Required Resource


Rogers, S. (2012). Essentials of Business Law [Electronic version]. Retrieved from

  • Chapter 12: Agency and Employment Law 

Recommended Resources 


Muhl, C. J. (2001). The employment-at-will doctrine: Three major exceptions (Links to an external site.)Links to an external site.. Monthly Labor Review, 124(1), 3-11. Retrieved from

  • This article details the history, current status, and three exceptions to employment-at-will.

Interactive Exercise

Rogers, S. (2012). Essentials of Business Law [Electronic version]. Retrieved from

  • Section 2.2: Applying the Law: False Imprisonment

Week Three Lecture

Agency and Relationships With Third Parties


Agency is a consensual relationship that the principal and agent may form by contract or agreement and therefore, consideration may not be required. What is required is a manifestation by the principal to have the agent act on his behalf and consent to so act by the agent. The Restatement defines an agency relationship as “the fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” Thus the agency relationship involves three basic elements: assent, control by the principal, and the agent’s acting on behalf of the principal. A person can manifest assent or intention through written or spoken words or other conduct. In some circumstances, a person is held liable as a principal, even though no actual agency has been created, in order to protect third parties who justifiably rely on a reasonable belief that a person is an agent and who act on that belief to their detriment.All employees are agents, even those not authorized to contract on behalf of the employer or to conduct business with third parties. Thus, a worker in a factory is an agent of the company employing her. In the employment relationship, the employer has the right to control the conduct of the employee. The person who hires an independent contractor has no right to control how the contractor does the job.For a real-life example of the importance to properly distinguish between independent contractors and employees, you may find the following article about Fedex useful: FedEx Misclassified Drivers As Independent Contractors, Rules Ninth Circuit (Links to an external site.)Links to an external site..

Duties of Agent to Principal: Agents owe duties to the principal, and these duties are usually defined in the contract while law imposes other duties, unless the parties agree otherwise. An agent is a fiduciary (a person in a position of trust and confidence) and owes his principal the duties of obedience, good conduct, diligence, inform, and account.  The agent also owes the principal a fiduciary duty. The fiduciary duty requires that an agent demonstrates utmost loyalty and good faith in conducting the principal’s business. For example, an agent cannot compete with his principal or act on behalf of a competitor.Incentivization at Apple: Can greater executive buy-in solve the corporate principal-agent problem? Review Solving the Principal Agent Problem: Apple Insists That Executives Must Hold Company Stock (Links to an external site.)Links to an external site. for more information.Duties of Principal To Agent:An agency relationship may exist in the absence of a contract between the principal and agent. However, many principals and agents do enter into contracts, in which case a principal has a duty to act in accordance with the express and implied terms of any contract between the principal and the agent. The principal owes the agent the contractual duties of compensation, reimbursement, and indemnification, but agents may agree to exclude or modify any of these.Corporate management, not CEOs or the principal-agent problem, as the cause for rising salary inequality, is discussed in Soaring Inequality and CEO Pay Are Not Caused by the Principal/Agent Problem (Links to an external site.)Links to an external site.. Relationships With Third Parties:The power of an agent is the ability to change the legal status of the principal. An agent who has either actual or apparent authority has the power to bind the principal. Thus, whenever an agent, acting within the authority, makes a contract for the principal, the agent creates new rights or liabilities for the principal and thus changes the principal’s legal status. This power of an agent to act for the principal in business transactions is the basis of agency.A principal’s contract liability also depends on whether the principal is disclosed or undisclosed. The principal is a disclosed principal if, when an agent and a third party interact, the third party has noticed that the agent is acting for a principal and also has notice of the principal’s identity. A principal is undisclosed if the third party did not know of his existence. Thus, a principal can be liable for the acts of an agent who is not, in fact, acting with authority, if the principal does something that causes a third party to reasonably believe that the agent is authorized. The issue of apparent authority is what the principal has done, not the agent.Let’s consider an example: Suppose you were a business owner, and you told your employee to run an errand in the company car. If the employee gets into an accident, who is responsible? The employer? The employee? In this scenario, the employer is the principal, because they were delegating power to another person. The employee is the agent because they were acting on behalf of the principal. Since the principal has given authority to the agent, the principal has created a legal relationship with third parties.  When determining if the principal is responsible for the actions of the agent, it is necessary to find out if the acts were done within the principal’s authority, either actually or apparently. Forbes School of Business Faculty


Liuzzo, A. L. (2013). Essentials of business law (8th ed.). New York, NY: McGraw-Hill.

Rogers, S. (2012). Essentials of business law. Retrieved from

Wood, R. W. (2014, August 27). FedEx misclassified drivers as independent contractors, rules Ninth Circuit. Retrieved from

Worstall, T. (2013, March 1). Solving the principal agent problem: Apple insists that executives must hold company stock. Retrieved from

Worstall, T. (2014, July 20). Soaring inequality and CEO pay are not caused by the principal/agent problem. Retrieved from


Employment-at Will                                                                                                         

Should the law allow an employer to fire an employee without a good reason? Conduct research to provide examples to support your position and use your own personal employment experiences when possible. Have you observed situations where an employee was fired? Did the employer give a reason? Do you believe the employer’s actions were legal?

Guided Response: Review your classmates’ responses. Respond to at least two of your classmates’ postings by Day 7, expressing whether you agree or disagree with their assessment of the employer’s actions.  Explain your position.


A Principal’s Responsibility for the Actions of Their Agent                                               

Karen is shopping at Big Mart. She has with her an umbrella which is the same brand Big Mart carries. When a Big Mart employee, Steve, sees her leave with the umbrella without going through the checkout lane, he asks her to come back into the store. Steve says that he thinks Karen is shoplifting the umbrella. Karen tells him that she has had the umbrella for years and shows him marks of wear and tear. Steve apologizes and tells Karen she is free to go. Can Karen successfully sue for false imprisonment or defamation? From what you have learned about the relationship between a principal and an agent, analyze whether Steve or Big Mart could be liable because of Steve’s actions.

Guided Response: Review your peer’s responses. For at least two of your classmates, determine if your analysis of the facts is the same. Do you agree with their assessment or do you see the issue differently? Explain. Respond to at least two of your classmates’ posts by Day 7.


Final Paper Proposal

For detailed information regarding outlines, introductions, thesis statements, and an APA references list, visit the Ashford Writing Center.

Review the assignment instructions for the Final Paper in Week Five. Submit an outline for your Final Paper that includes the following:

  • Develop an introduction with a thesis statement for the Final Paper.
  • Create an outline of the major headings with a two- to three-sentence description of what you will discuss under each heading.
  • Provide a references page for the sources used in the Final Paper (the Final Paper has a minimum requirement of five scholarly sources).
    • State the complete bibliographic citation for the scholarly source following APA guidelines

The outline must be two to three pages in length (excluding title and reference pages) and formatted according to APA style as outlined in the Ashford Writing Center (Links to an external site.)Links to an external site..


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