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chapter 16: 16-1,16-2,16-5,16-7, 16-8 (p.485)

chapter 14: 14-1, 14-3, 14-5, 14-8, 14-10. (p.424)

16 C H A P T E R
Agency Relationships
CONTENTS
LEARNING OBJECTIVES
• Agency Relationships
• Formation of Agencies
• Duties of Agents and Principals
• Agent’s Authority
• Liability in Agency Relationships
• Termination of Agency
Relationships
The five learning objectives below are designed to help improve your
understanding of the chapter. After reading this chapter, you should be able to
answer the following questions:
(Goodluz/iStockphoto.com)
1. What is the difference between an employee and an independent
contractor?
2. How do agency relationships arise?
3. What duties do agents and principals owe to each other?
4. When is a principal liable for the agent’s actions with respect to third
parties? When is the agent liable?
5. What are some of the ways in which an agency relationship can be
terminated?
“[It] is a universal principle in the law of agency, that the powers of
the agent are to be exercised for the benefit of the principal only,
and not of the agent or of third parties.”
—Joseph Story, 1779–1845 (Associate justice of the United States Supreme Court,
1811–1844)
Agency A relationship between two parties
in which one party (the agent) agrees to
represent or act for the other (the principal).
462
O
ne of the most common, important, and pervasive legal relationships is that of
agency. In an agency relationship between two parties, one of the parties, called
the agent, agrees to represent or act for the other, called the principal. The principal has the
right to control the agent’s conduct in matters entrusted to the agent, and the agent must
exercise his or her powers “for the benefit of the principal only,” as Justice Joseph Story
indicated in the chapter-opening quotation.
By using agents, a principal can conduct multiple business operations, such as entering
contracts, at the same time in different locations. Using agents provides clear benefits to
principals, but agents also create liability for their principals. For this reason, small businesses sometimes attempt to retain workers as independent contractors or “permalancers,”
but this strategy may lead to problems with federal and state tax authorities, as you will
read later in this chapter. Agency relationships are crucial to the business world. Indeed,
the only way that some business entities can function is through their agents.
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Agency Relationships
Section 1(1) of the Restatement (Third) of Agency1 defines agency as “the fiduciary relation
which results from the manifestation of consent by one person to another that the other
shall act in his [or her] behalf and subject to his [or her] control, and consent by the
other so to act.” In other words, in a principal-agent relationship, the parties have agreed
that the agent will act on behalf and instead of the principal in negotiating and transacting
business with third parties.
The term fiduciary is at the heart of agency law. The term can be used both as a noun
and as an adjective. When used as a noun, it refers to a person having a duty created by
her or his undertaking to act primarily for another’s benefit in matters connected with the
undertaking. When used as an adjective, as in “fiduciary relationship,” it means that the
relationship involves trust and confidence.
Agency relationships commonly exist between employers and employees. Agency relationships may sometimes also exist between employers and independent contractors who
are hired to perform special tasks or services.
Fiduciary As a noun, a person having a
duty created by his or her undertaking to
act primarily for another’s benefit in matters
connected with the undertaking. As an
adjective, a relationship founded on trust and
confidence.
Normally, all employees who deal with third parties are deemed to be agents. A salesperson
in a department store, for instance, is an agent of the store’s owner (the principal) and acts
on the owner’s behalf. Any sale of goods made by the salesperson to a customer is binding on the principal. Similarly, most representations of fact made by the salesperson with
respect to the goods sold are binding on the principal.
Because employees who deal with third parties are generally deemed to be agents of
their employers, agency law and employment law overlap considerably. Agency relationships, however, can exist outside an employer-employee relationship, so agency law has a
broader reach than employment law. Additionally, agency law is based on the common law,
whereas much employment law is statutory law.
Employment laws (state and federal) apply only to the employer-employee relationship. Statutes governing Social Security, withholding taxes, workers’ compensation, unemployment compensation, workplace safety, employment discrimination, and the like (see
Chapters 17 and 18) are applicable only if employer-employee status exists. These laws do
not apply to an independent contractor.
Employer–Independent Contractor Relationships
Independent contractors are not employees because, by definition, those who hire them
have no control over the details of their physical performance. Section 2 of the Restatement
(Third) of Agency defines an independent contractor as follows:
[An independent contractor is] a person who contracts with another to do something for him
[or her] but who is not controlled by the other nor subject to the other’s right to control with
respect to his [or her] physical conduct in the performance of the undertaking. He [or she] may
or may not be an agent. [Emphasis added.]
Building contractors and subcontractors are independent contractors. A property owner
does not control the acts of either of these professionals. Truck drivers who own their
equipment and hire themselves out on a per-job basis are independent contractors, but
truck drivers who drive company trucks on a regular basis are usually employees.
(Lisegagne/iStockphoto.com)
Employer-Employee Relationships
Corporations could not operate
without employing agents.
Learning Objective 1
What is the difference between
an employee and an independent
contractor?
Independent Contractor One who works
for, and receives payment from, an employer
but whose working conditions and methods are
not controlled by the employer. An independent
contractor is not an employee but may be an
agent.
1. The Restatement (Third) of Agency is an authoritative summary of the law of agency and is often referred to by judges
and other legal professionals.
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The relationship between a person or firm and an independent contractor may or may
not involve an agency relationship. To illustrate: An owner of real estate who hires a real
estate broker to negotiate a sale of the property not only has contracted with an independent contractor (the broker) but also has established an agency relationship for the specific
purpose of selling the property. Another example is an insurance agent, who is both an
independent contractor and an agent of the insurance company for which she or he sells
policies. (Note that an insurance broker, in contrast, normally is an agent of the person
obtaining insurance and not of the insurance company.)
Determining Employee Status
The courts are frequently asked to determine whether a particular worker is an employee
or an independent contractor. How a court decides this issue can have a significant effect
on the rights and liabilities of the parties. Employers are required to pay certain taxes, such
as Social Security and unemployment insurance taxes, for employees but not for independent contractors.
Criteria Used by the Courts In determining whether a worker has the status of an employee or an independent contractor, the courts often consider the following
questions:
1. How much control can the employer exercise over the details of the work? (If an
employer can exercise considerable control over the details of the work, this would
indicate employee status. This is perhaps the most important factor weighed by the
courts in determining employee status.)
2. Is the worker engaged in an occupation or business distinct from that of the employer?
(If so, this points to independent-contractor status, not employee status.)
3. Is the work usually done under the employer’s direction or by a specialist without supervision? (If the work is usually done under the employer’s direction, this would indicate
employee status.)
4. Does the employer supply the tools at the place of work? (If so, this would indicate
employee status.)
5. For how long is the person employed? (If the person is employed for a long period of
time, this would indicate employee status.)
6. What is the method of payment—by time period or at the completion of the job?
(Payment by time period, such as once every two weeks or once a month, would indicate employee status.)
7. What degree of skill is required of the worker? (If little skill is required, this may indicate employee status.)
Disputes Involving Employment Law Sometimes, workers may benefit from having
employee status—for tax purposes and to be protected under certain employment laws,
for example. As mentioned earlier, federal statutes governing employment discrimination
apply only when an employer-employee relationship exists. Protection under antidiscrimination statutes provides a significant incentive for workers to claim that they are employees
rather than independent contractors.
CASE EXAMPLE 16.1 A Puerto Rican television station, WIPR, contracted with a
woman to co-host a television show. The woman signed a new contract for each episode
and was committed to work for WIPR only during the filming of the episodes. WIPR
paid her a lump sum for each contract and did not withhold any taxes. When the woman
became pregnant, WIPR stopped contracting with her. She filed a lawsuit claiming that
WIPR was discriminating against her in violation of federal antidiscrimination laws,
but the court found in favor of WIPR. Because the parties had structured their
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CHAPTER 16
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relationship through repeated fixed-length contracts and had described the woman as
an independent contractor on tax documents, she could not maintain an employmentdiscrimination suit.2
•
Disputes Involving Tort Liability Whether a worker is an employee or an independent contractor can also affect the employer’s liability for the worker’s actions. In the following case,
the court had to determine the status of an auto service company and its tow truck driver
who assaulted the passenger of a vehicle the company had been hired to tow.
Case 16.1
Coker v. Pershad
Superior Court of New Jersey, Appellate Division, 2013 WL 1296271 (2013).
BACKGROUND AND FACTS AAA North Jersey, Inc., contracted with Five Star Auto Service to perform towing and auto
repair services for AAA. Terence Pershad, the driver of a tow
truck for Five Star, responded to a call to AAA for assistance by
the driver of a car involved in an accident in Hoboken, New
Jersey. Pershad got into a fight with Nicholas Coker, a passenger in the car, and assaulted Coker with a knife. Coker filed
a suit in a New Jersey state court against Pershad, Five Star,
and AAA. The court determined that Pershad was Five Star’s
employee and that Five Star was an independent contractor,
not AAA’s employee. Thus, AAA was “not responsible for the
alleged negligence of its independent contractor, defendant
Five Star, in hiring Mr. Pershad.” Five Star entered into a settlement with Coker. Coker appealed the ruling in AAA’s favor.
