BLTS 11e-IM-Ch23



Chapter 27Agency Relationships in BusinessIntroductionUp to this point, most of the text has considered when a person may be liable for something that he or she did. With this chapter, the text goes a step further to ask when and under what circumstances a person may make another person liable—that is, when the actions of an agent can bind a principal.A familiar example of an agent is a corporate officer. Agency law is essential to the existence and operation of a corporate entity, because only through its agents can a corporation function and enter into contracts.Once a principal–agent relationship has been created, attention often focuses on the rights of third persons who deal with an agent. Thus, this chapter also discusses the rights of third parties when they contract with agents. Of course, liability is determined by a careful examination of all the facts surrounding an agency relationship. A contract will make an agent’s principal liable to a third party only if the agent had authority to make the contract or if the principal ratified, or was estopped from denying, the agent’s acts. The chapter mentions an agent’s liability to third parties in contract and tort and a principal’s liability to third parties for an agent’s torts.The chapter also includes a look at how agency relationships are terminated. It may be helpful to emphasize to your students that unless termination is by operation of law, a principal must give clear notice of termination to persons who dealt with the agent.Chapter OutlineI.Agency RelationshipsIn a principal-agent relationship, the parties have agreed that the agent will act on behalf and instead of the principal in doing business with third persons. An employee or an independent contractor may act in the capacity of an agent.A.Employer-Employee RelationshipsAn employee is one whose physical conduct is controlled, or subject to control, by an employer. The key feature is the employer’s right to control the employee in the performance of tasks involved in the employment.Additional Background—Agency RelationshipsAn employee can be an agent if the employee has an appointment or contact for hire with authority to represent the employer. According to the Restatement (Second) of Agency employees are always agents. The following is the text of the Restatement (Second) of Agency, Sections 2, 14N, and 25 with selected comments.§ 2. Master; Servant; Independent Contractor(1) A master is a principal who employs an agent to perform service in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service.(2) A servant is an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master.(3) An independent contractor is a person who contracts with another to do something for him but who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking. He may or may not be an ment:a. Servants and non-servant agents. A master is a species of principal and a servant is a species of agent.§ 14 N. Agent and Independent ContractorOne who contracts to act on behalf of another and subject to the other’s control except with respect to his physical conduct is an agent and also an independent contractor.§ 25. Applicability of General Agency RulesThe rules applicable generally to principal and agent as to the creation of the relation, delegability and capacity of the parties apply to master and ment:a. As stated in Section 2, a servant is an agent of a special kind, over whose physical acts the principal has control or the right to control. Consequently, the master has special liabilities both to the servant *??*??* and to third persons *??*??* with reference to physical harm caused to or by a servant. But, aside from these features, the relation between master and servant is the same as between a principal and a non-servant agent and is created in accordance with the same rules, and the rules *??*??* applicable to principals and agents are applicable to masters and servants.B.Employer-Independent Contractor Relationships?Independent contractors are not employees, because the person for whom they have agreed to perform has no control over the physical conduct of their performance. Generally, the less control an employer has over the work, the more likely that the worker is an independent contractor.?An independent contractor may or may not be an agent.Enhancing Your Lecture—????How Can an Employer UseIndependent Contractors??????As an employer, you may at some time consider hiring an independent contractor. Hiring workers as independent contractors instead of as employees may help you reduce both your potential tort liability and your tax liability.Minimizing Potential Tort LiabilityOne reason for using an independent contractor is that doing so may reduce your susceptibility to tort liability. If, however, an independent contractor’s words or conduct leads another party to believe that the independent contractor is your employee, you may not escape liability for the contractor’s tort.To minimize the possibility of being legally liable for negligence on the part of an independent contractor, you should inquire about the contractor’s qualifications before hiring him or her. The degree to which you should investigate depends, of course, on the nature of the work. A more thorough investigation is necessary when the contractor’s activities present a potential danger to the public (as in delivering explosives).Generally, it is a good idea to have the independent contractor assume, in a written contract, liability for harms caused to third parties by the contractor’s negligence. You should also require the independent contractor to purchase liability insurance to cover the costs of potential lawsuits for harms caused to third persons by the independent contractor’s hazardous activities or negligence.Reducing Tax LiabilityAnother reason for hiring independent contractors is that you need not pay or deduct Social Security and unemployment taxes on their behalf. The