CHAPTER 23
THE AGENCY RELATIONSHIP--CREATION, DUTIES, AND TERMINATION
Outline
I. Introduction
Agency relationships arise when one person (the agent) acts for the benefit of and under the direction of another (the principal).
II.Creation of an Agency
A. Nature of Agency
Agency relationships may arise from agreement or may be implied from the circumstances.
Example: Iragorri v. United Technologies: The court ruled that Otis Elevator Company was not responsible for the negligence of Columbian Companies which installed and maintained an elevator that did not function properly and caused Iragorri’s death. The Columbian Companies were not acting for the benefit, nor were under the control, of Otis.
B.Capacity to Be a Principal
Generally, the capacity of the principal determines the agent capacity to contract on behalf of the principal.
C.Capacity to Be an Agent
A person may have capacity to act as an agent although he does not have the legal capacity to contract. Minors are an example of this.
III.Types of Agents
- Commercial Agents
Commercial agents take orders on behalf of their principal and are usually compensated by
payment of a commission. Agents usually possess the authority to contract on behalf of their principals and they usually do not bear financial risk of nonpayment by the purchaser.
- Employees
Employees are dependent agents who are under the control of their employer as to both the objective
of their work and the means used to achieve it.
- Independent Contractors
Independent contractors are under the control of their principals as to the result of their work, but
not the means to achieve it.
IV. Duties of Agents to Principals
An agent owes certain duties to the principal.
A. Duty of Loyalty
An agent is a fiduciary and owes a duty of loyalty to the principal.
1.Conflicts of Interest
The duty of loyalty requires either avoidance of conflicts between interests of the agent and those of the principal or full disclosure of any such conflict. Agents breach their duty of loyalty by buying for the principal from themselves even if they charge a fair price.
Example: Wesco Autobody Supply v. Ernest: The court found that Wesco had a claim for for breach
of loyalty. Throughout the duration of an agency relationship, an agent has a duty to refrain from competing with the principal and from taking action on behalf of or otherwise assisting the principal’s competitors.
2.Moonlighting
An agent/employee may supplement her income by taking on a second job. Whether or not this violates the duty of loyalty may turn on several factors.
3.Dual Agency
Usually, a dual agency is a breach of duty of loyalty; however, an exception arises when the dual agent is merely a middleman (as in real estate contracts). Both principals must agree to the dual agency.
4.Confidential Information
An agent breaches the duty of loyalty if he discloses confidential information obtained in the agency relationship.
Example: American Family Mutual Insurance v. Roth: The court found that Roth breached his duty to his principal when he used customer information, which was the principal’s exclusive property.
B.Duty to Obey Instructions
An agent must obey instructions, exercise care and skill, and communicate information to principal.
C.Duty to Exercise Care and Skill
The agent has a duty to act with ordinary care and with the skill common for the kind of work he is hired to do. The standard of skill and care is generally less for a gratuitous agent.
Example: Ikola v. Schoene: The court found that a jury should determine whether a real estate agent violated her duty of reasonable care and skill when she failed to give the seller’s disclosure statement to Ikola and when she also misrepresented that Ikola had no right to an inspection report.
D. Duty to Communicate Information
The agent has a duty to inform the principal of knowledge the agent gains in the course of her responsibilities.
- Duty to Account for Funds and Property
An agent has a duty to account for funds and property, and to keep funds separate from her own.
V. Duties of Principals to Agents
Unless otherwise stated, the common law of agency imposes a duty to compensate, reimburse, indemnify and keep accounts on the principal.
A. Duty to Compensate
A principal must compensate the agent.
1.Contingent Compensation
An agent is entitled to be paid if the agreed-on result is obtained even though the principal does not benefit.
2.Procuring Cause
Under the procuring cause rule, if an agent was the primary factor in a purchase or sale, he may be entitled to the commission regardless of who eventually completes the sale.
Example: AA Sales & Associates v. Coni-Seal: The court found that the procuring cause rule does not apply because the parties’ contract gave Saltzman commission without Saltzman having to prove that he was the cause of the sale.
3. Duration of Employment
Duration of an agency will be a reasonable one (if agreement is silent).
4.Real Estate Commission
A real estate broker is generally entitled to a commission when she procures a "ready, willing, and able" buyer.
5. Insurance Commissions
It is customary for a company to pay an insurance agent a commission on all premiums paid on the insurance contract sold.
