Agency Relationship
Agency relationships are consensual, requiring assent by both parties. For this reason, whenever two parties with the necessary legal ... [Show More] capacity mutually consent to a relationship in which one will act on behalf of the other and subject to the other's control, they have formed an agency relationship.
The most recognized principals are employers who control the actions of their employees (agents). A corporation or other business organization can be a principal, and the officers and other employees of the corporation are agents (just as partners are agents of a partnership).
Although agency relationships are generally based on consent, agency may be imposed by operation of law (e.g., estoppel or a state motorist statute).
Creation of an Agency Relationship
The most common method of creating an agency relationship is by appointment (oral or written). Generally, a principal's appointment of an agent need not comply with specific formalities (for example, a writing) to be effective. However, many states require an agent's appointment to be in writing when the agency relates to interests in property (e.g., a power of attorney).
The principal will generally be bound by any contract created on the principal's behalf, by an agent with the power to bind the principal, whether the power to bind is:
i) Expressed orally or in a writing;
ii) Implied by a principal's conduct; or
iii) Misinterpreted by a third party.
**Partnership and corporations questions often require application of agency law. Be prepared to (i) identify the existence of agency relationships, (ii) discuss whether the principal is subject to liability for the agent's actions, (iii) articulate an agent's fiduciary duty to the principal and whether the agent has breached that duty, and (iv) determine if or when an agency relationship has terminated.**
Determining the Existence of an Agency Relationship
An agency relationship is created when:
i) A principal manifests assent to an agent;
ii) The agent acts on the principal's behalf;
iii) The agent's actions are subject to the principal's control; and
iv) The agent manifests assent or otherwise consents.
**Points are obtained for agency questions by listing the elements that create an agency relationship and demonstrating how they are or are not present.**
The Principal's Control
An agent agrees to be subject to the principal's control, and a principal agrees to be bound by the acts of its agent within the scope of the agent's authority. The fact that a principal lacks the right to control the full range of an agent's actions (professional judgment), or fails to exercise the right to control the agent, does not eliminate the principal's rights or affect the existence of an agency relationship.
It is sufficient that the principal has the right to control the result or the ultimate objectives of the agent's work.
**Do you need to identify a principal quickly? Look for (i) the types of principals listed below when reading fact patterns and (ii) examples of any person, individual, or entity that exerts control over another party. The key word is "control."**
Types of Principals--Individual
An agent has a duty to refrain from using the principal's confidential information for the benefit of anyone other than the principal, including the agent. This duty survives termination of the agency relationship.
Types of Principals--Master or employer
A master (often referred to as an employer) is a principal who employs an agent to perform services and who controls—or has a right to control—the physical conduct of the employee's performance. Restatement (Second) of Agency § 2(1) (1958). An agent who is subject to this level of control is referred to as a servant or employee.
The more control a principal exerts over an agent's actions, the more likely it is that a master-servant (or employer-employee) relationship exists.
Courts usually determine a principal's status as a master/employer based upon the control that the principal asserts over the servant/employee. Several factors contribute to this analysis, such as whether:
i) The principal exercises significant control over the details of the worker's day-to-day activities;
ii) The principal supplies the tools at the place of employment;
iii) The principal pays the worker on a structured pay period;
iv) The worker's skill level is specialized; and
v) The principal directs the work to completion.
Types of Principals--Entrepreneur
Any business owner who has the legal capacity to contract with a person to represent him and conduct business on his behalf can be a principal.
EXAM NOTE: Look for business owners (e.g., sole proprietors without partners) to be frequently highlighted as principals in agency and partnership fact patterns.
Types of Principals--Corporation
A corporation is a legal entity created for the purpose of conducting business. A corporation must have legal existence to be considered a principal in an agency relationship. Corporations that are yet to be formed (i.e., future incorporation pending) cannot be principals.
Corporate officers, employees of the corporation, and other persons can serve as agents of the corporation.
Types of Principals--Partnership
A partnership is an association of two or more persons for the purpose of carrying on as co-owners of a business for profit. The partnership can be considered the principal in an agency relationship. Partners, employees of the partnership, and other persons, such as attorneys, can all serve as agents of the partnership.
The Agent
Generally, any person with minimal capacity can serve as an agent. An agent is not required to have the capacity to form contracts. Therefore, minors or incompetents can serve as agents. Entities may also serve as agents. Agents may perform a variety of general or specialized tasks.
Depending on the level of the agent's authority, or the manner in which the agent conducts business with a third party, the agent may incur personal liability for acts that are unauthorized by the principal or that are illegal, negligent, or outside the scope of the agent's employment.
The consensual nature of the agency relationship requires an agent to:
i) Have minimal capacity;
ii) Manifest assent and consent to act on the principal's behalf; and
iii) Manifest assent to be subject to the principal's control.
Formalities of an Agency
Creating an agency relationship is relatively easy because:
i) An agent need not receive consideration (a gratuitous agent); and
ii) A principal's appointment of an agent generally need not be in writing or comply with other formalities.
**Do you need to identify an agent quickly? Look for (i) the types of agents listed below in fact patterns and (ii) persons who work on behalf of, and are subject to the control of, another person/principal.**
Types of Agents--Individual
Any individual with minimal capacity (some understanding that a contract is being initiated and the general nature of its subject matter) has the requisite capacity to be an agent. Status as an agent is established by the agreement to act on behalf of, and subject to the control of, the principal.
