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CHAPTER 8: AGENCY FORMATION AND DUTIES 17
DISCUSSION QUESTIONS
1. Why is agency law essential to the existence and operation of a corporation? An agent acts for a principal.
Agency law is essential to the existence and operation of a corporate entity, because only through its agents can a
corporation function and enter into contracts. Corporate officers, for example, are agents.
2. What is a principal–agent relationship? In a principal–agent relationship, the parties have agreed that the
agent will act on behalf of and instead of the principal in transacting business with others. The agent is empowered to
perform acts that are binding on the principal (a theatrical agent for a dance troupe, for example, can negotiate and
sign contracts for the company to perform).
independent contractor? The factors include: (1) the amount of control an employer exercises over the details of the
work; (2) whether the individual is in an occupation or business distinct from that of the employer; (3) whether work is
normally subject to the employer’s direction or may be done by a specialist without supervision; (4) whether the
employer supplies the tools; (5) the period for which the individual is hired; (6) the method of payment—by time period
or at the completion of the job; and (7) the degree of skill required to do whatever it is the individual was hired to do.
purpose, from the hotel’s conduct, for example). An agency relationship may be created by operation of law. State law
often makes state officials agents for service of process, and in most states, a corporation must designate an agent
for service (who sometimes must be the state’s secretary of state). Courts have granted agents emergency power
under unusual circumstances, when principals could not be reached, and failure to act would have caused the
principals substantial loss. Agencies have also been held to occur in family relationships, when, for example, a
foundation for estoppel. If a principal could avoid liability by denying that a party he or she represented as an agent
was not an agent, the principal could choose to fulfill only those obligations that were to his or her advantage and
ignore other obligations. This would undercut the purposes of contract law.
7. What are the general duties that agents and principals owe each other? An agency relationship is fiduciary:
each party owes the other a duty to act in good faith and to disclose material facts having a bearing on the
relationship.
8. What are an agent’s rights and remedies against a principal? For every duty of a principal, an agent has a
corresponding right (a right to be compensated, reimbursed, and indemnified and to work in a safe environment). An
whole or in part.
agent also has a right to perform agency duties without the principal’s interference. Remedies follow normal contract
and tort remedies. An agent can recover for past services and future damages but has no right to specific
performance unless the agency relationship was created by contract.
9. What are a principal’s rights and remedies against an agent? A principal has general contract remedies (and
may terminate an agency relationship) for an agent’s breach of fiduciary duties. A principal has tort remedies for an
agent’s torts (fraud, misrepresentation, negligence, deceit, libel, slander, and trespass). Other remedies include:
Constructive trust. If an agent breaches his or her fiduciary duty by retaining benefits or profits that belong to the
principal, a court may impose a constructive trust, according to which the agent is considered to hold the benefits or
profits on the principal’s behalf. Avoidance. If an agent breaches an agency contract, a principal can avoid the
to choose between this duty and the duty to exercise his or her special skills, or a conflict might arise in which an
agent would have to disobey a principal’s instructions to follow the duty of loyalty
11. What are some advantages to being an independent contractor? What might be some disadvantages?
The principal advantage of being an independent contractor is probably the degree to which the independent
Divide students into groups (four to five students per group) and have them compile lists of the jobs held by
members of the group. Ask them to discuss with each other the rights and responsibilities of each job to determine
whether the student is an agent and an employee or an independent contractor, or only an agent, an employee, or an
independent contractor. Have each group share its conclusions with the class. Discuss with the class the difference
between employees and independent contractors. Are there students with jobs in which they are referred to as
Wiedmaier and her husband Jerry. Their son Michael worked for Wiedmaier as a fuel truck operator. Motorsport
Marketing, Inc., sells racing collectibles and memorabilia to retail outlets. Michael faxed Motorsport a credit
application, which Marsha signed as “Secretary-Owner” of Wiedmaier, after which Michael added himself to the list of
owners. Michael formed Extreme Diecast, LLC, which he told Motorsport was part of Wiedmaier, and began ordering
merchandise. When the payments ceased, Motorsport filed a suit in a Missouri state court against Wiedmaier to
whole or in part.
whole or in part.
22 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
whole or in part.
agent also has a right to perform agency duties without the principal’s interference. Remedies follow normal contract
and tort remedies. An agent can recover for past services and future damages but has no right to specific
performance unless the agency relationship was created by contract.
9. What are a principal’s rights and remedies against an agent? A principal has general contract remedies (and
may terminate an agency relationship) for an agent’s breach of fiduciary duties. A principal has tort remedies for an
agent’s torts (fraud, misrepresentation, negligence, deceit, libel, slander, and trespass). Other remedies include:
Constructive trust. If an agent breaches his or her fiduciary duty by retaining benefits or profits that belong to the
principal, a court may impose a constructive trust, according to which the agent is considered to hold the benefits or
profits on the principal’s behalf. Avoidance. If an agent breaches an agency contract, a principal can avoid the
to choose between this duty and the duty to exercise his or her special skills, or a conflict might arise in which an
agent would have to disobey a principal’s instructions to follow the duty of loyalty
11. What are some advantages to being an independent contractor? What might be some disadvantages?
The principal advantage of being an independent contractor is probably the degree to which the independent
Divide students into groups (four to five students per group) and have them compile lists of the jobs held by
members of the group. Ask them to discuss with each other the rights and responsibilities of each job to determine
whether the student is an agent and an employee or an independent contractor, or only an agent, an employee, or an
independent contractor. Have each group share its conclusions with the class. Discuss with the class the difference
between employees and independent contractors. Are there students with jobs in which they are referred to as
Wiedmaier and her husband Jerry. Their son Michael worked for Wiedmaier as a fuel truck operator. Motorsport
Marketing, Inc., sells racing collectibles and memorabilia to retail outlets. Michael faxed Motorsport a credit
application, which Marsha signed as “Secretary-Owner” of Wiedmaier, after which Michael added himself to the list of
owners. Michael formed Extreme Diecast, LLC, which he told Motorsport was part of Wiedmaier, and began ordering
merchandise. When the payments ceased, Motorsport filed a suit in a Missouri state court against Wiedmaier to
whole or in part.
whole or in part.
22 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