independent contractor is the party responsible for paying these taxes. Additionally, the independent contractor is not eligible for any retirement or medical plans or other fringe benefits that you provide for yourself and your employees, and this is a cost saving to you.A word of caution, though: simply designating a person as an independent contractor does not make her or him one. Under Internal Revenue Service (IRS) rules, individuals will be treated as employees if they are “in fact” employees, regardless of how you have classified them. For example, the IRS will not treat an office assistant as an independent contractor simply because you designate him or her as such. If the IRS determines that you exercise significant control over the assistant, the IRS may decide that the assistant is, in fact, an employee.If you improperly designate an employee as an independent contractor, the penalty may be high. Usually, you will be liable for back Social Security and unemployment taxes, plus interest and penalties. When in doubt, seek professional assistance in such matters.Checklist for the Employer1.Check the qualifications of any independent contractor you plan to use to reduce the possibility that you might be legally liable for the contractor’s negligence.2.It is best to require in any contract with an independent contractor that the contractor assume liability for harm to a third person caused by the contractor’s negligence.3.Require that independent contractors working for you carry liability insurance. Examine the policy to make sure that it is current, particularly when the contractor will be undertaking actions that are more than normally hazardous to the public.4.Make sure that independent contractors do not represent themselves as your employees to the rest of the world.5.Regularly inspect the work of the independent contractor to make sure that it is being performed in accordance with contract specifications. Such supervision on your part will not change the worker’s status as an independent contractor.C.Determining Employee StatusFactors for determining whether a person is an employee or an independent contractor include—1.Criteria Used by the CourtsTo 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?a.Disputes Involving Employment LawAntidiscrimination laws protect workers, not independent contractors.b.Disputes Involving Tort LiabilityAn employer is more likely to be liable for the wrongful conduct of an employee than the tortious act of an independent contractor.Case Synopsis—Case 27.1: Asphalt & Concrete Services, Inc. v. PerryMoran Perry was walking in an intersection with the right of way when he was struck and injured by a dump truck driven by William Johnson. Perry filed a suit in a Maryland state court against Asphalt & Concrete Services, Inc. (ACS) to recover for the injuries, alleging that Johnson was ACS’s employee. The defendant claimed that Johnson was an independent contractor. A jury agreed with Perry and awarded damages.A state intermediate appellate court affirmed. The evidence on which the jury could base a finding of Johnson’s status as ACS’s employee included that the employer directed him to drive to a certain quarry, pick up certain materials, and bring those materials to a specific job site. If Johnson was not prompt, ACS could dock his pay—which was hourly—or discharge him. And “at the job site, Mr. Johnson was obligated to follow ACS's directions in terms of where to drop the materials, how much material to drop, and how many times he would need to return to the quarry.””..................................................................................................................................................Notes and QuestionsWhy would Asphalt & Concrete want to avoid liability for Perry’s injuries? Asphalt & Concrete would want to avoid liability for Perry’s injuries because of the cost. It is likely, of course, that Asphalt & Concrete has insurance that would cover the expense directly but its premiums could be increased or its coverage might be canceled in the wake of too many claims. It may be that this concern is a significant reason for the employer-independent contractor relationship in the facts of this case in the first place.Additional Cases Addressing this Issue —Employer-Independent Contractor RelationshipsRecent cases in which the status of a worker as an employee or an independent contractor affected the employer’s liability for the worker’s actions include the following.?Guillaume v. Hall Farms, Inc. 914 N.E.2d 784 (Ind.App. 2009) (a harvesting contractor who supplied a crew of farm laborers to a produce distributor was an “independent contractor” of the distributor, who did not control the contractor or its crew, for purposes of determining (whether the distributor was liable for the injuries of one of the laborers).?White v. Frederick, 17 So.3d 1016 (La.App. 2 Cir. 2009) (an oilfield worker was an independent contractor, not an employee, of an oilfield consulting company, which did not supervise his work, and thus the company was not liable for injuries and damage arising from a three-vehicle collision caused by the worker).?Chuchuca v. Chuchuca, 67 A.D.3d 948, __ N.Y.S.2d (2 Dept. 2009) (an employer exercised only incidental control over the owner-operator of a vehicle in the performance of her work delivering newspapers, and the owner-operator was only an independent contractor and not an employee, precluding the employer's liability for a vehicle passenger's personal injury).?Viado v. Domino's Pizza, LLC, 230 Or.App. 531, 217 P.3d 199 (2009) (pizza franchisee was not an “employee” of its franchisor, but at the most was a “nonemployee agent,” for purposes of determining whether the franchisor could be held liable for the alleged negligence of the franchisee's pizza delivery driver, who struck and injured a motorcyclist).2.Criteria Used by the IRSThe IRS considers chiefly the degree of control that an employer exercises over the work.3.Employee Status and “Works for Hire”An employee’s work of intellectual property belongs to the employer, but an independent contractor’s similar effort is the employer’s only if the parties agreed to exchange the rights.II.Formation of an Agency?