1. Agency Law

Agency Law

Playlist: 10 Videos: 27 Minutes


Topic: Learning Material

Introduction to Agency Law
Agency law concerns the legal relationship by which one person acts on behalf of another. This chapter will examine the agency relationship and the legal duties owed by principal and agent. It will focus upon the scope of the agency relationship — particularly in the context of the employer-employee relationship. It will introduce the concept of vicarious liability and provide the elements necessary for a principal to be held liable for the actions of the agent. This topic will include liability for contracts entered into by the agent and torts committed by the agent. For further written and video explanation, discussion and practice questions, see Agency Law (Intro)

What is an “Agency” relationship?
An agency relationship is one in which a party acts on behalf of and with the authority of another party. The “principal” appoints or authorizes the “agent” to act on her behalf. Thus, she is responsible for the actions of the agent taken in furtherance of her duties or per the instructions of the principal. The agent will interact with “third parties” on behalf of the principal. The agency relationship requires an understanding of the relationship between principal and agent, agent and third parties, and the principal and third parties’ roles, responsibilities, and rights. For further written and video explanation, discussion and practice questions, see What is an "agency" relationship?

What are the type of agent?
The principal will lay out the “scope of the agency”, including the responsibilities and limitations of the agent. Agents generally fall into three categories: Limited Agent - A limited agent has a special purpose and limited authority to act on behalf of the principal. Unless specifically limited by the principal, actions done in furtherance of that purpose are within the scope of the agent’s authority. General Agent - A general agent has broad authority to act on behalf of the agent. The scope of the agency is not limited to a special purpose. Independent Contractor - Agency law considers an independent contractor to be a special form of agent of the principal. The independent contractor is hired to perform a service for the principal but is generally not under the direct control or supervision of the principal. In this way, the agent has very limited ability to represent or act on behalf of the principal outside of the context of the services contract. Numerous subcategories of agent exist within these broader categories. For instance, an “agent coupled with an interest” is a type of special agent who earns compensation through performing her agency duties (rather than receiving compensation directly from the principal). For example, a sales agent who receives a commission on sales may be an agent coupled with an interest. This type of agency is subject to contract rules and cannot be terminated without violating the legal rights of the agent or principal. For further written and video explanation, discussion and practice questions, see What are the types of agent?

Agency - “Employee vs Independent Contractor”
Employee - An employer hires an employee to work on behalf of the employer as part of or in support of the business’s core functions. The employee generally works exclusively for the business in the functions for which she is hired. The employer exercises extensive control over the nature, time, and manner of work carried out by the employee. As such, the employee is a general agent of the business to the extent of her authority in the position. Independent Contractor - An independent contractor is not an employee; rather, she or it is a separate business that is hired to perform services for or on behalf of another person or business. One way of thinking of an independent contractor is that she has her own business that services the employer as a client or customer. The employer does not directly control the manner and method by which an independent contractor carries out her duties. Also, an independent contractor generally has more than one customer or client. As such, the independent contract is only a limited or special agent of the principal-employer. Both independent contractors and employees are agents of the principal. The distinction, however, is important for determining a principal’s liability for the agent’s actions. Generally, absent specific instructions to do a task leading to liability, an employer is not liable for the actions of an independent contractor taken on behalf of the principal. For further written and video explanation, discussion and practice questions, see Employee vs. Independent Contractor

What are the types of “Principal”?
Principals are categorized based upon whether their identity is disclosed to third parties with whom the agent interacts on their behalf. Disclosed Principal - A disclosed principal’s identity is known to third parties dealing with the agent. Partially-disclosed Principal - A partially-disclosed principal is known by third-parties to exist, but her exact identity is unknown. This type of relationship exists when there is some benefit to the principal to remain anonymous to third parties interacting with the agent. Undisclosed Principal - The existence of an undisclosed principal is unknown to a third party. The third party believes that she is interacting only with the agent. These categorizations of principal are important in determining the rights and duties of the principal, agent, and third party. For further written and video explanation, discussion and practice questions, see What are the types of principal?

