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William Shakespeare
I. Teacher to Teacher Dialogue
ask key questions about agency-based issues.
Agency is defined by Section 1 of the Second Restatement of Agency as:
The fiduciary relation that results from the manifestation of consent by one person to another that
the other shall act on his behalf and subject to his control, and consent by the other so to act.
from that agent’s selling activities, be they $100 or $1,000,000. This net gain is what allows the
use of agency theory to maximize one’s efficiency through the actions of others. There, are,
however, some limits on the ability to designate others to act on one’s behalf based on uniqueness
of personal services or on public policy grounds that forbid use of agents, such as voting or
relationships.
II. Chapter Objectives
1. Define an agency.
2. Identify and define a principal-independent contractor relationship.
AGENCY FORMATION AND
TERMINATION
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III. Key Question Checklist
How is an agency relationship created?
What definition best fits the agency relationship?
IV. Text Materials
Introduction to Agency Formation and Termination
If businesspeople had to personally conduct all their business, the scope of their activities would
Agency – Agency relationships are fiduciary relationships formed by mutual agreement between
Persons Who Can Initiate an Agency Relationship – Agents can be appointed by any person
Principal-Agent Relationship – The principal hires an employee and gives him/her the authority
Employer-Employee Relationship – An employer-employee relationship exists when an
Critical Legal Thinking Case: Scope of Employment
Massey v. Starbucks Corporation
Independent Contractor
Principals often employ outsiders—that is, persons and businesses that are not employees—to
perform certain tasks on their behalf. These persons and businesses are called independent
Critical Legal Thinking – A principal agent relationship is when an employee is authorized to
act on behalf of the principal. The employer employee relationship does not permit the employee
Agency Formation and Termination
Formation of an Agency
An agency can arise as an express agency, an implied agency, an apparent agency, and an agency
by ratification.
Express Agency – The most common form of agency is an express agency, where the agent
If a principal and an agent enter into an exclusive agency contract, the principal cannot
employ any agent other than the exclusive agent. The exclusive agency terminates upon
Contemporary Environment: Power of Attorney
This express agency agreement gives an agent the power to sign legal documents. There are two
Implied Agency – In many situations, a principal and an agent do not expressly create an agency.
Instead, the agency is implied from the conduct of the parties. This type of agency is referred to
Agency by Ratification – Agency by ratification occurs when (1) a person misrepresents himself
or herself as another’s agent when in fact he or she is not, and (2) the purported principal ratifies
Case 29.1 Agency: Eco-Clean, Inc. v. Brown
749 S.E.2d 4, 2013 Ga. App. Lexis 913 (2013), Court of Appeals of Georgia
Facts: Brown was a student at a college who was hurt in a car, which was part of the mascot of
Apparent Agency
Agency by estoppel arises when the principal creates the appearance of an agency that does not
Case 29.2 Agency Relationship: Bosse v. Brinker Restaurant Corporation, d.b.a. Chili’s Grill
and Bar
2005 Mass. Super. Lexis 372 (2005), Superior Court of Massachusetts
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at a Chili’s restaurant in Dedham, Massachusetts. Chili’s is owned by Brinker Restaurant
Corporation (collectively “Chili’s”). The cost of the meal was $56. The teenagers decided not to
pay. They went out of the building, got in their car, and drove away, heading northward up Route
1. A patron of the restaurant saw the teenagers leave without payment. He followed them in his
white sport-utility vehicle (SUV). The teenagers saw him following them. A high-speed chase
ensued through Dedham’s side streets. The patron used his cell phone to call the Chili’s manager.
Issue: Is the restaurant patron who engaged in the high-speed car chase an agent of Chili’s?
