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Essentials of Business Law, 9th edition
INSTRUCTOR’S MANUAL
Chapter 19 Agency
LESSON OVERVIEW
While the previous chapters dealt with the concept of sales and warranties, Chapter 19 clarifies the
concept of agency. This chapter intends to describe the principal–agent relationship and classify the two
major kinds of agents. Students will also learn the four ways in which an agency may be created, the
various forms of an agent’s authority, and the duties of an agent to a principal, a principal to an agent, a
principal and third party to each other, and an agent and third party to each other, in light of whether the
principal is disclosed, partially disclosed, or undisclosed. The methods that may be employed for an
agency to be terminated and the differentiation between the principal–agent and employer–employee
relationship are also discussed in this chapter. Finally, students’ understanding of the topics is evaluated
through objective-type questions, discussion questions, and case scenarios. Students are encouraged to
conduct their own research through the use of the Internet and other sources.
CHAPTER OUTLINE
A. PRINCIPAL–AGENT RELATIONSHIPS (p. 302)
1. Who May Appoint an Agent (p. 302)
2. Who May Be Appointed as an Agent (p. 302)
B. CLASSES OF AGENTS (p. 303)
1. General Agent (p. 303)
2. Special Agent (p. 303)
C. CREATION OF AGENCY (pp. 303-305)
1. Agency by Agreement (p. 303)
2. Agency by Ratification (p. 303)
3. Agency by Necessity (p. 303)
4. Agency by Operation of Law (p. 303-304)
D. AUTHORITY OF AN AGENT (pp. 305-306)
1. Express or Implied Authority (p. 305)
2. Apparent Authority (pp. 305-306)
3. Agent’s Torts and Crimes (p. 306)
E. DUTIES OF AGENTS, PRINCIPALS, AND THIRD PARTIES (pp. 306-309)
1. Duties of Agent to Principal (pp. 306-307)
2. Duties of Principal to Agent (pp. 307-308)
3. Duties of Principal and Third Party to Each Other (p. 308)
4. Duties of Agent and Third Party to Each Other (pp. 308-309)
F. TERMINATION OF AGENCY (pp. 309-310)
G. DIFFERENCES BETWEEN PRINCIPAL–AGENT AND EMPLOYER–EMPLOYEE
RELATIONSHIPS (pp. 310-311)
H. CHAPTER SUMMARY (p. 311)
I. CHAPTER ASSESSMENT (pp. 314-319)
1. Matching Legal Terms (p. 313)
2. True/False Quiz (pp. 313-314)
3. Discussion Questions (p. 315-316)
4. Thinking Critically About the Law (pp. 314-315)
5. Case Questions (pp. 315-316)
6. Case Analysis (pp. 316-317)
7. Legal Research (p. 317)
KEY TERMS
Key terms are listed at the beginning of the chapter, posted in the student textbook margins, and placed
in bold in the copy. They are listed here for your quick reference.
§ agent (p. 302)
§ principal (p. 302)
§ contract of agency (p. 302)
§ general agent (p. 303)
§ special agent (p. 303)
§ power of attorney (p. 303)
§ attorney in fact (p. 303)
§ durable power of attorney (p. 303)
§ agency by ratification (p. 304)
§ agency by necessity (p. 304)
§ agency by operation of law (pp. 304-305)
§ express authority (p. 305)
§ implied authority (p. 305)
§ apparent authority (p.305)
§ gratuitous agent (p. 307)
§ irrevocable agency (p. 310)
LEARNING OUTCOMES
The chapter Learning Outcomes will help you and the students discover the concepts and information
that should be understood upon completion of the chapter. You may want to access the PowerPoint
(PPT) slides for Chapter 19 when you begin the study of the chapter and discuss each Learning
Outcome. Each Learning Outcome will be covered separately in the Instructor Notes, but they are
shown here in total as an overview of the sections being presented in Chapter 19. The corresponding
text page numbers and PPT slides are listed next to each outcome. These slides should be used to
reinforce the main points of the lecture.
After completing this chapter, the students will be able to:
1. Describe the principal–agent relationship. (p. 302, PPT slides 2-5)
2. Classify the two major kinds of agents. (p. 303, PPT slide 6)
3. Discuss the four ways in which an agency may be created. (pp. 303-305, PPT slides 7-12)
4. Explain the various forms of an agent’s authority. (pp. 305-306, PPT slides 13-18)
5. Describe the duties of (a) an agent to a principal, (b) a principal to an agent, (c) a principal and
third party to each other, and (d) an agent and third party to each other, in light of whether the principal
is disclosed, partially disclosed, or undisclosed. (pp. 306-309, PPT slides 19-27)
6. Explain how an agency may be terminated. (p. 309-310, PPT slides 28-30)
7. Differentiate between the principal–agent and employer–employee relationship. (pp. 310-311,
PPT slides 31-32)
7.
