Understanding Agency Law - Chapter 9

Accounting

An agent must account to the principal for all the principal's property and money that come into the agent's possession. As part of this duty the agent must keep the principal's property including money separate from the agent's. If the agent commingles the property or money then the law assumes that it all belongs to the principal unless the agent clearly proves otherwise. Money held b the agent should be deposited in a separate bank account in the principal's name. If the agent deposits t in his or her own name and the bank then fails the agent is liable for any loss the principal sustains, The agent should account promptly for any of the principal's money held. Failure to do so makes the agent liable for interest payments to the principal

Doctrine of Respondeat Superior

Which one of these describes why the codtrine of reaspondeat superior is important for tort liability reasons? - It absolves a principal of liability for an agent's intentional tort. - It can attribute vicarious liability to a principal for the torts of an agent - It can allow a principal to dissolve an agency relationship - It can attribute vicarious liability to an agent for the torts of a principal

ratification

creation of an agency relationship resulting when a principal adopts the act of another two has purported to act for the principal to act for the principal and has neither power nor authority to perform the act for the principal.

Scope of Authority

A court analyzing a question about an agent's authority first determines whether the agent was acting under actual authority. If no actual authority exists the court should determine whether the agent had apparent authority.

Agency

A legal, consensual relationship that exists when one party, the agent, acts on behalf of another party, the principal.

Reimbursement for Expenses

A principal must reimburse an agent for any expenses necessarily incurred for the discharge of agency duties. For example if the agent must incur travel and advertising expenses to accomplish agency purposes the principal must reimburse these expenses. The agent must spend the money reasonably if the agent's negligent conduct results in unnecessary expense, the agent bears the expense rather than the principal.

Principal's Duties to Agent

A principal owes several duties to an agent. - Agreed on period of employment - Compensation - Reimbursement for expenses - Indemnity for losses

Agency Relationships

An agency is a fiduciary relationship that is the agent holds a position of trust managers the principal's affairs or funds and has a duty to the principal to act in a trustworthy manner. In insurance producers may act as agents of either insurers or insureds. Understanding how the agency relationship is created is essential to knowing whether a purported agent has the authority to make legally binding agreements on behalf of the principal. The parties to an agency are the agent and the principal. Although many agency relationships involve contracts a contract is not required to form an agency. The agency relationship is consensual rather than contractual and that consent can be written or oral and express or implied. An agency relationship can be established by appointment estoppel or ratification. Let's discuss each of these pathways.

Reasonable care

An agent must exercise the degree of care and skill that a reasonable person would exercise under the same or similar circumstances. An agent with special skills or training is held to the standard of care or a reasonable person possessing those skills. This a real estate broker employed to sell property must exercise the reasonable care of any real estate broker dealing with similar property An agent's failure to act when action is reasonably required also constitutes a breach of this duty. An agency contract carries an implied promise that the agent will carry out the duties of the agency with reasonable care to avoid injury to the principal.

Information

An agent owes a duty to keep the principal informed of all facts relating to the agency. Therefore if a principal authorizes an agent to sell property for a specified amount and the agent later learns that the property's value has materially changed then the agent must give the principal that information Generally the agent owes a duty to make reasonable efforts to provide the principal with information relevant to the affairs entrusted to the agent. Failure to perform this duty makes the agent liable to the principal for any resulting loss. The law imputes the knowledge an agent obtains during the course of performing a principal's business to the principal and therefore imposes on the agent the duty to give the information to the principal. Most courts do not impose a duty to communicate information that the agent obtains outside the scope of the agent's employments

Agent's Duties to Principal

An agent owes several implied fiduciary duties to a principal. Violation of any of these duties subjects the agent to discharge and to liability for any damages to the principal even if the agency contract does not expressly state these duties. Learn more see " Duties Agents Owe to Principals" A subagent who is the agent of an agent owes the same duties to the principal that the original agent owes. An original agent is responsible to the principal for any subagent's violation of duty even if the agent has exercised good faith in selecting the subagent. Further a subagent owes the agent who did the hiring substantially the same duties If a subagent is employed without a principal's authority no agency relationship arises between the principal and the subagent. The principal is not liable to third parties for an unauthorized subagent's act. At the same time the unauthorized subagent owes no duties to the principal.

Duties Agents Owe to Principals

An agent's implied fiduciary duties to a principal include these - loyalty - obedience - reasonable care - accounting - information

actual authority

Authority (express or implied) conferred by the principal on an agent under an agency contract.

Lapse of Time

Authority granted to an agent for a specified period terminates at the expiration of that period. If the parties forming the agency do not specify a time span lapse would occur after a reasonable period depending on the circumstances. For example if Margaret authorized Joe to sell her home five years ago and they have not communicated since the agency has probably terminated through lapse of time. If however Joe made occasional reports to Margaret about prospective buyers and Margaret gave no indication that the agency was terminated Joe would continue to have authority to sell.

