1. Copyright © 2004 by Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany BUSINESS LAW E-Commerce and Digital Law International Law and Ethics 5 th Edition by Henry R. Cheeseman Slides developed by Les Wiletzky Wiletzky and Associates, Puyallup, WA Chapter 29 Agency Formation and Termination Chapter 29 Agency Formation and Termination

2. 29 - 2Copyright © 2004 by Prentice-Hall. All rights reserved. The Nature of Agency  Agency relationships are formed by the mutual consent of a principal and an agent.  Agency is the fiduciary relationship “which results from the manifestation of consent by one person to another that the other shall act in his behalf and subject to his control, and consent by the other so to act.”

3. 29 - 3Copyright © 2004 by Prentice-Hall. All rights reserved. The Nature of Agency (continued)  Agency Law – The large body of common law that governs agency. A mixture of contract law and tort law. A mixture of contract law and tort law.  Principal – The party who employs another person to act on his or her behalf.  Agent – The party who agrees to act on behalf of another.

4. 29 - 4Copyright © 2004 by Prentice-Hall. All rights reserved. The Principal-Agent Relationship Principal Agent Third Party Agency Contract Contract with third party on behalf of principal Principal’s obligation to perform the contract

5. 29 - 5Copyright © 2004 by Prentice-Hall. All rights reserved. Persons Who Can Initiate an Agency Relationship  Any person who has the capacity to contract can appoint an agent to act on his or her behalf.  Persons who lack contractual capacity cannot appoint an agent. e.g., insane persons and minors e.g., insane persons and minors

6. 29 - 6Copyright © 2004 by Prentice-Hall. All rights reserved. Persons Who Can Initiate an Agency Relationship (continued)  An agency can be created only to accomplish a lawful purpose.  Agency contracts that are created for illegal purposes or are against public policy are void and unenforceable.

7. 29 - 7Copyright © 2004 by Prentice-Hall. All rights reserved. Kinds of Employment Relationships Employer-Employee Relationship Principal-Agent Relationship Principal-Independent Contractor Relationship

8. 29 - 8Copyright © 2004 by Prentice-Hall. All rights reserved. Employer-Employee Relationship  A relationship that results when an employer hires an employee to perform some form of physical service.  An employee is not an agent unless he or she is specifically empowered to enter into contracts on the principal employer’s behalf.

9. 29 - 9Copyright © 2004 by Prentice-Hall. All rights reserved. Principal-Agent Relationship  An employer hires an employee and gives that employee authority to act and enter into contracts on his or her behalf.  The extent of this authority is governed by any express agreement between the parties and implied from the circumstances of the agency.

10. 29 - 10Copyright © 2004 by Prentice-Hall. All rights reserved. Principal-Independent Contractor Relationship  Principals employ persons or businesses who are not employees to perform certain tasks on their behalf. These persons and businesses are called independent contractors. These persons and businesses are called independent contractors.  A principal can authorize an independent contractor to enter into contracts. Principals are bound by the authorized contracts of their independent contractors. Principals are bound by the authorized contracts of their independent contractors.

11. 29 - 11Copyright © 2004 by Prentice-Hall. All rights reserved. Principal-Independent Contractor Relationship (continued)  The crucial factor in determining whether a person is an employee or an independent contractor is the degree of control that the principal has over that person.

12. 29 - 12Copyright © 2004 by Prentice-Hall. All rights reserved. Employment at Will  At-Will Employees – Employees who do not have an employment contract. Under common law, an at-will employee could be discharged by an employer at any time for any reason. Under common law, an at-will employee could be discharged by an employer at any time for any reason.  Exceptions to the at-will doctrine: Statutory Exception Statutory Exception Contract Exception Contract Exception Public Policy Exception Public Policy Exception

13. 29 - 13Copyright © 2004 by Prentice-Hall. All rights reserved. Summary: Kinds of Employment Relationships Type of Relationship DescriptionEmployer-Employee The employer has the right to control the physical conduct of the employee. Principal-Agent The agent has the authority to act on behalf of the principal as authorized by the principal and implied from the agency. An employee is often the agent of his employer. Principal-Independent Contractor The principal has no control over the details of the independent contractor’s conduct. An independent contractor is usually not an agent of the principal.