LECTURE OUTLINE
A. PRINCIPAL–AGENT RELATIONSHIPS
The relationship in which a person or firm is represented by another in business or personal dealings
with third parties is called a principal–agency relationship.
The person who represents another is known as the agent. The person the agent represents or for whom
he or she performs duties is called the principal. An agreement between a principal and an agent by
which the agent is vested with authority to represent the principal is known as a contract of agency.
1. Who May Appoint an Agent
Any competent party who has the legal right to perform an act may delegate his or her
performance to another by appointing an agent.
2. Who May Be Appointed as an Agent
Anyone who is legally competent to act for himself or herself may serve as an agent for
another. Minors and others who lack the capacity to enter into contracts on their own
may still be considered competent to represent other persons as agents if they are
capable of properly carrying out the duties of an agency relationship.
B. CLASSES OF AGENTS
Agents are usually classified according to the nature of their relationship with their principals.
1. General Agent
A general agent is a person authorized to assume complete charge of his or her
principal’s business or who is entrusted with general authority to act for the principal in
all business-related matters.
2. Special Agent
A special agent is a person delegated to act only in a particular transaction, under
definite instructions, and with specific limits on the scope of his or her authority.
C. CREATION OF AGENCY
An agency may be created by agreement, ratification, necessity, or operation of law.
1. Agency by Agreement
A contract of agency usually states the rights and duties of the principal and the agent,
the duration of the agency, and any other agreements made between the parties. The
legal document that formally creates an agency is called a power of attorney. The
precise legal term for the person appointed as agent is attorney in fact.
2. Agency by Ratification
An agency by ratification results when a principal (1) approves an unauthorized act
performed by an agent or (2) approves an act done in the principal’s name by an
unauthorized person.
3. Agency by Necessity
An agency by necessity is created when circumstances make such an agency necessary.
For example, when one spouse fails to support the other spouse, or their minor children,
an agency by necessity is created. The spouse, acting as agent for the other spouse, may
purchase necessities for himself or herself and their children, even against the will of the
nonsupporting spouse, and thereby makes the other spouse responsible for payment.
4. Agency by Operation of Law
An agency by operation of law is created when a court finds the need for an agency to
achieve a desired social policy. A court may appoint a guardian ad litem, with the
authority to purchase whatever necessities the parent has failed to provide.
D. AUTHORITY OF AN AGENT
An agent may perform only those acts that have been authorized by the principal or court. The
authority of an agent can be express, implied, or apparent.
1. Express or Implied Authority
The authority of an agent to perform the duties that are specifically stated in the contract
of agency is known as express authority. Implied authority is the authority an agent
reasonably assumes he or she has that relates to the express authority granted by the
principal.
2. Apparent Authority
Apparent authority is the authority that a third party may reasonably assume an agent
possesses, despite the fact that the agent does not actually possess such authority.
3. Agent’s Torts and Crimes
A principal is liable for the torts and crimes of the agent if they are committed at the
direction of the principal or while the agent is performing authorized duties during the
ordinary course of the agency.
E. DUTIES OF AGENTS, PRINCIPALS, AND THIRD PARTIES
1. Duties of Agent to Principal
There are several duties that an agent owes to a principal:
• An agent must obey all the principal’s reasonable and lawful orders and instructions
within the scope of the agency contract.
• An agent may not perform any act that would betray the principal’s trust.
• An agent may not act for two parties to a contract without the consent of both.
• An agent may not buy his or her own property for the principal, sell the principal’s
property to himself or herself, or compete with the principal in any way, without the
principal’s knowledge and consent.
• An agent must possess the qualifications needed to carry out the work of the agency as
agreed.
• An agent is liable for losses to the principal resulting from the agent’s incompetence.
• An agent must keep accurate accounts of his or her transactions conducted as part of
the agency agreement.
• An agent must remit to the principal all profits from contracts made by the agent unless
other provisions are made in the agency agreement.
2. Duties of Principal to Agent
There are several duties that a principal owes to an agent:
• A principal must pay the agent the compensation agreed to in the contract.
• If a person acts as agent for more than one party with their knowledge, the agent is
entitled to receive compensation from each principal.
• A principal must reimburse the agent for any money advanced by the agent in carrying
out the principal’s instructions and for debts legally paid to third parties on behalf of the
principal.
• A principal must reimburse the agent for any loss or damage suffered by the agent in
the legitimate performance of duties.
3. Duties of Principal and Third Party to Each Other
A principal is responsible to third parties for all agreements made by the agent on behalf
of the principal if the agent acted within the scope of his or her authority, either express
or implied.
4. Duties of Agent and Third Party to Each Other
The relationship between an agent and a third party, and whether an agent can be held
personally responsible, is influenced by a number of factors.
