of the employment or agency relationship belongs to the principal.

Fiduciary:

As a noun, a person having a duty created by his or her undertaking to act primarily for another's benefit in matters connected with the undertaking. As an adjective, a relationship founded on trust and confidence.

Implied authority:

Authority that is created not by an explicit oral or written agreement but by implication. In agency law, implied authority (of the agent) can be conferred by custom, inferred from the position the agent occupies, or implied by virtue of being reasonably necessary to carry out express authority. Principal and third party are bound in contract.

Agency relationships are consensual.

Generally, the agreement need not be in writing, and consideration is not required.

Liability of principals for contracts formed by agents:

Generally, the liability of the principal will depend on whether the agent was authorized to form the contract.

Authorized acts:

If an agent acts within the scope of his or her authority, normally the principal is obligated to perform the contract regardless of whether the principal was disclosed, partially disclosed, or undisclosed. Whether the agent may also be held liable under the contract, however, depends on the disclosed, partially disclosed, or undisclosed status of the principal.

Indemnification:

In certain situations, when a principal is sued by a third party for an agent's negligent conduct, the principal can sue the agent for indemnification - that is, for an equal amount of damages.

Principal's rights and remedies against the agent:

In general, a principal has contract remedies for an agent's breach of fiduciary duties. The principal also has tort remedies if the agent engages in misrepresentation, negligence, deceit, libel, slander, or trespass.

Compensation:

In general, when a principal requests certain services from an agent, the agent reasonably expects payment. The principal therefore has a duty to pay the agent for services rendered.

Equal dignity rule:

In most states, a rule stating that express authority given to an agent must be in writing if the contract to be made on behalf of the principal is required to be in writing. Failure to comply can make a contract voidable at the option of the principal.

Express authority is authority declared in clear, direct and definite terms:

It is authority expressly given by one party to another. In agency law, an agent has express authority to act for a principal if both parties agree, orally or in writing, that an agency relationship exists in which the agent had the power (authority) to act in the place of, and on behalf of, the principal. Principal and third party are bound in contract.

Agency by agreement:

Most agency relationships are based on an express or implied agreement that the agent will act for the principal and that the principal agrees to have the agent so act.

Ratification:

Occurs when the principal affirms, or accepts responsibility for, an agent's unauthorized act. When ratification occurs, the principal is bound to the agent's act, and the act is treated as if it had been authorized by the principal from the outset. Ratification can be either express or implied.

Independent contractor:

One who works for, and receives payment from, an employer but whose working conditions and methods are not controlled by the employer. An independent contractor is not an employee but may be an agent.

Agent's duties to the principal:

Performance, notification, loyalty, obedience, and accounting.

Tort and contract remedies:

Remedies of the agent for breach of duty by the principal follow normal contract and tort remedies.

Agency by operation of law:

The agency relationship is based on a social or legal duty (such as the need to support family members) or formed in emergency situations when the agent is unable to contact the principal and failure to act outside the scope of the agent's authority would cause the principal substantial loss.

Apparent authority and estoppel:

The doctrine of agency by estoppel may be applied in situations in which a principal has given a third party reason to believe that an agent has authority to act. If the third party changes position to his or her detriment in good faith reliance on the principal's representations, the principal may be estopped (prevented) from denying that the agent had authority.

Agency:

The fiduciary relation that results from the manifestation of consent by one person to another that the other shall act in his or her behalf and subject to his or her control, and consent by the other so to act.

Principal's duties to the agent:

The principal also has certain duties to the agent. These duties relate to compensation, reimbursement and indemnification, cooperation, and safe working conditions.

Accounting:

Unless an agent and a principal agree otherwise, the agent has a duty to keep and make available to the principal an account of all property and funds received and paid out on behalf of the principal.

Obedience:

When acting on behalf of the principal, an agent has a duty to follow all lawful and clearly stated instructions of the principal.

Avoidance:

When an agent breaches the agency agreement or agency duties under a contract, the principal has a right to avoid any contract entered into with the agent.

Emergency powers:

When an unforeseen emergency demands action by the agent to protect or preserve the property and rights of the principal, but the agent is unable to communicate with the principal.

No right to specific performance:

When the principal-agent relationship is not contractual, the agent has no right to specific performance.

Reimbursement and indemnification:

Whenever an agent disburses funds to fulfill the request of the principal or to pay for necessary expenses in the course of reasonable performance of his or her agency duties, the principal has the duty to reimburse the agent for these payments. Subject to the terms of the agency agreement, the principal has the duty to indemnify (compensate) an agent for liabilities incurred because of authorized and lawful acts and transactions.

An agency relationship can arise in four ways:

by agreement of the parties, by ratification, by estoppel, and by operation of law.

In other words:

the parties have agreed that the agent will act on behalf and instead of the principal in negotiating and transacting business with third parties.