IN THE WORDS OF THE COURT . . .
PER CURIAM [By the Whole Court].
****
The important difference between an employee and an
independent contractor is that one who hires an independent
contractor has no right of control over the manner in which the
work is to be done. [Emphasis added.]
****
* * * Plaintiff [Coker] argues AAA controlled the means
and method of the work performed by Five Star. * * * Factors
* * * [that] determine whether a principal maintains the right
of control over an individual or a corporation claimed to be an
independent contractor [include]:
(a) the extent of control which, by the agreement, the master
may exercise over the details of the work;
(b) whether or not the one employed is engaged in a distinct
occupation or business;
(c) the kind of occupation, with reference to whether, in the
locality, the work is usually done under the direction of the
employer or by a specialist without supervision;
(Brian Stablyk/Getty Images)
2. Alberty-Vélez v. Corporación de Puerto Rico para la Difusión Pública, 361 F.3d 1 (1st Cir. 2004).
(d) the skill required in the particular occupation:
(e) whether the employer or the workman supplies the * * *
tools * * * ;
(f) the length of time for which the person is employed * * * .
Applying these factors to the facts of this case, it is clear AAA
did not control the manner and means of Five Star’s work. The
Agreement specifically stated Five Star was an independent contractor. Five Star purchased its own trucks and any other necessary equipment. AAA assigned jobs to Five Star and Five Star
completed the work without any further supervision by AAA. Five
Star chose the employees to send on towing calls and the trucks
and equipment the employees would use. [Emphasis added.]
Five Star was also in business for itself and performed auto
repair services for principals and customers other than AAA.
Five Star hired and fired its own employees * * * .
****
Plaintiff also argues Five Star should be considered to be
controlled by AAA because “providing towing and other roadside assistance is arguably the focus of the regular business of
AAA.” * * * [But] AAA is an automobile club that provides a
wide variety of services to its members. It contracts with numerous service providers, such as gas stations, motels and other
businesses, to provide these services. Thus, AAA is not solely
in the towing business.
* * * AAA had used Five Star to provide towing services for
approximately eight years and there is nothing in the record to
demonstrate it lacked the skill needed to provide these services.
DECISION AND REMEDY A state intermediate appellate court
affirmed the lower court’s ruling. AAA could not be held liable for the actions of Five Star, its independent contractor,
because “AAA did not control the manner and means of Five
Star’s work.”
Case 16.1—Continues ➥
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Case 16.1—Continued
THE LEGAL ENVIRONMENT DIMENSION Five Star’s contract
with AAA required Five Star to be available to provide service
for AAA members. Does this support Coker’s argument that
Five Star was AAA’s employee? Why or why not ?
MANAGERIAL IMPLICATIONS When an employment contract clearly designates one party as an independent contractor, the relationship between the parties is presumed to be
that of employer and independent contractor. But this is only
a presumption. Evidence can be introduced to show that the
employer exercised sufficient control to establish the other
party as an employee. The Internal Revenue Service is increasingly pursuing employers that it claims have wrongly classified
employees as independent contractors. Thus, from a tax perspective, business managers need to ensure that all independent contractors fully control their own work.
Criteria Used by the IRS The Internal Revenue Service (IRS) has established
its own criteria for determining whether a worker is an independent contractor or an
employee. The most important factor in this determination is the degree of control the
business exercises over the worker.
The IRS tends to closely scrutinize a firm’s classification of its workers because, as
mentioned, employers can avoid certain tax liabilities by hiring independent contractors instead of employees. Even when a firm classifies a worker as an independent contractor, the IRS may decide that the worker is actually an employee. In that situation,
the employer will be responsible for paying any applicable Social Security, withholding,
and unemployment taxes. Microsoft Corporation, for instance, was once ordered to pay
back payroll taxes for hundreds of workers that the IRS determined had been misclassified as independent contractors.3 (See this chapter’s Insight into Ethics feature, which
discusses the ethical ramifications of discouraging businesses from hiring independent
contractors.)
Employee Status and “Works for Hire” Under the Copyright Act
of 1976, any copyrighted work created by an employee within the scope of her or his
employment at the request of the employer is a “work for hire,” and the employer owns the
copyright to the work. When an employer hires an independent contractor—a freelance
artist, writer, or computer programmer, for example—the independent contractor owns
the copyright unless the parties agree in writing that the work is a “work for hire” and the
work falls into one of nine specific categories, including audiovisual and other works.
CASE EXAMPLE 16.2 Artisan House, Inc., hired a professional photographer, Steven H.
Lindner, owner of SHL Imaging, Inc., to take pictures of its products for the creation of
color slides to be used by Artisan’s sales force. Lindner controlled his own work and carefully chose the lighting and angles used in the photographs.
When Artisan published the photographs in a catalogue without Lindner’s permission,
SHL filed a lawsuit for copyright infringement. Artisan claimed that its publication of the
photographs was authorized because they were works for hire. The court, however, held
that SHL was an independent contractor and owned the copyrights to the photographs.
Because SHL had not given Artisan permission (a license) to reproduce the photographs in
other publications, Artisan was liable for copyright infringement.4
•
3. See Vizcaino v. U.S. District Court for the Western District of Washington, 173 F.3d 713 (9th Cir. 1999).
4. SHL Imaging, Inc. v. Artisan House, Inc., 117 F.Supp.2d 301 (S.D.N.Y. 2000).

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I NSIGHT INTO E THICS
SHOULD SMALL BUSINESSES BE ALLOWED TO HIRE “PERMALANCERS”?
Freelancers, of course, are independent contractors. Now small
businesses across the country are turning increasingly to permalancers—freelancers who stay on a business’s payroll for years.
Business Advantages
From the business’s perspective, the advantages are obvious—
the cost savings from using freelancers rather than employees can
be as much as 30 percent. The savings are because the business does not have to pay payroll and unemployment taxes or
workers’ compensation. Additionally, freelancers do not receive
health-care and other benefits offered to employees. Finally, during an economic downturn, the business has more flexibility—it
can let freelancers go quickly and usually without cost.
Taxation and Regulation Issues
The IRS and state tax authorities, however, view permalancers differently. In early 2010, the IRS launched an ongoing program that
will examine six thousand companies to make sure that permanent
workers have not been misclassified as independent contractors.
The Obama administration also revised some regulations to make
it harder for businesses to classify workers as freelancers.
The IRS is targeting small businesses not only because they
hire lots of freelancers but also because, unlike larger companies, they usually do not have on-staff attorneys to defend them
and thus are likely to acquiesce when the IRS clamps down. But
these efforts raise some ethical issues.
Certainly, the tax authorities will gain some revenues but at
the cost of reducing the flexibility of small businesses. Another
trade-off to consider is between the advantages that a business
obtains from hiring permalancers and the disadvantages to those
workers of having no employee benefits.
For Critical Analysis
Insight into the Social Environment
If businesses hire fewer workers as a result of the IRS’s actions,
are the taxes collected worth the possible increase in unemployment ? Discuss.
Formation of Agencies
Agency relationships normally are consensual. They come about by voluntary consent and
agreement between the parties. Generally, the agreement need not be in writing,5 and consideration is not required.
A person must have contractual capacity to be a principal. Those who cannot legally
enter into contracts directly should not be allowed to do so indirectly through an agent.
Any person can be an agent, though, regardless of whether he or she has the capacity to
enter a contract (including minors).
An agency relationship can be created for any legal purpose. An agency relationship
that is created for an illegal purpose or that is contrary to public policy is unenforceable.
EXAMPLE 16.3 Sharp (the principal) contracts with McKenzie (the agent) to sell illegal
narcotics. This agency relationship is unenforceable because selling illegal narcotics is a
felony and is contrary to public policy. It is also illegal for physicians and other licensed
professionals to employ unlicensed agents to perform professional actions.
Generally, an agency relationship can arise in four ways: by agreement of the parties, by
ratification, by estoppel, or by operation of law.
•
Learning Objective 2
How do agency relationships arise?
5. The following are two main exceptions to the statement that agency agreements need not be in writing: (1) Whenever
agency authority empowers the agent to enter into a contract that the Statute of Frauds requires to be in writing, the
agent’s authority from the principal must likewise be in writing (this is called the equal dignity rule, which will be
discussed in this chapter, and (2) a power of attorney, which confers authority to an agent, must be in writing.
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468
UNIT THREE
Business and Employment
(Jamie VanBuskirk/iStockphoto.com)
Agency by Agreement of the Parties
If a homeowner contracted with
a landscaper to hire a gardener,
who is the agent of whom?
Most agency relationships are based on an express or implied agreement that the agent will
act for the principal and that the principal agrees to have the agent so act. An agency agreement can take the form of an express written contract or be created by an oral agreement.
EXAMPLE 16.4 Reese asks Cary, a gardener, to contract with others for the care of his lawn
on a regular basis. Cary agrees. An agency relationship is established between Reese (the
principal) and Cary (the agent) for the lawn care.