Disclosed Principal. When the agent informs the third party that he or she is acting on
behalf of another, and makes the third party aware of the identity of the principal, the
principal is known as a disclosed principal.
Partially Disclosed Principal. When the agent informs the third party that he or she is
acting on behalf of another, but the identity of the principal is unknown to the third
party, the principal is known as a partially disclosed principal.
Undisclosed Principal. When the agent does not inform the third party that he or she is
acting on behalf of another person, the unidentified principal is known as an undisclosed
principal.
F. TERMINATION OF AGENCY
An agency contract is terminated by an act of the parties when (1) the principal and the agent have
mutually agreed on termination, (2) the principal has dismissed the agent, or (3) the agent has given up
the position.
A principal may not revoke an agency contract if the agent has an interest in the subject matter of the
agency in addition to the remuneration that he or she receives for services. Such a contract is an
irrevocable agency, or an agency coupled with an interest.
G. DIFFERENCES BETWEEN PRINCIPAL–AGENT AND EMPLOYER–EMPLOYEE
RELATIONSHIPS
The main difference between principal–agent and employer–employee relationships is an employer’s
power to control the activities of a nonagent employee. Whereas an agency agreement brings about a
relationship between a principal and a third party that results in a contract, an employee who is not also
an agent has no such rights or powers. An employee acts under the employer’s direction and is subject
to the employer’s control.
INSTRUCTOR NOTES
A resulting answer or explanation is provided below for each Learning Outcome in Chapter 19. Every
outcome is also mapped to corresponding text page numbers, PPT slides, and relevant chapter
assessment exercises and activities for ease of reference and use.
LO1. Describe the principal–agent relationship.
The person who represents another is known as the agent. The person whom the agent represents is
called the principal. An agreement between a principal and an agent by which the agent is vested with
authority to represent the principal is known as a contract of agency.
Text Pages: 302
PowerPoint: Slides 2-5
Discussion Questions: 25
Thinking Critically About the Law: 31, 35
LO2. Classify the two major kinds of agents.
The major kinds of agents are general agents, persons authorized to assume complete charge of
their principal’s business; and special agents, persons delegated to act only in particular transactions.
Text Pages: 303
PowerPoint: Slide 6
Discussion Questions: 26
LO3. Discuss the four ways in which an agency may be created.
An agency can be created by agreement, ratification, necessity, or operation of law.
Text Pages: 303-305
PowerPoint: Slides 7-12
Case Questions: 38
LO4. Explain the various forms of an agent’s authority.
Authority can be either express, implied, or apparent. Express authority is the authority of an agent to
perform the duties that are specifically stated in the contract of agency. Implied authority is the
authority an agent reasonably assumes he or she has that relates to the express authority granted by the
principal. Apparent authority is the authority that a third party may reasonably assume an agent
possesses, despite the fact that the agent does not actually possess such authority.
Text Pages: 305-306
PowerPoint: Slides 13-18
Discussion Questions: 30
Thinking Critically About the Law: 32
Case Questions: 36-37
Case Analysis: 39
LO5. Describe the duties of (a) an agent to a principal, (b) a principal to an agent, (c) a principal
and third party to each other, and (d) an agent and third party to each other, in light of whether the
principal is disclosed, partially disclosed, or undisclosed.
(a) An agent has a duty to obey all of the principal’s reasonable and lawful orders and instructions
within the scope of the agency contract. (b) A principal must pay the agent the compensation agreed
upon in the contract, must reimburse the agent for any money advanced by the agent in carrying out the
principal’s instructions and for debts legally paid to third parties, and must reimburse the agent for any
loss or damages suffered by the agent in the legitimate performance of duties. (c) A principal is
responsible to a third party for all agreements made by the agent on behalf of the principal if the agent
acted within the scope of his or her authority, either express or implied. (d) In the case of a disclosed
principal, an agent cannot be held personally responsible to a third party as long as the agent acts
within the scope of his or her actual authority. In the case of a partially disclosed or undisclosed
principal, an agent can be held personally responsible to the third party.
Text Pages: 306-309
PowerPoint: Slides 19-27
Discussion Questions: 27
Thinking Critically About the Law: 33
Case Analysis: 40-42
LO6. Explain how an agency may be terminated.
Agency can be terminated by agreement, performance, or operation of law. Specific reasons may
include death, insanity, illness, impossibility of performance, or bankruptcy.
Text Pages: 309-310
PowerPoint: Slides 28-30
Discussion Questions: 28
LO7. Differentiate between the principal–agent and employer–employee relationship.
The main difference between principal–agent and employer–employee relationships is an employer’s
power to control the activities of a nonagent employee.
Text Pages: 310-311
PowerPoint: Slides 31-32
Discussion Questions: 29
Thinking Critically About the Law: 31, 34
