BELL QUIZ ON CHAPTER 18 Name one thing an agent can negotiate. What is a servant? Who has more authority than special agents? If the principal hires two or more agents, what has he/she created? When does ratification occur?

ANSWERS TO BELL QUIZ Deals, contracts, and perform other business tasks. A person whose conduct in the performance of a task is subject to the control of another. General agents. Coagent situation If the principal accepts the benefits of the unauthorized acts.

Section 19.1

Agents and Principals NOTES: It is important to understand the nature of agency authority, the duties and rights that exist between agents and principals, the responsibilities that extend to third parties, and the ways that agency relationships can end.

Types of Agency Authority NOTES: Agents act within the scope of their authority and contract with a third party on behalf of the principal.

Types of Agency Authority The agent’s authority in negotiating the contracts with the third party may be actual apparent

Actual Authority NOTES: Actual authority is the real power a principal gives to an agent to act on the principals’ behalf.

Actual Authority Such actual authority may be expressed in words implied from the nature of the relationship or the conduct of the parties

Express Authority Express authority includes all of the orders, commands, or directions a principal directly states to an agent when the agency relationship is first created. These instructions may be general or specific. Example 1

Implied Authority The law allows some actual authority to be implied or understood from the express terms that create the agency relationship, which constitutes an agent’s implied authority. Example 2

Going Beyond Implied Authority Sometimes a dispute arises over what powers can be implied from the express authority given to the agent.

Going Beyond Implied Authority NOTES: The court draws the line by saying that implied authority must be “reasonably derived from the express power.” Example 3

Apparent Authority NOTES: Apparent authority exists when the principal has somehow led a third party to believe that a nonagent is an agent, or that an agent has a power that he or she does not truly have.

Apparent Authority Apparent authority is sometimes referred to as agency by estoppel because the principal cannot deny that the nonagent acted on his or her behalf. Example 4

Agent’s Duties to the Principal An agent owes a principal the following five duties: obedience good faith

Agent’s Duties to the Principal loyalty accounting for all the principal’s money handled by the agent exercising judgment and skill in the performance of the assigned work

Obedience An agent owes the principal the duty of obedience, which means the agent must obey all reasonable orders and instructions within the scope of the agency agreement. Example 5

Good Faith To have good faith simply means to deal honestly with another party with no intent to seek advantage or to defraud.

Good Faith NOTES: Good faith also requires an agent to notify the principal of all matters pertaining to the agency relationship.

Loyalty NOTES: Agents may not work for others who are competing with their principals, nor may they make deals to their own advantage at the expense of their principals.

Duty to Account The duty to account means the agent must keep a record of all the money collected and paid out and must report this to the principal.

Judgment and Skill Agents: Example 6 Agents: must use all of the skill and judgment that they have when performing work for principals NOTE: are not held liable for honest mistakes if they have performed to the best of their ability.

Principal’s Duties to the Agent The principal has four duties to the agent by law. compensation reimbursement indemnification cooperation

Compensation NOTES: An agent who is working on behalf of a principal is entitled to be paid for services rendered, unless he or she is a gratuitous agent.

Reimbursement and Indemnification Agents are entitled to reimbursement, or repayment, when they spend their own money for the principal’s benefit.

Reimbursement and Indemnification In addition, if an agent suffers any loss as a result of the principal’s instructions, he or she is entitled to indemnification; that is, he or she is entitled to repayment of the amount lost.

Cooperation The duty of cooperation means working together toward a common end. If the principal makes the agent’s job difficult or impossible, he or she has breached the duty of cooperation. Example 7

Agent’s Liability to Third Parties Principals may or may not wish to disclose their relationship in a contractual arrangement between an agent and a third party.

Agent’s Liability to Third Parties NOTES: If the agent represents a disclosed principal, one whose existence and identity are known to the third party, the agent assumes no contractual liability for the resulting contract.

When the Principal is Not Disclosed or Wrongfully Exceed Authority NOTES: Agents may be held responsible for contracts negotiated for the principal when the agents do not disclose the identity or the existence of the principal, or when agents wrongfully exceed their authority. Examples 8 - 10

Section 19.2 Terminating the Relationship NOTES: Because many agency relationships involve contractual arrangements, the usual rules that apply to the termination of contracts are applicable.

Terminating the Relationship Agency relationships can be terminated either by operation of law or by the acts of the parties involved.

By Operation of Law NOTES: When a significant change of circumstances alters the original reason for the agency relationship, a court may hold the agency relationship terminated.

Death of the Principal or Agent NOTES: The death of either the principal or agent will terminate the agency relationship.

Bankruptcy Bankruptcy of the principal terminates an agency relationship because it cancels all of the principal’s ordinary contracts.

Bankruptcy Bankruptcy of the agent will terminate the agency relationship if the agent has used his or her own funds to conduct the principal’s business.

Impossibility of Performance NOTES: An agency relationship is terminated when the essential subject matter is destroyed or the incapacity of the agent makes performance impossible.

Agent’s Objective Becomes Illegal NOTES: If, after an agency agreement has been entered, the purpose of the agency is declared illegal, then the agency is terminated by operation of law.

By Acts of the Parties Most agency relationships are terminated by performance mutual agreement agent’s withdrawal agent’s discharge

Performance When the parties have fully carried out their duties, the agency relationship is terminated. NOTES: In other words, when the job is done, the agency ends.

Mutual Agreement NOTES: The principal and the agent may mutually agree to terminate the agency. Termination may result from the passing of a preset time period.

Agent’s Withdrawal NOTES: An agent may terminate the agency at any time. However, if termination involves a breach of contract, the agent may be liable for any damages suffered by the principal.

Agent’s Discharge NOTES: The principal may terminate an agency relationship at any time by firing the agent. There are some limits on the authority of the principal to fire an agent, however.

Agent’s Discharge When an agent has an interest in the subject matter of the agency, he or she is said to have an irrevocable agency, which cannot be discharged by the principal. Example 11

Notice to Third Parties NOTES: Third parties who have done business with the principal through an agent or who know of the agency relationship are entitled to notice of its termination. Example 12

Notice to Third Parties NOTES: A principal who fails to notify third parties when an agency has ended may be liable for future acts of the agent.

Type of Notice The type of notice given to a third party depends on how the former business relations were carried out. There are three situations to consider

Type of Notice When the third party has given credit to the principal through the agent, the third party is entitled to actual notice.

Type of Notice (continued) Notice by certified mail is perhaps the best way to give actual notice, because receipt of the notice can be obtained from the post office.

Type of Notice When the third party has never given credit but has done a cash business with the agent,

Type of Notice (continued) or knows that other persons have dealt with the principal through the agent, notice by publication in a newspaper is sufficient.

Type of Notice When the third party has never heard of the agency relationship, no notice of any kind is required.

Type of Notice (continued) The third party who is dealing with an agent for the first time has a duty to investigate and determine the exact extent of the agent’s authority.

How Liability Is Determined after Termination of an Agency 19.2 How Liability Is Determined after Termination of an Agency