Chapter 31

1. Business Law, Sixth Edition
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Chapter 31:
Basic Principles of Agency

2. Business Law, Sixth Edition
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Learning Objectives
• Describe agency law.
• Understand types of principals.
• Understand types of agents.
• Explain duties of an agent.
• Explain duties of a principal.
• Discuss termination of agency by operation
of law.
• Discuss termination of agency by parties’
actions.

3. Business Law, Sixth Edition
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31.0 In the News
Trump dumped Flynn over ‘trust issue’
http://bvtlab.com/T9d9F
President Trump requested Michael Flynn’s
resignation after a review of his contacts with a
Russian diplomat led Trump to say he could no
longer trust his national security advisor. But the
internal investigation found that Flynn hadn’t
violated the law.
• What kind of agency relationship exists in this case?
• What duties did Flynn owe the President?
• What duties does the presidency owe Flynn?

4. Business Law, Sixth Edition
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31.1 Agency Law: In General
• Case law has developed most of the
principles applicable to the law of agency.
• Agency issues are usually discussed
within a framework of three parties:
– Principal
– Agent
– Third party

5. Business Law, Sixth Edition
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31.1a Types of Principals
• Disclosed principal
– An agent who reveals that he/she is working
for another
– An agent who reveals the principal’s identity
• Undisclosed principal
– Third party reasonably believes that agent
acts only on own behalf.
• Partially disclosed principal
– Third party learns of the principal’s existence
but not identity.

6. Business Law, Sixth Edition
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31.1b Types of Agents (Slide 1 of 2)
Broker
An agent with special, limited authority to
procure a customer so that the owner can
affect a sale or exchange of property.
Factor
Person who has possession and control of
another’s personal property and is
authorized to sell that property

7. Business Law, Sixth Edition
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31.1b Types of Agents (Slide 2 of 2)
General Agent
Authorized to do all the acts connected with
carrying on a particular trade, business, or
profession
Special Agent
Has limited authority to accomplish one
specific task
Independent Contractor
Exercises independent judgment on the
means used to accomplish the result

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31.2 Duties of Agents
Duties governed by contract of employment.
Other implied fiduciary duties:
• Be loyal to the principal
• Maintain confidentiality of information
• Obey all reasonable instructions
• Inform the principal of material facts that affect
the relationship
• Act reasonably; take care to avoid negligence
• Account for all money or property received for
principal

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31.2 Critical Thinking
CASE: Lee
Two individuals had a personal and business
relationship over the course of many years.
The court ruled that a fiduciary relationship was
established because Lee relied on Hasson for
emotional, moral, and financial support
sufficient to create a relationship of trust and
confidence.
• What facts did the court use to fashion a
fiduciary relationship?
• Were these facts truly “extraordinary”? Why?

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31.3 Duties of Principals
• Loyalty and honesty in dealing with the
agents
• Compensation of agents
– If not stated, reasonable value of services
• Reimbursement of agents for their
reasonable expenses
• Indemnification of agents for liability incurred
within the scope of employment

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31.3d Critical Thinking
Case: Admiral Oriental Line
Involves a suit for reimbursement for
expenses of an agent, American Oriental,
from its principal, the U.S. government.
• Why should the subagent in the case be able to
proceed directly against the principal for
indemnification? Does this approach make logical
sense? Does it make financial sense?
• Does the principal have an ethical duty to
indemnify? Why or why not?

12. Business Law, Sixth Edition
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31.4 Termination by Operation of Law
Four happenings end the principal-agent
relationship:
• Death of either party
• Insanity of either party
• Bankruptcy of either party under specific
conditions
• Destruction or illegality of the agency’s
subject matter

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31.5 Termination by Parties’ Actions
Mutual Agreement
• Terms of the principal-agent agreement
- Definite period of time stated in agreement.
- Accomplishment of a certain purpose
• Mutual agreement of the principal and agent
Unilateral Action
• As a general rule, either party has full power to
terminate agreement.
• Breaching party becomes liable for damages
suffered by the other party.