Chapter 35 – The Agency Relationship
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CHAPTER 35
THE AGENCY RELATIONSHIP
I. OBJECTIVES
This chapter acquaints students with the formation of the agency relation, some basic agency
concepts, the agent’s duties to the principal, the principal’s duties to the agent, and termination of
the agency relation (including termination’s effect on the principal‘s authority). The next chapter,
Chapter 36, mainly discusses the principal’s and the agent’s relations with third parties.
The Restatement (Third) of Agency has been adopted by the ALI and most courts are applying its
rules rather than the Restatement (Second) of Agency. Therefore, Chapters 35 and 36 focus on the
Restatement (Third). Any references to the Restatement (Second) are for historical reasons.
II. ANSWER TO INTRODUCTORY PROBLEM
Rita has breached several fiduciary duties. She has competed with her principal by providing
she terminates her employment with IPQ, she is able to compete with IPQ and take its clients,
unless she uses IPQ’s confidential client list or has agreed not to solicit clients in a non-compete
agreement.
There are many win-win solutions to Rita’s problem besides the unethical choices to breach her
III. SUGGESTIONS FOR LECTURE PREPARATION
A. Introduction
2. Then define agency and give some examples of typical agency relationships. Students
should be able to suggest additional examples.
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B. Creation of the Agency Relation and Related Matters
1. Note that, while agency is based on consent and many agencies are contractual, no
agreement to a writing.
2. Note also that the general test for the creation of an agency is objective, and that the
3. Note further that there can be an agency even where the parties agree that the relation will
that the courts will so regard it.
4. Finally, emphasize that the principal‘s actual control or right to control the agent’s
5. Note that the text’s discussion of the principal‘s or the agent’s incapacity is limited to
6. Note that there are certain non-delegable obligations that cannot be performed by an agent.
to an art student.
7. MDM Group Associates, Inc. v. CX Reinsurance Company, Ltd. (p. 953). This case
illustrates the risks of litigation due to a judge not understanding the law. Thankfully, the
trial court’s decision overturned.
Points for Discussion: Note that fiduciary duties flow only one way in an agency: from
the agent to the principal. Why does the agent owe a fiduciary duty, that is, a duty of trust,
C. Agency Concepts, Definitions, and Types
1. This section attempts to lay out certain basic agency types and concepts early on. In
certain cases (e.g., authority and the employee/nonemployee agent distinction), this creates
where they assume importance.
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2. Authority
a. Distinguish actual authority and apparent authority, noting that, in theory at least,
are two kinds of actual authority: express authority and implied authority.
b. Note that the scope of true express authority may be very limited. While it is possible
for a principal to specify minutely what the agent is to do, it is rarely practical to do
relations of the parties. They are described as implied authority.
c. Stress that the general test for the scope of an agent’s implied authority is what the
most important of these factors.
d. For apparent authority, stress: 1) that it is theoretically based on whatever the principal
you should probably add that the seeming reason for apparent authority is to protect
third parties who rely on a reasonable appearance of authority. The rule that such
authority must be based on the principal’s communications can be seen as an attempt
to protect the principal from being bound by any assertion of authority that the agent
reasonableness of the third party‘s belief.
e. Note that actual and apparent authority can both exist at the same time and often are
equal to each other. Suppose that P appoints A to a position such as general sales
manager that customarily carries with it certain kinds of authority.
f. Additional examples: Problem Cases ## 1 and 2.
warranties binding the principal.
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4. Note that the possibility of a gratuitous agency has something to do with the fact that
consideration is not needed to form an agency. Point out that the existence of a gratuitous
agency may change the various principal-agent duties discussed later in the chapter.
5. Subagents
agent.
b. Distinguish the situation where the agent appoints another agent for the principal.
State why this is important: except where the appointing agent is directly liable, he is
c. The ABKCO case on page 959 involves a sub agency.
