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19 - 129 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 29 Agency Formation and Termination.

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Presentation on theme: "19 - 129 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 29 Agency Formation and Termination."— Presentation transcript:

1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 29 Agency Formation and Termination

2 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Nature of Agency Agency relationships are formed by the mutual consent of a principal and an agent. Agency is the fiduciary relationship “which results from the manifestation of consent by one person to another that the other shall act in his behalf and subject to his control, and consent by the other so to act.”

3 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Nature of Agency (continued) Agency Law – The large body of common law that governs agency. –A mixture of contract law and tort law. Principal – The party who employs another person to act on his or her behalf. Agent – The party who agrees to act on behalf of another.

4 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman The Principal-Agent Relationship Principal Agent Third Party Agency Contract Contract with third party on behalf of principal Principal’s obligation to perform the contract

5 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Persons Who Can Initiate an Agency Relationship Any person who has the capacity to contract can appoint an agent to act on his or her behalf. Persons who lack contractual capacity cannot appoint an agent. –e.g., insane persons and minors

6 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Persons Who Can Initiate an Agency Relationship (continued) An agency can be created only to accomplish a lawful purpose. Agency contracts that are created for illegal purposes or are against public policy are void and unenforceable.

7 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Kinds of Employment Relationships Employer-Employee Relationship Principal-Agent Relationship Principal-Independent Contractor Relationship

8 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Employer-Employee Relationship A relationship that results when an employer hires an employee to perform some form of physical service. An employee is not an agent unless he or she is specifically empowered to enter into contracts on the principal employer’s behalf.

9 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Principal-Agent Relationship An employer hires an employee and gives that employee authority to act and enter into contracts on his or her behalf. The extent of this authority is governed by any express agreement between the parties and implied from the circumstances of the agency.

10 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Principal-Independent Contractor Relationship Principals employ persons or businesses who are not employees to perform certain tasks on their behalf. –These persons and businesses are called independent contractors.

11 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Principal-Independent Contractor Relationship (continued) A principal can authorize an independent contractor to enter into contracts. –Principals are bound by the authorized contracts of their independent contractors. The crucial factor in determining whether a person is an employee or an independent contractor is the degree of control that the principal has over that person.

12 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Summary: Kinds of Employment Relationships Type of Relationship Description Employer- Employee The employer has the right to control the physical conduct of the employee. Principal-AgentThe agent has the authority to act on behalf of the principal as authorized by the principal and implied from the agency. An employee is often the agent of his employer. Principal- Independent Contractor The principal has no control over the details of the independent contractor’s conduct. An independent contractor is usually not an agent of the principal.

13 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Formation of the Agency Relationship Express Agency Implied Agency Apparent Agency Agency by Ratification

14 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Express Agency An agency that occurs when a principal and an agent expressly agree to enter into an agency agreement with each other. –Exclusive agency contract –Power of attorney Express agency contracts can be either oral or written unless the Statute of Frauds stipulates that they must be written.

15 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Implied Agency An agency that occurs when a principal and an agent do not expressly create an agency. The agency is implied from the conduct of the parties. The extent of the agent’s authority is determined from the particular facts and circumstances of the particular situation. –Incidental authority is the implied authority to act.

16 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Apparent Agency Agency that arises when a principal creates the appearance of an agency that in actuality does not exist. When an apparent agency is established, the principal is estopped from denying the agency relationship. It is the principal’s actions that create an apparent agency.

17 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Agency by Ratification An agency that occurs when: 1. A person misrepresents himself or herself as another’s agent when in fact he or she is not, and 2. The purported principal ratifies (accepts) the unauthorized act.

18 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Summary: Formation of Agency Relationships (1 of 2) Type of Agency DefinitionEnforcement of the Contract ExpressAuthority is expressly given to the agent by the principal. Principal and third party are bound to the contract. ImpliedAuthority is implied from the conduct of the parties, custom and usage of trade, or act incidental to carrying out the agent’s duties. Principal and third party acts are bound to the contract.

19 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Summary: Formation of Agency Relationships (2 of 2) Type of Agency DefinitionEnforcement of the Contract ApparentAuthority created when the principal leads a third party into believing that the agent has authority. Principal and third party are bound to the contract. By Ratification Acts of the agent committed outside the scope of his authority. Principal and third party are not bound to the contract unless the principal ratifies the contract.

20 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Principal’s Duties The principal has a duty to compensate an agent for services provided within a mutually agreeable time. If the agent spends his or her own money, on the principal’s behalf, the principal owes a duty to reimburse the agent for all such expenses if they were: 1.Authorized by the principal. 2.Within the scope of the agency. 3.Necessary to discharge the agent’s duties in carrying out the agency.

21 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Principal’s Duties (continued) A principal owes a duty to indemnify the agent for any losses the agent suffers because of the principal. Such duty arises when the agent is held liable for the principal’s misconduct. The principal owes a duty to cooperate with and assist the agent in the performance of the agent’s duties and accomplishments of the agency.

22 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Agent’s Duties An agent who enters into a contract with a principal has two distinct obligations. Collectively, these are referred to as the agent’s duty of performance. –Performing the lawful duties expressed in the contract –Meeting the standards of reasonable care, skill, and diligence implicit in all contracts.

23 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Agent’s Duties (continued) Duty of notification –The agent’s has a duty to notify the principal of any information that is important, –Imputed knowledge Duty of accountability –Agent has duty to maintain accurate accounting of all transactions undertaken on the principal’s behalf.

24 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Termination of an Agency An agency contract is similar to other contracts in that it can be terminated by: –Acts of the parties, or –Operation of law Once an agency relationship is terminated, the agent can no longer represent the principal or bind the principal to contracts.

25 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Termination by Acts of the Parties An agency may be terminated by the following acts of the parties: 1. Mutual agreement 2. Lapse of time 3. Purpose achieved 4. Occurrence of a specified event

26 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Notification Required The principal is responsible to give certain third parties notification of the agency termination. –Parties who dealt with the agent must be given direct notice –Parties who have knowledge of the agency must be given direct or constructive notice –Parties who have no knowledge of the agency are owed no notice

27 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Irrevocable Agency An agency coupled with an interest: –Special type of agency relationship –Irrevocable by the principal –Not terminated by the death or incapacity of either the principal or the agent –Terminates only when the agent’s obligations are performed

28 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Termination by Operation of Law An agency is terminated by operation of law, including: 1. Death of the principal or agent 2. Insanity of the principal or agent 3. Bankruptcy of the principal 4. Impossibility of performance 5. Changed circumstances 6. War between the principal’s and agent’s countries

29 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Wrongful Termination of an Agency or Employment Contract The termination of an agency contract in violation of the terms of the agency contract. The nonbreaching party may recover damages from the breaching party. The distinction between the power and the right to terminate an agency is critical. –Revocation of authority –Renunciation of authority


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