Requirements for a “Principal-Agent Relationship”
An agency relationship is created in the following manners: Express Agreement, Implied Agency, Ratification, By Estoppel, By Necessity. To learn more about these manners of forming an agency relationship and for further written and video explanation, discussion and practice questions, see What is required to form a principal-agent relationship?

Duties of the Principal to the Agent
Generally, a principal owes the following duties to the agent: Duty to Compensate, Duty to Reimburse, and Duty to Indemnify. To learn about these duties, and or further written and video explanation, discussion and practice questions, see What are the duties of a principal?

Duties of the Agent to the Principal
Agents generally have the following duties to the principal: Duty of Loyalty, Duty of Care, Duty of Information & Disclosure, and Duty of Accounting. For further written and video explanation, discussion and practice questions, see What are the duties of an agent?

Authority of an Agent to Bind a Principal
A principal is generally bound to third parties pursuant to the contracts entered into by the agent on behalf of the principal. This means that the principal is responsible for any obligations incurred by the agent that are within her authority. An agent has varying sources of authority when dealing with third parties: Actual Authority, Implied Authority, Apparent Authority, and Ratification. In each of the above situations, a disclosed principal is liable to third parties dealing with the agent. If the agent exceeds her express authority, the third party may still have the ability to back out of the contract. The third party is generally bound by the contract if the principal ratifies the agent’s conduct before the third-party finds out about the lack of authority and withdraws. To learn more about these types of authority, and for further written and video explanation, discussion and practice questions, see What is the authority of Agent to Bind Business in Contract?

Agent’s Liability to Third Parties
An agent acting within the scope of her authority is not liable to third parties on obligations entered into on behalf of the principal. Even if the agent exceeds her express authority, her implied authority may bind the principal to the agreement and relieve her from any contractual liability to the third party. The important point is that the agent must act on behalf of the principal and disclose that relationship to the third party. If the agent is acting on behalf of a principal, but fails to disclose her agency status, it may subject her to liability to the third party. In some cases, it may also serve to bind the principal once the agency relationship is determined. For further written and video explanation, discussion and practice questions, see When are agents liable to principals and third parties?

When is a Principle Liable for the Torts of an Agent?
An individual is always liable for her own conduct. Whenever an individual is held liable for the actions of another, this is known as “vicarious liability”. In the context of agency, the agent is acting vicariously for the principal. A principal is responsible for the tortious acts of an agent pursuant to a doctrine known as “respondeat superior”. More specifically, an agent may create legal liability for the principal for actions taken by the agent “within the scope of the agency”. In such cases, the principal and agent are “jointly and severally” liable for the harm caused by the agent’s conduct. An act is within the scope of the agency if the purpose behind the action taken is to advance the interests of the principal. As such, if any act taken by an employee in an effort to advance the employer’s interest is a tort, the employer may be liable for that conduct. For further written and video explanation, discussion and practice questions, see When does the Agency Relationship Terminate?

What is a “Frolic and Detour”?

A “frolic and detour” is a general defense to vicarious tort liability. It states that the principal should not be liable for the tortious acts of the agent when the agent is acting outside the scope of her employment and for the benefit of someone other than the employer. Plainly stated, an employee who is on a frolic or detour is no longer acting for the employer. Frolic - A frolic is when an employee abandons the employer’s business objectives and pursues personal interests. Detour - A detour occurs when an employee substantially deviates from an employer’s instructions or rules. Generally, both a frolic and detour must be present to relieve an employer from liability for the agent’s actions. For further written and video explanation, discussion and practice questions, see What is a "Frolic and Detour"?

When does the agency relationship terminate?
The establishment, duration, and termination of the agency relationship is generally governed by the agreement between the principal and agent. In the absence of an express agreement, several default rules apply regarding the point at which the agency relationship terminates. Below are common rules for terminating the agency relationship: Withdrawal by Either Party, Withdrawal by Both Parties, Termination by the Principal, Renunciation by the Agent, Duties of Agent Complete, Death or Incapacity, Bankruptcy. The above situations resulting in termination of the agency relationship are default rules. The parties may reserve any rights or restrictions on terminating the agency relationship within their agreement. For further written and video explanation, discussion and practice questions, see When does the Agency Relationship Terminate?


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