Relationship of Principal and Agent

3) Duty of good conduct

Duty of good conduct: The agent must not take steps that would damage the principal's interest or reputation.

b. Scope of the agency

Scope of the agency: Generally, a principal may use an agent to perform any task the principal would be able to perform. 1) Exception: The principal cannot delegate to an agent "personal" tasks such as contracts for performance of personal services.

d. Revocation of authority

d. Revocation of authority: The principal has the right to terminate an agency at any time, but if the termination breaches a contractual agreement with the agent, the agent would be able to sue for damages. If the principal terminates an agency because the agent breached the agency contract, disobeyed orders of the principal, or violated a fiduciary duty, the principal would not be liable for the revocation.

2. Creation of agency

Creation of agency: The usual method of creating an agency relationship is by contract. Gratuitous agencies are common, and the rights and duties of a gratuitous agent are the same as those of an agent who works for consideration.

c. Duties of agent to principal

Duties of agent to principal: The obligation of an agent to the principal is determined by the terms of the contract pursuant to which the agency is created and other obligations imposed by law.

3. Duties of the principal to the agent

Duties of the principal to the agent: The principal owes a number of duties to the agent. The obligations of the principal arise from the agency contract and the requirements of law. These duties include the duty of compensation, reimbursement, indemnification and the duty not to terminate the agency wrongfully.

a. Duty of compensation

Duty of compensation: Except in cases of gratuitous agency, the principal must compensate the agent for his or her work. If a specific compensation has not been agreed upon, the principal must pay the reasonable value of the agent's work. 1) Agent loses the right to compensation: Under the following circumstances: a) Agent breaches the duty of obedience b) Agent breaches the duty of loyalty c) Agent willfully and deliberately breaches the agency contract

4) Duty of diligence

Duty of diligence: A paid agent must act with reasonable care in carrying out his or her duties. An agent who was hired due to special skills the agent possessed must act in a reasonable manner of a person who possessed such skills. Agent who breaches this duty would be liable to the principal for losses.

c. Duty of indemnification

Duty of indemnification: The principal has a duty to indemnify an agent for losses suffered or payments made by the agent in carrying out authorized instructions on behalf of the principal.

2) Duty of obedience

Duty of obedience: The agent must act only as he or she is authorized and to obey all reasonable instructions from the principal. If the agent exceeds the scope of authority that he or she was given, the agent would be liable to the principal for any losses. The agent may also lose the right to compensation. The agent need not undertake instructions that are unethical or against the law. Example: Agent entered into a contract even though the agent did not have the authority to do so. The agent commits a tortious act.

b. Duty of reimbursement

Duty of reimbursement: A principal has a duty to reimburse the agent for authorized expenditures and payments made by the agent.

6) Duty to account

Duty to account: An agent has a duty to maintain records of all property and money the agent is managing for the principal. The agent also has a duty not to combine the property and money of the principal with those of the agent.

5) Duty to inform

Duty to inform: When an agent receives information, the law assumes that the principal has also received the same information. For this reason, the agent has a duty to keep the principal informed of all relevant information surrounding his or her work. An agent is required to inform the principal of information the agent has and should have had.

a. Formalities

Formalities: The contract creating the agency relationship may be written or oral. 1) Exceptions: Contracts creating an agency relationship that will last longer than one year and agency relationships where the agent will engage in the sale of real property must be supported by some writing. 2) Gratuitous agency: This is an agency where the agent agrees to represent the principal without consideration. Example: Jack offers to park Henry's car. 3) Agency by estoppel: In some cases, the law will state that an agency relationship was created (called agency by estoppel) even though it wasn't. This is designed to protect the interests of third parties who believed that an agency-principal relationship existed. The following elements must be shown: a) The principal intentionally or negligently causes another to believe that an agency relationship was created, b) The principal realizes that a third party has relied on the above belief but does nothing to warn the third party that such a relationship does not exist, c) The third party relied on the existence of the agency-principal relationship, d) The third party changes his or her position to his or her detriment upon reliance on the existence of the agency-principal relationship.

