Chapter Four

Principal Agent -
Relationship
Chapter Outline
 The agency concept
 Classification of agents
1. General Agents
2. Special Agents
3. Gratuitous Agent
 Relationships Similar To Agencies

 Creation Of The principal –Agent Relationship
1. Contract
2. Appearance
3. Ratification
4. Necessity
 Obligations Of The agent To The principal

 Obligations Of The principal To The agent
 Termination Of The principal-Agent Relationship
 Notifying Third Parties Of The Termination
 A principal-agent relationship is created when one person, called the principal, grants
authority to another person, called the agent, to act in place of and for the
principal’s benefit and bind the latter in dealing with third parties.
 Principal: one a who authorizes another to act for him or her in business transactions.
 Agent: one who represents another in making business transactions.
 Authority: power to act for someone else
 Competencies of Agents: Agents make independent decisions and exercise judgment
as if they were making the transactions themselves except for too personal acts such
as: voting, making a will for the principal, make a gift of the principal’s money to a
third person … etc.
The principal-Agent Relationship
AGENT THIRD PARTY

PRINCIPAL A person who acts for A person who the
A person for whom the principal in agent deals with on
the agent acts . business transactions behalf of the
with third parties. principal.
Chapter Outline
1. General Agents
2. Special Agents
3. Gratuitous Agent

1. Contract
2. Appearance
3. Ratification
4. Necessity

Classification of Agents
There are three types of agents as follows:
1. General Agents
2. Special Agents
3. Gratuitous Agents
General Agents:
 A general agent has the authority to perform acts that relate to
all business matters of the principal. The general agent is
considered to be in complete charge of the principal’s business
affairs.
Ex: You appointed Gray, an attorney, to represent you in all

matters relating to your business affairs. Gray could collect
the rents from tenants and authorize all repairs to the
apartments, he could draw money out of your bank account to
pay your bills and he can even sell your company car if there
was a good reason to do so.
Special Agents:
 A special agent, in contrast with a general agent, has the authority to
perform one type of act or a limited number of acts relating to the
principal’s business.
Ex. A friend gave you written authorization to sell her computer. You are
considered a special agent for that transaction, and your authority is
limited to selling the computer.
 One type of special agent is a broker. A broker is an agent whose job is
to bring a willing seller and a willing buyer together to form a contract.
(ex. real estate broker)
Gratuitous Agents:
 Agents who do not always receive pay for the services they perform. Agents
who do not receive compensation are called gratuitous agents.
 A gratuitous agent who agrees to act for the principal has the same power to
bind the principal as an agent who is paid. Because no consideration is given
to the gratuitous agent in return for a promise to perform for the principal,
however; the gratuitous agent cannot be forced to carry out an action for the
principal.
Chapter Outline
1. General Agents
2. Special Agents
3. Gratuitous Agent

1. Contract
2. Appearance
3. Ratification
4. Necessity

Relationships Similar To Agencies
Employer –Employee:
 The major difference between the principal-agent relationship and the

employer-employee relationship is the degree of control exercised. And
employee is not authorized to act in place of the employer. The employer
controls not only what the employee does but also how it is done.
 An agent is authorized to act on behalf of the principal; although an agent is
told what tasks to perform, he or she is not told how to carry out the
tasks.
 A person may act both an employee and an agent.
Ex.1: As an employee the vice president in charge of the loan department of a bank
must follow bank procedures determined by the bank president and perhaps the
bank’s board of directors in deciding who is or is not eligible for a loan.
Ex.2: The vice president also enters into contracts with the bank’s customers when
granting them loans. In this respect the vice president is an agent acting on behalf
of the bank’s president and board of directors, the principals.
Relationships Similar To Agencies cont.
Independent Contractor:
 An independent contractor is generally hired to perform a specific task and
has complete control over the manner in which the work will be conducted
and does not represent the hirer in dealings with third parties.
 Ex.: Plumbers, electricians, physicians.

Chapter Outline
1. General Agents
2. Special Agents
3. Gratuitous Agent

1. Contract
2. Appearance
3. Ratification
4. Necessity

Creation Of The principal –Agent
Relationship
 A principal –agent relationship may be created by the

following:
1. Contract
2. Appearance
3. Ratification
4. Necessity
Creation Of The principal –
Agent Relationship
Contract:
Relationship
 A principal may legally appoint an agent by means of an oral or written contract.
 To prevent any misunderstanding between the principal and the agent regarding
the agent’s authority, an agent should be given written authority.
 Written evidence of authority to act could be an informal instrument, such as a
letter written by the principal to the agent containing all the essential elements
of a contract.
 It could also be a formal written document such as the power of attorney.
 If the contract between the principal and the agent is for more than one year,
the contract creating the agent’s authority MUST be in writing. Likewise, if an
agent is given the authority to sell real estate, the agent’s authority must be in
writing.
Relationship
Appearance:
 If third parties are led to believe that a person is an agent because an

appearance of a principal-agent relationship exists, an agency by estoppel is
created. In this case, the so-called principal is estopped (prevented) by law
from denying the relationship. Otherwise, the third parties would unjustly
suffer damages or loss.
Creation Of The principal –Agent Relationship
Ratification (approval):
 If one person attempts to act as an agent for another and this other person
approves the unauthorized act of the assumed agent, a principal – agent
relationship arises by ratification.
 Approval of the unauthorized act by the so-called principal has the effect of
authorizing the agency.
Ex.: Ahmad, owner of a music store, learned that you had a violin for sale.
Without your permission, Ahmad, representing himself as your agent,
sold the violin to Hossam for $10,000. Hossam gave Ahmad a $1,000
deposit for the violin. When Ahmad gave you the deposit and explained
that he had sold the violin to Hossam, you accepted the money. By
accepting the money, you ratified Ahmad’s act of selling the violin and
created a principal-agent relationship. You cannot change your mind and
refuse to sell the violin to Hossam.
Relationship
Necessity:
 An emergency situation may require a person to act as an agent and thus may
create a principal-agent relationship by necessity.
Ex.: A tour group missed a flight to its home base, and the tour
director arranged to house the group at a nearby hotel. Although
not generally authorized to act as agent for the tour operator (the
principal), the tour director had authority by necessity in this case
because of the emergency.
Chapter Outline
1. General Agents
2. Special Agents
3. Gratuitous Agent

