1. Business Law with UCC Applications,13e
Agency Law
Chapter 22
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives Describe the nature of the agency relationship.
Outline the doctrine of vicarious liability.
Distinguish among the different types of principals.
Distinguish among the different types of agents.
Distinguish among express, implied, and apparent authority.

3. Learning Objectives Outline the duties of an agent to the principal.
Clarify the duties that a principal has in relation to an agent.
Name the ways that an agency relationship can be terminated.
Identify who is entitled to a notice that an agency has ended.
Explain electronic agency.

4. The Nature of Agency Law
The emergence of the law of agency within our culture is an example of the tendency toward change within the legal system.
Many of the changes emerge because the law must adapt by striking a balance between or among competing interests.

5. Question? Who is the individual with whom the agent
deals for the principal?
Third party
Servant
Second party
Master
The correct answer is “A” – third party. See next slide.

6. Agency and Other Relationships
a legal relationship in which one party, the agent , transacts business for and under the control of the second, the principal .
Third party
individual with whom the agent deals for the principal
Teaching Tips Ask students to think of certain situations in which they have made contracts through
third parties. Agency relationships are not always recognized as involving agency, so you might offer
some examples. For instance, salespeople act as agents for their employers when they make contracts
with customers.

7. Principal–Agent Relationship
An agency relationship is always consensual because the agent must agree to act for the principal.
The agency relationship is fiduciary because the agent and principal trust each other

8. Principal–Agent Relationship
Figure 22-1
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9. Employer–Employee Relationship
The legal principles governing the relationship of principal and agent and of employer and employee are very similar
The main distinction between the two relationships is that agent–employees have the authority to deal with third parties on behalf of the principal.
Generally, we say that agent–employees conduct business
for the principal, whereas non-agent–employees do not.

10. Question? A __________ is a person who has the right
to control the activities of another person.
Servant
Employee
Master
Tyrant
The correct answer is “C” – master. See next slide.

11. Master–Servant Relationship
a person who has the right to control the activities of another person
Servant
The person whose activities are controlled
The terms master (employer) and servant (employee) are not outdated but continue to be
used in some legal circumstances.
In common usage, the terms employer and employee refer to the master–servant relationship.
The terms master and servant are used instead of employer and employee in a legal setting
when questions of tort liability arise.

12. Proprietor–Independent Contractor Relationship
a party who agrees to do a job and retains complete control over the methods employed to obtain final completion
Proprietor
The party for which an independent contractor works
Independent contractors are not subject to the control of the proprietor.
They maintain all required business licenses and
permits and pay all job-related expenses; they are obligated only to get the job done. The
proprietor has the right to specify the results of the job in question. Moreover, he or she has
the right to inspect and approve, or disapprove, the results of the independent contractor’s
performance

13. The Question of Liability
Contract Liability
Tort Liability
Criminal Liability
Statutory Liability
Sovereign Immunity and the Federal Government
Sovereign Immunity, Respondeat Superior, and the States
The distinctions among these relationships frequently can be crucial
in determining the nature and the extent of legal liability. It is important
to note, however, that the names themselves are not controlling.
Instead, it is the true nature of the relationship that is critical.

14. Tort Liability
Vicarious liability is based on the principle of respondeat superior (let the master, or the superior, respond).

15. Vicarious Liability
Figure 22-2
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16. Tort Liability To apply the doctrine of respondeat superior
in a tort case, two questions must be
answered.
Is the alleged tortfeasor a servant?
Was the servant’s action within the scope of employment?
State Variations If an insurance agent sells a policy issued by a company not licensed in the
principal’s state, the agent can be held liable for any bills that the company does not pay. Agents can also
be held liable if they sell a policy with the knowledge that the company is insolvent.
In Texas, an agent must notify the insured of a company’s financial problems or risk a suit.

17. Tort Liability
To establish the existence of the master–servant relationship, the court must decide whether the alleged tortfeasor is a servant or an independent contractor.
The control test requires that we look at the degree of control, or right to control, that the hiring person exercises over the hired person.
The more control, or right to control, that the hiring person has over
the hired person, the more likely that the court will rule that a master–servant relationship
exists.
When the degree of control is unclear or in dispute, the court has a series of factors
that can be applied to bring the level of control into focus.