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. ?An agency agreement need not be in writing.A.Agency by Agreement of the PartiesGenerally, 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.B.Agency by RatificationAgency 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 authority.C.Agency by EstoppelAgency is created by estoppel when a principal causes a third person to believe that another is the principal’s agent, and the third person deals with the other.D.Agency by Operation of LawAgency may be created by operation of law. Courts have granted agents emergency power under unusual circumstances and have held agency to arise in family relationships.Additional Background—Agency by Operation of Law For businesses, some state statutes make state officials (a state’s secretary of state) the businesses’ agents for service of process. This is an agency created by operation of law. Most states require a corporation to designate a registered agent for service of process on the corporation. In some states, designation of the registered agent is by a separate instrument filed with the articles of incorporation. New York requires designation of the state’s secretary of state as agent of the corporation for service of process. This designation must be in the articles of incorporation. In addition to this requirement, however, New York permits the articles of incorporation to designate a resident agent. The following is the text of the New York statutes spelling out this addition (New York Business Corporation Law Sections 304, 305, 402).MCKINNEY’S CONSOLIDATED LAWS OF NEW YORK ANNOTATEDBUSINESS CORPORATION LAWCHAPTER 4 OF THE CONSOLIDATED LAWSARTICLE 3—CORPORATE NAME AND SERVICE OF PROCESS§ 304. Statutory designation of secretary of state as agent for service of process(a) The secretary of state shall be the agent of every domestic corporation and every authorized foreign corporation upon whom process against the corporation may be served.(b) No domestic or foreign corporation may be formed or authorized to do business in this state under this chapter unless in its certificate of incorporation or application for authority it designates the secretary of state as such agent.(c) Any designation by a domestic or a foreign corporation of the secretary of state as such agent, which designation is in effect on the effective date of this chapter, shall continue. Every domestic or foreign corporation, existing or authorized on the effective date of this chapter, which has not designated the secretary of state as such agent, shall be deemed to have done so. Any designation prior to the effective date of this chapter by a foreign corporation of an agent other than the secretary of state shall terminate on the effective date of this chapter.(d) Any designated post-office address to which the secretary of state shall mail a copy of process served upon him as agent of a domestic corporation or a foreign corporation, shall continue until the filing of a certificate under this chapter directing the mailing to a different post-office address.§ 305. Registered agent for service of process(a) In addition to such designation of the secretary of state, every domestic corporation or authorized foreign corporation may designate a registered agent in this state upon whom process against such corporation may be served. The agent shall be a natural person who is a resident of or has a business address in this state or a domestic corporation or foreign corporation of any type or kind formed, or authorized to do business in this state, under this chapter or under any other statute of this state.(b) Any such designation of a registered agent may be made, revoked or changed as provided in this chapter.(c) A registered agent may resign as such agent. A certificate, entitled “Certificate of resignation of registered agent of ................. (name of designating corporation) under section 305 of the Business Corporation Law”, shall be signed, verified by him and delivered to the department of state. It shall set forth:(1) That he resigns as registered agent for the designating corporation.(2) The date the certificate of incorporation or the application for authority of the designating corporation was filed by the department of state. (3) That he has sent a copy of the certificate of resignation by registered mail to the designating corporation at the post office address on file in the department of state specified for the mailing of process or if such address is the address of the registered agent, then to the office of the designating corporation in the jurisdiction of its formation or incorporation.(d) The designation of a registered agent shall terminate thirty days after the filing by the department of state of a certificate of resignation or a certificate containing a revocation or change of the designation, whichever is filed earlier. A certificate designating a new registered agent may be delivered to the department of state by the corporation within the thirty days or thereafter.§ 402. Certificate of incorporation; contents(a) A certificate, entitled “Certificate of incorporation of ............ (name of corporation) under section 402 of the Business Corporation Law”, shall be signed by each incorporator, with his name and address stated beneath or opposite his signature, acknowledged and delivered to the department of state. It shall set forth:*??*??*??