Week 6

Content
• 1 Agency and agents
• 2 Creation of agency
• 3 Duties and rights of an agent
• 4 Authority of the agent
• 5 Liability of the parties
Exam requirements - an important area for
your exam with 5 questions
• In the assessment, candidates may be required to:
• Identify the methods by which agency can be created
• Identify the rights and duties of agents including commercial agents
• Recognise the authority an agent has to enter into contracts on
behalf of a principal, including actual and ostensible authority
Quotes of the Day
“If you want something done right, do it
yourself.”

“Many hands make light work.”

-- Anonymous folk sayings

“There are three ways to get something

done: do it yourself, pay someone else
to do it, or tell a teenager not to do it.”
-- Anonymous
Agency: A Tripartite Relationship
Outward-looking
Principal consequences

Inward-looking
consequences
Third Party

Agent
Agent Action
Principal Obligation or liability

Fiduciary
relationship Third Party

Agent Contract or tort

 Creating an Agency Relationship
• Agency is a relationship in which the agent agrees to
perform a task for, and under the control of, the
principal.
• To create an agency, there must be:
• A principal and An agent,
• Who mutually consent that the agent will act on behalf of the
principal, and Be subject to the principal’s control. Thereby
creating a fiduciary relationship. ( relationship based on trust)
• The key to correctly identifying agents is often to look for
the authority they are given or
Requirements for Agency
• Consent, control and a fiduciary relationship
are required.
• Elements not required for an agency
relationship include:
• A written agreement (unless the business of the
agent requires a written contract).
• A formal agreement (acting like agent and
principal is enough to establish agency).
• Consideration (an agent does not have to be
paid).
Creating Agency Relationships

Agency by consent Agency by necessity

Agency by Ratification Agency by Estoppel

Duties of Agent to Principal
• Duty of Loyalty-- The agent:
• must act for the benefit of the principal.
• may not receive outside benefits without approval of
the principal.
• can neither disclose nor use for her own benefit any
confidential information.
• is not allowed to compete with his principal within the
scope of the agency business.
• may not act for two principals whose interests
conflict.
• may not become a party to a transaction without the
principal’s permission.
• may not engage in inappropriate behavior that reflects
badly on the principal.
Other Duties of an Agent
• An agent must obey her principal’s
instructions, unless illegal or unethical.
• Agent must act with reasonable care.
• An agent with special skills is held to a higher
standard because she is expected to use those
skills.
• Agent must give accurate information.
• An agent has a duty to provide the principal with
all information in her possession that she has
reason to believe the principal wants to know.
Principal’s Remedies When the
Agent Breaches a Duty
• The principal can recover damages caused by
the agent’s breach.
• The agent must refund any profits made from
the agency, if he breaches his duty of loyalty.
• The principal may rescind a transaction with
an disloyal agent.
Duties of Principal to Agent
• Duty to Reimburse the Agent for Reasonable
Expenses
• A principal must also indemnify an agent for an
unauthorized purchase if the agent reasonably
believed he was authorized and the principal
received a benefit.
• Torts Committed by the Agent
• A principal must indemnify an agent for tort
claims brought by a third party if the principal
authorized the agent’s behavior and the agent did
not realize he was committing a tort.
Duties: Principal to Agent (cont’d)
• Contracts Entered into by the Agent
• The principal must indemnify the agent for
liability she incurs as a result of a contract on the
principal’s behalf, including attorney’s fees and
reasonable settlements.
• Duty to Cooperate
• Cannot unreasonably interfere with the agent’s
ability to accomplish his task.
• Unless the contract provides otherwise, the
principal may compete with her agent.
• Principal must perform her part of the contract.
Terminating Agency
• There are five basic ways an agency
relationship is terminated by the parties:
• By completion of the agreed term.
• By completion of the agreed purpose.
• Mutual agreement, no matter what the previous
agreement was.
• In an agency at will, either party can terminate at
any time, for any reason.
• Wrongful termination – either party can
terminate relationship, but the wrongful party
may have to pay damages.
Other Causes of Agency
Termination
• Principal or Agent Can No Longer Perform
Required Duties
• Loss of Qualification, Bankruptcy, Death or
Incapacity of the Principal or Agent, Disloyalty of
Agent
• Change of Circumstances
• Loss or Destruction of Subject Matter, Change of
Law
Effect of Termination
• Termination of the agency ends the agent’s power to act on behalf of
the principal.
• Principal’s duty to reimburse expenses of the agent ends with the
end of the agency.
• Confidential information remains confidential and unusable, even
after the end of the agency.
Principal’s Liability for
Contracts
• The principal is bound by the acts of an agent
if:
• the agent has authority, or
• the principal, for reasons of fairness, is estopped
from denying that the agent had authority, or
• the principal ratifies the acts of the agent.
Principles of Attribution
Manifestations
Principal create apparent
authority
Manifestations
create actual Third Party
authority

