Which of the following is the primary test for whether or not an agency relationship exists?

The principal-agent relationship is an arrangement in which one entity legally appoints another to act on its behalf. In a principal-agent relationship, the agent acts on behalf of the principal and should not have a conflict of interest in carrying out the act. The relationship between the principal and the agent is called the "agency," and the law of agency establishes guidelines for such a relationship.

A principal appoints an agent to act on their behalf and in their best interest. Examples include an investor picking a fund manager or someone hiring an attorney for legal work.
There should be no conflict of interest between the two, if there is, this creates a principal-agent problem.
The principal-agent relationship is expressed clearly through a written contract or is implied through actions.

A principal-agent relationship is often defined in formal terms described in a contract. For example, when an investor buys shares of an index fund, he is the principal, and the fund manager becomes his agent. As an agent, the index fund manager must manage the fund, which consists of many principals' assets, in a way that will maximize returns for a given level of risk in accordance with the fund's prospectus.

Agents have an obligation to perform tasks with a certain level of skill and care and may not intentionally or negligently complete the task in an improper manner.

The principal-agent relationship can be entered into by any willing and able parties for the purpose of any legal transaction. In simple cases, the principal within the relationship is a sole individual who assigns an agent to carry out a task; however, other relationships under this guise have a principal that is a corporation, a nonprofit organization, a government agency or a partnership.

The agent is most often an individual capable of understanding and ultimately carrying out the task assigned by the principal. Common examples of the principal-agent relationship include hiring a contractor to complete a repair on a home, retaining an attorney to perform legal work, or asking an investment advisor to diversify a portfolio of stocks. In each scenario, the principal is the individual seeking out the service or advice of a professional, while the agent is the professional performing the work.

Whether the principal-agent relationship is expressed clearly through a written contract or is implied through actions, the principal-agent relationship creates a fiduciary relationship between the parties involved. This means the agent acting on behalf of the principal must carry out the assigned tasks with the principal's best interest as a priority.

The agent is responsible for completing tasks given by the principal so long as the principal provides reasonable instruction. Additionally, the agent has an obligation to perform tasks that will not intentionally harm the principal. A duty of loyalty is also implied within the principal-agent relationship, which requires the agent to refrain from putting himself in a position that creates or encourages conflict between his interest and the interest of the principal, also known as the principal-agent problem.

AGENCY RELATIONSHIPS:

AN OVERVIEW

Why do we care about agency relationships? Because it is the fundamental concept on which other business or other relationships are built, such as partnerships, corporations, trusts, and the like!

An Agency relationship is:

· [T]he fiduciary relation which results from the manifestation of consent by one person to another that the other person shall act in his behalf and is subject to his control; and consent by the other so to act.

RESTATEMENT (SECOND) OF AGENCY § 1(1).

è In other words, one person (the agent) agrees to do something for another party (the principal), subject to the control of the other party, and the other party (the principal) also agrees to the agreement.

It simultaneously means the principal is bound (normally) by what the agent does, since the agent is acts as if the principal were there him/herself.

It is a fiduciary and consensual relationship between two “persons” where one person acts on behalf of the other person and where the agent can form legal relationships on behalf of the principal.

It may be a business or personal relationship.

It allows the principal the ability, if you will, to be more than one place at a time, thereby expanding their potential business opportunities.

è Simply stated, the agent acts for the principal as if it were the principal acting

-and with the same authority- as if it were the principal. ç

Usually results in the following relationships:[4211.05]

a. Principal and agent

b. Employer (master) and employee (servant)

c. Principal and Independent contractor

More on this later!

Definitions (some not in the text at this juncture):

● Principal: The person or entity on whose behalf and subject to whose control an agent acts. For example, your boss at work.

· Agent: A person who agrees to act on behalf of and instead of his or her principal, subject to the principal's control. A good example would be an insurance agent.

Generally, in a business relationship, the principal and agent relationship requires being either an employee/employer relationship or an independent contractor.

· Fiduciary: A person who undertakes to act on behalf of and primarily for the benefit of another. For example, a trustee for a trust.

