Chapter 11 Agency Outline

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Agency Relationships
an employee or independent contractor may act in the capacity of an agent

employer-employee relationships
An employee is one whose physical conduct is controlled, or subject to control, by an employer. The key feature is the em¬ployer’s right to control the employee in the performance of tasks in¬volved in the employment. An employee can be an agent if the employee has an appointment or contract for hire with au¬thor¬ity to represent the employer.

determination of employee status
Factors for determining whether a person is an employee or an independent contractor are listed in the text.

criteria used by the courts
To decide whether an individual is an employee or independent contractor, courts consider the following—

• How much control does the employer have over the details of the work (the most important factor)?
• How distinct are the occupations of the individual and employer?
• Does the employer supervise the work?
• Does the employer supply the tools at the place of work?
• What is the length of the employment?
• How is the individual paid (periodically or by project)?
• What skill does the work require?

disputes involving employment law
anti discrimination laws protect workers, not independent contractors

disputes involving tort liability
an employer is more likely to be liable for the wrongful conduct of an employee than the tortious act of an independent contractor

Criteria used by the IRS
the IRS considers chiefly the degree of control that an employer exercises over the work

Employee Status and “Works for hire”
An employee’s work of intellectual property be¬longs to the employer, but an independent contractor’s similar effort is the employer’s only if the parties agreed to exchange the rights.

Formation of the Agency Relationship
An agency relationship must be based on an affirmative indication that the agent agrees to act for the principal and the principal agrees to have the agent so act. It may be created for any legal purpose. In most states, the principal—but not the agent—must have contractual capacity. The text notes two excep¬tions to oral agency agreements—

• Under the equal dignity rule, in many states an agent’s author¬ity must be in writing if the agent is empowered to enter into a con¬tract that the Statute of Frauds requires to be in writing.
• A power of attorney must be in writing.

Agency by Agreement
Generally, no formalities are required to create an agency relationship. Agency can be implied from conduct, or can be created by written contract or oral agreement.

Agency by Ratification
Agency is created by ratification when a principal affirms a contract made by a person who is not an agent, or a person who is an agent acting outside the scope of his or her au¬thority.

Agency by Estoppel
Agency is created by estoppel when a principal causes a third person to be¬lieve that another is the principal’s agent, and the third person deals with the other.

1. The Third Party’s Reliance Must Be Reasonable
Facts must show that an ordinary, prudent person familiar with business practice and custom would have been justified in concluding that the agent had authority.

2. Created by the Principal’s Conduct
The deeds or statements of the principal create an agency by estoppel.

Agency by operation of law
Agency may be created by operation of law. The text points out that courts have granted agents emergency power under unusual circumstances and that agency has been held to arise in family relation¬ships.

Duties of agents and principals
an agency relationship is fiduciary

agents duties to the principal
An agent’s duties are implied from the agency relationship whether or not the identity of the principal is disclosed to a third party.

1. Performance

a. Standard of Care
The degree of skill or care required of an agent is that expected of a reasonable person un¬der similar circumstances (un¬less the agent has presented himself or herself as possessing special skills). If an agent fails to perform his or her duties, he or she will be li¬able for breach of the agent’s duty.

b. Gratuitous Agents
An agent who does not act for money may be sub¬ject to the same standards of care, but cannot be liable for breach of contract because there is no contract.

2. Notification
An agent must notify a principal of matters that come to his or her at¬tention concerning the subject matter of the agency (the principal is bound even if the agent says nothing).

3. Loyalty
An agent cannot represent two principals in the same transaction unless both know of the dual capacity and consent.

a. Maintain Confidentiality
Knowledge ac¬quired through an agency relationship is confidential.

b. Actions Benefit the Principal
An agent must act solely for the benefit of the principal.

4. Obedience
An agent must follow the principal’s instructions (except during an emergency or when in¬struc¬tions are not clearly stated, in which case an agent must act in good faith and in a manner reasonable under the circumstances.

5. Accounting
An agent must account for all property and money received and paid out on behalf of the principal. The agent should keep personal funds separate.

principal’s duties to the agent
A principal’s duties may be express or may be implied by law.

1. Compensation
Except in a gratuitous agency, a principal must pay an agent for services rendered and to do so in a timely manner. The amount is the agreed-on value, the cus¬tomary value, or, if no amount has been agreed on or established by custom or law, the reasonable value.

