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									Chapter 19
Formation of Agency Relationship

                               Four ways to

                                                        4. OPERATION OF
         1. Agency by Agreement

   Example: Power of Attorney
   Contract Rules (such as the Statute of Frauds)
    Apply – Also, remember the Equal Dignity Rule
   Powers of Attorney can be specific or broad
   Remember Power of Attorney terminates upon
    death of principal
   Power of Attorney terminates upon incapacity
    of principal unless it is a Durable Power of
         2. Agency by Ratification

   Determined by intent (which may be expressed
    by words or conduct)
   Ratification can be express or implied.
   Principal approves or affirms an agent’s
    unauthorized act
           3. Agency by Estoppel
   Occurs when a principal leads a third person to
    believe that another person is his agent and the
    third person acts to his or detriment in reliance
    on that belief.
   Then the principal is “estopped to deny” the
    agency relationship.
     4. Agency by Operation of Law
   Example: If a spouse buys necessaries (food or
    clothing) and charges them to the other spouse’s
    charge account, the courts will often rule that
    the latter is liable for payment.
   Another example: Emergency situations- when
    the agent’s failure to act outside its authority
    would cause the principal to sustain substantial



   The agent has derivative authority.
   The agent derives authority to carry out the
    principal’s business from the principal.
   The principal is liable to the third party for the
    agent’s acts.
   Frequently an employee is an agent for the
            SCOPE OF AGENT’S
                          Agent’s authority to act
                          Stems from one of the

               1. Actual authority      2.Apparent authority

a. Express (specific)      b. Implied (inherent)
   A principal’s liability      An agent who acts on behalf
                                  of the principal either by
    in a contract with a          agreement or by operation of
    third party arises from       law has actual authority
    the authority given to        (express or implied).
    the agent to enter           If a 3rd party relies on the
                                  appearance of authority that
    legally binding               the principal has apparently
    contracts on the              given to another person, the
    principal’s behalf.           person is an agent by
                                  apparent authority.
    Duties of Agents and Principals
   Duties of Agent to              Duties of Principal to
    Principal – Fiduciary            Agent
    Duties                          Compensation (but even if
   Performance                      the agency is gratuitous, the
   Loyalty                          agent still has the fiduciary
   Obedience                        duties to principal)
   Accounting (no commingling      Reimbursement &
    of funds)                        Indemnification
   Notification–                   Cooperation
    Actual/Constructive             Provide Safe Working
    Knowledge                        Conditions
Liability of Principals and Agents to
       3rd Parties for Contracts
   If an agent acts in scope         If the principal is partially
    of his authority, a                disclosed or undisclosed, the
    disclosed principal is             principal and agent are both
    liable to a 3rd party for a        treated as parties to the
    contract made by the               contract in most states. The
    agent. The agent has no            3rd party can elect to hold
    contractual liability to the       either the partially disclosed
    3rd party.                         or undisclosed principal or
                                       the agent liable if the contract
                                       is not performed.
                 Tort Liability
   An employee or agent is always liable for his
    own torts and crimes.
   In addition, an employer may be liable for the
    negligent torts of the employee if the employee
    commits the torts within the scope of
    employment. This is the doctrine of respondeat
    superior (“Let the master answer.”).
        Tort Liability Continued
   The employer may be liable for its employee’s
    intentional torts when the employee commits
    those acts within the scope of employment.
   Employer liability may be based upon negligent
    hiring – if the employer knew or should have
    known that the employee was unfit, the
    employee caused the injury to another person,
    and a causal connection exists between the
    injury and the employment of the employee.
         Independent Contractor
             or Employee?

                  Important in 2 areas

     1. Liability             2. Tax Payment to IRS
  (Employer is liable for     (Employer withholds for employee,
many torts of employee but     But independent contractor pays
   Not liable for torts of             Estimated taxes)
 independent contractor)
Definition of independent contractor
   “A person who contracts
    with another to do
    something for him but
    who is not controlled by
    the other nor subject to the
    other’s right to control
    with respect to his physical
    conduct in the
    performance of the
    undertaking.”Restatement, 2nd,
    Employee or independent contractor?
           Factors to consider:
   How much control is exercised by employer
    over the details of the work?
   Is the worker engaged in business distinct from
   Is the work usually done under employer’s
    supervision or by a specialist without
   (continued on next page)
            Factors (continued)
   Does employer supply tools?
   For how long is the person employed?
   What is method of payment (by the hour, by
    time period or by the job)?
   What degree of skill is required of the worker?
            Termination of Agency

   1. By act of the parties      2. By operation of law
   a. Lapse of Time              a. Death or insanity
   b. Purpose Achieved           b. Impossibility
   c. Occurrence of              c. Changed
    Specific Event                 Circumstances
   d. Mutual Agreement           d. Bankruptcy
   e. Termination by One         e. War

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