B.Duty to Reimburse and Indemnify
If the agent is acting within the scope of her authority, the principal has a duty to reimburse the agent for expenses incurred for the principal. If the agent suffers losses while acting for the principal, the principal must indemnify the agent.
C.Duty to Keep Accounts
The principal has a duty to keep records from with the compensation due the agent can be determined.
VI.Enforcement of Liabilities between Principals and Agents
A.Breach of Duty by Agent
When an agent’s breach of duty causes harm to the principal, the principal may deduct the loss from the amount due the agent.
B.Breach of Duty by Principal
Generally, an agent who is in lawful possession of property belonging to the principal may place a lien on that property for the compensation due the agent from the principal.
VII. Termination of Agent's Powers
A. Termination by Will of Parties
The principal and agent may agree to terminate the agency.
B.Agency at Will
Either party may terminate an agency based on mutual consent at any time.
- Agency Coupled with an Interest
An agency coupled with an interest arises when the power of agency is given as security; such an agency is irrevocable without the consent of the agent.
2. Legislative Restrictions
Termination of an agency may be prohibited under federal and state law (as, for example, in cases of illegal discrimination based on race, color, sex, etc.).
C.Termination by Operation of Law
Termination by operation of law, including death or insanity or bankruptcy of either party, will end the agency relationship.
D.Notice to Third Parties
An agent may still be liable to third persons after termination of the agency unless the principal gives actual notice or the third party has constructive notice of the termination.
Example: Johnson v. Nationwide Insurance Company: Under the doctrine of apparent authority, Nationwide was liable to Johnson when a former agent sold her an investment he no longer had the actual authority to sell.
VIII.International Agency Agreements
Most of the world does not share the United States’ notion of an agency at will. It may be extremely difficult to terminate an overseas agent without good cause.
Learning Objectives
1.You should understand that an agency is a relationship that may arise through express agreement, or may be implied from circumstances.
2.Generally, an implied agency only arises when the principal acts in such a way as to imply that an agency exists.
3.You should know what a principal is and what an agent is, and should understand how the agency relationship may facilitate business transactions.
4.You should recognize the numerous ways in which the agent's duty of loyalty can arise, and should be aware of the potential problems that accompany any self-dealing by the agent.
5.You should be aware of the agent's general duty to obey instructions, but be able to recognize the special circumstances in which the agent will be excused for violating instructions.
6.You should become familiar with the agent's general duty to exercise care and skill, as well as the agent's duty to communicate, to the principal, agency-related information that comes to the attention of the agent.
7.You should be aware of the risks an agent faces when she commingles personal property with agency property, or when she uses the principal's money or property for her (the agent's) own personal purposes.
8.You should be aware of the general nature of the duties the law will impute to the principal in the absence of contractual provisions to the contrary.
9.You should understand the general rights of the agent to compensation, including the rights an agent may have to receive contingent compensation, such as commissions, upon termination of the agency.
10.You should recognize the general situations in which the principal has a duty to reimburse or indemnify the agent.
11.You should be able to distinguish among commercial agents, employees, and independent contractors.
Learning Hints
1.An agency relationship is an important legal concept because it facilitates commercial enterprise. Utilizing an agency relationship, a principal may do business with many individuals from corporate entities.
2.An agency relationship may arise as a result of an express agreement. Certain kinds of agency agreements, for example real estate agency agreements between a principal and agent, must be in writing in order to be enforceable in many states.
3.There are many kinds of agency relationships. One of the most common is the employee/employer relationship.
4.An agency relationship may also arise as a result of circumstances. In some cases, for example, a court may find that a principal has created the implied authority for an agent to act on his/her behalf. This relationship may even arise in cases where the parties do not believe such an agency to exist.
5.The agent's duty of loyalty lies at the very heart of the agent's responsibilities to the principal and governs all of the agent's activities. Any time an agent engages in self-dealing or appears to be engaging in an improper act, the agent is in violation of this duty unless the principal approves of the activity. Accordingly, the agent must fully and openly disclose all conflicts and potential conflicts to the principal.
6.If an agent's activities could lead to any appearance of impropriety, the agent must make a full disclosure to the principal. Therefore, an agent's purchases from the principal or an agent's sales to the principal fall into the category of activities that must be disclosed to the principal, in order that the principal is not taken advantage of by the agent. Further, if the agent is serving two principals (making the agent a dual agent), the agent possesses dual loyalties and must disclose the situation to both principals.