Death or Incapacity

Death or incapacity can terminate an agency in three ways - The death of either the principal or agent terminates the agency - The incapacity of the principal terminates the agency - The principal has the right to terminate the agency upon learning of the agency's incapacity

Tort Liability of Principal and Agent

Generally principal's and agents are liable to third parties for their own torts. In several situations however a principal may be liable for torts committed by an agent. Knowing when these situations occur can help individuals and organizations address their risk exposures in contracts. Agents can be employees of the principal or they can be independent contractors. Although it can be difficult to discern employees from independent contractors the most important distinguishing factor is how much control the principal has over the agent's work the more control the principal has the more likely it is that the agent is an employee of the principal.

implied authority

The authority implicitly conferred on an agent by custom, usage, or a principal's conduct indicating intention to confer such authority.

Express authority

The authority that the principal specifically grants to the agent.

Respondeat Superior

The legal principle under which an employer is vicariously liable for the torts of an employee acting within the course and scope of employment.

Ministerial duties

The routine or mechanical tasks performed by agents.

Just Cause

When an agency relationship is terminated for just cause that cause generally consists of behavior so outrageous or of such a serious nature that it voids any contractual relationship between two parties. Reasons to terminate an agency for just cause include fraud criminal activity and flagrant violations of agency contract.

Principal's Liability for Agent's Torts

When an agent commits a tort against a third party in the course of an agency relationship, how do you determine the extent of the principal's liability? Let's explore several circumstances in which a principal becomes liable for an agent's torts.

When Undisclosed Principal's Rights Against Third Parties Are Limited

- The agent frequently represents to a third party that the contract is on behalf of the agent or someone other than the principal - The agent or principal knows the third party is unwilling to deal with the principal - The contract would impose a substantial burden on the third party - the principal substitutes his or her performance for the agent's promised performance -The third party sues and judgment is levied against the agent for breach

Exceptions to a third party's right to sue undisclosed principal

- The principal has a good faith settlement of the account with agent - The third party expresses the intent to hold the agent liable

Independent contractor

A person (or organization) hired to perform services without being subject to the hirer's direction and control regarding work details.

Liability for Independent Contractor's Torts

A principal is generally not liable for the torts of agents who are independent contractors. This is because the principal doe s not have authority over how independent contractors perform their duties. However the rule has three exceptions - A principal negligently enters into an agency with an independent contractor that is unsuitable or incompetent. For example a mall owner (principal) secures the services of a security firm (agent) through a contract, knowing that the firm's employees have several previous convictions for assault and battery. If a security guard attacks and injures a mall patron (third party) while on duty the mall owner may be liable. - Certain duties are so important that responsibility for them cannot be delegated to another party. For example a municipality has a duty to keep public roads in good repair. While the municipality (principal) can delegate the repair work to an independent contractor (agent) it cannot delegate responsibility for ensuring that the work is done in an acceptable manner. If a third party is harmed because the roads aren't properly maintained the municipality may be liable. - A principal hires an independent contractor to perform dangerous activities. For example if a principal hires an independent contractor to demolish a building the principal must ensure that the contractor takes appropriate safety precautions. If the independent contractor fails to do so the principal may be liable for any resulting harm to third parties. This theory of liability is sometimes called the peculiar risk doctrine.

Direct Liability

A principal who commits a tort against a third party is directly liable to that party for any resulting harm. A principal may also be directly liable to a third party for an agent's tort that is committed at the specific direction of the principal. For example a landlord (principal) who directs a property manager (agent) to unlawfully evict a tenant is liable for any harm to the tenant. A principal may even be directly liable to a third party for an agent's tort if the principal has been negligent in hiring training or supervising the agent. This is because the principal is responsible for selecting appropriate individuals as agents giving them clear instructions providing them with the appropriate tools or materials monitoring their performance and discharging those who do not perform appropriately.

Duty to Ascertain Scope if Authority

A principal's representation to a third party that is the appearance the principal has created determines the existence and scope of an agent's apparent authority. A third party is not entitled to rely on an agent's statements about the scope of the agent's authority. Only the actual authority the principal has given or the apparent authority the principal has manifested to the third party controls the extent of the agent's authority. If an agent acts in a way that's adverse to the principal's best interests the third party has notice that the agent might be exceeding his or her authority. The third party must ascertain the scope of the agent's authority by a direct inquiry to the principal. If the third party fails to inquire and the agent does not have authority the transaction in question does not bind the principal.

