Chapter 29. Agency Formation and Termination

Chapter Objectives
Define an agency.
Identify and define a principal-independent contractor relationship.
Describe when a principal is liable for actions of independent contractors.
Describe how express and implied agencies are created.
Define an apparent agency.
Describe how an agency is terminated by the acts of the parties.
Describe how an agency is terminated by operation of law.
Identify who should be notified when an agency is terminated.
Identify a wrongful termination of an agency contract.
Define an irrevocable agency.

Definition of agency
Principal—the party who employs another person to act on his or her behalf Agent—the party who agrees to act on behalf of another Agency—the principal/agent relationship


Any person with the capacity to contract can appoint an agent to act or his or her behalf. An agency relationship can only be created to accomplish a lawful purpose.

Kinds of employment relationships

Employer/employee—a relationship that results when an employer hires an employee to perform some form of physical service.
Principal/agent—an employer hires an employee and gives that employee authority to act and enter into contracts on his or her behalf.
Principal/independent contractor—a relationship that results when a person or business that is not an employee is employed by a principal to perform a certain task on his or her behalf. Critical factors in determining independent contractor status include:

When is a principal liable for actions of independent contractors?

The crucial factor in determining whether a person is an employee or an independent contractor is the degree of control that the principal has over that person. If the principal has substantial control, there is an employer/employee relationship, and the principal can be held liable for actions of the independent contractor.

Types of agency

Termination of agency by acts of the parties
An agency may be terminated by the following acts of the parties:

Termination of agency by operation of law
An agency is terminated by operation of law if there is:

Notification when an agency is terminated
If an agency is terminated by agreement of the parties, the principal is under a duty to give certain third parties notification of the termination.

Wrongful termination of an agency contract
Wrongful termination is the termination of an agency in violation of the terms of the agency contract. The nonbreaching party may recover damages from the breaching party.

Irrevocable agency
An agency coupled with an interest is a special type of agency relationship that is created for the agent's benefit. It is irrevocable by the principal. This type of agency is commonly used in security agreements to secure loans.


Internet Links

Legal Information Institute: http://www.law.cornell.edu/topics/agency.html
AgencyLaw: http://www.agencylaw.com/
The Economics of Agency Law and Contract Formation: http://netec.mcc.ac.uk/WoPEc/data/Papers/wpawuwple9506002.html