● Fiduciary Duty: A duty arising from the trust and confidence placed in a fiduciary by those on whose behalf and for whose benefit he or she acts.

· Person: a natural person, corporation, partnership or other recognized entity

EMPLOYER-EMPLOYEE or

INDEPENDENT CONTRACTOR RELATIONSHIPS? [4212]

· CONTRAST: Principal/Agent: Agent works for the benefit of the principal and under its control. Agent has right to represent the principal and make contracts with 3rd parties on behalf of principal. HUGE responsibility and duty! More on this later…

· Employee: One who works for, and receives payment from, an employer, whose working conditions and methods are controlled by the employer, and for whose acts and omissions occurring in the scope of employment the employer is liable. A classic agency relationship!

Now, lets compare an employee to an

· Independent Contractor: One who does work for, and receives payment from, an employer, but whose working conditions and methods are not controlled by the employer, and for whose acts and omissions the employer is not liable. For example, a CPA is paid by a client whom the CPA audits, but the CPA is free to review the records in any fashion they wish. Also, the CPA would be liable to 3rd parties relying on the CPA’s work (but paid by the audited client!).

· Whether a worker is an employee or an independent contractor may be determined by: (recall the principal is the employer) [4212.03]

(1) How much direction and control the employer exercises over the details of the person's work;

(2) Whether the person is engaged in an occupation or business distinct from that of the employer;

(3) Who supplies tools used at the place of work;

(4) What degree of skill is required of the worker; and

(5) the Duration of employment and method of payment.

This often becomes important for various tax items, such as W-2 or 1099 income reporting. Usually people like to say an employee is an independent contractor so they don’t have to pay Social security taxes on those payments (actually wages).

SIDEBAR: When you hit the real world, BE VERY CAREFUL IF YOU DECIDE TO BE AN INDEPENDENT CONTRACTOR, after all, you then have to come up with the full social security load (12.4%), Medicare, and income tax! This can be devastating particularly when you no longer have the funds!!! (after the $$$ is long since spent)

AGENCY RELATIONSHIPS:

èFORMATION/CREATIONç [4213]

· Agency by Agreement/Contract: An agency relationship based on an express or implied agreement that the agent will act for the principal. Obviously the most common form. In some cases, there weren’t enough required elements to form a contract, and thus only an “agreement.”

· Agency by Ratification: A confirmation by the principal of an act or contract performed or entered into on his or her behalf by another, who assumed, without authority, to act as his or her agent. May be oral or written, usually cannot be rescinded, is retroactively applied back to original date the alleged contract was “made.”

· Agency by Estoppel: If a principal (NOT THE AGENT) holds out to a third party that another is authorized to act on the principal's behalf, and the third party deals with the other person accordingly, the principal may not later deny that the other was the principal's agent for purposes of dealing with that third party. RARE!

· Agency by Operation of Law: Agencies recognized by courts -- e.g., family relationships, emergency situations -- in the absence of any formal agreement, confirmation, or act or omission by the principal that implied the agent's authority. Usually deals with necessities.

· Note that marriage is not necessarily considered an agency relationship solely due to the mere fact the couple is *married*. è èRecall an agency relationship results from manifestation of assent and direction from one to another (don’t laugh, married folks!) ç ç.

ACTUAL AUTHORITY [4225]

· Express Authority: Authority declared in clear, direct, and definite terms, orally or usually in writing.

· Equal Dignity Rule: If a contract being executed by an agent on the principal's behalf is in writing, most states require that the agent's authority must also be in writing; otherwise, the contract executed by the agent is voidable at the principal's option.

· The equal dignity rule does not apply when the agent acts in the principal's presence or when the agent's act is merely perfunctory (ministerial).

· Power of Attorney: A written document, usually notarized, authorizing an agent to act for a principal. [4211.1a]

(i) conferred by custom (“everyone in the job has always done this…”),

(ii) inferred from the position the agent occupies (you would expect a vice president to be able to act on behalf of the company), or

(iii) inferred as being reasonably necessary to carry out express authority (sign the contract).