An agency agreement can also be implied by conduct. CASE EXAMPLE 16.5 Gilbert
Bishop was admitted to Laurel Creek Health Care Center suffering from various physical
ailments. During an examination, Bishop told Laurel Creek staff that he could not use his
hands well enough to write or hold a pencil, but he was otherwise found to be mentally
competent. Bishop’s sister, Rachel Combs, offered to sign the admissions forms, but it was
Laurel Creek’s policy to have the patient’s spouse sign the admissions papers if the patient
was unable to do so. Therefore, Gilbert asked Combs to get his wife, Anna, so that she
could sign his admissions papers.
Combs then brought Anna to the hospital, and Anna signed the admissions paperwork,
which contained a provision for mandatory arbitration. Later, the Bishops sued the hospital
for negligence, and Laurel Creek sought to compel arbitration. The Bishops argued that
Anna was not Bishop’s agent and had no legal authority to make decisions for him, but the
court concluded that an agency relationship between Bishop and his wife, Anna, had been
formed by conduct.6
•
•
Agency by Ratification
Ratification A party’s act of accepting
or giving legal force to a contract or other
obligation entered into by another that
previously was not enforceable.
On occasion, a person who is in fact not an agent (or who is an agent acting outside the
scope of her or his authority) may make a contract on behalf of another (a principal). If
the principal affirms that contract by word or by action, an agency relationship is created
by ratification. Ratification involves a question of intent, and intent can be expressed by
either words or conduct. The basic requirements for ratification will be discussed later in
this chapter.
Agency by Estoppel
When a principal causes a third person to believe that another person is his or her agent,
and the third person deals with the supposed agent, the principal is “estopped to deny” the
agency relationship. In such a situation, the principal’s actions create the appearance of an
agency that does not in fact exist. The third person must prove that she or he reasonably
believed that an agency relationship existed, though. Facts and circumstances must show
that an ordinary, prudent person familiar with business practice and custom would have
been justified in concluding that the agent had authority.
CASE EXAMPLE 16.6 Francis Azur was president and chief executive officer of ATM
Corporation of America. Michelle Vanek, Azur’s personal assistant at ATM, reviewed his
credit-card statements, among other duties. For seven years, Vanek took unauthorized cash
advances from Azur’s credit-card account with Chase Bank. The charges appeared on at
least sixty-five monthly statements. When Azur discovered Vanek’s fraud, he fired her and
closed the account. He filed a suit against Chase, arguing that the bank should not have
allowed Vanek to take cash advances. The court concluded that Azur (the principal) had
given the bank reason to believe that Vanek (the agent) had authority. Therefore, Azur was
estopped (prevented) from denying Vanek’s authority.7
•
6. Laurel Creek Health Care Center v. Bishop, 2010 WL 985299 (Ky.App. 2010).
7. Azur v. Chase Bank, USA, N.A., 601 F.3d 212 (3d Cir. 2010).
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Note that the acts or declarations of a purported agent in and of themselves do not create an agency by estoppel. Rather, it is the deeds or statements of the principal that create
an agency by estoppel.
Agency by Operation of Law
The courts may find an agency relationship in the absence of a formal agreement in other
situations as well. This can occur in the family setting. When one spouse purchases certain
necessaries and charges them to the other spouse’s account, for example, the courts will
often rule that the second spouse is liable to pay for the necessaries, either because of a
social policy of promoting the general welfare of a spouse or because of a legal duty to supply necessaries to family members.
Agency by operation of law may also occur in emergency situations, when the agent’s
failure to act outside the scope of his or her authority would cause the principal substantial loss. If the agent is unable to contact the principal, the courts will often grant this
emergency power. For instance, a railroad engineer may contract on behalf of her or his
employer for medical care for an injured motorist hit by the train.
Duties of Agents and Principals
Agent’s Duties to the Principal
Generally, the agent owes the principal five duties: (1) performance,
(2) notification, (3) loyalty, (4) obedience, and (5) accounting.
What duties do agents and
principals owe to each other?
(SJ Locke/iStockphoto.com)
Once the principal-agent relationship has been created, both parties have duties that govern their conduct. As mentioned previously, an agency relationship is fiduciary—one of
trust. In a fiduciary relationship, each party owes the other the duty to act with the utmost
good faith.
In general, for every duty of the principal, the agent has a corresponding right, and vice versa. When one party to the agency
relationship violates his or her duty to the other party, the remedies available to the nonbreaching party arise out of contract
and tort law. These remedies include monetary damages, termination of the agency relationship, an injunction, and required
accountings.
Learning Objective 3
Performance An implied condition in every agency conWhat five duties does a real estate agent owe to his
tract is the agent’s agreement to use reasonable diligence and skill
clients?
in performing the work. When an agent fails entirely to perform
her or his duties, liability for breach of contract normally will result. The degree of skill
or care required of an agent is usually that expected of a reasonable person under similar
circumstances. Generally, this is interpreted to mean ordinary care. If an agent has claimed
to possess special skill, however, failure to exercise that degree of skill constitutes a breach
of the agent’s duty.
Not all agency relationships are based on contract. In some situations, an agent acts
gratuitously—that is, not for monetary compensation. A gratuitous agent cannot be liable
for breach of contract, as there is no contract, but he or she can be subject to tort liability.
Once a gratuitous agent has begun to act in an agency capacity, he or she has the duty to
continue to perform in that capacity in an acceptable manner and is subject to the same
standards of care and duty to perform as other agents.
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470
UNIT THREE
“If God had an agent,
the world wouldn’t be
built yet. It’d only be
about Thursday.”
Notification An agent is required to notify the principal of all matters that come
to her or his attention concerning the subject matter of the agency. This is the duty of
notification, or the duty to inform. EXAMPLE 16.7 Lang, an artist, is about to negotiate a
contract to sell a series of paintings to Barber’s Art Gallery for $25,000. Lang’s agent learns
that Barber is insolvent and will be unable to pay for the paintings. The agent has a duty to
inform Lang of this fact because it is relevant to the subject matter of the agency—the sale
of Lang’s paintings.
Jerry Reynolds, 1940–present
(National Basketball Association
executive)
Business and Employment
•
Loyalty Loyalty is one of the most fundamental duties in a fiduciary relationship.
Basically, the agent has the duty to act solely for the benefit of his or her principal and not
in the interest of the agent or a third party. For instance, an agent cannot represent two
principals in the same transaction unless both know of the dual capacity and consent to it.
The duty of loyalty also means that any information or knowledge acquired through the
agency relationship is considered confidential. It would be a breach of loyalty to disclose
such information either during the agency relationship or after its termination.
In short, the agent’s loyalty must be undivided. The agent’s actions must be strictly
for the benefit of the principal and must not result in any secret profit for the agent.
CASE EXAMPLE 16.8 Don Cousins contracts with Leo Hodgins, a real estate agent, to negotiate the purchase of an office building. While working for Cousins, Hodgins discovers that
the property owner will sell the building only as a package deal with another parcel, so he
buys the two properties, intending to resell the building to Cousins. Hodgins has breached
his fiduciary duties. As a real estate agent, Hodgins has a duty to communicate all offers to
his principal and not to purchase the property secretly and then resell it to his principal.
Hodgins is required to act in Cousins’s best interests and can become the purchaser in this
situation only with Cousins’s knowledge and approval.8
•
Obedience When acting on behalf of a principal, an agent has a duty to follow all
lawful and clearly stated instructions of the principal. Any deviation from such instructions
is a violation of this duty.
During emergency situations, however, when the principal cannot be consulted, the
agent may deviate from the instructions without violating this duty. Whenever instructions
are not clearly stated, the agent can fulfill the duty of obedience by acting in good faith and
in a manner reasonable under the circumstances.
Accounting Unless an agent and a principal agree otherwise, the agent has the duty
to keep and make available to the principal an account of all property and funds received
and paid out on behalf of the principal. This includes gifts from third parties in connection
with the agency. For instance, a gift from a customer to a salesperson for prompt deliveries
made by the salesperson’s firm, in the absence of a company policy to the contrary, belongs
to the firm. The agent has a duty to maintain separate accounts for the principal’s funds and
for the agent’s personal funds, and the agent must not intermingle these accounts.
Principal’s Duties to the Agent
The principal also owes certain duties to the agent. These duties relate to compensation,
reimbursement and indemnification, cooperation, and safe working conditions.
Compensation In general, when a principal requests services from an agent, the
agent reasonably expects payment. The principal therefore has a duty to pay the agent for
services rendered. For instance, when an accountant or an attorney is asked to act as an
8. Cousins v. Realty Ventures, Inc., 844 So.2d 860 (La.App. 5th Cir. 2003).
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CHAPTER 16
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agent, an agreement to compensate the agent for service is implied. The principal also has
a duty to pay that compensation in a timely manner. Unless the agency is gratuitous and
the agent does not act in exchange for payment, the principal must pay the agreed-on value
for the agent’s services. If no amount has been expressly agreed on, the principal owes the
agent the customary compensation for such services.