14. 29 - 14Copyright © 2004 by Prentice-Hall. All rights reserved. Formation of the Agency Relationship Express Agency Implied Agency Apparent Agency Agency by Ratification

15. 29 - 15Copyright © 2004 by Prentice-Hall. All rights reserved. Express Agency  An agency that occurs when a principal and an agent expressly agree to enter into an agency agreement with each other. Exclusive agency contract Exclusive agency contract Power of attorney Power of attorney  Express agency contracts can be either oral or written unless the Statute of Frauds stipulates that they must be written.

16. 29 - 16Copyright © 2004 by Prentice-Hall. All rights reserved. Implied Agency  An agency that occurs when a principal and an agent do not expressly create an agency.  The agency is implied from the conduct of the parties.  The extent of the agent’s authority is determined from the particular facts and circumstances of the particular situation. Incidental authority Incidental authority

17. 29 - 17Copyright © 2004 by Prentice-Hall. All rights reserved. Apparent Agency  Agency that arises when a principal creates the appearance of an agency that in actuality does not exist.  When an apparent agency is established, the principal is estopped from denying the agency relationship.  It is the principal’s actions that create an apparent agency.

18. 29 - 18Copyright © 2004 by Prentice-Hall. All rights reserved. Agency by Ratification An agency that 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 (accepts) the unauthorized act.

19. 29 - 19Copyright © 2004 by Prentice-Hall. All rights reserved. Summary: Formation of Agency Relationships (1 of 2) Type of Agency Definition Enforcement of the Contract Express Authority is expressly given to the agent by the principal. Principal and third party are bound to the contract. Implied Authority is implied from the conduct of the parties, custom and usage of trade, or act incidental to carrying out the agent’s duties. Principal and third party acts are bound to the contract.

20. 29 - 20Copyright © 2004 by Prentice-Hall. All rights reserved. Summary: Formation of Agency Relationships (2 of 2) Type of Agency Definition Enforcement of the Contract Apparent Authority created when the principal leads a third party into believing that the agent has authority. Principal and third party are bound to the contract. By Ratification Acts of the agent committed outside the scope of his authority. Principal and third party are not bound to the contract unless the principal ratifies the contract.

21. 29 - 21Copyright © 2004 by Prentice-Hall. All rights reserved. Termination of an Agency and Employment Contract  An agency contract is similar to other contracts in that it can be terminated by: Acts of the parties, or Acts of the parties, or Operation of law Operation of law  Once an agency relationship is terminated, the agent can no longer represent the principal or bind the principal to contracts.

22. 29 - 22Copyright © 2004 by Prentice-Hall. All rights reserved. Termination by Acts of the Parties An agency may be terminated by the following acts of the parties: 1. Mutual agreement 2. Lapse of time 3. Purpose achieved 4. Occurrence of a specified event

23. 29 - 23Copyright © 2004 by Prentice-Hall. All rights reserved. Termination by Operation of Law An agency is terminated by operation of law, including: 1. Death of the principal or agent 2. Insanity of the principal or agent 3. Bankruptcy of the principal 4. Impossibility of performance 5. Changed circumstances 6. War between the principal’s and agent’s countries

24. 29 - 24Copyright © 2004 by Prentice-Hall. All rights reserved. Irrevocable Agency  An agency coupled with an interest: Special type of agency relationship Special type of agency relationship This type of agency is irrevocable by the principal This type of agency is irrevocable by the principal Not terminated by the death or incapacity of either the principal or the agent Not terminated by the death or incapacity of either the principal or the agent Terminates only when the agent’s obligations are performed Terminates only when the agent’s obligations are performed

25. 29 - 25Copyright © 2004 by Prentice-Hall. All rights reserved. Wrongful Termination of an Agency or Employment Contract  The termination of an agency contract in violation of the terms of the agency contract.  The nonbreaching party may recover damages from the breaching party.  The distinction between the power and the right to terminate an agency is critical.