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What is Agency? How to Create Agent’s Authority

What is Agency?

Buyers and sellers usually knew one another and dealt with one another face to face. Today, a greater percentage of the world’s business is done by large corporate organizations that act only through agents, employees, and contractors.

In many instances, an employer today exercises less direct supervision over its employees than it did in the past. Fewer people are working in large manufacturing plants in which their actions are overseen by foremen representing the principal. Instead, sales representatives, computer operators, and specialized agents perform more highly skilled activities on behalf of their principles or employers. Similarly, separate firms often provide specialized technical services, cleaning assistance, or part-time word processors, nurses, secretaries, or attorneys for other firms.

In the future, agency law is more likely to concern the employer-independent contractor relationship. As firms increasingly contract with other firms and use the employees or agents of those firms rather than hiring their own, the law may reexamine the duties of the various parties toward one another. The imposition of liability on the principal for the wrongs of “its” agents is likely to be viewed as a cost of doing business.

Overview

Most business activities are carried on by people who work on behalf of business firms. Business firms may hire persons to act as employees, may appoint persons as general agents, or may contract with independent contractors that agree to do specific work. This lecture first examines how these agency relationships are created and terminated. Then, it discusses the duty of the agent and the principal to each other. Finally, it considers the relationships between the principal-employer and the servant employee, the agent and the independent contractor.

No one person is able to perform all the activities that are required to operate a business. Therefore, business select agents to represent them in their myriad activities with suppliers, employees and customers. In this context, the term agent refers to any person who acts on behalf of or represents a principal. The nature of the relationship between an employer or principal and its employees, agents, and independent contractors affects its liability for tortuous acts and contracts of those representatives.

Agency under the Statute

The two terms ‘agent’ and ‘principal’ have been defined in Section 182 of the Contract Act as follows:

“An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is represented is called the principal.”

The contract which creates the relationship of principal and agent is called an ‘agency’. Thus where X appoints Y to purchase ten bags of sugar on his behalf, X is the ‘principal’ and Y is the ‘agent’ and the contract between the two is agency. If, in pursuance of the contract of agency, the agent purchases the said amount of sugar from Z, a wholesale dealer in sugar, on credit, then in the eye of law the principal and the wholesale dealer are brought into direct contractual relations and the contract of purchase is enforceable both by and against the ‘principal’.

It will be observed that under a contract of agency the agent is authorized to establish a privity of contract between the principal (his employer) and a third party. As such the function of an agent is to bring about contractual relations between the principal and third parties. In a way, therefore, an agent is merely a connecting link. After entering into contract o behalf of the principal with a third party, the agent drops out and ceases to be a party to the contract and the contract binds the principal and the third party as if they have made it themselves.

Apparent Authority

When the principal creates the appearance of authority in an agent, even though it does not grant the agent actual authority, apparent authority exists. If the principal does something that leads a third party to reasonably believe that an agent has authority, the principal is liable for the agent’s actions. For example, if you go to a store and the person who is acting as the manager of the store approves the cashing of your cashing of your check, it is reasonable for you to assume that the owner has authorized the store manager to give such approval on its behalf. Even if the owner did not expressly give the manager such authority, the manager may have the apparent authority to act on the owner’s behalf.

The question is whether the principal has put the agent in a position that would lead a reasonable person to believe that the agent is authorized to certain acts for the principal. The principal is the source of the agent’s apparent authority. If the principal does not make it apparent to the third party that the agent can act for the principal, the agent lacks apparent authority.

Will a company that authorizes an agent to sell some insurance policies, but not others, be liable if the agent does sell unauthorized policies? As the Morrow case illustrates, questions regarding apparent authority are usually raised by a third party, such as Morrow, who claimed that the agent for the Travelers Insurance Company had the apparent authority to do something that the principal company claimed was beyond the agent’s actual authority.

 

Morrow bought flight insurance for a private plane trip to Honduras at the Tulsa, Oklahoma, airport. The representative at the airport who sold the insurance to him was employed by a company that had the airport insurance concession. The representative had the authority to sell Travelers insurance policies to passengers on scheduled flights but not to passengers on private flights. The insurance policy sold to Morrow stated that it covered only scheduled aircraft flights. Morrow was killed when the plane in which he was flying crashed. His surviving spouse claimed that the agent at the airport had the apparent authority to sell insurance on the private flight despite the policy’s language to the contrary. The trial court found for travelers, and Morrow appealed to the Court of Appeals.

