2/12/2014BUSINESS LAW (Ms. Hawkins)1 CHAPTER 20: CREATION OF AGENCY Chapter 20 presents an overview of how agency is created and the types of authority an agent can possess. We will look at… When does agency exist? Whos qualified to be a principal and an agent? Sources of an agents authority Acting outside the scope of express authority

2/12/2014BUSINESS LAW (Ms. Hawkins)2 CHAPTER 20: CREATION OF AGENCY Hot Debate (Page 378): Bruce owned an apartment building. He hired a maintenance manager named Tom to make minor repairs requested by tenants such as fixing plumbing leaks, replacing light switches, and replacing broken garbage disposals. Things worked well until Tom ordered a new refrigerator and stove for one of the apartments without consulting Bruce. Tom had given the business card Bruce had printed for him to the appliance store. The card described Tom as the Manager of Maintenance for the apartment complex. Based on that business card, the retailer delivered the appliance.

2/12/2014BUSINESS LAW (Ms. Hawkins)3 CHAPTER 20: CREATION OF AGENCY Hot Debate (Page 378): Why should Bruce be bound to pay for the appliances? Why should Bruce not be bound to pay for the appliances? Bruce should be bound to pay for the appliances because he created the impression that Tom had the authority to purchase the appliances. Bruce should not have to pay for the appliances because Tom went beyond the duties that Bruce had assigned him.

2/12/2014BUSINESS LAW (Ms. Hawkins)4 CHAPTER 20: CREATION OF AGENCY What is an agency relationship? An employee is a person who works for pay under the supervision and control of another person. An employee has an agency relationship when they are authorized to alter anothers legal relationships--to make contracts for their employer (e.g., a salesperson makes contracts with customers for a business owner).

2/12/2014BUSINESS LAW (Ms. Hawkins)5 CHAPTER 20: CREATION OF AGENCY What is an agency relationship? The person who authorizes a relationship of agency is a principal. The person authorized by the principal is the agent. The agent facilitates agreements between the principal and a third party (customers).

2/12/2014BUSINESS LAW (Ms. Hawkins)6 CHAPTER 20: CREATION OF AGENCY Whats Your Verdict? (Page 379) José worked at the Civic Center Service Station. His duties included selling gasoline, oil, and accessories, for which he either collected cash or made out credit tickets. José also changed oil and filters, provided lubrication services, and cleaned the premises.

2/12/2014BUSINESS LAW (Ms. Hawkins)7 CHAPTER 20: CREATION OF AGENCY Whats Your Verdict? (Page 379)… Was José an agent, an employee, or both? José is an employee when he changes oil and filters, lubricates cars, and cleans the premises. José is an agent when he sells gas, oil, and accessories--an agency relationship exists.

2/12/2014BUSINESS LAW (Ms. Hawkins)8 CHAPTER 20: CREATION OF AGENCY Altering Legal Relations There are several ways to alter legal relationships: Contracting (most common) Marriage Divorce Sue Waive your legal rights

2/12/2014BUSINESS LAW (Ms. Hawkins)9 CHAPTER 20: CREATION OF AGENCY Scope of Authority The scope of authority is the range of acts authorized by the principal. The agent must act within the granted scope. If the agent acts outside the scope of authority, and the third party is injured, the third party can recover from the agent.

2/12/2014BUSINESS LAW (Ms. Hawkins)10 CHAPTER 20: CREATION OF AGENCY Fiduciary Duties All agents owe to their principals fiduciary duties--these duties require that the agent serve the best interests of the principal. Fiduciary duties include loyalty, obedience, reasonable care and skill, confidentiality, and accounting.

2/12/2014BUSINESS LAW (Ms. Hawkins)11 CHAPTER 20: CREATION OF AGENCY Consensual Nature Agency is consensual. Both parties always have the ability to terminate.

2/12/2014BUSINESS LAW (Ms. Hawkins)12 CHAPTER 20: CREATION OF AGENCY Who can be a principal? Minors and others who lack contractual capacity can be principals and act through agents. Minors may still disaffirm contracts made with their agents for non-necessaries. Agents who represent those who lack contractual capacity are bound by a warranty of the principals capacity. This protects the third party if the principal lacked capacity and avoids the contract, resulting in injury to the third party (the third party can sue the agent).

2/12/2014BUSINESS LAW (Ms. Hawkins)13 CHAPTER 20: CREATION OF AGENCY Whats Your Verdict? (Page 380) Carey, a minor wished to sell her roller blades. She agreed to pay Fischer 10 percent of the sales price of $100 if Fischer would sell them for her. Fischer agreed, but after he had found a buyer, Carey decided not to sell. She claimed that, as a minor, she had the power to avoid the agency agreement and to avoid the contract made by Fischer, her agent.

