Ch 13 The Agency Relationship.docx

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Management and Organizational Studies
Management and Organizational Studies 2275A/B
Frederick King

The Agency Relationship 11/7/2012 6:18:00 PM Chapter 13 The Nature of the Agency  Agency – the relationship that exists when one party represents another party in the formation of legal relations  Agent – a person who is authorized to act on behalf of another  Principal – a person who has permitted another to act on her behalf o E.g. – a sports agent negotiates a multimillion-dollar deal on behalf of a hockey player o A stockbroker buys and sells shares on behalf of individual companies  Agency defined o Agency relationships operate for the most part with few difficulties, agents simply represent principals in transactions with others o Two key relationships at play in an agency situation:  Agent-principal relationship  Relationship between agent and principal  Outsider-principal relationship  Relationship between the principal and the party with whom the agent does business  Outsiders – the party with whom an agent does business on behalf of the principal o Law of agency – the law governing the relationship where one party, the agent, acts on behalf of another, the principal Creation of Agency  Most commonly, the relationship arises by contract between parties  Agency by agreement o Involves the principal authorizing an agent to act on behalf and the agent agreeing to do so in return for some fee or other remuneration o When an agent acts within their scope of authority, and negotiates a contract, the principal is bound by that contract whether they like it or not  Sometimes when the agent exceeds the power they have been given, the contract may still be binding o Actual authority – the power of an agent that derives from either express or implied agreement  Express authority – the written or oral authority granted by the principal to the agent and is an authority the agent actually has  Implied authority – authority the agent actually has, but it is present by implication only, an agent will has implied authority when that authority:  Is inferred from the position the agent occupies  Is reasonable necessary to carry out or otherwise implement the agent’s express authority  Arises by virtue of a well-recognized custom in a particular trade, industry or profession  The nature of authority given to the agent is inherently flexible and easily customized, it can be:  Very broad or very narrow  For only one transaction or for several  For a short, long or indefinite period of time  Very formal or informal o Apparent authority (ostensible authority) – the power that an agent appears to have to an outsider because of conduct or statements of the principal  As long as the agent is acting within their apparent authority, the principal will be bound by the transaction unless the third party knew, or should have known, of the limitation on the agent’s authority  E.g. – a principal may have given someone acting as a buyer for them a spending limit, if the third party (sellers) don’t know of this limit, the principal must bear the risk of the agent exceeding the limit  Agency by estoppel – an agency relationship created when the principal acts such that third parties reasonably conclude that an agency relationship exists o Representation by authority – another way an agency relationship can be created by estoppel is when the principal indicates that another is his agent when in fact no relationship exists  The principal is not permitted to avoid the contract by claiming that not agency relationship existed because they had given an appearance that one did o Extension of existing authority – the principal makes it seem as though the agent has authority in excess of the actual authority given o Termination of authority – the principal terminates or reduces the agent’s authority but doesn’t notify third parites  The responsibility lies with the principal to notify third parties when a person ceases to be their agent  Agency by ratification – an agency relationship created when one party adopts a contract entered into on his beha
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