CASE EXAMPLE 16.9 Keith Miller worked as a sales representative for Paul M. Wolff
Company, a subcontractor specializing in concrete finishing services. Sales representatives
at Wolff are paid a 15 percent commission on projects that meet a 35 percent gross profit
threshold, after the projects are completed and Wolff is paid. When Miller resigned, he
asked for commissions on fourteen projects for which he had secured contracts. Wolff
refused, so Miller sued. The court found that “an agent is entitled to receive commissions
on sales that result from the agent’s efforts,” even after the employment or agency relationship ends. Miller had met the gross profit threshold on ten of the unfinished projects, and
therefore he was entitled to more than $21,000 in commissions. (The court also awarded
Miller nearly $75,000 in attorneys’ fees and court costs.) 9
•
Many disputes arise because the principal and agent did not specify how much the agent
would be paid. To avoid such disputes, always state in advance, and in writing, the amount
or rate of compensation that you will pay your agents. Even when dealing with salespersons,
such as real estate agents, who customarily are paid a percentage of the value of the sale,
it is best to explicitly state the rate of compensation.
Preventing
Legal Disputes
Reimbursement and Indemnification
Whenever an agent disburses
funds at the request of the principal or to pay for necessary expenses in the reasonable
performance of his or her agency duties, the principal has the duty to reimburse the agent
for these payments. Agents cannot recover for expenses incurred through their own misconduct or negligence, though.
Subject to the terms of the agency agreement, the principal has the duty to compensate,
or indemnify, an agent for liabilities incurred because of authorized and lawful acts and
transactions. For instance, if the principal fails to perform a contract formed by the agent
with a third party and the third party then sues the agent, the principal must compensate
the agent for any costs incurred in defending against the lawsuit.
Additionally, the principal must indemnify (pay) the agent for the value of benefits that
the agent confers on the principal. The amount of indemnification is usually specified
in the agency contract. If it is not, the courts will look to the nature of the business and
the type of loss to determine the amount. Note that this rule applies to acts by gratuitous
agents as well. If the finder of a dog that becomes sick takes the dog to a veterinarian and
pays the required fees for the veterinarian’s services, the (gratuitous) agent is entitled to be
reimbursed by the dog’s owner for those fees.
Cooperation A principal has a duty to cooperate with the agent and to assist the agent
in performing her or his duties. The principal must do nothing to prevent that performance.
When a principal grants an agent an exclusive territory, for instance, the principal creates an exclusive agency and cannot compete with the agent or appoint or allow another
agent to so compete. If the principal does so, she or he may be liable for the agent’s lost
sales or profits.
EXAMPLE 16.10 River City Times Company (the principal) grants Emir (the agent) the
right to sell its newspapers at a busy downtown intersection to the exclusion of all other
9. Miller v. Paul M. Wolff Co., 178 Wash.App. 957, 316 P.3d 1113 (2014).
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vendors. This creates an exclusive territory within which only Emir has the right to sell
those newspapers. If River City Times allows another vendor to sell its papers on another
corner of the same intersection, Emir can sue for lost profits.
•
Agent’s Authority
“Let every eye
negotiate for itself
and trust no agent.”
An agent’s authority to act can be either actual (express or implied) or apparent. If an agent
contracts outside the scope of his or her authority, the principal may still become liable by
ratifying the contract.
William Shakespeare, 1564–1616
(English poet and playwright)
Express Authority
Express authority is authority declared in clear, direct, and definite terms. Express authority
can be given orally or in writing.
Equal Dignity Rule In most states, the equal dignity rule requires that if the
contract being executed is or must be in writing, then the agent’s authority must also be
in writing. Failure to comply with the equal dignity rule can make a contract voidable at
the option of the principal. The law regards the contract at that point as a mere offer. If the
principal decides to accept the offer, the agent’s authority must be ratified, or affirmed,
in writing.
EXAMPLE 16.11 Lee (the principal) orally asks Parkinson (the agent) to sell a ranch
that Lee owns. Parkinson finds a buyer and signs a sales contract (a contract for an interest in realty must be in writing) on behalf of Lee to sell the ranch. The buyer cannot
enforce the contract unless Lee subsequently ratifies Parkinson’s agency status in writing. Once Parkinson’s agency status is ratified, either party can enforce rights under the
contract.
Modern business practice allows exceptions to the equal dignity rule. An executive officer of a corporation normally is not required to obtain written authority from the corporation to conduct ordinary business transactions. The equal dignity rule also does not apply
when an agent acts in the presence of a principal or when the agent’s act of signing is merely
perfunctory (automatic). Thus, if the principal negotiates a contract but is called out of
town the day it is to be signed and orally authorizes his or her agent to sign the contract,
the oral authorization is sufficient.
Equal Dignity Rule A rule requiring that
an agent’s authority be in writing if the contract
to be made on behalf of the principal must be
in writing.
•
Power of Attorney Authorization for
another to act as one’s agent or attorney in
either specified circumstances (special) or in all
situations (general).
Power of Attorney
Notary Public A public official authorized to
attest to the authenticity of signatures.
(Lucky Business/Shutterstock.com)
What functions does a notary
public perform?
Giving an agent a power of attorney confers express
authority.10 The power of attorney normally is a written document and is usually notarized. (A document is notarized when a notary public—a person authorized by the state
to attest to the authenticity of signatures—signs and dates the document and imprints
it with his or her seal of authority.) Most states have statutory provisions for creating a
power of attorney.
A power of attorney can be special (permitting the agent to do specified acts only), or
it can be general (permitting the agent to transact all business for the principal). Because a
general power of attorney grants extensive authority to an agent to act on behalf of the principal in many ways, it should be used with great caution. Ordinarily, a power of attorney
terminates on the incapacity or death of the person giving the power.11
10. An agent who holds the power of attorney is called an attorney-in-fact for the principal. The holder does not have to be
an attorney-at-law (and often is not).
11. A durable power of attorney, however, continues to be effective despite the principal’s incapacity. An elderly person, for
example, might grant a durable power of attorney to provide for the handling of property and investments or specific
health-care needs should she or he become incompetent.
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Implied Authority
An agent has the implied authority to do what is reasonably necessary to carry out his or
her express authority and accomplish the objectives of the agency. Authority can also be
implied by custom or inferred from the position the agent occupies.
EXAMPLE 16.12 Mueller is employed by Al’s Supermarket to manage one of its stores.
Al’s has not expressly stated that Mueller has authority to contract with third persons. In
this situation, though, authority to manage a business implies authority to do what is reasonably required (as is customary or can be inferred from a manager’s position) to operate
the business. A manager’s implied authority typically includes forming contracts to hire
employees, to buy merchandise and equipment, and to advertise the products sold in the
store.
If an employee-agent makes unauthorized use of his employer’s computer data, has he
committed a crime? See this chapter’s Online Developments feature that follows for a discussion of this issue.
•
What Happens When an Agent Breaches
Company Policy on the Use of Electronic Data?
Suppose that an employee-agent who is authorized to access
company trade secrets contained in computer files takes those
secrets to a competitor for whom the employee is about to
begin working. Clearly, the agent has violated the ethical—
and legal—duty of loyalty to the principal. Does this breach
of loyalty mean that the employee’s act of accessing the trade
secrets was unauthorized?
The question has significant implications for both parties.
If the action was unauthorized, the employee will be subject
to state and federal laws prohibiting unauthorized access to
computer information and data, including the Computer Fraud
and Abuse Act (CFAA, discussed in Chapter 6). If the action
was authorized, these laws will not apply.

Employees “Exceed Authorized Access”
to Their Company’s Database
David Nosal once worked for Korn/Ferry and had access
to the company’s confidential database. When he left, he
encouraged several former colleagues who still worked there
to join him in starting a competing firm. He asked them to
access Korn/Ferry’s database and download source lists,
names, and client contact information before they quit. The
employees had authority to access the database, but Korn/
Ferry’s policy forbade disclosure of confidential information.
The government filed charges against Nosal and his colleagues for violating the CFAA, among other things.
A Court Rules That Violating
an Employer’s Use Restrictions Is Not a Crime
The U.S. Court of Appeals for the Ninth Circuit refused to find
that the defendants had violated the CFAA. The court ruled that
the phrase “exceed authorized access” in the CFAA refers to
restrictions on access, not restrictions on use. The court reasoned
that Congress’s intent in enacting the CFAA was to prohibit people from hacking into computers without authorization.
The court also stated that the CFAA should not be used
to criminally prosecute persons who use data in an unauthorized or unethical way. The court pointed out that “adopting
the government’s interpretation would turn vast numbers of
teens and pre-teens into juvenile delinquents—and their parents and teachers into delinquency contributors.” Furthermore,
“the effect this broad construction of the CFAA has on workplace conduct pales by comparison with its effect on everyone
else who uses a computer, smart-phone, iPad, Kindle, Nook,
X-box, Blu-Ray player or any other Internet-enabled device.”a
Critical Thinking
If an employee accesses Facebook at work even though personal use of a workplace computer is against the employer’s
stated policies, can the employee be criminally prosecuted?