Agent
Authority
• A principal is bound by the acts of an agent if the agent has authority.
• There are three types of authority: express, implied, and apparent.
• Only express and implied are actual authority, because the agent is truly
authorized.
• In apparent authority, the agent seems to be authorized, but is actually not.
The principal is still bound by the agent’s actions.
Actual Authority
• Express Authority
• Granted by words or conduct that, reasonably
interpreted, cause the agent to believe the
principal desires her to act.
• In ambiguity about the principal’s intent, the
courts look at the principal’s objective
manifestation not his subjective intent.
• Implied Authority
• Unless otherwise agreed, authority to conduct a
transaction includes authority to do acts that are
reasonably necessary to accomplish it.
Apparent Authority
• A principal can be liable for the acts of an agent who is not, in fact,
acting with authority if the principal’s conduct causes a third party
reasonably to believe that the agent is authorized.
• An agent with actual authority may perform an act beyond the scope
of that authority. If the action appears to the third party to be within
the scope of the authority, the principal will be bound.
Estoppel and Ratification Defined
• Estoppel
• No one may claim that a person was not his
agent, if he knew that others thought the person
was acting on his behalf, and he failed to correct
their belief.
• Ratification
• If a person accepts the benefit of an unauthorized
transaction or fails to repudiate it, then he is as
bound by the act as if he had originally authorized
it.
Estoppel and Ratification
Distinguished
• Estoppel and ratification are easy to confuse.
• Ratification applies when the principal accepts
the benefits of the contract.
• Estoppel applies when the principal does not
want the benefit of the contract, but delays in
telling the innocent third party of the mistake.
Agent’s Liability: Contracts
• Fully Disclosed Principal
• An agent is not liable for any contracts.
• Partially Disclosed Principal
• Third party can recover from either the agent or
the principal.
• Undisclosed Principal
• Third party can recover from either the agent or
the principal.
• Unauthorized Agent
• The principal is not liable and the agent is.
Exceptions to the Rule on
Undisclosed Principals
• A third party is not bound to the contract
with an undisclosed principal if:
• The contract specifically provides that the third
party is not bound to anyone other than the
agent, or
• The agent lies about the principal because she
knows the third party would refuse to contract
with him.
Illustrations
• 1. B appoints A as Manager of B’s apartment building. A has implied authority to conclude
short term lease contracts relating to the individual apartments.
• Owner B consigns to shipmaster A a cargo to be carried to country X within 10 days. With
only three days of navigation left, the ship is damaged and must stop in the nearest port for
repairs. A has implied authority to unload the cargo and consign it to another shipmaster to
be carried to destination on another ship.

• A, a sales representative for computer manufacturer B, accepts the order placed by