APPARENT AUTHORITY [4225]

· Apparent Authority: Authority that arises when a principal, by either words or actions, causes a third party to believe that an agent has authority to act, even though the agent has no express or implied authority to act with regard to the particular matter at hand.

· If the third party changes his or her position in reliance on the principal's representations regarding the agent's authority, the principal may be estopped from denying that the agent had authority to act. Estopped means “kings x, you can’t go back on the deal”

· Emergency Powers: When an unforeseen situation demands action to protect or preserve the property and rights of the principal, but the agent is unable to contact the principal, the agent has emergency authority to act on the principal's behalf.

RATIFICATION [4213.03]

· Ratification: The express or implied affirmation of a previously unauthorized contract made by a purported agent. In summary:

(1) The purported agent must have acted on behalf of the principal who subsequently ratified the action;

(2) The principal must know all material facts involved in the transaction;

(3) The agent's act must be affirmed in its entirety by the principal;

(4) The principal must have the legal capacity to affirm the transaction both

(a) at the time the agent acts, and

(b) at the time the principal ratifies;

(5) The principal must affirm before the third party withdraws from the transaction;

and (all of this stuff must exist!)

(6) The principal must observe the same formalities when he or she ratifies the act as would have been required to authorize it initially.

AGENT'S DUTIES TO THE PRINCIPAL (Principal’s Rights) [4219]

· Loyalty: An agent has the duty to act solely for the benefit of his or her principal, and not in the interest of the agent or a third party. Moreover, any information or knowledge obtained in the course of the agency is confidential. THE AGENT CANNOT PROFIT INDIVIDUALLY WITHOUT PERMISSION FROM THE PRINCIPAL.

· Obedience: An agent has the duty to follow all lawful and clearly stated instructions of the principal. Why else would anyone agree to have an agent/principal relationship???

· Accounting: Unless otherwise agreed, an agent has the duty to keep and make available to the principal an account of all property and money received and paid out on the principal's behalf, including gifts received from third persons.

· Performance: An agent impliedly agrees to use reasonable diligence and skill (except for a specialist, who is held to a higher degree of skill) in performing the task in its entirety. In other words, due care.

· Notification: An agent is required to notify the principal of all matters that come to the agent's attention concerning the subject matter of the agency. As a result, the principal must be in constant communication with the agent.

PRINCIPAL'S DUTIES (Agent’s rights)

TO THE AGENT [4220]

· Compensation: When a principal requests certain services from an agent, the principal has a duty to pay the agent, in a timely manner, for those services rendered.

· Reimbursement: Whenever an agent disburses sums of money to fulfill the principal's request or to pay for necessary expenses incurred in the reasonable performance of his or her duties, the principal has the duty to reimburse the agent.

· Indemnification: Subject to the terms of the agency agreement, the principal has a duty to compensate, or indemnify, the agent for liabilities arising from the agent's lawful and authorized acts on the principal's behalf.

· Cooperation: A principal has the duty to cooperate with the agent and to assist the agent in performing his or her duties.

· Safe Working Conditions: A principal has the duties (i) to provide its agents and employees with safe working premises, equipment, and conditions, and (ii) to inspect working conditions and warn agents and employees of unsafe areas.

PRINCIPAL'S REMEDIES [4223]

· Most principal-agent relationships are governed by some actual or implied contract; therefore, most of the remedies available to a principal are the same available to any plaintiff in a breach of contract case. In other words, the principal can sue!!!

· However, in the event that the agent violates her fiduciary duties to the principal, the following may also apply:

o Constructive Trust: Anything an agent obtains by virtue of the agency relationship belongs to the principal; therefore, a principal may sue to recover any benefits retained by the agent. This is the reason anything developed in intellectual property while on the job belongs to the employer, not the employee, although usually, but not necessarily, the employer will allow the employee to share in the royalties.

o Avoidance: In the event that the agent breaches her contract with the principal, the principal may elect to avoid any contract he entered into with the agent.

o Indemnification: To the extent that the agent's breach causes harm to some third party, who then sues the principal, the principal may seek indemnification from the agent.