18. Control Test
Who decides the time period in which the job is performed?
Who owns the tools that are used on the job?
Who selects the overall length of the hired person’s employment?
Who decides the method of compensating the hired person?
Who decides how the job is to be done?
The first five questions are fairly straightforward. If the answer to a question is the
hired person, then it is likely that he or she is an independent contractor (IC) at least
for that question.

19. Control Test What job skills are required to perform the tasks?
How much freedom does the hired person possess on the job?
Does the hired person operate a distinct business?
What was the understanding that existed between the parties?
What is the nature of the written agreement (if one exists)?
The final five questions require a bit more analysis. For instance, in
question six, the more skill involved on the job, the more likely the hired party is an IC.
In question seven, the more freedom, the more likely the hired person is an IC. In
question eight, a distinct business is indicative of an IC. Finally, the ninth and the tenth
questions examine what transpired between the parties themselves.

20. Question? What involves the range of activities for
which the servant is engaged?
Scope of law
Scope of knowledge
Scope of employer
Scope of employment
The correct answer is “D” – Scope of employment . See next slide.

21. Tort Liability Scope of employment
Involves the range of activities for which the servant is engaged.
To determine whether a servant was operating within the scope of employment,
ask the following questions:
1. Was the action committed by the employee authorized by the employer?
2. Where did the action take place?
3. Were the employer’s interests promoted by the action?
4. Did the employer supply the instrumentality used in the action?
5. Was this action performed by other employees on a regular basis?
6. Was the action committed by the employee criminal?

22. Tort Liability
In some jurisdictions, if a proprietor is negligent in checking an independent contractor’s qualifications and consequently hires someone who is incompetent, the proprietor may be held liable should an innocent third party be injured by the negligence of the incompetent independent contractor.
In this case, the court may hold the proprietor liable for the negligent hiring of the
incompetent independent contractor. Similarly, a proprietor may be liable for the negligent
retention of an incompetent independent contractor if, after hiring the independent contractor,
the proprietor learns that the contractor is incompetent and does not dismiss the
contractor.

23. Tort Liability
Proprietor may also be open to liability when the independent contractor has been hired to perform a nondelegable duty.
Nondelegable duty
one that the proprietor cannot delegate, or pass off, to another party

24. Criminal Liability
The principal or employer ordinarily is not liable for an agent’s or employee’s crimes, unless the principal or employer actually aids or participates in their commission.

25. The Economic Reality Test
The courts have created a test, called the economic reality test , to uncover the true nature of the employment relationship
Includes determining the hired party’s autonomy on the job, the length of time involved in the employment situation, and the level of skill needed to do the job
However, the economic
reality test also adds some factors of its own. For example, in an attempt to determine
the true nature of the financial arrangement between the parties, the economic reality test
also asks about the hired party’s investment in the employer’s business and the degree to
which the hired person’s services were integrated into the employer’s commercial activity.

26. Question? What doctrine prevents a lawsuit against a
government authority without the
government’s consent?
Sovereign impunity
Diplomatic immunity
Sovereign immunity
Diplomatic impunity
The correct answer is “C” – Sovereign immunity. See next slide.

27. Sovereign Immunity and the Federal Government
doctrine preventing a lawsuit against a government authority without the government’s consent
The doctrine is no longer as important a defense for government torts as it
once was. The Federal Tort Claims Act of 1946 limits the federal government’s sovereign
immunity. Whenever a federal employee harms a third party or private property while driving
a motor vehicle in the course of employment, the federal government is liable. However,
the 1946 law explicitly preserves governmental immunity for a vaguely defined
category of “discretionary” actions by officials.

28. Types of Principals and Agents
Disclosed principal
one whose identity is known by third parties dealing with that principal’s agent
Undisclosed principal
When an agent does not reveal the existence of an agency relationship but appears to act on his or her own behalf rather than for another
Teaching Tips Explain that an agent works for and on the behalf of a principal
and is subject to the principal’s control. Review the three types of principals and
ask students to suggest examples
of each type.