5. Irrevocable agencies

Irrevocable agencies: If the agent gives an interest to the principal, the principal loses the right to end the agency. Example: An agent advances money to the principal and is given the right to act as an agent in order to protect the loan made by the agent. In cases such as the above, the agency will survive the death or incapacity of the principal and the filing of bankruptcy by the principal.

a. Nature of agency

Nature of agency: Agency is the relationship between two people, the principal and the agent, in which the agent is authorized to act on behalf of the principal. 1) Authority to bind the principal: If the agent is acting within the authority given to him or her by the principal, the agent can enter into agreements that will bind the principal, and if the agent should act negligently, the act of negligence and the resulting harm will also be imputed to the principal.

a. Lapse of time

a. Lapse of time: If the parties agree that the agency will exist for a set period of time, the expiration of the period will bring the agency to a close.

c. Mutual agreement of the parties

c. Mutual agreement of the parties: Both the agent and principal, by mutual agreement, may bring the agency to an end.

f. Operation of law

f. Operation of law: Under certain circumstances, the law will end an agency when certain events take place. These events make it impossible for the agent to continue to work or the principal will not want the agent to continue his or her work. 1) Bankruptcy: If the principal files for bankruptcy, it will end an existing agency relationship. 2) Death: The death of an agent or principal will bring the agency to an end. The second and third restatement have different outcomes: a) Second restatement: When the principal dies, the agent's right to act as an agent comes to an end whether the agent is aware of the principal's death or not. b) Third restatement: When the principal dies, the agent may continue to act as an agent until the agent receives notice of the principal's death. 3) Incapacity: The impact of the disability of the agent or principal on the agency relationship depends upon whether the second or third restatement applies: a) Second restatement: The incapacity of the principal will automatically terminate the agency relationship. b) Third restatement: The incapacity of the principal will terminate the agency relationship as soon as the agent is informed of the principal's incapacity. c) Power of attorney: If the principal gives to the agent a durable power of attorney prior to his or her incapacity, the agency will continue. 4) Change in circumstances: The agent's authority to act on behalf of the principal may come to end if changes in business circumstances would alert the agent that the principal would no longer want the agent to continue in his or her capacity. Example: An agent is instructed by a principal to sell an old painting for $500. The agent discovers that the painting is a Rembrandt. The agent should realize that the painting is worth much more than $500 and his instruction to sell at that price would no longer be valid. 5) Loss or destruction of the subject matter: If the subject matter of an agency agreement is destroyed, the agency comes to an end. 6) Disloyalty of agent: If the agent, without telling the principal, places him or herself in a position where the agent is now in a conflict of interest with the principal, the agency comes to an end. 7) Change of law: If the subject matter of the agency becomes illegal after the agency comes into existence, the agency will come to an end. 8) Outbreak of war: If the outbreak of war places the agent and principal on opposite sides of the war, the agency will come to an end.

b. Capacity of an agent

Capacity of an agent: The agent's capacity is determined by the capacity of the principal. Generally, an agent has no greater powers than the principal he or she represents. Example: Contracts entered into by a minor are voidable. Contracts entered into by an adult agent on behalf of a minor are also voidable. Contrast: If a minor acts as an agent on behalf of an adult, contracts entered into by the minor/agent would be enforceable against the principal.

d. Principal's tort duties

Principal's tort duties: The principal has a duty to deal fairly with the agent and to disclose risks associated with the agency of which the principal knows or should know. 1) To employee agents: If the agent is also an employee, the principal owes additional duties. These include providing the employee with a safe work environment, warning the employee of unreasonable risks associated with the work, and being responsible for the employee's injuries that are the result of negligence of other employees and agents.

