Chapter 28 Principal-Agent Relationship

Examples of information that an agent is under a duty to communicate

1. a customer of the principal has become insolvent; 2. a debtor of the principal has become insolvent; 3. a partner of a firm with which the principal has previously dealt, and with which the principal or agent is about to deal, has withdrawn from the firm; 4. property that the principal has authorized the agent to sell at a specified price can be sold at a higher price.

Independent Contractors

Agents who are not employees. In these cases, although the principal has the right of control over the agent, the principal does not control the manner and means of the agent's performance. For instance, an attorney retained to handle a particular transaction would be an independent contractor-agent regarding that particular transaction because the attorney is hired by the principal to perform a service, but the manner of the attorney's performance is not controlled by the principal. Other examples are auctioneers, brokers, and factors.

Contractual Duties

An agency relationship may exist in the absence of a contract between the principal and agent. However, many principals and agents do enter into contracts, in which case a principal has a duty to act in accordance with the express and implied terms of any contract between the principal and the agent.

Death

Because the authority given to an agent by a principal is strictly personal, the death of an individual agent terminates the agent's actual authority. The death of an individual principal also terminates the actual authority of the agent when the agent has notice of the principal's death.

Termination of Agency

Because the authority of an agent is based on the consent of the principal, the agency is terminated when such consent is withdrawn or otherwise ceases to exist. On termination of the agency, the agent's actual authority ends, and she is not entitled to compensation for services subsequently rendered.

Duty Not to Compete

During the agency relationship an agent must not compete with his principal or act on behalf or otherwise assist any of the principal's competitors. After the agency terminates without breach by the agent, however, unless otherwise agreed, the agent may compete with his former principal. The courts will enforce by injunction a contractual agreement by the agent not to compete after termination if the restriction is reasonable as to time and place and necessary to protect the principal's legitimate interest.

Indemnification and Reimbursement

In general, a principal has an obligation to indemnify (compensate for a loss) an agent whenever the agent makes a payment or incurs an expense or other loss while acting as authorized on behalf of the principal. The contract between the principal and agent may specify the extent of this duty. In the absence of any contractual provisions a principal has a duty to reimburse the agent when the agent makes a payment within the scope of the agent's actual authority. For example, an agent who reasonably and properly pays a fire insurance premium for the protection of her principal's property is entitled to reimbursement for the payment.

Incapacity

Incapacity of the principal that occurs after the formation of the agency terminates the agent's actual authority when the agent has notice of the principal's incapacity.

Duty to Account

Subject to any agreement with the principal, an agent has a duty to keep and render accounts to the principal of money or other property received or paid out on the principal's account.

Duty to Account for Financial Benefits

Unless otherwise agreed, an agent has a duty not to acquire any financial or other material benefits in connection with transactions conducted on behalf of the principal. Such benefits would include bribes, kickbacks, and gifts.

Does the principal have control over the agent?

Yes

electronic agent

a computer program or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part without review or action by an individual. E-Sign specifically excludes certain transactions, including 1. wills, codicils, and testamentary trusts; 2. adoptions, divorces, and other matters of family law 3. the Uniform Commercial Code other than sales and leases of goods.

Power of Attorney

is an instrument that states an agent's authority. A power of attorney is a formal manifestation from principal to agent, who is known as "an attorney in fact," as well as to third parties, that evidences the agent's appointment and the nature or extent of the agent's authority. Under a power of attorney, a principal may, for example, appoint an agent not only to execute a contract for the sale of the principal's real estate but also to execute the deed conveying title to the real estate to the third party.

Duty of Obedience

requires the agent to act in the principal's affairs only as actually authorized by the principal and to obey all lawful instructions and directions of the principal. If an agent exceeds her actual authority, she is subject to liability to the principal for loss caused to the principal. The agent may be subject to liability to her principal for breach of the duty of obedience 1. if she entered into an unauthorized contract for which her principal is now liable 2. if she has improperly delegated her authority 3. if she has committed a tort for which the principal is now liable.

Agency by Estoppel

1. a person ("principal") intentionally or carelessly causes a third party to believe that another person (the "agent") has authority to act on the principal's behalf, 2. the principal has notice of the third party's belief and does not take reasonable steps to notify the third party, 3. the third party reasonably and in good faith relies on the appearances created by the principal, and 4. the third party justifiably and detrimentally changes her position in reliance on the agent's apparent authority.

Compensation

A principal has a duty to compensate her agent unless the agent has agreed to serve gratuitously. If the agreement does not specify a definite compensation, a principal is under a duty to pay the reasonable value of authorized services the agent has performed. An agent loses the right to compensation by 1. breaching the duty of obedience, 2. breaching the duty of loyalty, or 3. willfully and deliberately breaching the agency contract.