Types of Agents--Servant or employee
A servant (often referred to as an employee) is an agent who is subject to the principal's control with respect to the physical conduct of the employee's performance. Generally, employees are paid hourly or by time periods (e.g., weekly, biweekly, monthly). Their work is an integral part of the work of the employer, tasks are generally completed under the employer's direction, and employees are employed for long periods of time with the same employer. The more control an employer exerts over an agent's day-to-day activities, the more likely the agent qualifies as an employee.
Types of Agents--Independent Contractor
An agent who is not a servant/employee is referred to as an independent contractor. Courts examine several factors to determine whether an agent is an employee or an independent contractor. The most important factor is that an independent contractor is not subject to the principal's control regarding the physical conduct of the agent's performance.
An independent contractor can be identified as a person who:
i) Bears the risk and benefits from good management;
ii) Maintains a high level of independence;
iii) Is free to work for others;
iv) Agrees to be paid a fixed fee;
v) Receives payment based on results;
vi) Is liable for work performed; and
vii) Accepts responsibility to remedy defects at her own expense.
EXAM NOTE: Questions may refer to an independent contractor as a "nonemployee agent."
Types of Agents--Gratuitous agent
A gratuitous agent is an agent who does not receive compensation. This does not prevent the creation of an agency relationship, but it generally does prevent the formation of an enforceable contract between an agent and a principal due to the lack of consideration.
General and special agents
A general agent is an agent with broad authority over a wide variety of tasks, involving a continuity of service in a particular kind of business, without renewed authorization for each transaction or decision. General agents include store managers and purchasing agents.
Special agents generally have limited authority regarding a specific transaction or a string of repetitious acts. Common types of special agents include real-estate agents, subagents, insurance agents, commission merchants, and bailees.
A trustee as an agent
A trustee is an agent and is subject to the control of the settlor of the trust or one or more of its beneficiaries. A trustee maintains a fiduciary relationship with and holds property for the benefit of the settlor. Restatement (Third) of Agency § 1.04(10) (2006).
Subagents
A subagent is a person appointed by an agent to perform functions that the agent has agreed to perform on behalf of a principal. The agent is liable to the principal for the conduct of the subagent. When an appointing agent hires employees, those employees are presumed to be subagents of the appointing agent, acting on behalf of the appointing agent's principal.
1) Power to appoint a subagent
An agent may appoint a subagent only if the agent has actual or apparent authority to do so.
2) Duties of a subagent
A subagent owes a duty of loyalty to the principal as well as to the appointing agent.
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An agent who appoints a subagent may be vicariously liable for torts committed by the subagent.
Subagent--Contractual liability
a) Agent
The agent is responsible to the principal for the subagent's conduct. Thus, the agent may be liable for a loss incurred by the principal as a consequence of the subagent's misconduct.
b) Principal
A principal is bound by the subagent's acts to the same extent as if the agent had undertaken the acts. Notice received by a subagent is treated as notice to the principal; knowledge possessed by the subagent is imputed to the principal. The principal is not obligated to compensate the subagent when the subagent and the agent create an agreement between them concerning compensation or other duties.
c) An agent serving co-principals
An agent has a duty of loyalty to the principal. In a situation in which an agent is serving more than one principal, and there is no substantial conflict among the principals' interests or their instructions to the agent, the agent may fulfill duties owed to all principals.
If a conflict exists between the principals, then the agent may not work for the conflicting principals.
Formation of Agency Relationships--Capacity
To become a principal and be bound by an agent's actions, a person must have capacity both to consent to the agency relationship and to enter into the transaction to which the agent purports to bind the principal.
In contrast, virtually any person can serve as an agent. A person can serve as an agent as long as he has the physical and mental capability to do whatever he has been appointed to do.
Minors
A person under the age of majority does not have the legal capacity to form contracts. Therefore, a minor generally may not be bound to a contract by an agent. However, a minor can serve as an agent.
Incompetents
A person who has a factual incapacity, such as incompetence, due to a mental condition related to medication, drugs, alcohol, or illness, does not have the legal capacity to be a principal, but she may be an agent.
Unincorporated associations
An unincorporated association is a non-legal entity in which two or more persons voluntarily associate with mutual consent or purpose. Examples of unincorporated associations include religious, literary, professional, charitable, or social associations; they each lack the capacity to form agency relationships.
Formation of Agency Relationships--Consent
Both the principal and the agent must consent to the agency relationship. The agent does not have to verbally consent, but she may manifest assent by performing acts on behalf of the principal. Restatement (Third) of Agency § 1.01, cmts. c, d; § 103 (2006).
Note that termination of an agency relationship may be unilateral. The principal or agent may terminate the agency without the other's consent.
Formation of Agency Relationships--Consideration
The parties may create an agency relationship without consideration.
Formation of Agency Relationships--Writing Requirement
A writing is generally not necessary to create an agency relationship. In some jurisdictions, statutes require that the principal's authorization of the agent be in writing and comply with specific requirements. The most common example is when the agent contracts to sell or buy real property.
When a statute requires the principal's authorization to be in writing, the requirement is often referred to as the "equal-dignities rule," i.e., the authorization must be of equal dignity to the underlying transaction. The equal-dignities rule operates to protect the principal against third-party actions. Therefore, a principal can raise the lack of written authorization as a defense. It does not apply in a contract action brought by a principal against a third party or in an action brought by an agent against the principal. Restatement (Third) of Agency § 3.02, cmt. b (2006).
Agency Liability
Once an agency relationship has been created, the principal potentially can be bound to contracts by the agent and subject to vicarious liability for the agent's tortious conduct. [Show Less]