Pickett, Circuit judge

At the Tulsa International Airport the Travelers insurance policy is marketed through an independent company which has the insurance concession rights there. The local operation is through an arrangement with the independent company. Travelers has no control over the persons making sales from the booth. The printed AT (5) policy is complete, except for space to fill in the names and addresses of the insured and beneficiary, together with the amount of insurance, the name of the airline and flight number of the plane upon which the insured is to be a passenger. In the space where the flight number was to be recorded, the attendant wrote the words, “Private Air.” Upon payment of $2.50, the policy was delivered to Morrow, who shortly thereafter gave it to his wife.

Policy AT (5) was the only Travelers insurance policy authorized for sale at the counter, and the attendant had authority to sell it to the public. The provisions of the policy limited coverage of an insured to injuries sustained while traveling on “Aircraft Operated by a Scheduled Air Carrier,” as defined in the policy. The policy also provided that no agent had authority to change or waive any of its provisions. No claim is made that Policy AT (5) covered private plane flights. The evidence discloses that Morrow was not advised of these provisions, and that he and the sales person assumed that the policy covered the Honduras trip.

It is urged that because the representative at the Tulsa airport sold a policy to Morrow, representing that it was for a private air flight, that Travelers is estopped to deny liability. In the field of insurance, the contract between the insurance company and the insured is known as an insurance policy. Policies are generally prepared by insurance companies and ambiguities and uncertainties are strictly construed against the company. This rule is particularly applicable to air flight policies acquired at airports because of the conditions under which they are sold. The settled law of Oklahoma is that an insurance policy, if its terms are free from doubt or ambiguity, must be permitted to speak for itself. It cannot be altered or contradicted by parole evidence. Generally, however, parties are bound by the policy provisions under the law of contracts. The failure of an insured to read the policy does not relieve him from its provisions.

It is undisputed that the only actual authority of the agent by Travelers Insurance Company was to sell policies limited to regularly scheduled commercial flights. There is no ambiguity in the provisions of the AT (5) policy. This leaves only the issue of whether the agent had apparent authority to sell a policy of its principal covering flights in private airplanes.

To establish that an agent had apparent authority to bind its principal, it must be shown that the principal knowingly permitted the agent to exercise the authority in question, or in some manner manifested its consent that such authority be exercised. The evidence is without conflict that the only policy of Travelers Insurance Company which operators of both at the Airport were authorized sell was the AT (5) policy. There is total lack of evidence that the agency offered a policy of Travelers Insurance Company insuring passengers on private airplane flights.

Case Questions:

  1. Since the agent at the airport was not actually authorized to sell Travelers insurance for a person on a private flight, on what basis could Morrow hold that the Travelers policy was nevertheless effective?

 

  1. How could Morrow be sure that the policy he purchased covered his flight? Couldn’t he rely on the agent to know what she was authorized to do?

 

  1. If the policy sold to Morrow had been unclear as to whether private flights were covered, would this case have turned out differently?

Ratification  

When a principal approves an act performed by an agent without authority, ratification occurs. The ratification may be expressed or implied. If a principal agrees to be bound by a contract negotiated by an agent who acted without authority or who exceeded the bounds of his or her authority, an express ratification occurs. If the principal accepts the benefits of the contract and does nothing more, an implied ratification occurs.

 

What source of authority gives a business manager the power to offer a certain salary to a prospective employee? The following case considers the concepts of actual, apparent, and ratification authority in an employment situation.

 

Schoenberger (S) sued the Chicago Transit Authority (CTA) to recover contract damages. At issue was whether the CTA might be held liable under agency principles for a promise, allegedly made by its employee ZuChristian (ZC) when S was hired, that he would receive a $500 increase in salary within a year after beginning work. S stated that he never inquired into ZC authority overrode the authority of the Placement Department, which he thought had only a “perfunctory” role in hiring.

 

ZC testified that his supervisor had told him to make informal offers to prospective employees. However, ZC stated that when he told S of his desire to hire him, he intended S to regard this as an offer. He also stated that he lied to S when he told him that the $19,300 salary offer was a clerical error. This story, he said, was agreed upon by his superior, John Hogan, and was intended to ensure S’s acceptance of the lower salary approved by the Employee Relations Department.

When the increase was not given at the promised time, S resigned and filed this suit. The trial court ruled in favor of the CTA, and S appealed.

Campbell, Justice

The main question before us is whether ZC, acting as an agent of the CTA, orally contracted with S for $500 in compensation in addition to his $19,300 salary. The authority of an agent may only come form the principal and it is therefore necessary to trace the source of an agent’s authority to some word or act of the alleged principal. Authority may be actual or apparent, actual being either express or implied. The authority to bind a principal will not be presumed, but rather, the person alleging authority must prove its source unless the act of the agent has been ratified.

testified that ZC had no actual authority to either make an offer of a specific salary to S or to make any promise of additional compensation. Furthermore, ZC’s testimony corroborated the testimony that he lacked the authority to make formal offers. From this evidence it is clear that ZC lacked the actual authority to bind the CTA for the additional $500 in compensation to S.