1. Contract
2. Appearance
3. Ratification
4. Necessity

Obligations Of The Agent To The
principal
 The duties of an agent to a principal are usually spelled out in the agency
contract. In addition to the usual implied duties as follows:
o Obedience
o Loyalty
o Reasonable Skill
o Accurate Accounting
o Communication
Chapter Outline
1. General Agents
2. Special Agents
3. Gratuitous Agent

1. Contract
2. Appearance
3. Ratification
4. Necessity

Obligations Of The principal To The
Agent
 There are certain obligations of the principal to their agents. These
obligations imposed by contract or implied by Law as follows:
o Compensation
o Reimbursement (Repay)
o Indemnification
o Safe Working Conditions
o Cooperation
Chapter Outline
1. General Agents
2. Special Agents
3. Gratuitous Agent

1. Contract
2. Appearance
3. Ratification
4. Necessity

Termination Of The principal-Agent
Relationship
 A principal-agent relationship may be terminated by:
1. Fulfillment of Purpose or Lapse of Time
2. Mutual Agreement
3. Revocation of Authority
4. Renunciation by The Agent
5. Operation of Law (ex. The death/insanity of either the principal or the
agent, bankruptcy of the principal).
6. Subsequent Destruction or Illegality
 Fulfillment of purpose or lapse of time:
If the agent has authority to accomplish a specific act, the agency ends as soon as
the act has been accomplished
 Mutual agreement:
The principal and the agent may mutually agree to end their relationship at any
time.
 Revocation of authority:
The principal may revoke an agent’s authority and thus terminate the principal agent
relationship with or without cause at any time. Actually, the principal discharges the
agent. If the discharge is for a good reason, such as a failure to follow instructions,
the agent may not recover damages for breach of contract. Instead, the agent may
have to pay money damages to the principal for causing the breach. If an agent has
been wrongfully discharged, the agent can collect unpaid compensation up to the
time of discharge and in addition recover damages for the wrongful discharge.
 Renunciation by the agent:
An agent may refuse to continue to work for the principal. Of course, an agent who
quits without just cause breaches the agency contract. The agent could be held liable
for any loss suffered by the principal.
 Operation of law:
By operation of law, certain situations will terminate a principal agent relationship
immediately. Among these situations are the death or insanity of either the principal
or the agent, bankruptcy of the principal and in some cases bankruptcy of the agent.
 Subsequent destruction or illegality:

A principal agency relationship established for a specific purpose will end if the
purpose becomes illegal, or prohibited by law, making the agency meaningless.
Chapter Outline
1. General Agents
2. Special Agents
3. Gratuitous Agent

1. Contract
2. Appearance
3. Ratification
4. Necessity

Notifying Third Parties Of
The Termination
 As a general rule, third parties, unless otherwise notified by the principal,
may presume that a principal-agent relationship continues to exist. The
principal will continue to be bound by any acts that the agent performs in the
apparent scope of authority until the principal gives notice of termination of
the agency (ex. A public notice in the Official Gazette may suffice even
though a third party may not actually read the notice).
Case
David, a friend who owned a service station, asked Sarah to watch the station
while David went to lunch, he told her not to deal with any customers but
simply to inform them that he would return in an hour. While David was gone,
a customer requested some automotive parts. Sarah sold the parts but
guessed at the prices because no price list was available. When David
returned from the lunch and discovered that Sarah had under-charged by $20,
he called the customer to ask for the additional money. He explained that
Sarah was not employed at the station and consequently had no knowledge of
what prices to charge. The customer refused to pay the additional $20,
claiming that she thought Sarah worked at the station and sold the parts at
the correct price. Is David entitled to the extra $20 under these
circumstances?
Case’s Solution
By leaving Sarah alone at the station, David created the

impression in the customer’s mind that Sarah had the
authority to deal with customers. The law now prevents David
from claiming that Sarah had no right to charge the prices
she did. Because he allowed her to watch the station, David
must suffer the consequences of Sarah’s act and cannot
legally collect the additional $20. To allow otherwise would
be unfair to the customer, who might not have purchased the
parts had she known their true price.

Chapter Four

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Chapter Four

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Principal Agent -

 Relationships Similar To Agencies

 Obligations Of The agent To The principal

AGENT THIRD PARTY

 Relationships Similar To Agencies

 Obligations Of The agent To The principal

There are three types of agents as follows:

Ex: You appointed Gray, an attorney, to represent you in all

 Relationships Similar To Agencies

 Obligations Of The agent To The principal

 The major difference between the principal-agent relationship and the

 Ex.: Plumbers, electricians, physicians.

 Relationships Similar To Agencies

 Obligations Of The agent To The principal

 A principal –agent relationship may be created by the

 If third parties are led to believe that a person is an agent because an

 Relationships Similar To Agencies

 Obligations Of The agent To The principal

 Relationships Similar To Agencies

 Obligations Of The agent To The principal

 Relationships Similar To Agencies

 Obligations Of The agent To The principal

 Subsequent destruction or illegality:

 Relationships Similar To Agencies

 Obligations Of The agent To The principal

By leaving Sarah alone at the station, David created the

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