Power of authority

A written document that authorizes one person to act as another person's agent or attorney in fact

Actual Authority

Actual authority can be express or implied. Express authority applies not just to carrying out the principal's specific instructions but also to performing acts incidental to carrying out those instructions. To determine the scope of express authority courts examine the goals of the agency in light of all surrounding circumstances. For example the power to sell generally includes authority to collect payment and to make customary warranties. However a sales agent who has power only to solicit orders has no authority to collect the purchase price. In most commercial situations the agent has the authority only to solicit orders or to produce a buyer with whom the principal can deal. Custom is the most common source of implied authority. Agents can reasonably infer that they have authority to act according to prevailing custom unless the principal gives different instructions. Without different instructions an agents' authority extends to and is limited to what a person in this agent's position usually does. Implied authority also can apply when an agent acts beyond the usual scope of authority in an emergency. If the agent needs to act to protect or preserve the principal's property or rights but is unable to contact the principal and if the agent reasonably believes that an emergency exists, he or she has the authority to act beyond or even contrary to the principal's instructions. An agent who acts reasonably in an emergency has authority to act even if the agent is mistaken about the necessity for the actions or is at fault in creating the emergency. The agent however can be liable to the principal for any expenses resulting from the agent's wrongful conduct.

Changed Circumstances

Agents can exercise authority only with a reasonable belief that the principal still wants that authority exercised. In other words if a substantial change in circumstances should cause the agent to reasonably assume that the principal would not want to agency to continue authority to act terminates. A principal's bankruptcy is usually considered a changed circumstance that will terminate the agent's authority with respect to all assets under a bankruptcy court's control. In bankruptcy the principal's assets and the power to deal with those assets pass to a trustee in bankruptcy even without notice to the agent. Outside of bankruptcy the principal's inability to pay bills is not usually sufficient to terminate an agent's authority. For the agent however bankruptcy that affects his or her ability to perform the agency's purpose or the principal's business stadnign will terminate the agency.

Agency's Authority

Agents generally must act within the scope and limitations of the authority specifically granted to them by the principal. However in some situations even if the agent acts outside of that authority, the principal still may be bound to a third party by the agent's actions. From the perspective of a third party an agent's authority can be either actual authority or apparent authority. Actual authority can be either express or implied. The scope of an agent's authority depends on which type of authority the agent has.

Agency by estoppel

An agency relationship created by a principal's words or conduct that cause a third party to reasonably believe that an agency exists.

Agent's Remedies

An agent can sue for compensation indemnity or reimbursement and can also obtain a court order requiring an accounting from the principal. An agent discharged b a principal during a specified employment period can sue for compensation for the remainder of the period. An agent can also exercise a lien or right to retain possession of the principal's good until the principal has paid the amounts due. Some agents such as attorneys bankers and stockbrokers can enforce a general lien against the principal that is they can hold the principal's goods and papers until all accounts are settled. The general lien us not limited to the immediate transaction between the agent and principal but to all transactions between the parties. Many other kinds of agents can assert only a special lien, which allows retention of the principal's property until the account for the immediate transaction between the principal and agent is settled.

Obedience

An agent owes a duty to obey a principal's lawful instructions. If the agent disobeys a reasonable instruction the principal can sue for any resulting damages and can also terminate the relationship. Generally the agent cannot challenge the instruction unless it calls for illegal or immoral acts. The agent owes a duty to perform according to the principal's instructions. If the principal selects the agent because of personal qualifications. However three exceptions apply to the nondelegation rule - Ministerial duties - If certain tasks do not require judgment or discretion an agent can delegate their performance - Customary appointments - If custom and usage of a particular business involve the delegation of authority the agent can delegate. - Emergency appointments - In a emergency that requires the appointment of another to protect the principal's interests the agent can make an emergency appointment

Determining an Agent's Authority

An agent's authority that is based only on the beliefs of a third party is - Actual authority - implied authority -Apparent authority - Express authority When an agent outside his or her usual scope of actual authority in an emergency the agent is acting with - Express authority - Implied authority - apparent authority - Principal authority

Renunciation

An agent's termination of the agency relationship is referred to as renunciation of authority. Even if it breaches the contract that binds the agent to perform the renunciation is effective. For example Lyle an actor hired Rachel to represent him as his agent for two years. After year one Rachel resigned. Although Rachel may be liable under contract to Lyle for the cost of finding a replacement, Rachel's renunciation has terminated her authority as his agent and ended the agency relationship The first involves the death of the principal or agent. Agency termination occurs upon a principal's death even if the agent or third party doesn't receive a notice of death. Because death is a matter of public record the law often assumes that the public will have received notice of death. The necessities of modern banking and commerce sometimes require a relaxation of this rule however until a bank receives actual notice of a depositor's death the bank retains the authority to pay checks drawn on the depositor's account. The second involves the principal's becoming incapacitated. When this occurs courts generally treat the incapacity in the same manner as a principal's death. Because the agent acts in the principal's place and the principal cannot act agency authority ends during incapacity. For example if a principal is declared mentally incompetent because of an inability to understand the consequences of his or her actions the agent's authority will end because the principal would no longer have the legal ability to take action. The third involves the principal's right to terminate the agency upon learning of the agent's incapacity. An agent does not need capacity to be able to contract the principal's capacity is the determining factor. A mentally incompetent agent may represent a principal and if so the agent's contract binds the principal. However the principal can terminate the agency upon leaning of the agent's incapacity. To illustrate Julio authorizes Freansesca to sell his property. Fransesca contracts to sell the property to a buyer who does not know that Fransesca is under the influence of drugs. Although Fransesca's contract will bind Julio to sell the property to the buyer he can terminate the agency if he learns of Fransesca's incompetency

How and Agency Can Be Created.

