1. Chapter 1, Fundamentals of Business
Organizations for Paralegals
Professor Morissette

2. Agency
 Please note we are only covering pages 4-9 of the
first chapter. We are focusing on agency.
 A principal-agent relationship is so important
because it can help determine liability. Typically, a
principal will be held liable for the actions of his
agent.
 An agent agrees to act for another, called the
principal.

3. Formation of Agency Relationship
 There are several ways in which to form a principal-
agent relationship:
 Agreement
 Express
 Can be oral or written.
 Implied—words, conduct, or prior interactions prove a principal-
agent relationship
 Estoppel
 Public policy argument that says it would be unfair unless a
principal-agent relationship was found by the judge.

4. Authority of Agents
 The principal-agent relationship covers more than just
employers and employees. However, let’s say Tom, of
Tom’s Cameras, hires Lucy. Lucy is selling a camera to
Alyssa, when Lucy drops the very heavy camera on
Alyssa’s foot.
 It is in Alyssa’s best interest to be able to sue
Tom, because he owns his own business and likely to
have more money than Lucy.
 It is in Tom’s interest to deny a principal-agent
relationship with Lucy, so that he can avoid having to pay
Alyssa.
 The general rule is to hold Tom liable for Lucy’s
actions, in addition to holding Lucy liable for her own
actions.

5. Actual Authority
 Express
 Written or
 Oral
 Implied
 Here means those acts reasonably necessary to allow the
agent to perform his duties

6. Apparent Authority
 Occurs when a principal causes a third party to
reasonably believe the agent has the authority to act
for the principal.
 Examples: When you go to the dry cleaners, do you
assume that the person working behind the counter has
the authority to take your clothes and your money?
 If it appears that an agent has authority, then the principal
will be held liable for the agent’s actions.

7. Ratified Authority
 Happens when the principal accepts an agent’s
act(s) even though the agent had no authority to
perform the act(s) or exceeded the scope of their
authority.

8. Duties of Agents and Principals
 Duties are going to play an important role throughout
corporate law. You’ll see them come into play
starting now, and through all the business entities
we’ll cover.
 California calls these duties slightly different names
than in your book.
 Fiduciary duties—anything to do with money
 Good faith and fair dealing
 Honesty (really is considered part of fair dealing)
 Later we’ll hear about the duty of due care and the duty of
loyalty

9. Agent’s Duties
 Performance—basically do the work as soon as
possible, while still doing it carefully
 Notification—the book is not quite right. An agent
does not have to disclose all information relating to
the agency, only reasonable settlement offers.
 Loyalty—the duty not to compete or to have divided
loyalties (conflict of interest)
 Accounting—LET THE PRINCIPAL KNOW ALL THE
MONEY YOU’VE SPENT ON HIS BEHALF!!!

10. Principal’s Duties
 Compensation
 Reimbursement
 Cooperation
 Indemnification—General Rule (GR) is that
principal’s are responsible for the acts of their agents
and must pay for any lawsuits brought against the
agent.
 HOWEVER:
 Different types of conduct:
 Negligent
 “Reckless and Willful”
 Intentional
 “Frolic and Detour”

11. Will the employer indemnify the agent?
Depends upon conduct of agent…
Negligence Employer
must
indemnify
agent
“Reckless and Depends In CA, In DE, Case-by-case
Willful” probably yes. probably no. basis.
Intentional Employer
does not have
to indemnify
agent
“Frolic and Depends. How far did Case-by-case
Detour” the agent basis.
frolic or
detour?

12. Liability for Agent’s Torts
 Examples of Frolic and Detour
 On your own, make sure you understand the terms
respondeat superior and vicarious liability—these
are big issues in corporate law.

13. Termination of Agency
 Stated time period for agency expires (often 1 year)
 Purpose of agency has been completed (ie bought a
house, escrow is closed, etc.)
 Mutual agreement (sometimes principal can revoke
on their own, ie through reasonable notice)
 Death
 Bankruptcy
 Reasonable notice

14. Agency in Business Relationships
 Many of the relationships we will discuss in the
future are based upon agency law.
 A sole proprietor is vicariously liable for the acts of
her employees.
 In general partnerships, any partner is an agent of
the others!
 In a corporation, directors and officers are agents of
the corporation.