Gratuitous agency

An agency created without an agent's right to compensation. For example, Patti asks her friend Andrew to return for credit goods recently purchased from a store. If Andrew consents, a gratuitous agency has been created. The power of a gratuitous agent to affect the principal's relationships with third persons is the same as that of a paid agent, and his liabilities to and rights against third persons are the same as well. Nonetheless, agency by contract, the most usual method of creating the relationship, must satisfy all of the requirements of a contract.

Self-Dealing

An agent has a duty not to deal with the principal as an adverse party in a transaction connected with the agency relationship. The courts scrutinize transactions between an agent and her principal. The agent may not deal at arm's length with her principal. The agent thus owes her principal a duty of full disclosure regarding all relevant facts that affect the transaction.

Conflicts of Interest

An agent has a duty not to deal with the principal as, or on behalf of, an adverse party in a transaction connected with the agency relationship. An agent must act solely in the interest of his principal, not in his own interest or in the interest of another. In addition, an agent may not represent his principal in any transaction in which the agent has a personal interest.

Duty to inform

An agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know if 1. the agent knows, or has reason to know, that the principal would wish to have the facts 2. the facts are material to the agent's duties to the principal.

Confidential Information

An agent may not use or disclose confidential information obtained in the course of the agency for her own benefit or the benefit of a third party. Confidential information is information that, if disclosed, would harm the principal's business or that has value because it is not generally known. Confidential information includes unique business methods, trade secrets, business plans, personnel, nonpublic financial results, and customer lists. An agent, however, may reveal confidential information that the principal is committing, or is about to commit, a crime.

Misappropriation

An agent may not use property of the principal for the agent's own purposes or for the benefit of a third party. Unless the principal consents, an agent who has possession of the principal's property has a duty to use it only on the principal's behalf even if the agent's use of the property does not cause harm to the principal.

Formalities

As a general rule, a contract of agency requires no particular formality, and usually the contract either may be oral or may be inferred from the conduct of the principal. In some cases, however, the contract must be in writing. For example, the appointment of an agent for a period of more than a year comes within the one-year clause of the statute of frauds and thus must be in writing.

Scope of Agency Purposes

As a general rule, a person may do through an agent whatever business activity he may accomplish personally. Conversely, whatever he cannot legally do, he cannot authorize another to do for him.

capacity of the principal

The capacity of an individual to be a principal, and thus to act through an agent. Consequently, the appointment of an agent by a minor or an incompetent not under a guardianship and any resulting contracts are voidable, regardless of the agent's contractual capacity. The capacity of a person that is not an individual, such as a government or business association, to be a principal is determined by the law governing that entity.

Agency

a consensual relationship in which one person (the agent) acts as a representative of, or otherwise acts on behalf of, another person (the principal) with power to affect the legal rights and duties of the principal.

durable power of attorney

a written instrument that expresses the principal's intention that the agent's authority will not be affected by the principal's subsequent incapacity or that the agent's authority will become effective upon the principal's subsequent incapacity.

Duty of Diligence

an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances. Special skills or knowledge possessed by an agent are circumstances to be taken into account in determining whether the agent acted with due care and diligence.

Employment Relationship

an employee is an agent whose principal controls or has the right to control the manner and means of the agent's performance of work. All employees are agents, even those employees not authorized to contract on behalf of the employer or otherwise to conduct business with third parties. Does not have the right to bind the principal in contracts with third parties.

capacity to be an agent

any person able to act, including individuals, corporations, partnerships, and other associations. Therefore, although the contract of agency may be voidable, an authorized contract between the principal and the third person who dealt with the agent is valid.

Fiduciary Duty

arising out of a relationship of trust and confidence, requires the utmost loyalty and good faith. An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship. This duty is imposed by law upon the agent and is also owed by an employee to his employer. 1. acts in good faith, 2. discloses all material facts that the agent knows, has reason to know, or should know would reasonably affect the principal's judgment 3. otherwise deals fairly with the principal.

Duties of Agent to Principal

determined by the express and implied provisions of any contract between the agent and the principal. In addition to these contractual duties, the agent is subject to various other duties imposed by law, unless the parties agree otherwise. Normally, a principal bases the selection of an agent on the agent's ability, skill, and integrity. Moreover, the principal not only authorizes and empowers the agent to bind her on contracts with third persons but also often places the agent in possession of her money and other property.

Duty of Good Conduct

to act reasonably and to avoid conduct that is likely to damage the principal's interests. This duty reflects the fact that the conduct of agents can have a significant effect on the principal's reputation. A breach of this duty makes the agent liable to the principal and subject to rightful discharge or termination.