2. Reimbursement and Indemnification
A principal must reimburse an agent for sums disbursed at the principal’s request or for necessary expenses in the agent’s performance of his or her duties. A prin¬cipal also must indemnify an agent for liability incurred in accord with the agency. A subagent can recover from the principal or the agent who hired him or her.

3. Cooperation
A principal must cooperate with and assist an agent in performing his or her du¬ties.

4. Safe Working Conditions
A principal must provide safe premises, equipment, and conditions (and warn about unsafe areas).

Agent’s rights and remedies against the principal
For every duty of a principal, an agent has a cor¬re¬sponding right.

1. Tort and Contract Remedies
Remedies follow normal con¬tract and tort remedies.

2. Demand for an Accounting
An agent can withhold further performance and demand that a principal give an accounting.

3. No Right to Specific Performance
When an agency is not contractual, an agent can recover for past ser¬v¬ices and future dam¬ages but has no right to specific performance.

principal’s rights and remedies against the agent
Remedies follow normal contract and tort remedies. Actions available include constructive trust, avoidance, and indemnification.

1. Constructive Trust
When an agent retains benefits or profits that belong to the principal, a court may impose a con¬structive trust.

2. Avoidance
If an agent breaches an agency agreement, a princi¬pal can avoid any contract entered into with the agent.

3. Indemnification
A third party can sue a principal for an agent’s negligent conduct, and some¬times an agent must indemnify the principal for the damages. The same is true if an agent violates a prin¬ci¬pal’s instructions.

Express Authority
Express authority is embodied in what a principal engages an agent to do.

equal dignity rule
The equal dignity rule may determine when express authority must be in writing. Exceptions include—

• A corporate executive doing ordinary business does not need written authority from the corporation.
• An agent acting in the presence of the principal does not need written authority.
• When the agent’s act of signing is a formality, written authority is not necessary.

power of attorney
a power of attorney is a written document and is usually notarized

implied authority
Implied authority is conferred by custom, inferred from an agent’s position, or implied by virtue of being reasonably nec¬essary to carry out express authority.

Apparent authority
1. A Pattern of Conduct
Apparent authority exists when a principal causes a third party reasonably to believe that an agent has authority. This can occur through a pattern of conduct.

2. Apparent Authority and Estoppel
If the third party changes position in reliance on the principal’s representa¬tions, the principal may be estopped from denying that the agent had authority.

emergency powers
When an emergency requires action to protect or preserve the property and rights of a principal, but an agent is unable to contact the principal, the agent has emergency power to act.

Ratification is a principal’s affirmation of an agent’s previously unauthorized act. An en¬tire transaction must be ratified; a principal cannot ratify part and reject the rest. The require-ments for ratification are—

• The agent acted on behalf of an identified principal who later ratified the action.
• The principal must know all of the material facts. If not, the contract can be rescinded
• The principal must affirm the agent’s act in its entirety.
• The principal must have the capacity to authorize the transaction when the agent engages in it and the principal ratifies it. The third party must also have capacity
• The principal’s ratification must occur before the third party withdraws from the deal.
• The principal must follow the same formalities to ratify the contract as would have been needed to authorize it initially.

disclosed or partially disclosed principal
A disclosed or partially disclosed principal is liable to a third party for a contract made by an agent acting within the scope of authority. If a principal is disclosed, an agent is not normally li¬able. If, however, a principal is partially disclosed, in most states either princi¬pal or agent may be liable.

undisclosed principal
If the principal is undisclosed, the principal and the agent are bound to the contract. If the agent pays, however, he or she is entitled to indemnification. The undisclosed principal may also hold the third party to the contract unless—.

• The undis¬closed principal was expressly excluded as a party in the con¬tract.
• The contract is a ne¬gotiable instrument, and it does not show the agent signed in a representative capacity.
• The agent’s performance is personal to the con¬tract, allow¬ing the third party to refuse the principal’s performance.

implied warranty
If an agent without au¬thority contracts purportedly on behalf of a disclosed principal, the princi¬pal is not liable, but the agent is. If the third party re¬lies on the agency status, the agent’s liability is based on the theory of breach of implied warranty of authority.

third party’s knowledge
If the third party knew that the agent was mistaken, or the agent indicated uncertainty, about the extent of authority, the agent is not personally liable.

principal’s tortious conduct
A principal acting through an agent may be liable for harm resulting from the principal’s negligence or recklessness.

