Agency Formation and Duties

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• LO33-1: Define agency law
• LO33-2: Describe how an agency relationship
is created
• LO33-3: Recognize the different types of
agency
• LO33-4: Identify the different types of agency
relationships
• LO33-5: Describe the duties of the agent and
principal
• LO33-6: Outline the rights and remedies of
the agent and principal 33-2

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• 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
5:00 p.m.

• Would Brian Puryear violate his duty of loyalty to Wellborn Industrial

Systems, Inc., if he accepted the part-time security position? From an ethical 33-3
perspective, should Brian notify Wellborn of his intentions and secure
Wellborn's approval before accepting the security guard position?
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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 suffered 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
compensatory/consequential damages.

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 a personal insult as well as an affront to his
client, and he immediately rejected the offer.
33-4
• In rejecting the offer, did Robert Newman violate his professional duty as his client's
agent?
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• Agency: Relationship between principal
and agent
• Agent: One authorized to act for/on behalf
of principal
• Principal: One who hires agent to
represent him/her
• Fiduciary: One with duty to act primarily
for another person's benefit 33-5

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Creation of Agency Relationship
• Expressed agency: Agency formed by making written/oral
agreement
• 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 33-6
principal accepts/ratifies unauthorized act

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Agency by Ratification
Requirements
• Individual must misrepresent himself/herself as agent for
another party
• Principal must accept/ratify unauthorized act
• Principal has complete knowledge of all material facts
regarding contract
• Principal must ratify entirety of agent's act

33-7

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• 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
of employees
• 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 33-8

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Independent Contractor or
Employee?
• 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?

33-9

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• Principal's duties to agent
• Compensation
• Reimbursement and indemnification
• Cooperation
• Safe working conditions
• Agent's duties to principal
• Loyalty
• Notification
• Performance
• Obedience
• Accounting
33-10

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Principal and Agent
Rights and Remedies
• Principal's rights and remedies against agent
• Constructive trust
• Avoidance
• Indemnification
• Agent's rights and remedies against principal
• Tort and contract remedies
• Demand for an accounting
• Specific performance

33-11

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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 has
shown 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. and 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 3:30 p.m.

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
33-12
them. The contract is here on my desk. Aren't you proud of me?"

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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 33-13
standpoint, should the couple agree to pay at least Snell's cost for the car
($28,000)?
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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 extensive 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 did the work.

• Did Hofstadt breach her duties as an agent to the principal in this case? Explain your
answer. 33-14

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