By appointment - Principal extends agency proposal - Agent consents or acts in accordance with proposal - Agency by appointment is created By Estoppel (actions of principal) - Principal purports the existence of agency relationships - Third part relies on existence and conducts business with agent - Principal is estoppel from denying agency relationship - Agency by estoppel is created By Estoppel (actions of agent) - Agent purports agency relationship with knowledge of principal - Third part deals with agent and suffers a loss because of purported agency existence. - Principal is estopped from denying agency relationship because of failure to disavow it. - Agency by estoppel is created By ratification - Agent purports agency relationship and conducts business with third party - Principal confirms the transaction - Agency by ratification is created

Principal's Remedies

Depending on the offense a principal can sue an agent for breach of the contract or in tort for harm done. Remedies include requiring the agent to transfer improperly held property, pay the value of the benefit the agent received or pay damages for breach of contract or tort. If the agent is insolvent the principal's best remedy is a lawsuit to transfer the property. If the agent has personally profited from the transaction then a suit for the value of the benefit the agent received represents the principal's best alternative. In other cases a suit for breach of agency contract may be preferable to a suit in tort because the statute of limitations is generally longer for contract suits than for torts suits. In still other cases the principal can sue for an injunction prohibiting the agent from revealing trade secrets obtained during the course of employment or from competing with the principal in violation of a noncompetition agreement after termination of eomployment

Agreed on Period of Employment

Either party can terminate an employment contract at will unless the contract specifies a fixed period of employment. A contract to pay a salary by the month or year does not necessarily that employment is guaranteed for the stated period. A contract with a fixed period of employment makes the parties liable for any breach of their contract within that period. Because the agency relationship is consensual the parties can refuse to continue the relationship during the contractual period but they are subject to damages for breach of the contract. When an employment contract provides for a specified period of employment and the principal's business terminates during the period the agency also terminates because of changed conditions.

Agent's Liability for Own Torts

Even when they are employees acting on behalf of a principal agents are generally liable for their own torts. For example ab agent who slanders or commits libel against a third party while performing acts related to the agency relationship is liable for his or her actions. However there are four exceptions to the rule that agents are generally liable for their own torts: - If a principal has been granted permission to do something the principal's agent is considered to have the same permission. For example if a neighboring business allows a construction company ( principal) to park its heavy equipment in the neighbor's parking lot overnight the construction company's agent may also park the company's equipment there without trespassing. The scope of the agent's permission is strictly limited to that granted to the principal - If the principal is legally entitled to take action to defend his or her person or property the principal's agent may take similar action to protect the principal. For example a principal may use physical force to defend against an attacker so the principal's agent can also use physical force against the attacker to protect the principal. - An agent who makes misrepresentations in a transaction is not liable if the agent did not know and could not be expected to know that the statement was a misrepresentation. For example if the principal misrepresented information to the agent and then the agent in good faith relayed that misrepresentation to a third party the agent is not liable to the third party for any resulting harm. - If a principal supplies defective tools or instruments to the agent and a third party is injured of the defect the agent is not liable if he or she did not know or have reason to know that the tool or instrument was defective.

Third Party's Rights Against an Agent

Generally an agent isn't liable to a third party under a contract made on a disclosed principal's behalf. But in six situations a third party has rights of recovery against an agent under these types of contracts. The first is when the agent implies or intentionally misrepresents that he or she has actual authority to act on the principal's behalf. If the agent isn't authorized to act on the principal's behalf or exceeds the authority granted by the principal the agent breaches the implied warranty of authority. The agent is then liable to the third party for that breach. However if the third party knows or has reason to suspect that the agent lacks authority the agent is not liable for breach of warranty. This can incentivize an agent to fully disclose all the facts relating to its authority. The second situation is when an agent acts on behalf of a minor or a mentally incompetent principal. In such a case the agent is liable for breach of the warranty of authority if the third party wasn't aware of the principal's incapacity The third situation is when a third party intended to contract with the agent and the agent purported to act personally not for a principal. To avoid personal liability on such a contract the agent must actively disclose both the existence and identity of the principal to the third party avoiding liability requires more than the third party knowing enough facts to potentially identify the principal. The fourth is when the third party persuades the agent to agree to personally guarantee the contract. Sn agent who voluntarily assumes responsibility for performing the agreement is liable for the principal's nonperformance. The fifth is when a third party pays money to an agent who not only is unauthorized to collect it but also does not turn over the money to the principal. In situations like this the third party can sue the agent for the money. The agent cannot avoid liability by subsequently paying the money to the principal. In addition a third party can recover payments made to an agent resulting from the agent's mistake or misconduct even though the agent has turned the funds over to the principal. The sixth is when the agent commits fraudulent or malicious acts that harm a third party. Even if the agent was acting in god faith under the principal's direction it does not provide a valid defense against personal tort or criminal liability. An agent who wrongfully injures a third party or is guilty of theft is personally liable.

