Chapter 18 - Principal and agent. At the end of this chapter you should understand: the definition of an agency relationship; why contract law is relevant to the law of agency; the methods by which agency can be created including estoppel, necessity or ratification;…
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Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev 2-1 Principal and agent Chapter 18 Copyright â 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-2 Learning objectives At the end of this chapter you should understand: • the definition of an agency relationship • why contract law is relevant to the law of agency • the methods by which agency can be created including estoppel, necessity or ratification • the different types of agent, their roles and function • the difference between ‘actual authority’ and ‘apparent authority’ • liability of an agent to the principal and third parties • the rights of action that a third party has against an agent for breach of warranty of authority • the rights and powers of agents • how an agency can be terminated Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-3 Introduction Agency • A relationship that exists between one person (the principal) and another person (the agent) • The agent undertakes to certain acts on the principal’s behalf • The purpose is to bring a third party into a contractual relationship with the principal Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-4 Creation of an agency • Expressly created agency (written or verbal) • Impliedly created agency: – Agency of necessity – Cohabitation – Agency by estoppel – Agency by status – Agency by ratification Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-5 Agency of necessity • A person must be entrusted with the property of another person • An immediate expense is required to preserve the property • The owner of the property is virtually impossible to contact • The person entrusted with the property (agent) must act in the best interests of the owner (principal) Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-6 Agency by ratification May occur when: (1)A person acts on behalf of a principal and enters a contract with a third party, despite lacking authority to so, then the principal may ratify or affirm the unauthorised action (2)An agent exceeds the authority given to them by the principal, the principal may ratify or affirm the excessive authority Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-7 Conditions required for valid ratification • Agent when contracting must clearly be acting as an agent, not for themselves, and the third party must be aware of this • Principal must exist at the time the agent contracts • Principal must have the required capacity to contract both at the time of the agent’s unauthorised conduct and at the time of ratification • Principal must ratify the whole contract • Principal must have full knowledge of the details of the transaction Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-8 Conditions required for ratification (cont.) • Can only be made by the principal for whom the agent was acting or purporting to act when the contract was made • Ratification must take place within a reasonable time Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-9 Agency distinguished from other relationships • Agency is a fiduciary relationship— exercising rights and powers, in good faith, for the benefit of another • Employee is under control and supervision of employer • Independent contractors decide how their work is carried out • Trustee holds property on behalf of another person Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-10 Categories of agents • Special—appointed for a particular task • General—appointed for all normal matters • Universal—appointed for all acts principal can do, e.g Power of Attorney Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-11 Authority of an agent • Actual authority: – Express (written/spoken) – Implied (by action) • Apparent authority (ostensible authority): – Authority agent has from the point of view of the third party, with whom the agent is dealing Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-12 Duties of an agent • To follow the principal’s instructions • To act personally • To exercise reasonable skill and diligence • To act in principal’s best interest • Not to make a secret profit • Not to divulge confidential information • To keep proper accounts Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-13 Rights of an agent • To receive remuneration as specifically agreed for work performed • To be indemnified against all losses and expenses incurred while carrying out principal’s lawful instructions • To a lien (i.e a right to retain possession of principal’s property) until liabilities satisfied • To stoppage of subject goods in transit (before received by principal) Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-14 Liability of agent to principal • If agent: – fails to follow instructions – acts in a negligent matter • If a loss is incurred Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-15 Liability of agent to third party • Name and/or existence of principal disclosed: – Acts outside authority (i.e breach of warranty) Acts on behalf of someone who has not given authority (unless ratified) Exceeds authority (unless ratified) – Non-existent/unascertainable principal – Agent agrees to be liable – Usage/custom make agent liable Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-16 Liability of agent to third party (cont.) • Existence of principal not disclosed: – Agent bound • Torts committed while acting within actual or apparent authority • Tort committed by an agent acting outside the actual or apparent authority Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-17 Doctrine of undisclosed principal • If the agent acts as if he/she is the owner (by not disclosing agency), then the principal can later reveal the agency agreement and sue to enforce the contract • If third party discovers there was an agency agreement, he/she can then sue the principal (as well as the agent) for breaches of the contract Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-18 Termination of agency • By the acts of the parties: – By performance of the agency – With frustration of the agency agreement – By mutual agreement • By revoking the authority of the agent (ineffective to third parties until advised) • By the operation of law: – By death of either party – By bankruptcy of principal – By bankruptcy of agent – By insanity of either party Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-19 Types of agents (statute law) • Factors/mercantile agents—goods in agent’s possession to sell or use for borrowing • Del Credere agent—guarantees payment for goods sold (therefore higher commission) • Partners—principals/agents for each other • Broker—buys/sells goods without possession • Real estate agent—sells/leases vendor’s land; finds property for sale/lease • Travel agent—sells principal’s products; receives commission based on sales; organises principals travel arrangements Company directoragent of company Copyright â 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2-20 ... and agent Chapter 18 Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev • 2-2 Learning objectives At the end of this chapter you... breaches of the contract Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev •2 -1 8 Termination of agency • By the acts of the... principal can do, e.g Power of Attorney Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd PPTs to accompany Barron, Fundamentals of Business Law 7Rev • 2-1 1 Authority of an agent • Actual authority: