BUSINESS LAW SUMMARY
Ch. 5
Agency is perhaps the most pervasive legal relationship in the business world. In an agency
relationship, one person—the agent—acts for or represents another person—the principal.
5.1 Formation of an Agency Relationship
The agency relationship is consensual in nature and is typically created by agreement of the
parties, which can usually be written or oral.
● Equal dignities rule: If the agent enters into an agreement of a type that must be in
writing to be enforceable, then the agent’s signature on the agreement will not bind
the principal unless the agency relationship itself is evidenced by some signed writing
● Apparent authority, also referred to as agency by estoppel, arises when a person
leads another to believe that someone else is his or her agent and is thereafter
estopped (prevented) from denying it.
● Agency by ratification can be formed when a principal approves or accepts the
benefits of the actions of an otherwise unauthorized agent→ can thus be formed
without agreement through the act of ratification
5.2 Types of Agency Relationships
● Employer–Employee
○ The basic characteristic of this relationship is that the employer has the right to
control the conduct of the employee.
● Principal (Client)–Independent Contractor
○ An independent contractor, such as a lawyer working for a client or a plumber
working for a house builder, is not an employee of the person paying for his or
her services, because the independent contractor’s conduct is not fully subject
to that person’s control. The person hiring an independent contractor bargains
only for results.
Distinguishing Between Employees and Independent Contractors
Employee Independent contractor
Doctrine of respondeat superior: employers Persons hiring independent contractors are
are liable for the torts (and many crimes) of generally not liable for torts their
their employees, as long as the employee contractors commit.
was acting within the scope of employment.
Employers are required to deduct or pay Independent contractors are responsible for
income, Social Security, and unemployment paying their own self-employment taxes.
taxes for employees. Independent contractors are not eligible for
the same benefits provided to employees,
such as medical insurance, stock options,
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Ch. 5
Agency is perhaps the most pervasive legal relationship in the business world. In an agency
relationship, one person—the agent—acts for or represents another person—the principal.
5.1 Formation of an Agency Relationship
The agency relationship is consensual in nature and is typically created by agreement of the
parties, which can usually be written or oral.
● Equal dignities rule: If the agent enters into an agreement of a type that must be in
writing to be enforceable, then the agent’s signature on the agreement will not bind
the principal unless the agency relationship itself is evidenced by some signed writing
● Apparent authority, also referred to as agency by estoppel, arises when a person
leads another to believe that someone else is his or her agent and is thereafter
estopped (prevented) from denying it.
● Agency by ratification can be formed when a principal approves or accepts the
benefits of the actions of an otherwise unauthorized agent→ can thus be formed
without agreement through the act of ratification
5.2 Types of Agency Relationships
● Employer–Employee
○ The basic characteristic of this relationship is that the employer has the right to
control the conduct of the employee.
● Principal (Client)–Independent Contractor
○ An independent contractor, such as a lawyer working for a client or a plumber
working for a house builder, is not an employee of the person paying for his or
her services, because the independent contractor’s conduct is not fully subject
to that person’s control. The person hiring an independent contractor bargains
only for results.
Distinguishing Between Employees and Independent Contractors
Employee Independent contractor
Doctrine of respondeat superior: employers Persons hiring independent contractors are
are liable for the torts (and many crimes) of generally not liable for torts their
their employees, as long as the employee contractors commit.
was acting within the scope of employment.
Employers are required to deduct or pay Independent contractors are responsible for
income, Social Security, and unemployment paying their own self-employment taxes.
taxes for employees. Independent contractors are not eligible for
the same benefits provided to employees,
such as medical insurance, stock options,
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