2/12/2014BUSINESS LAW (Ms. Hawkins)14 CHAPTER 20: CREATION OF AGENCY Whats Your Verdict? (Page 380)… Was Carey correct? Yes. Carey can avoid the contract to pay Fischer 10 percent and also avoid the contract with the third party.

2/12/2014BUSINESS LAW (Ms. Hawkins)15 CHAPTER 20: CREATION OF AGENCY Who can be an agent? An agent must be able to understand the transaction entered into on behalf of the principal. Minors and others who lack contractual capacity can be agents. They can bind adult principals in contracts.

2/12/2014BUSINESS LAW (Ms. Hawkins)16 CHAPTER 20: CREATION OF AGENCY Whats Your Verdict? (Page 381) Tricia cousins, a 17-year-old minor, was asked to buy a car on behalf of Mrs. Cousins, her elderly grandmother. Mrs. Cousins signed documents appointing Tricia as her agent for this purpose. Then Tricia found a car and then executed a contract to buy it, signing as an agent. Later, her grandmother decided that she did not like the color and said she was not bound by the contract because Tricia was underage.

2/12/2014BUSINESS LAW (Ms. Hawkins)17 CHAPTER 20: CREATION OF AGENCY Whats Your Verdict? (Page 381)… Was Mrs. Cousins correct? No. Mrs. Cousins is bound by the contract, even though her agent, Tricia, was a minor.

2/12/2014BUSINESS LAW (Ms. Hawkins)18 CHAPTER 20: CREATION OF AGENCY Creation of agency authority Agency authority is created when a principal authorizes an agent to represent the principal. Gratuitous agency is when the agent receives no consideration (and there is no contract) for representing the principal.

2/12/2014BUSINESS LAW (Ms. Hawkins)19 CHAPTER 20: CREATION OF AGENCY Creation of agency authority… Agency can be created in various ways: 1.Express Grant of Authority 2.Implied Grant of Authority 3.Apparent Authority 4.Ratification

2/12/2014BUSINESS LAW (Ms. Hawkins)20 CHAPTER 20: CREATION OF AGENCY Express Grant of Authority Express authority is directly communicated by the principal to the agent (oral or written) Any writing that appoints someone as agent is called a power of attorney.

2/12/2014BUSINESS LAW (Ms. Hawkins)21 CHAPTER 20: CREATION OF AGENCY Implied Grant of Authority Implied authority is the power to do anything that is reasonably necessary or customary to carry out the duties of expressly authorized. An agents implied authority flows out of the express authority.

2/12/2014BUSINESS LAW (Ms. Hawkins)22 CHAPTER 20: CREATION OF AGENCY Apparent Authority Agency authority may sometimes result from the appearance created by the principal. There is no agreement between the principal and the agent. Apparent authority is created when the principal leads the third party to reasonably believe (through words or conduct) that a person has agency authority.

2/12/2014BUSINESS LAW (Ms. Hawkins)23 CHAPTER 20: CREATION OF AGENCY Ratification Ratification is approval of a previously unauthorized act by the agent who has acted outside the scope of authority. A principal can ratify by knowingly accepting the benefits of the ratification.

2/12/2014BUSINESS LAW (Ms. Hawkins)24 CHAPTER 20: CREATION OF AGENCY Ratification For valid ratification, the following conditions must be met: The third party believes that by dealing with the principals agent, he or she is making a contract with the principal. Before ratification, the principal must have full knowledge of all material facts.

2/12/2014BUSINESS LAW (Ms. Hawkins)25 CHAPTER 20: CREATION OF AGENCY Ratification For valid ratification, the following conditions must be met: The principal must show an intent to ratify. The principal must ratify the entire act, not just one part of the transaction. The principal must ratify before the third person withdraws from the ungratified transaction.

2/12/2014BUSINESS LAW (Ms. Hawkins)26 CHAPTER 20: CREATION OF AGENCY Whats Your Verdict (Page 382) Taylor was planning a birthday party for a friend. She asked another friend, Logan, to buy the cake. Logan agreed. Taylor told her to charge the cake to Taylors account at the bakery. Taylor also gave Logan the keys to her car.

2/12/2014BUSINESS LAW (Ms. Hawkins)27 CHAPTER 20: CREATION OF AGENCY Whats Your Verdict (Page 382)… What forms of agency authority does Logan have? There may be implied authority for Logan to buy some gas for the car if it is needed and charge it to Taylor. If Taylors car caught on fire while Logan was driving it on the errand, Logan would have implied authority to promise money to someone to assist in putting out the fire. Taylor would be liable to pay for this help.

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