Principal's Rights Against a Third Party

If a contract binds a principal to a third party it also binds the third party to the principal regardless of whether the third party knew of the principal's existence./ In transactions between a third party and an agent of a disclosed or partially disclosed principal the principal has the same rights against the third party as tit would if the agent wasn't involved. However undisclosed principal's right against third parties can be limited in several situations. One of them is if an agent fraudulently represents to a third party that the contract is on the agent's behalf alone or that the agent represents someone other than the real principal. In this case the third party has the right to avoid the contract Similarly if the agent or principal knows or should know that the third party is unwilling to deal with the principal the principal's identity becomes a material fact and misrepresentation of a material fact by the agent allows the third party to avoid the contract. Even if the agent doesn't actively misrepresent the principal's identity but knows that the third party would not agree to contract with the principal the agent has a duty to disclose the principal's identity to the third party. Failing to do this is misrepresentation. Also an undisclosed principal cannot enforce a contract against a third party if enforcement would impose a substantial additional burden on the third party. FOr example Sophie an agent agrees in a contract to purchase from Riko "all of the rubber that Sophie requires." Riko is unaware that Sophie represents Victor whose rubber requirements are substantially greater than Riko knows or is able to meet. Under the circumstances Victor cannot enforce the contract against Riko If a contract specifies the personal performance of the agent the principal cannot substitute his or her own performance to fulfill the contract. For example Peter is an undisclosed principal and Tobias is his agent. Tobias agrees in a contract to personallu paint Marios house. Because Tobias agreed to paint the house Peter cannot do the painting it must be done by Tobias. But once Tobias completers the paintings peter can demand payment from Mario. In addition if a third party sues an agent and is granted a judgement for breach of contract and the principal is undisclosed the principal loses the right of recovery against the third party. However if the principal's identity becomes known its rights may be retained regardless of whether the agent is found at fault.

Ratification

If a person acts as an agent for another without actual consent or authority, the purported principal has two options: - Ratify or confirm the transaction -Refusal to approve the purported agent's unauthorized acts. When an agency relationship is created by ratification the agent's authority comes into existence and a contract arises between the principal and the third party. Ratification must meet four conditions to be effective. To learn more see "the Four Conditions of a Ratification" Ratification establishes the agency relationship. In contrast agency by estoppel protects the third party only from a loss that would result if the agency were denied. In both agency by estoppel and agency by ratification the legal effect to the third party is the same: The third party has an enforceable contract with the principal. Let's look at an example of an agency relationship established by ratification: An agent's contract with an insurer expressly limits the agent's property insurance binding authority to $1,000,000 per building. An existing customer calls the agent to ask for coverage on a newly purchased $2,000,000 building. The agent binds the coverage and then asks the insurer to honor the binder. The underwriter refers the agent's request to the insurer's home office which agrees to honor the binder three days later. The binder is now ratified and coverage is effective from the moment the agent originally bound coverage. To learn more see "How and Agency Can Be Created."

Estoppel

If a principal's words or conduct causes a third party to reasonably believe that an agency exists and to rely on that representation in dealing with the supposed agent the principal is estopped (prevented) from denying the agency resulting in agency by estoppel. For example if an insurer's owner allows a customer service representative to find insurance coverage for applicants the owner has created an agency by estoppel and cannot deny coverage placed by the employee. The reason for agency by estopped as with any application of the estoppel doctrine is that people should be bound by their words and conduct if another person reasonably (and detrimentally) relies on those words and actions No agency by estoppel is formed if the person for whom the act is performed (who would be the principal if an agency relationship existed) is unaware of the supposed agent's action. For example Bob has created the appearance that he is Ralph's agent by printing stationary that falsely implies an agency relationship. As long as Ralph neither knows nor could be expected to know of Bob's deception, Ralph can deny the agency. Anyone relying on the deception stationary relies on appearances that Bob not Ralph created. Therefore Ralph would not be labile for Bob's actions as an alleged agent. However a person who knowingly permits another person to represent that an agency exists can be stopped from denying the agency. For instance Paul owns a jewelry store and permits his friend Anne to display and sell her handcrafted jewelry in his store. The businesses are separate but customers could reasonably believe that Anne works for Paul. Although Paul and Anne are not principal and agent any customer who deals with Anne and believes her to be Paul's agent could hold Paul liable as principal if the customer suffers a loss after reasonably relying on that belief. What if Anne had falsely represented that Paul is her principal? Must Paul disavow the relationship? Can his silence create agency by estoppel? The answer is maybe. A court would consider Paul's silence in relation to what a reasonable person would do. Clearly if Paul were to meet face to face with a person who expresses belief that Anne is Paul's agent he must disavow the agency relationship. Suppose however that Anne advertises the purported agency in internet ads that appear only in a distant city where Paul does not visit or conduct business. It's doubtful that when considering what a reasonable person might do a court would find an agency relationship