7.Because the agent is acting on behalf of the principal, it follows that the agent has a duty to follow the principal's instructions. However, in certain situations, the agent may have implied authority to deviate from the principal's instructions. These situations usually occur when the principal cannot be reached immediately and some emergency threatens to damage or destroy agency property. As the agent has been hired to further some goal in connection with the principal's property, it would not be in the best interests of either the agent or the principal if the property were damaged. Accordingly, the agent may possess special authority to supersede the principal's instructions.
8.Because the agent is considered to be one with the principal, the principal is entitled to any gifts the agent receives from third parties in connection with the agency. This follows from the agent's duty of loyalty. Any of these gifts might encourage an agent to pursue self-interest over the interests of the principal. Therefore, the gifts will belong to the principal unless the principal consents to the agent's keeping them, after a full and open disclosure by the agent.
9.The agent's duty of loyalty clearly is violated if the agent discloses the principal's confidential information to others without the principal's consent, or uses the confidential information to benefit him or herself. The agent's duty not to make such uses of the principal's confidential information continues even after the agency has terminated. After termination of the agency, the former agent may use the general knowledge and skills he gained while working for the principal, however. Therefore, it is important that a distinction be made between general knowledge and skills on the one hand, and confidential information or trade secrets on the other. In order for information to be considered a trade secret, the principal must have taken significant steps to keep the information substantially secret, and must generally have allowed only a limited number of persons to have access to it, on strictly a confidential basis.
10.If an agent uses agency property for personal purposes or commingles agency and personal property, the agent may be subjected to liability. Being inconsistent with the best interests of the principal, these practices smack of a conflict of interest. In order to discourage these practices, the principal may, where the agent has engaged in such a practice, choose to take the benefit of any contract the agent enters into--because the agent in theory was to have been acting for the principal. Alternatively, where the agent has engaged in such a practice, the principal may choose to disavow any responsibility for transactions that were not profitable and/or sue the agent for conversion.
11.The agent's ability to recover from the principal for expenses incurred is of the same general nature as a quasicontract remedy. It would be unduly harsh not to require the principal to pay for the benefits that an agent in good faith has bestowed upon the principal. Similarly, fairness demands that the principal indemnify the agent for loss experienced by the agent while acting on behalf of the principal. Of course, the principal is not held liable to the agent for the amounts of the agent's expenses if the expenses were unauthorized. For similar reasons, the principal has no obligation to indemnify the agent for a loss experienced by the agent if the loss resulted from some fault on the part of the agent.
12.The agent's entitlement to commissions–even after termination of the agency–is based on reasoning akin to what is set forth in #7, above. The agent should recover the commission when his or her activities were the procuring cause of a completed transaction. Otherwise, the principal or a subsequent agent will be receiving a windfall at the expense of the original agent.
13.Commercial agents have the ability to contract on behalf of their principals; they generally do not bear financial risk of nonpayment by purchasers; they take orders on behalf of their principals and generally are paid commissions for their work. Employees are under the control of their employers both as to the objective of their work and the means used to achieve it. Independent contractors are usually only under the control of their principal as to the result of their work.
True-False
In the blank provided, put "T" if the statement is True or "F" if the statement is False.
_____1.When an agency is terminated, actual notice to everyone who dealt or might deal with the agent is necessary.
_____2.An agent may represent both parties to a contract if each principal is fully informed of this situation and consents to it.
_____3.An agent is always liable to the principal for not following the principal’s instructions.
_____4.One aspect of the agent's duty of loyalty is that an agent cannot ever compete with his principal, even after the agency has ended.
_____5.Under the duty of loyalty, an agent must avoid even the appearance of impropriety.
_____6.An insurance agent terminates his employment with the insurance company. The agent decides to keep the computer that was furnished for him by the company. The agent is liable for conversion.
_____7.Under the procuring cause rule, an agent is not entitled to receive commissions on sales that occur after the agency relationship is terminated.
_____8.Marriage does not automatically make each spouse the agent of the other.
_____9.An exception to the rule that either party to an agency relationship has the power to terminate the agency at any time is agency coupled with an interest.
_____10.Agency at will generally empowers either an agent or principal to terminate the agency relationship at any time, even if the agency agreement states that the agency will continue for a certain length of time.
Multiple Choice
Circle the best answer.
1.Which of the following statements is not true concerning termination of an agency relationship?
a.Bill and Barbara Bailey place an advertisement in the local newspaper disclaiming any future liability for debts incurred by their son, Bronco. This is an example of constructive notice.