LIABILITY FOR CONTRACTS:

AUTHORIZED ACTS/CLASSIFICATION

[4225, 4215, 4216]

A disclosed or partially disclosed principal is liable to a third party for a contract made by an agent who is acting within the scope of his or her authority.

· Disclosed Principal: A principal whose identity is known to the third party at the time the agent makes a contract for the principal with the third party. For example, I go in and say I am representing my client, Mr. X, on his behalf.

· Partially Disclosed Principal: A principal whose identity is not known to the third party, but the third party does know that the agent is representing some principal at the time the agent makes a contract with the third party. In many states, the agent is also liable on a contract with a partially disclosed principal. For example, maybe I am representing someone big, like Disney, and I am buying some land for a new amusement park. If the seller knew it was Disney, the price would skyrocket.

· Undisclosed Principal: When neither the fact of agency nor the identity of the principal is disclosed by an agent to the third party at the time a contract is made, the agent is presumed to be acting on his or her own behalf, and will be liable as a party to the contract. NOTICE: If, in fact, the agent was authorized to act on behalf of the undisclosed principal, then the principal will also be liable on the contract and subject to indemnification. Here, I go in and don’t say a word that I am representing someone else.

LIABILITY FOR CONTRACTS: UNAUTHORIZED ACTS (by Agent) [4225, 4226]

· If an unauthorized agent contracts with a third party, the principal cannot be held liable on the contract, regardless of whether the principal was disclosed, partially disclosed, or undisclosed. Rather, the agent will be solely liable.

· However, if the third party knows or should know at the time of the contract that the agent lacks authority to contract on behalf of the principal, the agent will not be liable to the third party.

PRINCIPAL’S LIABILITY FOR AGENT'S TORTS [4227]

· Respondeat Superior: The doctrine by which an employer or other principal is liable, along with the agent or employee, for any tort committed by the agent or employee while acting within the scope of their agency or employment.

· To determine whether a tort was within the scope of agency or employment, courts look at the following:

(1) whether the act was authorized;

(2) the time, place, and purpose of the act;

(3) whether the act was one commonly performed by employees on behalf of their employers;

(4) whether the employer's interest was advanced;

(5) whether the employee's interests were involved;

(6) whether the employer furnished the means or instrumentality by which the injury was inflicted;

(7) whether the employer had reason to know; and

(8) whether the act involved a serious crime.

Generally the principal is not responsible for the torts of an independent contractor, except in situations which is inherently dangerous, illegal, nondelegatable, or impossible to separate from the principal.

· "Frolics": A principal is not liable for the acts of an agent who substantially departs from the principal's business. For example, someone takes the company truck to Galveston to go on the beach when he should be in Conroe and hurts someone while in Galveston.

· Borrowed Servants: A principal may be liable for the acts of an agent "lent" to another if the principal retained the primary right to control the agent's activities.

· Dangerous Conditions: A principal is charged with knowledge of any dangerous conditions discovered by an agent and pertinent to the agency regardless of whether the agent actually informs the principal of the condition.

· Intentional Torts: Principals are liable only for those intentional torts that are committed within the course and scope of the agent's actions on behalf of the principal.

· Crimes: A principal is not liable for an agent's crime if the agent independently undertook the crime.

· Subagents: A principal is liable for the acts of subagents hired by an agent authorized to hire subagents.

AGENCY RELATIONSHIPS: TERMINATION [4229]

· By Act of the Parties: An agency may be terminated by any of the following:

(1) lapse of time;

(2) accomplishment of particular purpose for agency;

(3) occurrence of a specific event (closed the deal, for example);

(4) mutual agreement of the agent and principal; and

(5) renunciation (by the agent) or revocation (by the principal) of the agent's authority.

· By Operation of Law: An agency may also terminate as a matter of law due to:

(1) death or incompetence of the agent or principal;

(2) impossibility of performance;

(3) materially changed circumstances; and/or

(4) bankruptcy of the principal or agent.

The principal should also give notice to 3rd parties of the termination of the agency to anyone that has dealt with the agent, which includes “published” notice.