Respondeat Superior Liability

If an agent commits a tort the principal may be held liable for that tort under the doctrine of respondeat superior. Respondeat superior means "let the master answer" in Latin and the doctrine attributes vicarious liability to a principal for the torts of an agent when these two conditions are met: - The agent is an employee of the principal - The tort is committed while the agent is acting within the scope of employment. Employers often grant their employees authority to act as their agents. FOr example a manufacturer might authorize a purchasing department employee (though company policy, job description or intruction from management) to enter into sales contracts with suppliers of raw materials on the company's behalf. Determining whether an employee was acting within the scope of employment when a tort was committed can be challenging. Generally agents are considered to be acting within the scope of employment when they are performing work assigned to them by the employer or undertaking activities that are under the employer's control. The critical element is whether the employer controls or has the right to control how the agent performs the assigned work. Typically if an employer has control (or can control) the work the agent is acting within the scope of employment. On the other hand if a tort is committed while the agent is engaged in activities on an independent basis (meaning the activities aren't meant to serve the employer) the agent is typically considered to not have been acting within the scope of employment and the employer wouldn't be liable for the tort. It's important to note that even when an agent is an employee and commits a tort, an injured third party may elect to sue the principal the agent or both to recover damages caused by the employee. And an employee who has some liability to the third party may be required to indemnify (compensate) an employer if the employer pays damages on account of the employee's tort unless such indemnification is prohibited by an employment or union contract or by statute as may be the case with some government workers.

Contractual Rights and Liabilities

In a contract between two parties if one party breaches the contract the other party has a right to seek damages or ensure that the contract is enforced. But when a breach occurs under a contract that involves an agent establishing rights and liabilities can be more complicated. In an agency relationship each party's contractual rights vary depending on the circumstances. Handling related contracts effectively requires understanding how courts determine who holds rights of recovery in certain circumstances the principal agent or third party. In contracts arranged by agents third parties may have rights of recovery against the principal and or the agent and both the principal and the agent may have rights of recovery against third parties. In determining these rights courts examine both the agent's authority to act and the status of the principal.

Agent's Rights Against a Third Party

In a contract made on behalf of a disclosed principal an agent usually doesn't have any rights of recovery against a third party for breach of contract. However the agent can have rights of recovery against the third party if the agent intended to be bound (and potentially liable as well) under the contract or if the principal is undisclosed or partially disclosed. An undisclosed principal can also sue the third party and the principal's right to sue is superior to the agent's (assuming the principal's rights aren't affected by one of the limitations mentioned above) An agent who falsely represents authority to act on a principal's behalf and who therefore fails to bind the principal to the contract cannot sue a third party because the agent cannot prove the existence of the alleged contract. In a suit by a third party against an agent concerning a contract entered into on a principal's behalf the agent can set up personal defenses as though the agent were the sole contracting party. These defenses include that the principal or agent performed the contract that the third party failed to perform the contract and that the statute of frauds or statute of limitations precludes recovery. Additionally in a suit by a third party involving a contract with a disclosed or partially disclosed principal the agent ( with the consent of the principal) can assert the same defenses or counterclaims against the third party that the principal can. As a result the third party cannot be in a better position to sue the agent than the principal.

Agent's Duties and Remedies

In an agency relationship the principal and agent have specific obligations to each other. If either party fails to fulfill these obligations and thereby harms the other party legal remedies are available to allow the injured party to recover. An agent's duties to a principal include loyalty obedience reasonable care accounting and information. If the agent fails to fulfill these duties the principal can sue the agent to recover any resulting loss or damage. The principal's duties to the agent include an agreed on period of employment compensation reimbursement for expenses and indemnity for losses. If the principal breaches these duties the agent can sue the principal or can retain the principal's property until the principal has paid the amounts due

Agency Creation

In insurance the term "agent" is used in a more specific manner than in general agency law. Agents representing insurance principals are generally referred to as producers defined as an individual who sells insurance products and related service. The producer may be an agent (the authorized representative of an insurer) or a broker (the authorized representative of an insured). For simplicity the producer's employer or office is called the agency. As such an independent agent in rural Nebraska a sales representative for a large direct writer an exclusive insurer's agent in a growing metropolitan area and a broker in New York City can all be considered producers working out of an insurance agency. So how is an agency created? The relationship between a principal and an agent is formed by appointment estoppel or ratification. To illustrate each of these pathways to agency we'll look at Manuel an executive of a small personal lines insurer and Emma an independent agent looking for opportunities to increase her customer base. We will revisit Manuel and Emma after learning the different ways the agency relationship can be formed and see which path describes their actions in various scenarios.

