Agency: The Inside Relationship

1. CHAPTER 28 Agency: The Inside Relationship

2. Creating an Agency Relationship • Agency is a relationship in which the agent agrees to perform a task for, and under the control of, the principal. • To create an agency, there must be: • A principal, • An agent, • Who mutually consent that the agent will act on behalf of the principal, and • Be subject to the principal’s control, • Thereby creating a fiduciary relationship.

3. Requirements for Agency • Consent, control and a fiduciary relationship are required. • Elements not required for an agency relationship include: • A written agreement (unless the business of the agent requires a written contract). • A formal agreement (acting like agent and principal is enough to establish agency). • Consideration (an agent does not have to be paid).

4. Duties of Agent to Principal • Duty of Loyalty-- The agent: • must act for the benefit of the principal. • may not receive outside benefits without approval of the principal. • can neither disclose nor use for her own benefit any confidential information. • is not allowed to compete with his principal within the scope of the agency business. • may not act for two principals whose interests conflict. • may not become a party to a transaction without the principal’s permission. • may not engage in inappropriate behavior that reflects badly on the principal.

5. Other Duties of an Agent • An agent must obey her principal’s instructions, unless illegal or unethical. • Agent must act with reasonable care. • An agent with special skills is held to a higher standard because she is expected to use those skills. • Agent must give accurate information. • An agent has a duty to provide the principal with all information in her possession that she has reason to believe the principal wants to know.

6. Principal’s Remedies When the Agent Breaches a Duty • The principal can recover damages caused by the agent’s breach. • The agent must refund any profits made from the agency, if he breaches his duty of loyalty. • The principal may rescind a transaction with an disloyal agent.

7. Duties of Principal to Agent • Duty to Reimburse the Agent for Reasonable Expenses • A principal must also indemnify an agent for an unauthorized purchase if the agent reasonably believed he was authorized and the principal received a benefit. • Torts Committed by the Agent • A principal must indemnify an agent for tort claims brought by a third party if the principal authorized the agent’s behavior and the agent did not realize he was committing a tort.

8. Duties: Principal to Agent(cont’d) • Contracts Entered into by the Agent • The principal must indemnify the agent for liability she incurs as a result of a contract on the principal’s behalf, including attorney’s fees and reasonable settlements. • Duty to Cooperate • Cannot unreasonably interfere with the agent’s ability to accomplish his task. • Unless the contract provides otherwise, the principal may compete with her agent. • Principal must perform her part of the contract.

9. Terminating Agency • There are five basic ways an agency relationship is terminated by the parties: • By completion of the agreed term. • By completion of the agreed purpose. • Mutual agreement, no matter what the previous agreement was. • In an agency at will, either party can terminate at any time, for any reason. • Wrongful termination – either party can terminate relationship, but the wrongful party may have to pay damages.

10. Other Causes of Agency Termination • Principal or Agent Can No Longer Perform Required Duties • Loss of Qualification, Bankruptcy, Death or Incapacity of the Principal or Agent, Disloyalty of Agent • Change of Circumstances • Loss or Destruction of Subject Matter, Change of Law

11. Effect of Termination • Termination of the agency ends the agent’s power to act on behalf of the principal. • Principal’s duty to reimburse expenses of the agent ends with the end of the agency. • Confidential information remains confidential and unusable, even after the end of the agency.

12. Irrevocable Agency Relationship • When a lender has the power to sell collateral upon the default of a borrower, the lender may appear to be the borrower’s agent. This is called a “power coupled with an interest.” • In this case, only the agent can terminate the relationship. The principal (borrower) has neither the power nor the right to terminate.