Nor can it be said that the CTA clothed ZC with the apparent authority to make S a promise of compensation over and above that formally offered by the Placement Department. Here S’s initial contract with the CTA was with the Placement Department where he filled out an application and had his first interview. There is no evidence that the CTA did anything to permit ZC to assume authority, nor did they do anything to hold him out as having the authority to hire and set salaries.

ZC was not at a management level in the CTA, nor did his job title of Principal Communications Analyst suggest otherwise. The mere fact that he was allowed to interview prospective employees does not establish that the CTA held him out as possessing the authority to hire employees or set salaries. Moreover, ZC did inform S that the formal offer of employment would be made by the Placement Department.

Our final inquiry concerns the plaintiff’s contention that irrespective of ZC’s actual or apparent authority, the CTA is bound by ZC’s promise because it ratified his acts. Ratification may be expressed or inferred and occurs where the principal, with knowledge of the material facts of the unauthorized transaction, takes position inconsistent with nonaffirmation of the transaction. Ratification is the equivalent to an original authorization and confirms that which was originally unauthorized. Ratification occurs where a principal attempts to seek or retain the benefits of the transaction.

Upon review of the evidence, we are not convinced that the CTA acted to ratify ZC’s promise. According to Bonner’s testimony, when he took over the supervision of ZC’s group in the fall of 1976 and was told of the promise, he immediately informed ZC that the promise was unauthorized and consequently would not be honored. Subsequently, he informed S of this same fact. Mere delay in telling S does not, as the plaintiff contends, establish the CTA‘s intent to ratify.

For the reasons we have indicated, the judgment in favor of the defendant, CTA, is affirmed.

Case Questions:

  1. Explain why the court found that the CTA did not authorize ZC to offer S a salary increase.
  2. What did S have to prove to show that ZC was acting as the CTA’s agent when he discussed S’s employment at $ 19,800 instead of $ 19,300?
  3. Who had the authority to commit the CTA to a definite salary for a prospective employee?

Duties owed by Principal and Agent to each other

 

Once an agency relationship exists, the parties owe certain duties to each other. An agent and principal have a special fiduciary relationship, one based on trust and confidence. This relationship constitutes the basis for many of the legal and ethical problems in business relations. A fiduciary duty arises in every transaction that an agent undertakes.

Duties of the Agent to the Principal

Fiduciary Duties

SECTIONS 217 & 218 of the Contract Act

 Law imposes fiduciary duties, which are duties above and beyond those assumed by the parties in their contract. Fiduciary duties are imposed on the agent (the fiduciary) because he is given power and authority over the property and interests of another party (the principal) that places its trust in him. As a fiduciary, the agent must act on behalf of the principal, not in his own interest.

The fiduciary duty is a special from of trust that requires the employee-agent to act in good faith, based on the utmost loyalty and due care for the principal’s interest. The agent may not allow conflicts of interest to modify a decision regarding the principal’s business. For example, the purchasing agent of a firm cannot allow a conflict of interest to affect his or her selection of automobiles purchased for the firm. The agent’s brother may own a car dealership, or a car dealer may promise the agent the use of a personal car in exchange for purchases on the firm’s behalf, but the agent’s purchasing decisions must be based on the best interests of the firm and not on family loyalty or on self-interest.

Despite this ideal, conflicts of interest test fiduciaries in many contexts. For example, trade secrets belonging to the employer should not be misused by an agent or taken to a new employment contracts. Such provisions often convey the ownership of discoveries to the employer and restrict the employee from working for competitors for a period of time after the employment has ended. A claim of breach of the fiduciary duty owed by an agent-employee to an employer is presented below in the Science Accessories case.

The Duty of Loyalty

 

Loyalty is the most important fiduciary duty imposed by law on the agent. The agent must honestly represent the principal’s interests. Any conflicts between the principal’s interests and the agent’s interests must be disclosed to the principal or avoided by the agent. For example, the law requires a stockbroker to disclose the brokerage firm’s role in underwriting a new issue of a company’s stock to its clients. A stock underwriter receives compensation for selling stock, so it cannot also receive compensation from a client-buyer unless it discloses its dual role to the client-buyer.,-

The agent’s duty of loyalty also prohibits representation of two principals that are contracting together unless these principals know of the agent’s dual role and agree to it. Some professions prohibit any dual agencies. For example, an attorney cannot represent opposing parties in a case. One of the parties can go unrepresented while the attorney represents the other party, but it must be made clear that the attorney is working on behalf of only one party. However, if an agent is merely a broker seeking to bring two parties together and neither party relies on the broker for advice and assistance in negotiation, the courts will allow the agent-broker to perform this limited, middleman function.

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