Agency Formation and Duties
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• LO33-1: What is agency law?
• LO33-2: How is an agency relationship created?
• LO33-3: What are the different types of agency?
• LO33-4: What are the different types of agency
• LO33-5: What are the duties of the agent and
• LO33-6: What are the rights and remedies of the
agent and principal?
Chapter 33 Hypothetical Case 1
• Brian Puryear is an employee of Wellborn Industrial Systems, Inc.
("Wellborn"), located in Little Rock, Arkansas. Times are tough at Wellborn—
the company's rank and file workers have not had a raise in four years.
Despite the federal government's assertions that inflation is under control,
Puryear knows that prices for goods and services keep rising, and he
desperately needs to make up for the difference.
Puryear has been searching the Internet for part-time jobs in Little Rock. He
notices that a security guard position is available at a local manufacturing
plant. The security job is Monday through Friday from 8:00 p.m. until
2:00 a.m. His job at Wellborn is Monday through Friday from 8:00 a.m. until
• Would Brian Puryear violate his duty of loyalty to Wellborn Industrial
Systems, Inc. if he accepted the part-time security position? From an ethical
perspective, should Brian notify Wellborn of his intentions and secure
Wellborn's approval before accepting the security guard position?
Chapter 33 Hypothetical Case 2
• Robert Newman, attorney-at-law, just attended a pretrial conference for a trial
scheduled to begin next week. The case, Effingham v. Atwater, involves his client,
Jessica Effingham. On September 8, 2009, Effingham sustained serious injuries in an
automobile accident when a car driven by Harvey Atwater (the defendant) struck her
car from behind. Effingham sustained permanent partial disability as a result of the
accident, and Newman believes the case is worth $250,000 for his client's permanent
partial disability, pain and suffering, medical expenses, and other
During the pretrial conference, Atwater's defense counsel, Gunner Vader, offered the
plaintiff $20,000 in full and final settlement of the Effingham v. Atwater litigation.
Vader proclaimed that $20,000 was all of the settlement authority he had, and his
client would not pay a penny more to settle the case. Judge Clarence Ginsburg
strongly recommended that the plaintiff take the $20,000 settlement offer, but
Newman considered the lowball offer to be a personal insult as well as an affront to
his client, and he immediately rejected the offer.
• In rejecting the offer, did Robert Newman violate his professional duty as his client's
• Agency: Relationship between principal
• Agent: One authorized to act for/on behalf
• Principal: One who hires agent to
• Fiduciary: One with duty to act primarily
for another person's benefit
Creation of Agency Relationship
• Expressed agency: Agency formed by making written/oral
• Power of attorney: Document giving agent authority to sign legal
documents on behalf of principal
• Durable power of attorney: Power of attorney intended to continue
to be effective/take effect after principal incapacitated
• Agency by implied authority: Agency formed by implication, through
conduct of parties
• Agency by estoppel: Agency formed when principal leads third party
to believe that another individual serves as his/her agent (although
principal had actually made no agreement with purported agent)
• Agency by ratification: Agency that exists when individual
misrepresents himself/herself as agent for another party, and
principal accepts/ratifies unauthorized act
Agency By Ratification
• Individual must misrepresent himself/herself as agent for
• Principal accepts/ratifies unauthorized act
• Principal has complete knowledge of all material facts
• Principal must ratify entirety of agent's act
• Agency relationship: Fiduciary relationship (relationship of
trust) in which agent acts on behalf of principal
• Principal-agent relationship: Employer hires employee to
enter into contracts on behalf of employer; parties have
agreed that agent will have power to bind principal in contract
• Employer-employee relationship: Employer hires employee to
perform certain tasks; employer has right to control conduct
• Employer-independent contractor relationship: Employer
hires persons (other than employee) to conduct some sort of
task; employer has no control over details of conduct of
Independent Contractor or
• Does worker engage in distinct
occupation/independently established business?
• Is work done under employer's supervision, or does
specialist without supervision complete the work?
• Does employer supply the tools?
• What skill is required for the occupation?
• What is the length of time for which worker employed?
• Is worker a regular part of the employer's business?
• How is worker paid?
Principal and Agent Duties
• Principal's duties to agent:
Reimbursement and indemnification
Safe working conditions
• Agent's duties to principal:
Principal and Agent
Rights and Remedies
• Principal's rights and remedies against agent:
• Constructive trust
• Agent's rights and remedies against principal:
• Tort and contract remedies
• Demand for an accounting
• Specific performance
Chapter 33 Hypothetical Case 3
• Maximillian Snell is having a very bad Monday at his pre-owned car dealership,
Maximillian Motors. Known countywide for his eye-catching television advertisements
(with staged customers proclaiming "Thanks a million, Maximillian!"), Snell is having a
difficult time attracting and retaining an effective and reliable sales staff; in fact, not a
single salesperson has appeared for work on Monday. The only employee who does
show up for work that day is his secretary of three years, Daisy Martinez, whose
responsibilities include processing tax, title, and tag paperwork.
Business is slow that day, with only two shoppers appearing on the lot between
8:00 a.m. to 2:00 p.m. Famished, and eager to try out the new Italian restaurant down
the street, Snell instructs Martinez to tell any prospective customers he will return at
When Snell returns at 3:30, he asks Martinez whether any potential customers visited
the lot in his absence. Martinez beams with pride and says, "Why yes, Max, there was
a young couple who came by right after you left. They wanted to buy that red BMW
sedan on the front row, and I knew business was slow, so I went ahead and sold it to
them. The contract is here on my desk. Aren't you proud of me?"
Chapter 33 Hypothetical Case 3
• Curious, Snell examines the contract. It describes the red BMW sedan and
includes the signatures of both purchasers, as well as Martinez's signature
(indicating "Daisy Martinez for Maximillian Motors"). The contract price is
$21,000. Snell's face reddens as he heads for the car inventory purchase
price records on his computer. Computer records reflect that he purchased
the car at auction last Wednesday for $28,000, and that his established retail
price for the car was $31,000. When he confronts Martinez with the facts,
she bursts into tears saying, "Please don't fire me! I've made a terrible
mistake!" Martinez is inconsolable, but that is irrelevant to Snell.
Through her tears, Martinez indicates that the couple will return at
5:30 p.m. to take possession and ownership of the car; they have gone to
their bank to obtain the $21,000.
• Is Snell legally obligated to sell the car to the couple? From an ethical
standpoint, should the couple agree to pay at least Snell's cost for the car
Chapter 33 Hypothetical Case 4
• Serena Hofstadt is a Massachusetts-based professional freelance editor who has a
wide variety of clients, including individuals and businesses. One of her clients is a
medical association based in Atlanta, Georgia, that publishes a monthly journal; as an
independent contractor, Hofstadt edits all of the journal articles, which are complex
and require solid knowledge of medical terms and the association's journal style.
Hofstadt has lately been inundated with work from several different clients. As a result
of her heavy workload, she decided to subcontract the work on last month's medical
journal articles to a less-experienced friend.
The journal's editor calls Hofstadt one afternoon and reprimands her for the poor
work on the previous batch of articles. Hofstadt reluctantly divulges that she did not
do the work herself, and that instead another editor performed the work.
• Did Hofstadt breach her duties as an agent to the principal in this case? Explain your