Why or why not ?
a. United States. v. Nosal, 676 F.3d 854 (9th Cir. 2012).
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Apparent Authority
Apparent Authority Authority that is
only apparent, not real. An agent’s apparent
authority arises when the principal causes
a third party to believe that the agent has
authority, even though she or he does not.
Actual authority (express or implied) arises from what the principal manifests to the agent.
An agent has apparent authority when the principal, by either words or actions, causes a
third party reasonably to believe that an agent has authority to act, even though the agent
has no express or implied authority. If the third party changes his or her position in reliance
on the principal’s representations, the principal may be estopped (prevented) from denying
that the agent had authority.
Apparent authority usually comes into existence through a principal’s pattern of conduct over time. At issue in the following Spotlight Case was whether the manager of a horse
breeding operation had the authority to bind the farm’s owner in a contract guaranteeing
breeding rights.
Case 16.2
Court of Appeals of Illinois, 502 N.E.2d 806, 151 Ill.App.3d 452 (1986).
Spotlight on
Apparent Authority
of Managers
BACKGROUND AND FACTS Gilbert Church owned a
horse breeding farm in Illinois managed by Herb Bagley.
Advertisements for the breeding rights to one of Church Farm’s
stallions, Imperial Guard, directed all inquiries to “Herb Bagley,
Manager.” Vern and Gail Lundberg bred Thoroughbred horses.
The Lundbergs contacted Bagley and executed a preprinted contract giving them breeding rights to Imperial Guard “at Imperial
Guard’s location,” subject to approval of the mares by Church.
Bagley handwrote a statement on the contract that guaranteed
the Lundbergs “six live foals in the first two years.” He then
signed it “Gilbert G. Church by H. Bagley.”
The Lundbergs bred four mares, which resulted in one
live foal. Church then moved Imperial Guard from Illinois to
Oklahoma. The Lundbergs sued Church for breaching the contract by moving the horse. Church claimed that Bagley was not
authorized to sign contracts for Church or to change or add
terms, but only to present preprinted contracts to potential buyers. Church testified that although Bagley was his farm manager
and the contact person for breeding rights, Bagley had never
before modified the preprinted forms or signed Church’s name
on these contracts. The jury found in favor of the Lundbergs and
awarded $147,000 in damages. Church appealed.
IN THE WORDS OF THE COURT. . .
Justice UNVERZAGT delivered the opinion of the court:
****
Defendant contends that plaintiffs have failed to establish
that Bagley had apparent authority to negotiate and sign the
Lundberg contract for Church Farm * * *.
(Somogyvari/iStockphoto.com)
Lundberg v. Church Farm, Inc.
The party asserting an agency
has the burden of proving its
Who can guarantee a minimum number
existence * * * but may do so
of foals during a limited time period?
by inference and circumstantial
evidence. * * * Additionally, an
agent may bind his principal by acts which the principal has
not given him actual authority to perform, but which he appears
authorized to perform. * * * An agent’s apparent authority is
that authority which “the principal knowingly permits the agent
to assume or which he holds his agent out as possessing. It is
the authority that a reasonably prudent man, exercising diligence and discretion, in view of the principal’s conduct, would
naturally suppose the agent to possess.” [Emphasis added.]
Plaintiffs produced evidence at trial that Gil Church approved
the Imperial Guard advertisement listing Herb Bagley as Church
Farm’s manager, and directing all inquiries to him. Church also
permitted Bagley to live on the farm and to handle its daily
operations. Bagley was the only person available to visitors
to the farm. Bagley answered Church Farm’s phone calls, and
there was a preprinted signature line for him on the breeding
rights package.
The conclusion is inescapable that Gil Church affirmatively
placed Bagley in a managerial position giving him complete
control of Church Farm and its dealings with the public. We
believe that this is just the sort of “holding out” of an agent by
a principal that justifies a third person’s reliance on the agent’s
authority.
We cannot accept defendant’s contention that the Lundbergs
were affirmatively obligated to seek out Church to ascertain
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CHAPTER 16
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Agency Relationships
Spotlight Case 16.2—Continued
the actual extent of Bagley’s authority. Where an agent has
apparent authority to act, the principal will be liable in spite
of any undisclosed limitations the principal has placed on that
authority.
THE LEGAL ENVIRONMENT DIMENSION The court held that
Church had allowed the Lundbergs to believe that Bagley was
his agent. What steps could Church have taken to protect himself against a finding of apparent authority ?
DECISION AND REMEDY The state appellate court affirmed the
lower court’s award of $147,000 to the Lundbergs. Because
Church allowed circumstances to lead the Lundbergs to believe
Bagley had authority, Church was bound by Bagley’s actions.
THE ETHICAL DIMENSION Does a principal have an ethical
responsibility to inform an unaware third party that an apparent
agent does not in fact have the authority to act on the principal’s
behalf ? Explain.
Ratification
As already mentioned, ratification occurs when the principal affirms an agent’s unauthorized act.
When ratification occurs, the principal is bound to the agent’s act, and the act is treated as if it
had been authorized by the principal from the outset. Ratification can be either express or implied.
If the principal does not ratify the contract, the principal is not bound, and the third
party’s agreement with the agent is viewed as merely an unaccepted offer. Because the
third party’s agreement is an unaccepted offer, the third party can revoke the offer at any
time, without liability, before the principal ratifies the contract.
The requirements for ratification can be summarized as follows:
1. The agent must have acted on behalf of an identified principal who subsequently ratifies
the action.
2. The principal must know of all material facts involved in the transaction. If a principal
ratifies a contract without knowing all of the facts, the principal can rescind (cancel) the
contract.
3. The principal must affirm the agent’s act in its entirety.
4. The principal must have the legal capacity to authorize the transaction at the time the
agent engages in the act and at the time the principal ratifies. The third party must also
have the legal capacity to engage in the transaction.
5. The principal’s affirmation must occur before the third party withdraws from the
transaction.
6. The principal must observe the same formalities when approving the act done by the
agent as would have been required to authorize it initially.
Liability in Agency Relationships
Frequently, a question arises as to which party, the principal or the agent, should be held
liable for contracts formed by the agent or for torts or crimes committed by the agent. We
look here at these aspects of agency law.
Liability for Contracts
Liability for contracts formed by an agent depends on how the principal is classified and on
whether the actions of the agent were authorized or unauthorized. Principals are classified
as disclosed, partially disclosed, or undisclosed.12
Learning Objective 4
When is a principal liable for the
agent’s actions with respect to third
parties? When is the agent liable?
12. Restatement (Third) of Agency, Section 1.04(2).
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Disclosed Principal A principal whose
identity is known to a third party at the time
the agent makes a contract with the third party.
A disclosed principal is a principal whose identity is known by the third party at the time
the contract is made by the agent. A partially disclosed principal is a principal whose identity is not known by the third party, but the third party knows that the agent is or may be acting
for a principal at the time the contract is made. EXAMPLE 16.13 Sarah has contracted with a
real estate agent to sell certain property. She wishes to keep her identity a secret, but the agent
makes it clear to potential buyers of the property that the agent is acting in an agency capacity.
In this situation, Sarah is a partially disclosed principal.
An undisclosed principal is a principal whose identity is totally unknown by the third
party, and the third party has no knowledge that the agent is acting in an agency capacity at
the time the contract is made.
Partially Disclosed Principal A principal
whose identity is unknown by a third party, but
the third party knows that the agent is or may
be acting for a principal at the time the agent
and the third party form a contract.
Undisclosed Principal A principal whose
identity is unknown by a third party, and that
person has no knowledge that the agent is
acting for a principal at the time the agent and
the third party form a contract.
Business and Employment
•
Authorized Acts If an agent acts within the scope of her or his authority, normally the principal is obligated to perform the contract regardless of whether the principal
was disclosed, partially disclosed, or undisclosed. Whether the agent may also be held
liable under the contract, however, depends on the status of the principal.
Disclosed or Partially Disclosed Principal A disclosed or partially disclosed principal is
liable to a third party for a contract made by an agent who is acting within the scope of her
or his authority. If the principal is disclosed, an agent has no contractual liability for the
nonperformance of the principal or the third party.
If the principal is partially disclosed, in most states the agent is also treated as a party to
the contract, and the third party can hold the agent liable for contractual nonperformance.
In the following case, the court applied these principles to determine an agent’s liability on
a contract to install flooring in a commercial building.
Stonhard, Inc. v. Blue Ridge Farms, LLC
New York Supreme Court, Appellate Division, Second Department, 114 A.D.3d 757, 980 N.Y.S.2d 507 (2014).