c. Similar relationships

Similar relationships: There are two legal relationships that are very similar to the principal/agent relationship. They are: 1) Employer/employee relationship: All employees are agents, but not all agents are employees. The employer has the legal right to set the terms of employment and exercise control over the employee's work environment. For this reason, the employer (principal) is liable for the consequences of his or her employee's actions. 2) Independent contractor: An independent contractor may or may not be an agent of the person who hired him or her. An independent contractor is hired to perform a specific task. How the task is performed is up to the independent contractor. Example: Carl, an attorney, is hired to represent Jacob in an effort to seek a zoning variance from the city. In this case, Carl is an independent contractor. While he may discuss legal strategies with Jacob, how he will handle the request, how many hours he will work, and when and where the work will be done are up to him to decide. In this case, Carl would also be an agent of Jacob. Contrast: Evelyn, an in-house attorney, who works for Jacob's company, is both an employee and an agent. Her place of work, salary, and other terms of employment are dictated by Jacob. a) Importance of distinction: See the case of Massey v. Tube Art Display, Inc. See the case of Wilson v. St. Louis Area Council Boy Scouts of America. A principal is responsible for the tortious conduct of his or her agent. A principal is not bound by such conduct of his or her independent contractor.

b. Fulfillment of purpose

b. Fulfillment of purpose: If an agency is created to accomplish a specific goal, the agency will come to an end when the goal is reached.

e. Renunciation by the agent

e. Renunciation by the agent: The agent has the power to end the agency by giving notice to the principal. If the renunciation violates the agency contract, the agent would be liable for breach of the agency contract.

4. Termination of agency

Termination of agency: An agency comes to an end when the permission to act as an agent is withdrawn by the principal or the agency ceases to exist. Termination can take place in a number of ways: 1. Lapse of time 2. Fulfillment of purpose 3. Mutual agreement of the parties 4. Revocation of authority 5. Renunciation by the agent 6. Operation of law

1. Use of agents

Use of agents: By using an agent to act in place of the principal, the principal can magnify his or her resources by simultaneously engaging in a number of different projects and transactions. The use of agents has become an indispensable element of business life. The law of Agency is particularly important to corporations and partnerships. In a partnership, each partner is an agent of the partnership. In a corporation, the officers and employees of the corporation (as agents) act on behalf of the corporation.

1) Fiduciary duties

1) Fiduciary duties: The agent is in a fiduciary (a position of trust and confidence) relationship with the principal. As such, the agent owes to the principal the duties of loyalty and good faith. If an agent violates these duties, he or she would be liable for resulting damages and would forfeit the right to compensation from the principal. Some common examples of breach of fiduciary duties involve: a) Conflicts of interests: An agent must always act in the best interest of the principal, not the best interest of the agent. An agent may not represent the principal in any transaction in which the agent has an interest. An agent may continue to represent the principal in situations where the agent has a conflict if the nature of the conflict is completely disclosed to the principal and the principal consents. b) Self-dealing: The agent owes to the principal the duty of completely disclosing any information regarding transactions in which the agent has a personal stake. Furthermore such transactions must be absolutely fair to the principal. If these requirements are not met, the principal may rescind any transactions. c) Duty not to compete: If an agent signs a contract agreeing not to compete against the principal in a specified area of business following the end of the agency relationship, courts will uphold such agreements if they are reasonable as to time and place, and necessary to protect the legitimate interests of the principal. See the case of Detroit Lions, Inc. v. Argovitz. d) Misappropriation: An agent must not use the principal's property for the agent's personal use. This is true even if the agent does not harm the property. The agent must disclose to the principal any profit the agent may have made by using the principal's property. This duty continues after the end of the agency. The agent must return to the principal any unused property. e) Confidential information: An agent may not disclose or use confidential information obtained in the course of the agency for his or her own benefit or in a way that is contrary to the benefit of the principal. Confidential information is information that may damage the principal if released or has value because the information is not well known. It includes trade secrets, business plans, financial plans, etc. The duties regarding confidential information continue after the agency is over. Example: Stuart, a client, tells Linda, his lawyer, that he was responsible for causing the death of a police officer. This is confidential information that Linda cannot release. Exception: If the agent learns that the principal is committing or will commit a crime, the agent is free to release this information in most jurisdictions. Contract skills and general knowledge: The skills and general knowledge gained by an agent during the course of the agency relationship are not confidential information and may be disclosed. f) Duty to account for financial benefits: An agent must account to the principal for any financial benefits the agent received while representing the principal. These payments may take the form of kickbacks, gifts, etc.