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CHAPTER 27
OPERATION AND TERMINATION OF AN AGENCY
Answers to Learning Objectives
1. An agent owes the principal the duties of loyalty and good faith, obedience, reasonable skill and
diligence, accounting, and information. The principal owes the agent the duties of compensation,
reimbursement, indemnification, and abidance by the terms of the contract.
Lesson Outline
1. An agency imposes duties upon the agent to the principal, duties upon the principal to the agent, and
duties upon both the principal and agent to third parties.
2. The agent owes these duties to the principal:
a. Loyalty and good faith. The relationship of agent and principal calls for a higher degree of faith
and trust than do most contractual relationships.
3. The principal owes these duties to the agent:
a. Compensation for the services according to the contract
b. Reimbursement for all necessary and reasonable expenses incurred
c. Indemnification for any loss or damage sustained while carrying out the duties
d. Abidance by the terms of the contract
4. Agent’s duties to third parties are as follows:
a. Agents who contract in their own names and do not disclose the names of their principals are
obligated to fulfill the contracts.
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c. Revocation
d. Renunciation by the agent
7. The agency may be terminated by operation of law by:
a. Subsequent illegality
8. When the agency is terminated by act of the principal, notice of the termination must be given to
third parties with whom the agents have transacted business.
Comments on Cases
(p. 319) The court pointed out that the allowance of $10,000 or less gifts per year was the same as the
annual gift exclusion of the federal income tax law at the time. The provision was to further a
financial, estate or tax plan. The gifts to Dominick did not do that. In re Estate of Ferrara,
852 N.E.2d 138 (N.Y.)
(p. 324) The court pointed out that St. Felix did not assign Kennedy any property interest in the
unclaimed money. She simply promised to pay part of the recovery as compensation, thus the
power of attorney was not coupled with an interest and was revocable. In re St. Felix, 436 B.R.
786 (E.D. Pennsylvania)
Answers to Questions
(Page 326)
1. In a contract of agency, the law imposes duties not set out in the contract on both the agent and the
principal to each other and to third parties.
2. The relationship of agent and principal calls for a higher degree of faith and trust than do most
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5. An agent may not enforce a principal’s promise to pay a bonus to the agent for information secured
by the agent in the performance of agency duties because the principal was entitled to the
information as a result of the agency.
6. When an agency agreement does not state the amount of compensation for the agent, the agent may
Answers to Case Problems
(Page 327)
1. No. The court pointed out that Cowart acted in furtherance of Doris’ wishes. He did not make a
gift to himself by opening the joint account since Doris was still alive and as a joint tenant she had
control of them. He did not withdraw any money for himself until after Doris’ death when the
funds by operation of law were his. Albert v. Cowart, 2012 WL 1081631 (N.C. Ct. App.)
4. Yes. The court stated that an agent owes the principal a duty of good faith and fair dealing. Good
faith required Falls to be honest in his transactions with State Farm. Since he was not honest State
Farm was justified in discharging him without penalty. Falls v. State Farm Ins. Mut. Auto. Ins. Co.,
774 F.Supp.2d 705 (M.D. Pennsylvania)
5. Yes. The appellate court stated that a principal was liable for the acts of his agent within the scope
of the agent’s authority, whether the principal was disclosed or undisclosed. It held the trial court
erred in concluding that the assignments’ failure to identify Sutton as an agent of Mission barred
legal title from passing. Wasatch Oil & Gas, L.L.C. v. Reott, 163 P.3d 713 (Utah Ct. App.)
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