Agency Formation and Duties


  • Agency=Principal and Agent.
  • Agency is the most common and most important legal relationship.
  • Understanding agency is crucial to understanding the legal environment of business.
  • Principals use agents to be able to conduct multiple business operations simultaneously in various locations.  
  • The principal has the right to control the agent in matters entrusted to the agent.

Agency Relationships

  • Agency is a “fiduciary” relationship based on trust and confidence.
  • Distinguish Employee vs. Independent Contractor  Relationships.

Employer Liability.

Determining whether the worker is an employee or an independent contract affects liability of Principal/Employer.

  • Tax Liability: Employer liable if employee.
  • Contract Liability: Employer not necessarily liable.
  • Tort Liability: Employer liable for torts of employee within scope of employment.
  • Works for Hire.  
  • Case 31.1:  Graham v. James  (1998).

Formation of the Agency Relationship

  • Consensual Agreement.
  • No consideration required.
  • Principal needs contractual capacity, Agent does not.
  • For any legal purpose.

Types of Agencies

  • Agency by Agreement.
  • Agency by Ratification.
  • Agency by Estoppel.
  • Agency by Operation of Law.
  • Necessaries for family.
  • Emergency.

Agency by Agreement

Formed through express consent (oral or written) or implied by conduct.
Case 31.2:  Acordia of Virginia Insurance Agency v. Genito Glenn (2002).
Agency by Ratification
Principal either by act or by agreement ratifies conduct of a person who is not in fact an agent.

Agency by Estoppel

Principal causes a third person to believe that another person is the Principal’s Agent, and the third person acts to her detriment in reasonable reliance on that belief.

Agency by Operation of Law

Agency based on social duty is formed in certain situations when the Agent is unable to contact the Principal.

  • Necessaries.
  • Emergencies.

Agent’s Duties to Principal
Performance: reasonable diligence and skill (special skills).
Notification to P.
Loyalty (no conflict of interest).
Case 31.3:  American Express v. Topel (1999)

Principal’s Duties to Agent

  • Compensation (Express or Implied).
  • Reimbursement and Indemnification.
  • Cooperation.
  • Provide safe working conditions.

Rights and Remedies of Agents andPrincipals

Rights of Agents:

  • Right to compensation, reimbursement, indemnification and cooperation.
  • Agent can withhold performance and demand an accounting.
  • Agent can recover damages for past services and future damages.

Principal’s Rights and Remedies:

  • Contract remedies for breach of fiduciary duty and performance.
  • Can sue in tort: libel, slander, trespass, deceit, fraud.
  • Constructive Trust – money/ property agent steals from Principal.
  • Avoidance of contract if agent does not do as told.
  • Indemnification 

Liability, Defenses, and Discharge


There are two kinds of liability associated with negotiable instruments:

  • Signature liability.
  • Warranty Liability.

Signature Liability

Relates to signatures on instruments.
Signers of negotiable instruments are potentially liable for amount stated on instrument.

  • Primary Liability: Makers/Acceptors.
  • Secondary Liability: Drawers/Indorsers.

Primary versus Secondary Liability


  • Promises to pay the note.
  • Obligated to pay terms of instrument at time of signing.
  • Acceptors.

  • Drawee promises to pay an instrument when presented for payment.
  • Secondary Liability

    Proper Presentment.

  • Must be timely (checks w/in 30 days).
  • Dishonor.
    Case 26.1: Messing v. Bank of America (2002).

Proper Notice.

  • Manner of Notice in any Reasonable manner.
  • Notice to Indorsers.
  • Accommodation Parties

    Signs instrument to lend name as credit to another party on the instrument.

  • Makers v. Indorsers.
  • Authorized Agents’ Signatures

  • Agent agrees to act for Principal.
  • Agents can hold Principal liable if authorized to sign.
  • Principal must be clearly named.
  • Agent is personally liable when Principal is not named or disclosed, unless check is drawn on Principal’s account.
  • Case 26.2: Caraway v. Land Design Studio (2001).

Unauthorized Signatures

Forgery does not bind owner but Bank is liable.
If Agent has no authority, Agent is personally liable, but Principal is not, unless ratified.

  • Ratification of signature.
  • Negligence of party.
  • Holder in Due Course.

Special Rules for Unauthorized Indorsements

Unauthorized indorsement does not bind maker/drawer except:

  • “Imposter Rule”: imposter induces maker/drawer to issue check to imposter.
  • When imposter signs as/on behalf of maker/drawer intending payee has no interest in the instrument.
  • Fictitious Payee.

Warranty Liability

Extends to both signers and non-signers.
Breach of warranty can occur when the instrument is transferred or presented for payment.
Transferors make certain implied warranties regarding instruments they negotiate.
Liability not subject to dishonor, presentment, notice.
Liabilities: Transfer or Presentment.

Transfer Warranties

Following transfer warranties extend to all subsequent holders:

  • Transferor is entitled to enforce the instrument.
  • Signatures are authentic and authorized.
  • Instrument has not been altered.
  • Instrument not subject to defense.
  • Transferor has no notice of insolvency.

Presentment Warranties

Person who presents an instrument makes the following presentment warranties:

  • No missing or unauthorized indorsement.
  • Instrument has not been altered.
  • Person obtaining payment has no knowledge signature is unauthorized.

Case 26.3: First National Bank of Chicago v. MidAmerica Federal Savings (1999).


Universal or Real – can be used to defeat a holder and a HDC. Personal – can be used to defeat a holder but not a HDC.

Universal Defenses

Forgery of maker’s or drawer’s signature.

  • Or if an authorized agent exceeds his authority to the amount which exceeds his authority.

Fraud in the execution – the”autograph” situation, not fraud in the inducement.

Material Alteration.

  • Do not have to pay the altered amount ($8 to $800), only a personal defense to the original amount ($8).
  • Not a real defense if instrument left blank, (.. filled in $800), then have to pay all ($800).

Discharge in Bankruptcy.

Infancy (Minority).
Illegality – severe enough to make contract void.
Mental Incapacity (adjudicated by court).
Extreme Duress. If instrument signed under threat of immediate force or violence.

Personal Defenses

Valid against holders but not HDC’s.

  • Breach of contract or warranty.
  • Lack of consideration.
  • Fraud in the inducement.
  • Illegality – not severe enough to make void.

Mental incapacity – not severe enough to make void.


  • By payment or cancellation.
  • Unauthorized completion.
  • Non-delivery of instrument.
  • Ordinary duress or undue influence rendering contract voidable.

Federal Limits on HDC Rights

FTC Rule 433 (1976) abolished the HDC doctrine in consumer credit transactions.

  • Allows Buyer to assert any defense she might have against the Seller of goods or services (Car Dealer), against the subsequent HDC (Bank) as well.
  • So Buyer’s duty to pay is conditional on Seller’s full performance under contract.
  • Discharge from liability on an instrument can occur by:

  • Payment.
  • Cancellation or Surrender.
  • Reacquisition.
  • Impairment of Recourse.
  • Impairment of Collateral.