university C for the purchase of a certain number of computers. The sales contract directly
binds B vis-à-vis C with the result that it is B, and not A, who is under an obligation to deliver
the goods to C and who is entitled to payment by C.
Illustrations
Dealer B, expecting a substantial increase in the price of wheat, decides to purchase a large quantity of
wheat. B, wishing to remain anonymous, entrusts commission agent A with this task. Even though
supplier C knows that A is purchasing on behalf of a principal, the purchase contract is binding on A
and C and does not directly affect B’s legal position.
Confirming house A, acting on behalf of overseas buyer B, places an order with supplier C for the
purchase of certain goods. Since C, who does not know B, insists on A’s confirmation of B’s order, A
accepts to be held liable itself vis-à-vis C. Even though C knows that A is purchasing on behalf of B, the
purchase contract is binding on A and C and does not directly affect B’s legal position.
• Principal B authorises agent A to buy on its behalf a specific quantity of grain but without exceeding a
certain price. A enters into a contract with seller C for the purchase of a greater quantity of grain and
at a higher price than that authorised by B. On account of A’s lack of authority, the contract between A
and C does not bind B, nor does it become effective between A and C.
Servant and Master
• Servant does not mean slave or even “butler or maid.” It means that
the principal has control over the agent’s work.
• Employees are always servants.
• The master is the principal, or the one in control.
Servant vs. Independent Contractor
• “Yes” responses to these questions may indicate
a servant, or employee, relationship:
• Does the principal control details of the work?
• Does the principal supply tools and place of work?
• Does the agent work full-time for the principal?
• Is the agent paid by time, rather than by job?
• Is the work part of the regular business of the
principal?
• Do the parties believe they have an employee-
employer relationship?
Principal’s Liability for Torts
• A principal may be liable for the torts of a
servant but generally is not liable for the torts
of an independent contractor.
• A master (principal) is liable for physical harm
caused by the negligent conduct of servants (agent)
within the scope of employment.
• The principal is liable for the physical torts of an
independent contractor only if the principal has
been negligent in hiring or supervising.
• Principals are only liable for torts that a servant
commits within the scope of employment.
Scope of Employment
• Authorization
• An act is within the scope of employment, even if expressly forbidden, if it is
of the same general nature as that authorized or if it is incidental to the
conduct authorized.
• Abandonment
• The master is liable for the actions of the servant that occur while the servant
is at work, but not for actions that occur after the servant has abandoned the
master’s business.
Negligent and Intentional Torts

• The master is liable if the servant commits a

negligent tort that causes physical harm to a
person or property.
• A master is not liable for the intentional torts
of the servant unless the servant was
motivated, at least in part, by the desire to
serve the master, or the conduct was
reasonably foreseeable.
Physical & Non-Physical Harm
• A master is liable for negligent conduct of a
servant that causes physical harm, if it is
within the scope of employment.
• With negligent conduct of a servant that
causes non-physical harm (harm to
reputation or finances), the principal is liable
only if the servant acted with actual or
apparent authority.
• Misrepresentation and defamation are treated
differently from other non-physical harms. (See next
slides.)
Misrepresentation
• A principal is liable if:
• The agent makes misrepresentation,
• The agent has express, implied, or apparent authority,
• The third party relies on the misrepresentation; and
• The third party suffers harm.
Defamation
• A principal is liable if:
• The agent makes a defamatory statement;
• The agent has express, implied, or apparent authority; and
• The third party is harmed by the statement.
Agent’s Liability For Torts
• Agents are always liable for their own torts, even if the principal is
also liable.
• Agents and principals are jointly and severally liable, which means that the
injured party may sue either one or both, as she chooses.
• The injured party may not recover twice, but may recover partially from both
parties.
• The principal can sue the agent, if the injured party recovers from the
principal.
• Discuss the case:

• SCB V.s Tân Việt Vs. Van Thinh Phat V.s

Client
Principal: Vạn Thịnh Phát
Agent: Tân Việt, SCB
Third party: Client
• Barnet was orally hired by Paula to locate desirable real estate that she could use for rental property. She
stated she wanted to find a four-unit building that could be purchased for under $200,000 that could be rented
for at least $1,000 per month per unit ($4,000 rental per month for the whole property). Barnet located a four-
unit building that could be purchased for $160,000 and was renting for $1,200 per unit. It was such a good
deal that he purchased it for himself. About two months later he found a second property that was listed for
$199,000 and rented for $1,000 per unit. Paula purchased the property. Afterwards, she learned that Barnet
had bought the $160,000 four-unit property for himself without telling her about it. Paula believes that Barnet
has acted improperly. Barnet claims that he did what she asked—he found a property for under $200,000 that
rented for $1,000 per unit. He also claims that since their agreement was oral, he has a legal defense if she
pursues the matter in court. Does Paula have any legal recourse against Barnet? Explain.