6. The employee-nonemployee agent contractor distinction
a. Point out that the distinction is most important for determining the principal‘s liability
for the agent’s torts, as discussed in Chapter 36. And the distinction obviously is
important outside agency law and is especially important in making corporations liable
for the torts of their employees.
an employee or a nonemployee agent. An employee is an agent whose principal
controls or has the right to control the manner and means of the agent’s performance
of work.
d. CBS Corp. v. FCC (p. 956) arose from the very famous, somewhat scandalous
network be liable for the fine.
Points for Discussion: The court cited the Reid case, which listed 12 factors relevant
to the employee/non-employee agent distinction. Those factors are similar to the
Restatement (Third) of Agency factors that are listed below. The court went through
on page 957.
Additional Point for Discussion: Among the three factors that the court pointed out
supported the FCC’s determination that Timberlake and Jackson were employees of
CBS was CBS’s control of the performance. Note, however, that the court reasoned
against that factor by pointing out that CBS’s control did not extend to all aspects of
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
the performers’ work, including choreography, performance visuals, set items, and
wardrobe. This factor, the principal’s control of the agents’ method of work, was
probably an important factor in the court’s decision.
e. The Restatement (Third) Section 7.07 comment f lists several factors for resolving the
employee-nonemployee agent (independent contractor) question. They are:
(1) the extent of control that the agent and the principal have agreed the principal may
exercise over the details of the work;
(2) whether the agent is engaged in a distinct occupation or business;
principal’s direction or without supervision;
(4) the skill required in the agent’s occupation;
(5) whether the agent or the principal supplies the tools and other instrumentalities
required for the work and the place in which to perform it;
(6) the length of time during which the agent is engaged by the principal;
relationship;
(10) whether the principal is or is not in business; and
(11) the extent of control that the principal has exercised in practice over the details of
the agent’s work.
f. Example: Problem Case #3.
D. Agent’s Duties to the Principal
1. Begin by stating that, if the agency is created by contract, the contract establishes one set
examples appear in the text’s discussion of the specific duties.
2. With respect to the agent’s duty of loyalty:
a. Loyalty is the fiduciary duty an agent owes to a principal. It can be argued that all the
other fiduciary duties are encompassed within this duty. If the agent is loyally
working for the principal’s benefit, he will obey the principal’s instructions, act with
agent’s duties.
b. Competing with the principal: Explain this duty by showing that it is essentially
stealing, that is, the stealing of business opportunities from the principal.
Example: Problem Cases ## 4, 8, and 9.
c. Dealing with himself: Although an agent is ordinarily forbidden to deal with himself
Chapter 35 – The Agency Relationship
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
both principals simultaneously, the agent may act for two principals without the
consent of either if her duties are basically those of a “finder,” or if her role is merely
to bring suitable parties together. It should be easy to create a real estate example to
illustrate the point. As soon as the agent is expected to advise or represent either
party, though, conflicts of interest are likely to arise and the duty of loyalty is probably
breached.
e. Under the Restatement (Third) section 8.03, the agent has a duty not to deal with the
principal as or on behalf of an adverse party to the transaction.
f. ABKCO Music, Inc. v. Harrison’s Music, Ltd. (p. 959): This case applies the agent’s
duty not to use or disclose confidential information after termination of the agency.
the conduct of the subagent.
Points for Discussion: Is it clear that Klein’s breach really hurt Harrison by torpedoing
the settlement of the suit against him? This is the apparent basis for a causation
argument toward the end of the court’s opinion (which has been deleted from our
consequences.
f. Additional Example: Problem Case # 8.
g. There is no breach of duty when the agent discloses that the principal has committed
Restatement (Third) section 8.11(2).
3. Duty to obey instructions
a. The text’s statement that the agent need not obey an order to behave unethically. The
relevant Restatement (Third) section is 8.09(2).
advance the principal’s interests? If possible, the agent should query the principal
about his wishes. If not, the agent will usually not be liable if he acts reasonably on
manager would not violate the duty of obedience by paying for temporary repairs.
4. Duty to act with care and skill
section 8.08.
b. Example: Problem Case #7.