*(8) If the corporation is to have a registered agent, his name and address within this state and a statement that the registered agent is to be the agent of the corporation upon whom process against it may be served.III.Duties of Agents and PrincipalsAn agency relationship is fiduciary (one of trust). For every duty, there is a corresponding right. A.Agent’s Duties to the PrincipalAn agent’s duties are implied from the agency relationship whether or not the identity of the principal is disclosed to a third party.1.PerformanceThe degree of skill or care required of an agent is that expected of a reasonable person under similar circumstances (unless the agent has presented himself or herself as possessing special skills).2.NotificationAn agent must notify a principal of matters that come to his or her attention concerning the subject matter of the agency (the principal is bound even if the agent says nothing).3.LoyaltyAn agent must act solely for the benefit of the principal. ?An agent cannot represent two principals in the same transaction unless both know of the dual capacity and consent.?An agent who owns property cannot sell it to the principal without first disclosing the ownership; and an agent authorized to buy cannot buy from himself or herself.?An agent authorized to sell cannot sell to himself or herself, without the principal’s consent.Knowledge acquired through an agency relationship is confidential.4.ObedienceAn agent must follow the principal’s instructions (except during an emergency or when instructions are not clearly stated, in which case an agent must act in good faith and in a manner reasonable under the circumstances.5.AccountingAn agent must account for all property and money received and paid out on behalf of the principal. The agent should keep personal funds separate.B.Principal’s Duties to the AgentA principal’s duties may be express or may be implied by law.pensationExcept 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 customary value, or, if no amount has been agreed on or established by custom or law, the reasonable value.2.Reimbursement and IndemnificationA 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 principal also must indemnify an agent for liability incurred in accord with the agency.3.CooperationA principal must cooperate with and assist an agent in performing his or her duties.4.Safe Working ConditionsA principal must provide safe working premises, equipment, and conditions for all agents and employees. Federal and state statutes often require employers to meet certain safety standards.IV.Agent’s AuthorityA.Express AuthorityExpress authority is embodied in what a principal engages an agent to do.1.Equal Dignity RuleThis 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.2.Power of AttorneyA power of attorney is a written document and is usually notarized.B.Implied AuthorityImplied authority is conferred by custom, inferred from an agent’s position, or implied by virtue of being reasonably necessary to carry out express authority.C.Apparent AuthorityApparent authority exists when a principal causes a third party reasonably to believe that an agent has authority. If the third party changes position in reliance on the principal’s representations, the principal may be estopped from denying that the agent had authority.Case Synopsis—Case 27.2: Lundberg v. Church Farm, Inc.Gilbert Church owned a horse-breeding farm in Illinois. Ads for the breeding rights to the stallion Imperial Guard directed all inquiries to “Herb Bagley, Manager.” Vern and Gail Lundberg signed a preprinted contract with Bagley for those rights. Bagley added a handwritten statement that guaranteed the Lundbergs “six live foals in the first two years.” The Lundbergs had obtained one foal when Church moved Imperial Guard to Oklahoma. The Lundbergs filed a suit in an Illinois state court against Church for breach of contract. Church claimed that Bagley was not authorized to sign contracts for Church or to change or add terms. The jury awarded the Lundbergs $147,000 in damages. Church appealed.A state intermediate appellate court affirmed. A principal may be bound by the unauthorized acts of an agent if the principal leads a third party to believe, or allows a third party to believe, that the agent has authority to perform the act. In this case, Church approved the ad listing Bagley as Church's manager and point of contact. The contract had a preprinted line for his signature. Church was not engaged in the negotiation or signing of the contracts. Under these circumstances, a reasonable third party would believe that Bagley had the authority to modify the preprinted contract...................................................................................................................................................Notes and QuestionsWould it have affected the outcome of this case if Bagley were construed as an independent contractor? Explain. Probably not. From the facts as stated, Bagley may have been Church’s employee or an independent contractor. An employee or an independent contractor can be a principal’s agent. Thus, regardless of Bagley’s status, the jury could have ascribed the authority to him to modify the preprinted contract.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? A principal’s ethical duty to notify a third party could depend on the specific circumstances. But if a principal acts to lead a third party reasonably to believe that an agency relationship exists, and the third party changes positions in reliance, it seems fair to impose legal liability on the principal. It seems likewise fair to hold the principal to an ethical responsibility to inform an unsuspecting third party in those same circumstances that no agency actually exists.D.RatificationRatification is a principal’s affirmation of an agent’s previously unauthorized act. An entire transaction must be ratified; a principal cannot ratify part and reject the rest. The requirements 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. V.Liability in Agency RelationshipsA.Liability for Agent’s Contracts1.Authorized Actsa.Disclosed or Partially Disclosed PrincipalA 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 the principal is disclosed, the agent is not normally liable. If the principal is only partially disclosed, the agent is also liable.Case Synopsis—Case 27.3: Stonhard, Inc. v. Blue Ridge Farms, LLCMarvin Sussman entered into a contract with Stonhard, Inc., to install flooring at Blue Ridge Farms, a food manufacturing 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. The court dismissed the complaint against Sussman. Stonhard appealed.A state intermediate appellate court reversed the dismissal and issued a summary judgment in Stonhard’s favor. As indicated by the “documentary evidence” presented in this case, “at best *??