BACKGROUND AND FACTS Stonhard, Inc., makes epoxy
and urethane flooring and installs it in industrial and commercial buildings. Marvin Sussman entered into a contract with
Stonhard to install flooring at Blue Ridge Farms, LLC, a foodmanufacturing facility in Brooklyn, New York. Sussman did not
disclose that he was acting as an agent for the facility’s owner,
Blue Ridge Foods, LLC. When Stonhard was not paid for the
work, the flooring contractor filed a suit in a New York state
court against the facility, its owner, and Sussman to recover
damages for breach of contract. Stonhard filed a motion for
summary judgment against the defendants, offering in support of the motion evidence of the contract entered into with
Sussman. The court denied Stonhard’s motion and dismissed the
complaint against Sussman. Stonhard appealed.
IN THE WORDS OF THE COURT . . .
William F. MASTRO, J.P. [Judge Presiding], Reinaldo E. RIVERA,
Sandra L. SGROI, and Jeffrey A. COHEN, JJ.
****
(IP Galantemik D.U./
iStockphoto.com)
Case 16.3
Who is liable when the installer of food plant
An agent who acts on
flooring is not paid?
behalf of a disclosed principal
will generally not be liable for
a breach of contract. A principal is considered to be disclosed
if, at the time of a transaction conducted by an agent, the other
party to the contract had notice that the agent was acting for
the principal and of the principal’s identity. Knowledge of the
real principal is the test, and this means actual knowledge, not
suspicion. The defense of agency in avoidance of contractual
liability is an affirmative defense and the burden of establishing the disclosure of the agency relationship and the corporate
existence and identity of the principal is upon he or she who
asserts an agency relationship. [Emphasis added.]
The plaintiff established, prima facie, its entitlement to judgment as a matter of law on the complaint insofar as asserted
against the defendant Marvin Sussman with evidence that it
entered into a contract with Sussman of “Blue Ridge Farms,”
pursuant to which the plaintiff was to install flooring at the
“Blue Ridge Farms” food manufacturing facility in Brooklyn,
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CHAPTER 16
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Case 16.3—Continued
and Sussman failed to disclose that he was acting as an agent
for the defendant Blue Ridge Foods, LLC, which owns the facility. * * * The documentary evidence submitted on the plaintiff’s
motion * * * indicates at best that Sussman was acting as an
agent for a partially disclosed principal, in that the agency relationship was known, but the identity of the principal remained
undisclosed. As an agent for an undisclosed [or partially disclosed] principal, Sussman became personally liable under the
contract. [Emphasis added.]
Accordingly, the [lower] Court should have granted that
branch of the plaintiff’s motion which was for summary judgment on the complaint insofar as asserted against Sussman.
DECISION AND REMEDY A state intermediate appellate court
reversed the lower court’s dismissal of Stonhard’s complaint and
issued a summary judgment in the plaintiff’s favor. The evidence
of the parties’ contract indicated that Sussman “at best” was
acting as an agent for a partially disclosed principal (or he was
acting as an agent for an undisclosed principal). In that capacity, Sussman was personally liable on the contract with Stonhard.
THE LEGAL ENVIRONMENT DIMENSION The court ruled that
Sussman was personally liable on the contract with Stonhard. Is
the principal, Blue Ridge Foods, also liable? Explain.
THE E-COMMERCE DIMENSION The court cited “documentary
evidence,” which is evidence contained in documents, such
as a contract offered to prove its terms. Could documentary
evidence include a printout of e-mail exchanged between the
parties?
Undisclosed Principal When neither the fact of agency nor the identity of the principal is
disclosed, the undisclosed principal is bound to perform just as if the principal had been fully
disclosed at the time the contract was made. The agent is also liable as a party to the contract.
When a principal’s identity is undisclosed and the agent is forced to pay the third party,
the agent is entitled to be indemnified (compensated) by the principal. The principal had a
duty to perform, even though his or her identity was undisclosed, and failure to do so will
make the principal ultimately liable.
Once the undisclosed principal’s identity is revealed, the third party generally can elect
to hold either the principal or the agent liable on the contract. Conversely, the undisclosed
principal can require the third party to fulfill the contract, unless (1) the undisclosed principal was expressly excluded as a party in the contract, (2) the contract is a negotiable
instrument signed by the agent with no indication of signing in a representative capacity,
or (3) the performance of the agent is personal to the contract, allowing the third party to
refuse the principal’s performance.
CASE EXAMPLE 16.14 Bobby Williams bought a car at Sherman Henderson’s auto repair
business in Monroe, Louisiana, for $3,000. Henderson negotiated and made the sale for the
car’s owner, Joe Pike, whose name was not disclosed. Williams drove the car to Memphis,
Tennessee, where his daughter was a student. Three days after the sale, the car erupted in
flames. Williams extinguished the blaze and contacted Henderson. The vehicle was soon
stolen, which prevented Williams from returning it to Henderson. Williams later filed suits
against both Pike and Henderson. The court noted that the state had issued Pike a permit
to sell the car. The car was displayed for sale at Henderson’s business, and Henderson
actually sold it. This made Pike the principal and Henderson his agent. The fact that their
agency relationship was not made clear to Williams made Pike an undisclosed principal.
Williams could thus hold both Pike and Henderson liable for the condition of the car.13
•
Unauthorized Acts If an agent has no authority but nevertheless contracts
with a third party, the principal cannot be held liable on the contract. It does not matter
whether the principal was disclosed, partially disclosed, or undisclosed. The agent is liable,
13. William v. Pike, 58 So.3d 525 (2011).
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however. EXAMPLE 16.15 Scranton signs a contract for the purchase of a truck, purportedly acting as an agent under authority granted by Johnson. In fact, Johnson has not given
Scranton any such authority. Johnson refuses to pay for the truck, claiming that Scranton
had no authority to purchase it. The seller of the truck is entitled to hold Scranton liable
for payment.
If the principal is disclosed or partially disclosed, the agent is liable to the third party as
long as the third party relied on the agency status. The agent’s liability here is based on the
breach of an implied warranty of authority, not on breach of the contract itself.14 An agent
impliedly warrants that he or she has the authority to enter a contract on behalf of the
principal. If the third party knows at the time the contract is made that the agent does not
have authority—or if the agent expresses to the third party uncertainty as to the extent of
her or his authority—then the agent is not personally liable.
•
Liability for Torts and Crimes
Obviously, any person, including an agent, is liable for her or his own torts and crimes.
Whether a principal can also be held liable for an agent’s torts and crimes depends on several factors. In some situations, a principal may be held liable not only for the torts of an
agent but also for the torts committed by an independent contractor.
When ski patrollers help an
injured skier, is there an agency
involved?
Principal’s Tortious Conduct
A principal conducting an activity through
an agent may be liable for harm resulting from the principal’s own negligence or recklessness. Thus, a principal may be liable for giving improper instructions, authorizing the use
of improper materials or tools, or establishing improper rules that resulted in the agent’s
committing a tort. EXAMPLE 16.16 Jack knows that Suki is not qualified to drive large
trucks but nevertheless tells her to use the company truck to deliver some equipment to a
customer. If someone is injured as a result, Jack (the principal) will be liable for his own
negligence in giving improper instructions to Suki.
•
(Life Journeys/iStockphoto.com)
Principal’s Authorization of Agent’s Tortious Conduct
A principal who authorizes an agent to commit a tort may be liable to persons or property injured
thereby, because the act is considered to be the principal’s. EXAMPLE 16.17 Selkow directs
his agent, Warren, to cut the corn on specific acreage, which neither of them has the right
to do. The harvest is therefore a trespass (a tort), and Selkow is liable to the owner of
the corn.
Note also that an agent acting at the principal’s direction can be liable as a tortfeasor
(one who commits a wrong, or tort), along with the principal, for committing the tortious
act even if the agent was unaware of the wrongfulness of the act. Assume in Example 16.17
that Warren, the agent, did not know that Selkow had no right to harvest the corn. Warren
can be held liable to the owner of the field for damages, along with Selkow, the principal.
•
Liability for Agent’s Misrepresentation A principal is exposed to tort
liability whenever a third person sustains a loss due to the agent’s misrepresentation. The
principal’s liability depends on whether the agent was actually or apparently authorized to
make representations and whether the representations were made within the scope of the
agency. The principal is always directly responsible for an agent’s misrepresentation made
within the scope of the agent’s authority.
EXAMPLE 16.18 Bassett is a demonstrator for Moore’s products. Moore sends Bassett to
a home show to demonstrate the products and to answer questions from consumers. Moore
14. The agent is not liable on the contract because the agent was never intended personally to be a party to the contract.
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has given Bassett authority to make statements about the products. If Bassett makes only
true representations, all is fine, but if he makes false claims, Moore will be liable for any
injuries or damages sustained by third parties in reliance on Bassett’s false representations.
•
Liability for Agent’s Negligence As mentioned, an agent is liable for his
or her own torts. A principal may also be liable for harm an agent caused to a third party
under the doctrine of respondeat superior,15 a Latin term meaning “let the master respond.”
