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Unformatted text preview: C HAPTER 13 T HE A GENCY R ELATIONSHIP Objectives After studying this chapter, you should have an understanding of: the agency relationship and its relevance to business how an agency relationship comes into being agency duties and liabilities how the agency relationship ends Learning Outcomes Understand the relationship between the agent, the principal, and the third party (pages 291 293) Understand the various ways an agency relationship can be created (pages 293 300) Understand the fiduciary duty owed by the agent to the principal (pages 301 303) Understand the liability of the agent and principal to each other and to the third party (pages 305-308) Understand how the agency relationship can be terminated (page 309) Chapter Summary A business could not function efficiently without agents. The agency relationship allows the agent to represent a principal and bind that principal in contracts. In most cases, the principal is bound by contracts made by the agent. The agent negotiates on behalf of the principal but is not a party to the contract. For example, the agent may make contracts related to buying, selling, and hiring, but the contract will be between the principal and the third party. The agency relationship is usually created when a principal gives authority to the agent to act on his behalf. However, agency can also be created by ratification and estoppel. The agent gets his authority to act from the principal. This is actual authority, which includes both express and implied authority. If a third party reasonably believes that the agent has other authority, the agent may have apparent authority. The agent owes a fiduciary duty to act in the best interests of the principal. However, the fiduciary duty will not protect a principal from an agent who exceeds his authority or who exercises poor judgment. It is likely that the principal will still be bound by such contracts. A business needs to monitor the work done by the agent. 2008 BY N ELSON , A DIVISION OF T HOMSON C ANADA L TD . PART 4: STRUCTURING BUSINESS ACTIVITY Study Outline Use this outline to prepare a complete set of notes for this chapter. The Nature of Agency page 291 _______________________________________________________________________ _______________________________________________________________________ Agent ___________________________________________________________ Principal ___________________________________________________________ Agency defined_______________________________________________________ _______________________________________________________________________ Agent-principal relationship__________________________________________ Outsider-principal relationship________________________________________ Creation of Agency page 293 _______________________________________________________________________ _______________________________________________________________________ Agency by agreement______________________________________________________...
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