29. Types of Principals and Agents
Partially disclosed principal
exists when the agent, in dealing with third parties, reveals the existence of an agency relationship but does not identify the principal
Teaching Tips Explain that an agent works for and on the behalf of a principal
and is subject to the principal’s control. Review the three types of principals and
ask students to suggest examples
of each type

30. Types of Principals and Agents
General agent
a person who is given broad authority to act on behalf of the principal in conducting the bulk of the principal’s business activity on a daily basis.
Getting Students Involved
Have students interview local real estate brokers about the status of the agents working for
them. Students should find out what kind of agency relationships exist between
the brokers and the agents.
Have students find out about multiple listings services and what happens when an agent sells a property
listed with a different brokerage firm.

31. Types of Principals and Agents
Special agent
a person who is authorized to conduct only a particular transaction, conduct a series of related transactions, or perform only a specified act for the principal.
Examples are real estate brokers, lawyers, and accountants who are retained to do a
specific job and whose authority is restricted to those acts necessary to accomplish it.

32. Question? What is a special agent who is employed to
sell merchandise consigned for that
purpose?
Factor
Sales agent
Broker
Dealer
The correct answer is “A” – factor. See next slide.

33. Types of Principals and Agents
Factor
a special agent who is employed to sell merchandise consigned for that purpose.
Del credere agent
A factor who guarantees the credit of a third party to a principal and guarantees the solvency of the purchaser and performance of the contract
The factor has possession of the goods and sells them for
and on behalf of a principal. A factor who guarantees the credit of a third party to a
principal and guarantees the solvency of the purchaser and performance of the contract
is known as a del credere agent. In the event of default, the del credere agent is liable
to the principal.

34. Liability of Principals and Agents
The principal is liable for all contracts that a general or special agent may enter into with third parties, as long as the agent acts within the authority conferred by the principal.
Teaching Tip Ask students to think about the responsibilities of the parties involved in a contract. Give
some examples of different types of contracts and have students identify in whose interest each party acts.
Next, name some examples of agency relationships and ask the students in whose interest each party acts.
Make sure students recognize the fundamental distinction between acting for oneself and acting for another.

35. Scope of an Agent’s Authority
Agents may perform only acts that have been authorized by the principal.
Unauthorized actions do not bind the principal unless those actions can be reasonably assumed by a third party to be within the scope of the agent’s authority.
Agents may perform only acts that have been authorized by the principal. Agents who exceed
their delegated authority become personally liable. Unauthorized actions do not bind
the principal unless those actions can be reasonably assumed by a third party to be within
the scope of the agent’s authority. Authority granted to an agent may be express, implied,
or apparent.

36. Creation of the Agency Relationship
An agency relationship is generally created
by the following methods:
By appointment and implication
By necessity and operation of law
By estoppel and ratification
An agency is created by some action or conduct on the part of the principal. A would-be
agent cannot by conduct alone or by any statement establish an agency relationship. It is
therefore wise for a third party, when dealing with an agent, to determine the nature and
extent of the agent’s authority.

37. Agency by Appointment and Implication
occurs when the principal either orally or in writing creates the agency relationship
agent’s express authority is created at the same time that the principal appoints the agent and creates the agency relationship
This happens when the principal writes down (word
processes, types out, s, faxes, texts, and so on) the instructions or instructs the agent
orally. In either case, the principal uses words to transfer authority to the agent. Sometimes
referred to as actual authority, express authority may also be indicated by conduct, as
when a sales representative informs the principal of travel plans, and no objection to them
is expressed.

38. Implied Authority Implied authority
The agent’s authority to perform acts that are necessary or customary to carry out expressly authorized duties
Implied authority can be described as incidental
authority when the acts performed are reasonably necessary to carry out an express authority.
For example, an agent might have incidental authority to contract for the repair of the
principal’s van that broke down while being used to deliver perishable products that the
agent had express authority to sell and deliver. Implied authority may be described as customary
authority when the agent acts in conformity with the general trade or professional
practices of the business.

39. Apparent Authority Apparent authority Lingering apparent authority
When a principal, by words or actions, leads a third party to believe that a non-agent is an agent
Lingering apparent authority
created if the principal terminates an agent’s actual authority but fails to give proper notice of that termination to those who are entitled to receive such notice.
Teaching Tips Inform students that the apparent principal is estopped to deny the authority of the
apparent agent, so a principal does not unjustly benefit from the actions of an agent
without also taking responsibility for the actions of the apparent agent.