This doctrine is similar to the theory of strict liability discussed in Chapter 5. It imposes
vicarious liability, or indirect liability, on the employer—that is, liability without regard
to the personal fault of the employer—for torts committed by an employee in the course
or scope of employment.
When an agent commits a negligent act, both the agent and the principal are liable.
CASE EXAMPLE 16.19 Aegis Communications hired Southwest Desert Images (SDI) to provide landscaping services for its property. An herbicide sprayed by SDI employee David
Hoggatt entered the Aegis building through the air-conditioning system and caused Catherine Warner, an Aegis employee, to suffer a heart attack. Warner sued SDI and Hoggatt for
negligence, but the lower court dismissed the suit against Hoggatt. On appeal, the court
found that Hoggatt was also liable. An agent is not excused from responsibility for tortious
conduct just because he is working for a principal.16
Respondeat Superior A doctrine under
which a principal or an employer is held liable
for the wrongful acts committed by agents or
employees while acting within the course and
scope of their agency or employment.
Vicarious Liability Indirect liability
imposed on a supervisory party (such as an
employer) for the actions of a subordinate
(such as an employee) because of the
relationship between the two parties.
•
Determining the Scope of Employment The key to determining whether a principal may
be liable for the torts of an agent under the doctrine of respondeat superior is whether the
torts are committed within the scope of the agency or employment. The factors that courts
consider in determining whether a particular act occurred within the course and scope of
employment are as follows:
The Distinction between a “Detour” and a “Frolic” A useful
insight into the “scope of employment” concept may be gained
from the judge’s classic distinction between a “detour” and a
“frolic” in the case of Joel v. Morison.17 In this case, the English
court held that if a servant merely took a detour from his master’s business, the master is responsible. If, however, the servant
was on a “frolic of his own” and not in any way “on his master’s
business,” the master is not liable.
EXAMPLE 16.20 While driving his employer’s vehicle to call
on a customer, Mandel decides to stop at the post office—which
(Scott Muthersbaugh/Burlington Times-News/AP Images )
1. Whether the employee’s act was authorized by the employer.
2. The time, place, and purpose of the act.
3. Whether the act was one commonly performed by employees on behalf of their employers.
4. The extent to which the employer’s interest was advanced by the act.
5. The extent to which the private interests of the employee were involved.
6. Whether the employer furnished the means or instrumentality (such as a truck or a
machine) by which the injury was inflicted.
7. Whether the employer had reason to know that the employee Under what circumstances could a school bus driver be charged
would do the act in question and whether the employee had individually with negligence?
ever done it before.
8. Whether the act involved the commission of a serious crime.
15. Pronounced ree-spahn-dee-uht soo-peer-ee-your.
16. Warner v. Southwest Desert Images, LLC, 218 Ariz. 121, 180 P.3d 986 (2008).
17. 6 Car. & P. 501, 172 Eng.Rep. 1338 (1834).
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is one block off his route—to mail a personal letter. Mandel then negligently runs into
a parked vehicle owned by Chan. In this situation, because Mandel’s detour from the
employer’s business is not substantial, he is still acting within the scope of employment,
and the employer is liable.
The result would be different if Mandel had decided to pick up a few friends for cocktails in another city and in the process had negligently run into Chan’s vehicle. In that situation, the departure from the employer’s business would be substantial, and the employer
normally would not be liable to Chan for damages. Mandel would be considered to have
been on a “frolic” of his own.
An employee going to and from work or to and from meals is usually considered outside the scope of employment. If travel is part of a person’s position, however, such as a
traveling salesperson or a regional representative of a company, then travel time is normally
considered within the scope of employment.
•
Notice of Dangerous Conditions The employer is charged with knowledge of any dangerous conditions discovered by an employee and pertinent to the employment situation.
EXAMPLE 16.21 Brad, a maintenance employee in Martin’s apartment building, notices a
lead pipe protruding from the ground in the building’s courtyard. Brad neglects either to
fix the pipe or to inform Martin of the danger. John trips on the pipe and is injured. The
employer is charged with knowledge of the dangerous condition regardless of whether or
not Brad actually informed him. That knowledge is imputed to the employer by virtue of
the employment relationship.
•
Liability for Agent’s Intentional Torts Most intentional torts that
employees commit have no relation to their employment. Thus, their employers will not
be held liable. Nevertheless, under the doctrine of respondeat superior, the employer can be
liable for an employee’s intentional torts that are committed within the course and scope
of employment, just as the employer is liable for negligence. For instance, an employer is
liable when an employee (such as a “bouncer” at a nightclub or a security guard at a department store) commits the tort of assault and battery or false imprisonment while acting
within the scope of employment.
In addition, an employer who knows or should know that an employee has a propensity
for committing tortious acts is liable for the employee’s acts even if they ordinarily would
not be considered within the scope of employment. For instance, if the employer hires a
bouncer knowing that he has a history of arrests for assault and battery, the employer may
be liable if the employee viciously attacks a patron in the parking lot after hours.
An employer may also be liable for permitting an employee to engage in reckless actions
that can injure others. EXAMPLE 16.22 The owner of Bates Trucking observes an employee
smoking while filling containerized trucks with highly flammable liquids. Failure to stop the
employee will cause the employer to be liable for any injuries that result if a truck explodes.
•
Liability for Independent Contractor’s Torts Generally, an employer
is not liable for physical harm caused to a third person by the negligent act of an independent contractor in the performance of the contract. This is because the employer does not
have the right to control the details of an independent contractor’s performance.
Exceptions to this rule are made in certain situations, though, such as when unusually hazardous activities are involved. Typical examples of such activities include blasting
operations, the transportation of highly volatile chemicals, or the use of poisonous gases.
In these situations, an employer cannot be shielded from liability merely by using an independent contractor. Strict liability is imposed on the employer-principal as a matter of law.
Also, in some states, strict liability may be imposed by statute.
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Liability for Agent’s Crimes
An agent is liable for his or her own crimes.
A principal or employer is not liable for an agent’s crime even if the crime was committed within the scope of authority or employment—unless the principal participated by
conspiracy or other action. In some jurisdictions, under specific statutes, a principal may
be liable for an agent’s violation—in the course and scope of employment—of regulations,
such as those governing sanitation, prices, weights, and the sale of liquor.
Termination of Agency Relationships
Agency law is similar to contract law in that both an agency and a contract can be terminated by an act of the parties or by operation of law. Once the relationship between the principal and the agent has ended, the agent no longer has the right (actual authority) to bind
the principal. For an agent’s apparent authority to be terminated, though, third persons may
also need to be notified that the agency has been terminated.
Termination by Act of the Parties
An agency may be terminated by act of the parties in any of the following ways:
1. Lapse of time. When an agency agreement specifies the time period during which the
agency relationship will exist, the agency ends when that period expires. If no definite
time is stated, the agency continues for a reasonable time and can be terminated at will
by either party. What constitutes a “reasonable time” depends, of course, on the circumstances and the nature of the agency relationship.
2. Purpose achieved. If an agent is employed to accomplish a particular objective, such as
the purchase of breeding stock for a cattle rancher, the agency automatically ends after
the cattle have been purchased. If more than one agent is employed to accomplish the
same purpose, such as the sale of real estate, the first agent to complete the sale automatically terminates the agency relationship for all the others.
3. Occurrence of a specific event. When an agency relationship is to terminate on the happening of a certain event, the agency automatically ends when the event occurs. If
Posner appoints Rubik to handle her business affairs while she is away, the agency terminates when Posner returns.
4. Mutual agreement. The parties to an agency can cancel (rescind) their contract by mutually agreeing to terminate the agency relationship, even if it is for a specific duration.
5. Termination by one party. As a general rule, either party can terminate the agency relationship (the act of termination is called revocation if done by the principal and renunciation
if done by the agent). Although both parties have the power to terminate the agency, they
may not possess the right.
Learning Objective 5
What are some of the ways in which
an agency relationship can be
terminated?
Wrongful Termination
Wrongful termination can subject the canceling
party to a suit for breach of contract (this topic will be discussed further in Chapter 17).
EXAMPLE 16.23 Rawlins has a one-year employment contract with Munro to act as an
agent in return for $65,000. Although Munro has the power to discharge Rawlins before the
contract period expires, if he does so, he can be sued for breaching the contract because he
had no right to terminate the agency.
•
Notice of Termination When the parties terminate an agency, it is the principal’s
duty to inform any third parties who know of the existence of the agency that it has been
terminated. Although an agent’s actual authority ends when the agency is terminated, an
agent’s apparent authority continues until the third party receives notice (from any source)
that such authority has been terminated.
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If the principal knows that a third party has dealt with the agent, the principal is
expected to notify that person directly. For third parties who have heard about the agency
but have not yet dealt with the agent, constructive notice is sufficient.18
No particular form is required for notice of agency termination to be effective. The principal can personally notify the agent, or the agent can learn of the termination through some
other means. EXAMPLE 16.24 Manning bids on a shipment of steel, and Stone is hired as
an agent to arrange transportation of the shipment. When Stone learns that Manning has
lost the bid, Stone’s authority to make the transportation arrangement terminates. If the
agent’s authority is written, however, it normally must be revoked in writing.
