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Chapter 32 Agency Formation & Duties Page 1

Agency Relationships
agency as the fiduciary relation 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.
One party, an agent, agrees to represent or act on behalf of another party, the
principal in negotiating and transacting business with third parties.
o Agency relationships commonly exist between
1. employers and employees (EEs), and
2. also exist between employers (ERs) and independent contractors
3. Usually, all employees who deal with 3
parties are considered agents
- Ex: salesperson, attorney, travel agent, insurance agent
Distinction between employees and independent contractors (ICs)
o An EE is subject to the control of the employer regarding the details of work
Benefits of EE status
- protection under employment laws, employment benefits
including social security, workers compensation, and
unemployment compensation
o An independent contractor is a person who contracts with another to do
work for him or her but who is not controlled by the employer with respect to
the physical conduct of the undertaking
Benefits of IC status
- may be tax advantages, freedom to control details of ones own
work performance ex. Building contractor, subcontractor.
- Employment-Employee discrimination apply only to the EE.
- Eomployer does not liable for ICs mistake.
Factors used in Determining EE vs. IC Status
1. How much control can the ER exercise over the details of the work?
This is the most significant factor used by the courts
If significant control, courts will tend to find EE status
2. Is the worker engaged in an occupation or business distinct from that
of the ER? If so, this indicates IC status
3. Is the work usually done under the ERs direction, or by a specialist
without supervision?
If the task is highly specialized, this indicates IC status
If the work performed under ERs direction, this indicates EE
4. Does the ER supply the tools at the place of work? If so, this indicates
EE status
5. For how long has the person been employed? If employed for a long
period of time, this indicates EE status

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6. What is the method of payment by time period, or at completion of
the job? Payment by period (ex: every 2 weeks) indicates EE status
7. What degree of skill is required of the worker? The more skill that is
required for the job, the more likely it is that the person is an IC
Employees as Agents
o Normally, all EEs who deal with third parties are agents of their ER. Ex: A
salesperson in a department store is an agent for the stores owner
Independent Contractors as Agents
o IC+ Agency relationship: ex. Real estate agent, insurance agent
o An IC may or may not be an agent of the ER
- Ex: An insurance agent is an IC, but is also an agent of the insurance
company for which he or she sells policies. If Bob utilizes the services
of the insurance agent, he must be aware that he is contracting with
the insurance agent who is an independent contractor, and that the
insurance agent is also an agent for the insurance company, and not
Employee Status and Works for Hire
o any copyrighted work created by an employee within the scope of her or his
employment at the request of the employer is a work for hire, and the
employer owns the copyright to the work.
Copyright protection arises from the US Constitution and grants copyright holders
exclusive rights to the work they create, including rights to reproduce their works,
to perform the works, to display the works, etc.
o Under the Copyright Act of 1976, any copyrighted work created by an EE
within the scope of employment is a work for hire and the ER owns the
copyright to the work
o In contrast, when the ER hires an IC, such as a freelance artist or writer, the
IC normally owns the copyright
Formation of the Agency Relationship
Agency relationships normally are consensual.
need not be in writing and consideration is not required.
A principal must have contractual capacity, but an agent need not, and an agent can
therefore be any person, a minor or a legally incompetent person
Agency relationships may be formed for any lawful purpose. An agency relationship
created for a purpose that is illegal or contrary to public policy is unenforceable.
4 Ways an Agency Relationship can arise
o Agency by Agreement
Most agency relationships are based on an express or implied
agreement that the agent will act for the principal and the principal
agrees to have the agent so act
Types of Agreements
Express written contract or Oral agreement

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Implied by Conduct the principals conduct shows a willingness for
another person to act as her agent
o Agency by Ratification
When a person who is not an agent makes a contract on behalf of
another (principal), the principal may establish an agency agreement
by ratification if she approves or affirms that contract by word or action
o Agency by Estoppel
When a principal causes a 3rd person to believe that another person
is the principals agent, and that third person acts to his or her
detriment in reasonable reliance on that belief, the principal cannot
deny that an agency relationships exists
- The principals actions have created the appearance of an agency
that does not actually exist
- The 3
person must prove that she reasonably believed that an
agency relationship existed
- Note that the acts or declarations of a purported agent do not
create an agency by estoppel it is the actions of the principal that
can create an agency by estoppel
If a purported agent contracts with a 3rd party on behalf of another,
who is not in fact a principal, the alleged principal will not be bound
by the alleged agents actions
o Agency by Operation of Law
Courts may find agency relationships in the absence of any agreement
in other situations
- Ex: When one spouse charges necessary items, such as clothing
or food, to the other spouses charge account, the spouse who
has the account will be liable to pay for the necessary goods,
because of a social policy promoting families.
- Agency by operation of law may also occur in emergency
situations, when the agents failure to act outside the scope of
authority would cause the principal substantial loss
If the principal cannot be reached, courts will often grant the
agent this power
Duties of Agents and Principals
The principal-agent relationship is fiduciary. It is a relationship of trust, and each
party owes the other the duty to act in the utmost good faith.
Agents Duties to the Principal
o Performance
An implied condition in every agency contract is the agents agreement to use
reasonable diligence in performing the work
When an agent fails to perform his or her duties, liability for breach of
contract may result.
The degree of skill or care required of an agent is that expected of a
reasonable person under similar circumstances (ordinary care)