Decision: The superior court held that the restaurant patron who engaged in the high-speed chase
in which the plaintiffs were injured was not an agent of Chili’s restaurant. The superior court
Principal’s Duties
Principal’s Duty to Compensate – A principal owes a duty to compensate the agent for
Principal’s Duties to Reimburse – In carrying out an agency, an agent may spend his or her own
money on the principal’s behalf. Unless otherwise agreed, the principal owes a duty to
Principal’s Duty to Indemnify – A principal owes a duty to indemnify the agent for any losses
Principal’s Duty to Cooperate – Unless otherwise agreed, the principal owes a duty to
Agent’s Duties
Agent’s Duty to Perform – The agent must perform the lawful duties as stated in the contract
Agent’s Duty to Notify – The agent must notify the principal of any information that would be
Agency Formation and Termination
Termination of an Agency
An agency contract can be terminated by an act of the parties, by changed circumstances, by
impossibility of performance, and by operation of law.
event.
Notice of Termination – The termination of an agency extinguishes an agent’s actual authority
to act on the principal’s behalf. However, if the principal fails to give the proper notice of
with these third parties.
Contemporary Environment: Agency Coupled with an Interest
An agency coupled with an interest is a special type of agency relationship that is created for the
agent’s benefit. This type of agency is irrevocable by the principal (i.e., the principal cannot
Termination by an Unusual Change in Circumstances – An agency terminates when there is
an unusual change in circumstances that would lead the agent to believe that the principal’s
original instructions should no longer be valid.
impossibility of performance.
Termination by Operation of Law – Agency contracts may be terminated by operation of law
by the death of either the principal or the agent, the insanity of either party, bankruptcy of the
principal, or by the outbreak of a war between the principal’s country and the agent’s country.
V. Key Terms and Concepts
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the unauthorized act.
Agency—The principal-agent relationship: the fiduciary relationship “which results from the
Agency coupled with an interest—A special type of agency that is created for the agent’s
benefit and that the principal cannot revoke.
and tort law.
Agent—The party who agrees to act on behalf of another.
Apparent agency—Agency that arises when a principal creates the appearance of an agency
that in actuality does not exist.
Attorney-in-fact—An agent who has been granted the power of attorney.
Contractual capacity—Generally, persons who lack contractual capacity, such as insane
persons and minors, cannot appoint agents.
Direct notice—At the time of termination of an agency, the principal can give direct notice of
termination to all persons with whom the agent dealt.
Duty to account (duty of accountability)—A duty that an agent owes to maintain an accurate
accounting of all transactions undertaken on the principal’s behalf.
Duty to compensate—A duty that a principal owes to pay an agreed-upon amount to the agent
either upon the completion of the agency or at some other mutually agreeable time.
agency.
Duty to indemnify—A principal owes a duty to indemnify the agent for any losses the agent
suffers because of the principal’s conduct.
Duty to notify—An agent owes a duty to notify the principal of important information
concerning the agency.
diligence implicit in all contracts.
Duty to reimburse—Unless otherwise agreed, the principal owes a duty to reimburse the
agent for expenses incurred by the agent if the expenses were (1) authorized by the principal,
(2) within the scope of the agency, and (3) necessary to discharge the agent’s duties in
carrying out the agency.
Estopped—Stopped.
Exclusive agency contract—A contract a principal and agent enter into that says the principal
cannot employ any agent other than the exclusive agent.
Agency Formation and Termination
Implied agency—An agency that occurs when a principal and an agent do not expressly
create an agency, but it is inferred from the conduct of the parties.
Imputed knowledge—Information that is learned by an agent that is attributed to the
principal.
principal cannot terminate it).
Notice of termination—The termination of an agency extinguishes an agent’s actual authority
to act on the principal’s behalf. However, if the principal fails to give the proper notice of
termination to a third party, the agent still has apparent authority to bind the principal to
contracts with these third parties.
independent contractor who is not an employee of the principal but that has been employed
by the principal to perform a certain task on behalf of the principal.
Respondeat superior—Holding a principal liable for the acts of its agents.
Restatement (Second) of Agency—The reference source for the rules of agency.
of a specified event.
Termination by an unusual change in circumstances—An agency terminates when there is an
unusual change in circumstances that would lead the agent to believe that the principal’s
original instructions should no longer be valid.
Termination by impossibility of performance—An agency relationship terminates if a
situation arises that makes its fulfillment impossible.