Agent

In the agency relationship, the party that is authorized by the principal to act on the principal's behalf.

Accomplishment of Purpose

Many agencies are terminated once their purpose has been accomplished even if someone else achieves that purpose. The agency however will usually continue until the agent receives notice that the agency's purpose has been accomplished. To illustrate Paul has given authority to two separate agents Anne and Barry to lease or sell Paul's house. With Anne's knowledge Barry finds a tenant to agree to the lease. Anne's authority to lease or sell the house ends as does Barry's

Loyalty

One of the agent's most important duties is loyalty to the principal's intense. The agent must not undertake any business venture that competes with or interferes with the principal's The principal can claim any profits the agent realizes in dealing with the principal's property. For example any gift the agent receives from a third party while transacting the principal's business belongs to the principal. The duty of loyalty however does not obligate the agent to shield a principal who is acting illegally or dishonest.

Fiduciary duty

That duty owed by an agent to act in the best interest of another

Compensation

The principal must pay the agent the agreed on compensation for the services performed. If no compensation agreement exists but an agent under similar circumstances would recieve compensation for services the agent is entitled to the reasonable value of services rendered. However an agent who breaches agency duties is not entitled to compensation. A principal is not responsible for a subagent's compensation if the principal did not authorize the agent to hire subagents. Likewise if the agent has the authority merely to delegate duties to a subagent the agent not the principal is responsible for compensation.

Indemnity for Losses

The principal owes a duty of indemnity or reimbursement for any losses or damages the agent has suffered because of the agency and incurred through no fault of the agent. If a principal directs an agent to commit a wrong against a third party and the agent does not know that the act is wrongful the agent is entitled to indemnity for the amount paid as a result of a lawsuit arising from the act,'' A principal must indemnify an agent for the expenses incurred in defending any lawsuits resulting from the agent's authorized acts. If the expense resulted from the agent's own intentional or negligent conduct even though the principal directed the act the agent is usually not entitled to indemnifications. An agent who makes payments or becomes subject to liability to third persons because of a subagent's authorized conduct has the same right to indemnity from the principal as if the conduct were the agent's. Because a subagent is both the agent's and the principal's agent the subagent is entitled to indemnity from either of them.

Types of Principals

The rights each party has under a contract largely depends on the principal's status. There are three types of principals - Disclosed Parties - A principal is considered disclosed when the third party knows an agent is acting on behalf of a principal and also knows the identity of the principal. When a contract is made on behalf of a disclosed principal the agent generally isn't liable for the terms of the contract. For example Hugo is a real estate developer and wants to purchase property form Mikael. Hugo sends Gabriela to act as his agent and negotiate the deal on his behalf. During the negotiations Gabriela makes it clear that she is representing Hugo. This makes Hugo a disclosed principal. Partially Disclosed Principals - A principal is partially disclosed when the third party knows an agent is acting on behalf of a principal but the identity of the principal is not known. In contracts made on behalf of a partially disclosed principal an agent can typically be personally liable. But if the third party is able to identify the principal the principal can be held liable. For example if during the negotiations with Mikael Gabriela discloses that she is an agent for a real estate developer without saying who the developer is, then Hugo is a partially disclosed principal. Undisclosed Principals - A principal is undisclosed when the third party does not know the agent is acting on behalf of a principal. In this case the agent appears (at least to the third party ) to be acting for himself or herself. Generally the agent is liable when he or she makes a contract on behalf of an undisclosed principal. But again if a third party discovers the identity of the principal the principal can be held liable. For example if Gabriela provides no indication that she is working for Hugo and therefore appears to be negotiating on her on behalf Hugo is an undisclosed principal.

Appointment

The usual method of creating an agency is by express appointment. Anita (the principal) authorizes Brian (the agent to act on her behalf and Brian assents to the appointment. The agent must consent to the relationship because agency laws imposes a fiduciary duty on the agent. As in contract formation the principal's proposal can make a communicated acceptance unnecessary. If the principal asks another to act indicating that no further communication is necessary and the other person acts an agency relationship arises. Foe example Margaret writes to Joe a real estate broker and asks him to purchase a particular piece of real property for her in his name. Joe purchases the property in his own name and then refuses to convey it to Margaret. The circumstances indicate an implied agreements to form an agency relationship. Joe purchased the property on Margaret's behalf and must therefore transfer it to her. If an agent contracts to sell a principals real estate the principal must sign the deed. Otherwise unless the agent has a power of attorney the agent's signature on a deed has no effect. A principal can extend additional power to an agent through power of attorney. A power of attorney can be specific such as a power to sell particular real estate, or it can be general fiving the agent power over all the principal's property. In the previous example if Margaret had given (specific) power of authority to Joe for this transaction and asked him to purchase the property for her he would have been able to purchase the property on her behalf without her signature.