40. Question? What occurs when the principal approves
the unauthorized act performed by an
agent?
Justification
Validation
Realization
Ratification
The correct answer is “D” – ratification. See next slide.

41. Agency by Ratification
occurs when the principal approves the unauthorized act performed by an agent or by one who has no authority to act as an agent
Terms Ratify has its origins in the Latin word ratus, which comes from two words meaning agree and
make. In an agency by ratification, the principal makes an agreement to fit circumstances
that already exist.

42. Agent’s Obligations to a Principal
An agent’s obligations generally involve the
following duties:
To obey all instructions and be loyal to the principal.
To exercise reasonable judgment, prudence, and skill and account for all property.
To perform work personally and communicate fully with the principal.

43. Remedies Available to the Principal
Terminate the agent’s contract of employment.
Withhold compensation otherwise due the agent.
Recover profit the agent made in violation of agency obligations.
Recover money or property gained or held by the agent to which the principal is entitled.

44. Remedies Available to the Principal
Restrain the agent from continuing to breach the agency obligations.
Recover damages from the agent for breach of the contract of employment or assessed against the principal for the agent’s wrongdoing.
Rescind a contract entered into by the agent based on an improper relationship between the agent and the third party.

45. The Principal’s Obligations to the Agent
Among the principal’s actual and implied
duties are the following obligations:
To compensate the agent.
To reimburse the agent.
To indemnify the agent.
To cooperate with the performance of the agent’s duties.

46. Remedies Available to the Agent
Leave the principal’s employ.
Recover damages for the principal’s breach of contract.
Recover the value of services rendered.
Obtain reimbursement for payments made for the principal.
Secure indemnity for personal liability sustained while performing an authorized act for the principal.

47. Termination by the Acts of the Parties
Revocation
Acting with or without cause, the principal may terminate the agreement by simply recalling the agent’s authority to act
Renunciation
Agents may terminate by simply giving notice to principals that they are quitting
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48. Termination by Operation of Law
Death or Insanity
Durable Power of Attorney
Bankruptcy
Impossibility of performance

49. Agency Coupled with an Interest
an agency agreement in which the agent is given an interest in the subject matter of the agency, in addition to compensation for services rendered to the principal.
concept protects the agent’s interest in specific property belonging to the principal

50. Cyber- Agency Statutes
Electronic agent
a computer program that acts without human intervention to begin an activity, answer cyber-messages, deliver or accept electronic mail, or enter electronic contracts as a representative of an individual who does not intervene in the action taken by the electronic agent at the actual time of the electronic agent’s activity
Another model act, the Uniform Electronic Transactions Act (UETA), has legitimized
the use of electronic agents by certifying that contracts made by electronic agents have the
same binding effect as contracts created by human agents. The net effect of these provisions
is to guarantee that a company that has used an electronic agent to receive and process
an order sent by an electronic agent will not be able to deny the effectiveness of that
electronic contract

51. Principal–Agent Relationship
The agent has the authority to represent the principal
The principal is liable for the agent’s acts when the agent deals with third parties for the principal.
The agent performs duties for the principal that require the exercise of judgment and discretion and that result in a contract.
Terms Principal and prince come from the word primus, meaning first. Principal
and prince are also associated with the Latin term princeps, which literally
means “one who takes the first part.”

52. Minors and Business Associations
Partnerships
Corporations
The law of agency frequently interacts with the laws related to minors. For example, a
principal may not use the infancy of an agent as a reason for avoiding a contract made by
that agent. The principal who is a minor may generally avoid or accept a contract made by
an agent to the same extent that he or she could have, had the principal dealt directly with
the third party. However, state statutes are not universal in the way they treat the business
contracts of minors. Some state courts have held that a minor who is sufficiently mature to
run a business may not avoid business-related contracts made while running the business.

53. Agency by Appointment and Implication
Power of attorney
an instrument in writing by which one person, a principal, appoints another as agent and confers the authority to perform certain specified acts on behalf of the principal.
Getting Students Involved
Obtain from a stationery store standard forms for a power of attorney and have students examine
them. Discuss the forms’ terminology and have each student complete a form, giving power
of attorney to an imaginary person. Be sure to void the forms at the end of class.