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If an agent has represented herself or himself as possessing special skills,
however, the agent is expected to exercise the degree of skill claimed. Failure
to do so constitutes a breach of the agents duty.
Gratuitous agency
o When an agent is acting gratuitously (for free), she is subject to the
same degree of care and duty as other agents
However, she cannot be held liable for breach of contract, since
there is no contract. She can be held liable for negligence.
o But, if an agent has represented that she has special skills, she is
expected to exercise that higher degree of skill. When an agent fails to
perform, she may be held liable for breach of agents duty.
o Notification
An agent is required to notify the principal of all matters that come to her
attention concerning the subject matter of the agency
The law generally assumes that the principal is aware of all information that
the agent has concerning the subject matter of the agency, regardless of
whether the agent has passed the information on to the principal
It is a basic tenet of agency law that notice to the agent is notice to the
- Ex: If agent is aware that buyer will not be able to pay for goods that
are the subject matter of the agency, she must inform the principal
of this fact
Loyalty - one of the most fundamental duties in a fiduciary relationship
o The agent has the duty to act solely for the benefit of her principal, and not in the
interest of herself or a 3
Agent cannot represent 2 principals in the same transaction unless both give
All information or knowledge acquired through the agency relationship is
confidential. Disclose the info during agency or after its terminated is breach
of loyalty
Agents loyalty must be undivided: The agents actions must be strictly for
the benefit of the principal and must not result in any secret profit for the
Agent cannot profit at the expense of the principal, and may only engage in
personal transactions related to the subject matter of the agency with the
knowledge and approval of the principal
o The agent must follow all clearly stated lawful instructions given by the principal
o Any deviation from such instructions is a violation of this duty.
o In an emergency, the agent may deviate from instructions provided that she acts
reasonably under the circumstances, and in good faith

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o Unless the principal and agent agree otherwise, the agent has the duty to keep
and make available to the principal an account of all property and funds
received and paid out on behalf of the principal
o The agent must keep the principals funds in an account separate from her own
funds, and no intermingling between the agents money and the principals
money is allowed
Principals Duties to the Agent
o Compensation
The agent is entitled to be paid for services performed on the principals
behalf, except when the agent is acting gratuitously
o Reimbursement
Whenever an agent spends some of her own money in performing her agency
duties, she is entitled to be reimbursed by the principal
o Indemnification
- Principal the duty to indemnify(compensate), or protect, the agent from all
liabilities incurred as a result of lawful and authorized actions
- Ex: A is the agent for P. A enters into a contract with B, and P does not
pay. B can sue A, who would then be entitled to indemnification from P.
o Cooperation A principal has a duty to cooperate with the agent and to assist
the agent in performing his or her duties.
- Ex. when a principal grants an agent an exclusive territory, it creates an
exclusive agency, in which the principal cannot compete with the agent or
appoint or allow another agent to compete.
o Safe working conditions duty to inspect premises and warn agent about
dangerous conditions
Remedies of Agents and Principals
Agents Remedies
o Tort and Contract Remedies
- Agent can sue principal for breach of contract
- Agent can seek a tort remedies (ex: damages resulting from Ps fraudulent
o Demand for an accounting
- An agent can withhold further performance and demand an accounting
from the principal(ex. Sales commission)
o No right to specific performance
- A cannot force P to allow A to continue to be an agent
- Damages may be obtained for past services and future losses, but
performance under a personal services contract cannot be compelled
Principals Remedies
o Constructive Trust

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- Anything Agent obtains by virtue of the employment or agency
relationship belongs to P. An agent commits a breach of fiduciary duty if
he or she secretly retains benefits or profits that, by right, belong to the
o Avoidance
- When an agent breaches the agency agreement or agency duties under a
contract, the principal has a right to avoid any contract entered into with
the agent. This right of avoidance is at the election of the principal.
o Indemnification
- In certain situations, when P is sued by a third party for an agents
negligence, P can sue A for indemnification (i.e., an amount equal to the
damages P must pay to 3P for As negligence)
- Same is true if A violates Ps instructions