Revocation

To revoke an agency the principal notifies its agent b word or act that the agent no longer has authority. The principal always has the power to terminate the agency but the agent could sue for damages if the termination violates the agency contract. Additionally even a contractual provision requiring revocation in a specific manner will not always prevent agency termination from being allowed to occur in another manner. If the principal appoints another agent to accomplish the authorized purpose and that new appointment conflicts with the first the original agent's authority sis terminated. For example if a client engages a new attorney to try a case with the knowledge of the original attorney the original attorney's agency ends because the two agency relationship conflicts. However appointing a second agent does not always terminate the fist agency. For instance merely giving a second agent the authority to sell the same property as a fist agent has an exclusive right to sell property the principal reserves the right to sell or to authorize another agent to sell. The appointments are consistent and the agent who sells the property will receive the benefit.

Apparent Authority

Unlike actual authority a principal neither confers apparent authority on an agent nor creates it. Apparent authority is based on appearances and includes all the authority that a reasonable person acquainted with the customs and nature of the business could reasonably assume the agent has. It generally arises in one of two overlapping circumstances: A principal grants less authority than agents in the same position in that business usually have - The method of operation of the principal's business differs from that of other businesses of the same kind in the principal's area For example principal Tyler instructed agent Samantha not to sell goods on credit if the total credit to a customer exceeds $200 an unusual restriction in Tyler's business. Samantha sold goods on credit to Lee for $250 with no actual authority to do so. Lee however neither knew nor had reason to know of the restriction. A third party could have reasonably believed that Samantha had the usual authority in that situation. The authority was apparent and Tyler could not deny it. As a second example Tyler puts Samantha in charge of a jewelry store and instructs her not to stock or sell watch batteries. All other jewelry stores in that area do stock and sell watch batteries. Samantha contracts with Zac to purchase a supply of watch batteries. Samantha has apparent authority to do this as long as Zac is unaware of the restriction on Samantha's authority. To learn more see "Determining an Agent's Authority"

Thirds Party's Rights Against a Principal

When a principal is disclosed the principal is liable to the third party under the agreement. In contracts involving partially disclosed principals and undisclosed principals third parties enter into agreements largely on the strength of the agent's credibility. The agent is liable under these agreements unless the third party discovers the existence or identity of the principal and wishes to enforce the contract against the principal. However the right to sue an undisclosed principal on a contract is subject to two exceptions A third party cannot sue the principal for nonpayment under a contract if the principal has a good faith settlement of the account with the agent. For example when an undisclosed principal has supplied an agent with money to purchase foods but the agent purchases the foods on credit and keeps the money a settlement has occurred. The principal isn't liable to then make a second payment to the third party creditor. The settlement can occur before or after formation of the contract with the third party but it must occur before disclosure of the principal to the third party. The second exception is if having learned of the principal's existence and identity the third part expresses the intention to hold the agent liable for the contract anyways. However partially disclosed principals remain liable with third parties able to sue the respective agent r partially disclosed principal without discharging the right against the other.

Liability for Agent's Misrepresentations

When an agent makes a material misrepresentation to a third party in a transaction the third party can rescind (avoid) that transaction. Alternatively the third party may seek to recover damages for any harm resulting from the misrepresentation and a principal may be liable for the agent's actions in these two situations - The principal intended for the agent to make the misrepresentation. In some states a principal may also be liable for negligently allowing an agent's misrepresentation - An agent has actual or apparent authority to make true statements about a particular subject. The principal is vicariously liable for any misrepresentations made by the agent in this situation even if the principal didn't direct or condone the misrepresentation. FOr example a real estate agent could have actual or apparent authority to make true statements about a property for sale. If the real estate agent misrepresents details about the property to a third party the principal could be held liable. In an attempt to relieve themselves of liability for agents' misrepresentations, Principals may include an exculpatory clause in the contracts agents make with third parties. An exculpatory clause limits the principal's liability for statements made to only those specifically included in the contract. The clause may protect a principal against tort liability resulting from misrepresentation by an agent but a third party injured by the misrepresentation can still choose to rescind the transaction.

Agency Termination

While entering into an agency relationship is rarely controversial exiting from one can be treacherous. When wrongful termination of an agent constitutes a breach of contract the terminating party can be held liable for damages to the party that was wronged. Understanding the ways an agency can legally be terminated protects both parties from liability. An at will agency allows either the principal or the agent to terminate the agency at any time without legal liability. But in some situations an agency is meant to continue for a certain period of time or until a specific purpose have the power to terminate the agency in any of several ways which will be discussed in this section.

principal

the party in an agency relationship that authorizes the agent to act on that party's behalf

Employee

the person hired to perform work and who is obligated both as to the work to be done and as to the manner in which it is to be done