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.

apparent implied authority
Placing an agent in a position of apparent authority may result in the principal’s liabil¬ity for the agent’s fraud.

innocent misrepresentation
A principal is always responsible for an agent’s misrepresentation—innocent or otherwise—made within the scope of authority.

liability for agent’s negligence
Under the doctrine of respondeat superior, a principal is vicariously liable for any harm caused to a third party by an agent acting in the scope of employment.

the doctrine of respondent superior
a. Underlying Rationale
The basis is the social duty that requires every person to manage his or her affairs, whether accomplished by the person or through agents, so as not to injure another.

b. Public Policy
Liability is imposed on employers in part because they are deemed to be in a better financial position to bear the expense. Insurance can cover the cost. Its risk can be spread among business customers

determining the scope of employment
Factors from the Restatement (Second) of Agency, Section 229, for determining whether or not an act occurred within the scope of em¬ployment, are—

• Whether the employer authorized the act.
• The time, place, and purpose of the act.
• Whether the act is commonly performed by employees on behalf of their employers.
• The extent to which the act advanced the employer’s interest.
• Whether the employer furnished the means by which the injury was inflicted.
• Whether the employer had reason to know that the employee would perform the act.
• Whether the act involved the commission of a serious crime.

the distinction between a “detour” and a “frolic”
f a servant takes a detour from his master’s business, the master is liable for any ensuing tort. If the servant is on a frolic of his or her own, however, the master is not responsible.

employee travel time
Commutes to and from work or meals is normally outside the scope of employment unless traveling is part of the job.

notice of dangerous conditions
Knowledge of a dangerous condition discovered by an employee and pertinent to the em¬ployment situa¬tion is imputed to the employer.

liability for agent’s intentional torts
The doctrine of respondeat superior can also apply to these torts. The principal is liable if he or she knows, for example, that an employee has a propensity for tortious acts and places the em¬ployee in a position to commit those acts. A principal may also be liable for allowing an agent to commit reckless acts. Insurance may cover the potential liability.

liability for independent contractor’s torts
A principal is gen¬erally not responsi¬ble for an independent contractor’s torts (un¬less excep-tion¬ally hazardous activities are involved, in which case strict liability is imposed.

liability for agent’s crimes
An agent is liable for his or her own crimes, and a principal is not, unless the principal partici¬pated by conspiracy or other act. In some states, a principal may be liable for an agent’s regula¬tory viola¬tions.

termination by act of the parties
• Lapse of time. An agency may terminate if it is limited to a specific time and the time passes.
• Purpose achieved. An agency may terminate if it is limited to a particular purpose and the purpose is achieved.
• Occurrence of a specific event. An agency may terminate if it is subject to a specific event that occurs (or doesn’t occur).
• Mutual agreement. An agency may terminate if the parties agree to end it.
• Termination by one party. Either party can terminate an agency—the agent by renunci-ation of authority, the principal by revocation of authority. Both parties have the power, but they may not possess the right.

wrongful termination
wrongful termination may subject an agent or principal to a suit for damages for breach

agency coupled with an interest
An agency that a principal may not revoke is an agency created for the agent’s benefit, or an agency coupled with an interest

notice of termination
If the parties terminate an agency, the principal must directly inform any third parties who the principal knows has dealt with an agent. For third per¬sons who have heard about the agency but who have not dealt with the agent, constructive notice is suf-ficient. An agent’s actual authority continues until the agent receives notice of termination; an agent’s appar¬ent authority continues until the third person learns that the authority has been termi¬nated.

termination by operation of law
An agency relationship may be terminated by—

• Death or insanity. Either party’s death or insanity terminates an agency. Some states require the agent’s knowledge of the principal’s death to terminate the agency.
• Impossibility. When the specific subject matter of an agency is destroyed or lost, the agency termi¬nates.
• Changed circumstances. When an event has such an unusual effect on the subject matter of an agency that an agent can reasonably infer that the principal would not want the agency to continue, it ter¬minates.
• Bankruptcy. The bankruptcy of either party usually terminates an agency.
• War. War between a principal’s country and an agent’s country terminates an agency.

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