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Chapter 13

BUS 393 Chapter Notes - Chapter 13: Vicarious Liability, Sole Proprietorship, Limited Liability

Business Administration
Course Code
BUS 393
Richard Yates

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Chapter 13 – Agency and Partnership
Agent represents and acts on behalf of principal in dealings with 3rd parties
Agency carries duties/obligations separate from employment relationship
The Agency Relationship
Can be created by express/implied contract, estoppels, ratification, or
gratuitously => key element is the granting of authority
Formation by Contract
Power of attorney – agency agreement in writing and under seal
Basic rules of contract apply to agency contracts
Even if agency contract is void, agreements made by the agent on behalf of
the principal may still be binding (only if agent is too young, drunk, or insane
to understand what they are doing is the contract between principal and third
party void)
Consent is the only essential requirement of agency
Authority of Agents
Actual Authority
Can be expressly stated by principal or implied from circumstances
Agent who exceeds actual authority may be liable for injury, but principal
may still be bound if agent acts within apparent authority
Apparent Authority – Authority Created by Estoppel
When principal does something by conduct/words to lead 3rd party to believe
agent has authority, principal is bound, even if principal had specifically
prohibited it
Estoppel – stops party from trying to establish position or deny something
that would be unjust
Agent acting on apparent authority will bind principal
If principal has sanctioned similar actions in the past, even though it is not
within scope of agent’s authority, principal will be bound
Reasonable person test used to determine existence of apparent authority –
should third party have been misled into believing agent had authority?
If agent was acting within authority, OR the principal did something to lead
the third party to believe the agent had authority, there is a contract between
the principal and third party. If neither are true, third party must look to
agent for redress
If principal ratifies an unauthorized contract created by agent, it is binding.
Must meet following qualifications:
1. Third party can set reasonable time limit within which ratification must
take place
2. Agent must have been acting for a specific principal
3. Principal must be capable of entering contract at the time agent
entered into it
4. Parties must still be able to perform the contract at time of ratification
– contract cannot make any reference to a need for ratification, or else
it becomes an agreement to enter into an agreement

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If principal knowingly accepts some benefit under the agreement, he
inadvertently ratifies it
Delay in repudiation can also be treated as ratification
Agency by Necessity
Rarely used today, because of the prominence of instantaneous
Must be some duty/responsibility placed on agent to care for goods => not
merely finding someone else’s property in danger
Exception in Family Relationships
Common for spouses to have actual/apparently authority, and when
marriage breaks down, authority may continue if third party is not
notified and continues to rely on that apparent authority
The Rights and Responsibilities of the Parties
The Agent’s Duties
The Contract
If agent exercises apparent authority and violates contract, he can be
sued for breach of contract and will be responsible for losses caused
Agents owe a duty of reasonable care to the principal
Agent must perform specific instructions as required by principal, even
if might not be in principal’s best interests
Usually, agent has obligation to perform agreement personally –
cannot delegate, unless there is consent to such delegation
Agent must turn over money earned in agency function to principal
Agent has obligation to keep accurate records of all agency
Fiduciary Duty
Agents must submerge personal interests in favour of principal’s
Positive duty of full disclosure – must disclose all information
Agent must act in utmost good faith: keep communications in
confidence, act in best interests of principal even if agent may lose
benefit, not take advantage of personal opportunities that come about
through the agency relationship, disclose to principal any personal
benefit agent stands to gain
Agent cannot act for both principal and third party at the same time,
unless with consent of both
Agent must not profit at the principal’s expense or compete with
The Principal’s Duties
Principal must honour terms of contract and pay reasonable amount for
Principal must reimburse agent’s expenses
If agent’s authority is ambiguous, courts will interpret to give agent broadest
power possible
Undisclosed Principals
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