•
Termination by Operation of Law
Termination of an agency by operation of law occurs in the circumstances discussed here. Note
that when an agency terminates by operation of law, there is no duty to notify third persons.
Death or Insanity The general rule is that the death or mental incompetence
of either the principal or the agent automatically and immediately terminates an ordinary
agency relationship. Knowledge of the death is not required. EXAMPLE 16.25 Geer sends
Tyron to China to purchase a rare painting. Before Tyron makes the purchase, Geer dies.
Tyron’s agent status is terminated at the moment of Geer’s death, even though Tyron does
not know that Geer has died. Some states, however, have enacted statutes changing this
common law rule to make knowledge of the principal’s death a requirement for agency
termination.
•
Impossibility When the specific subject matter of an agency is destroyed or lost, the
agency terminates. EXAMPLE 16.26 Bullard employs Gonzalez to sell Bullard’s house, but
before any sale, the house is destroyed by fire. In this situation, Gonzalez’s agency and authority to sell Bullard’s house terminate. Similarly, when it is impossible for the agent to perform
the agency lawfully because of a change in the law, the agency terminates.
•
Changed Circumstances
When an event occurs that has such an unusual
effect on the subject matter of the agency that the agent can reasonably infer that the principal will not want the agency to continue, the agency terminates. EXAMPLE 16.27 Roberts
hires Mullen to sell a tract of land for $20,000. Subsequently, Mullen learns that there is oil
under the land and that the land is worth $1 million. The agency and Mullen’s authority to
sell the land for $20,000 are terminated.
•
Bankruptcy If either the principal or the agent petitions for bankruptcy, the
agency is usually terminated. In certain circumstances, as when the agent’s financial status is irrelevant to the purpose of the agency, the agency relationship may continue.
Insolvency (defined as the inability to pay debts when they become due or when liabilities exceed assets), as distinguished from bankruptcy, does not necessarily terminate the
relationship.
War
When the principal’s country and the agent’s country are at war with each
other, the agency is terminated. In this situation, the agency is automatically suspended
or terminated because there is no way to enforce the legal rights and obligations of the
parties.
18. Constructive notice is information or knowledge of a fact imputed by law to a person if he or she could have
discovered the fact by proper diligence. Constructive notice is often accomplished by newspaper publication.
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Reviewing . . . Agency Relationships
Lynne Meyer, on her way to a business meeting and in a hurry, stopped at a Buy-Mart store for a new car charger for her
smartphone. There was a long line at one of the checkout counters, but a cashier, Valerie Watts, opened another counter and
began loading the cash drawer. Meyer told Watts that she was in a hurry and asked Watts to work faster. Instead, Watts slowed
her pace. At this point, Meyer hit Watts.
It is not clear whether Meyer hit Watts intentionally or, in an attempt to retrieve the car charger, hit her inadvertently. In
response, Watts grabbed Meyer by the hair and hit her repeatedly in the back of the head, while Meyer screamed for help.
Management personnel separated the two women and questioned them about the incident. Watts was immediately fired for
violating the store’s no-fighting policy. Meyer subsequently sued Buy-Mart, alleging that the store was liable for the tort (assault
and battery) committed by its employee. Using the information presented in the chapter, answer the following questions.
1. Under what doctrine discussed in this chapter might Buy-Mart be held liable for the tort committed by Watts?
2. What is the key factor in determining whether Buy-Mart is liable under this doctrine?
3. How is Buy-Mart’s potential liability affected by whether Watts’s behavior constituted an intentional tort or a tort of
negligence?
4. Suppose that when Watts applied for the job at Buy-Mart, she disclosed in her application that she had previously been
convicted of felony assault and battery. Nevertheless, Buy-Mart hired Watts as a cashier. How might this fact affect Buy-Mart’s
liability for Watts’s actions?
Debate This The doctrine of respondeat superior should be modified to make agents solely liable for their tortious
(wrongful) acts committed within the scope of employment.
Key Terms
agency 462
apparent authority 474
disclosed principal 476
equal dignity rule 472
fiduciary 463
independent contractor 463
notary public 472
partially disclosed principal 476
power of attorney 472
ratification 468
respondeat superior 479
undisclosed principal 476
vicarious liability 479
Chapter Summary: Agency Relationships
Agency Relationships
In a principal-agent relationship, an agent acts on behalf of and instead of the principal in dealing with third parties. An employee who deals
with third parties is normally an agent. An independent contractor is not an employee, and the employer has no control over the details of
the person’s physical performance. An independent contractor may or may not be an agent.
Formation of Agencies
Agency relationships may be formed by the following methods:
1. Agreement—The agency relationship is formed through express consent (oral or written) or implied by conduct.
2. Ratification—The principal either by act or by agreement ratifies the conduct of a person who is not in fact an agent.
3. Estoppel—The principal causes a third person to believe that another person is the principal’s agent, and the third person acts to his or
her detriment in reasonable reliance on that belief.
4. Operation of law—The agency relationship is based on a social duty or formed in emergency situations when the agent is unable to
contact the principal and failure to act outside the scope of the agent’s authority would cause the principal substantial loss.
Continued
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Chapter Summary: Agency Relationships—Continued
Duties of Agents and Principals
1. Duties of the agent—
a. Performance—The agent must use reasonable diligence and skill in performing her or his duties.
b. Notification—The agent is required to notify the principal of all matters that come to his or her attention concerning the subject
matter of the agency.
c. Loyalty—The agent has a duty to act solely for the benefit of the principal and not in the interest of the agent or a third party.
d. Obedience—The agent must follow all lawful and clearly stated instructions of the principal.
e. Accounting—The agent has a duty to make available to the principal records of all property and funds received and paid out on
behalf of the principal.
2. Duties of the principal—
a. Compensation—The principal must pay the agreed-on value (or reasonable value) for the agent’s services.
b. Reimbursement and indemnification—The principal must reimburse the agent for all funds disbursed at the request of the principal
and for all funds that the agent disburses for necessary expenses in the reasonable performance of his or her agency duties.
c. Cooperation—A principal must cooperate with and assist an agent in performing her or his duties.
Agent’s Authority
1. Express authority—Can be oral or in writing. Authorization must be in writing if the agent is to execute a contract that must be in writing.
2. Implied authority—Authority customarily associated with the position of the agent or authority that is deemed necessary for the agent
to carry out expressly authorized tasks.
3. Apparent authority—Exists when the principal, by word or action, causes a third party reasonably to believe that an agent has
authority to act, even though the agent has no express or implied authority.
4. Ratification—The affirmation by the principal of an agent’s unauthorized action or promise. For the ratification to be effective, the
principal must be aware of all material facts.
Liability in Agency Relationships
1. Liability for contracts—If the principal’s identity is disclosed or partially disclosed at the time the agent forms a contract with a third
party, the principal is liable to the third party under the contract if the agent acted within the scope of his or her authority.
2. Liability for agent’s negligence—Under the doctrine of respondeat superior, the principal is liable for any harm caused to another
through the agent’s torts if the agent was acting within the scope of her or his employment at the time the harmful act occurred.
3. Liability for agent’s intentional torts—Usually, employers are not liable for the intentional torts that their agents commit, unless:
a. The acts are committed within the scope of employment, and thus the doctrine of respondeat superior applies.
b. The employer knows or should know that the employee has a propensity for committing tortious acts.
c. The employer allowed the employee to engage in reckless acts that caused injury to another.
d. The agent’s misrepresentation causes a third party to sustain damage, and the agent had either actual or apparent authority to act.
4. Liability for independent contractor’s torts—A principal usually is not liable for harm caused by an independent contractor’s
negligence.
5. Liability for agent’s crimes—An agent is responsible for his or her own crimes, even if the crimes were committed while the agent
was acting within the scope of authority or employment. A principal will be liable for an agent’s crime only if the principal participated by
conspiracy or other action or (in some jurisdictions) if the agent violated certain government regulations in the course of employment.
Termination of Agency
Relationships
1. By act of the parties—
Notice to third parties is required when an agency is terminated by act of the parties. Direct notice is required for those who have
previously dealt with the agency, but constructive notice will suffice for all other third parties.
2. By operation of law—
Notice to third parties is not required when an agency is terminated by operation of law.
Issue Spotters
1. Dimka Corporation wants to build a new mall on a specific tract of land. Dimka contracts with Nadine to buy the
property. When Nadine learns of the difference between the price that Dimka is willing to pay and the price at which the
owner is willing to sell, she wants to buy the land and sell it to Dimka herself. Can she do this? Discuss. (See Duties of
Agent’s and Principal’s.)
2. Davis contracts with Estee to buy a certain horse on her behalf. Estee asks Davis not to reveal her identity. Davis makes a
deal with Farmland Stables, the owner of the horse, and makes a down payment. Estee does not pay the rest of the price.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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Farmland Stables sues Davis for breach of contract. Can Davis hold Estee liab…
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