*??* 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 principal, Sussman became personally liable under the contract.”..................................................................................................................................................Notes and QuestionsSuppose that at the time of the contract Stonhard had known that Sussman was acting on behalf of Blue Ridge Foods, and Sussman had proved it. Would the result have been different? Yes, if Stonhard had known at the time of the contract that Sussman was acting on behalf of Blue Ridge Foods, the result would have been different.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—actual knowledge—of the real principal is the test. And the burden of proving the disclosure of an agency relationship and the identity of the principal is on the party asserting an agency relationship. But a disclosed principal is liable to a third party for a contract made by an agent who is acting within the scope of his or her authority, and the agent has no contractual liability for the nonperformance of the principal.In this case, what did the “documentary evidence” most likely consist of to indicate Sussman acted as an agent for a partially disclosed principal in contracting with Stonhard? There are a number of possibilities as to what the documentary evidence in this case might have consisted of. For example, either party might have provided the other with a work order form. There may have been a memo of acknowledgement on letterhead stationery belonging to one of the parties. They might have negotiated and drafted a contract, which either or both parties could have signed. Or there might be a check, representing a down payment or initial deposit to secure the work. And any of these items could have been written or electronic.What could an agent offer as evidence to establish that the agent acted on behalf of a disclosed principal, and the plaintiff knew it, in defense to an action for breach of contract? In defense to an action for breach of contract, to establish that an agent acted on behalf of a disclosed principal and the other party to the contract knew I, the agent could offer as evidence a written or electronic contract or memo of acknowledgement and any supporting documents—work or purchase order forms, phone messages, exchanges of e-mail, and so on. Testimony by the parties to the contract could also establish whether the principal was disclosed.The court cited “documentary evidence,” which is evidence contained in or on documents, such as a contract offered to prove its terms. Could this include a printout of e-mail exchanged between the parties? Yes, documentary evidence can include a printout of e-mail exchanged between parties. As a matter of fact, the Federal Rules of Evidence permit the use of “mechanically reproduced documents”—which would include printouts of e-mail messages—unless one of the parties has raised a genuine question about the accuracy of the copy or can somehow show that its use would be unfair.b.Undisclosed PrincipalIf 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 undisclosed principal was expressly excluded as a party in the contract. ?The contract is a negotiable instrument, and it does not show the agent signed in a representative capacity. ?The agent’s performance is personal to the contract, allowing the third party to refuse the principal’s performance. 2.Unauthorized ActsIf an agent acts without authority, the principal is not liable, but the agent is.?If the principal is disclosed or partially disclosed, the agent’s liability is based on his or her breach of an implied warranty that the agent had authority.?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.B.Liability for Torts and Crimes1.Principal’s Tortious ConductA principal acting through an agent may be liable for harm resulting from the principal’s negligence or recklessness.2.Principal’s Authorization of Agent’s Tortious ConductA principal who authorizes an agent to commit a tort may be liable to persons or property injured.3.Liability for Agent’s MisrepresentationA principal is directly responsible for an agent’s misrepresentation made within the scope of authority. Placing an agent in a position of apparent authority may result in the principal’s liability for the agent’s fraud.4.Liability for Agent’s NegligenceUnder 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.a.Determining the Scope of EmploymentFactors from the Restatement (Second) of Agency, Section 229, for determining whether or not an act occurred within the scope of employment, 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.Additional Background—Scope of EmploymentThe phrase scope of employment is used for determining the liability of an employer for employees’ acts. Acts within the scope of employment include only acts of a kind authorized by an employer, done within the time and at the place of employment. An employee is authorized to do anything that is reasonably regarded as incidental to the work or that is ordinarily done with the work. Not all acts of the kind authorized and done within the time and at the place of employment are within the scope of employment—only those which an employee does in some part for the purpose of giving service to the employer are included—but the scope of employment includes acts that, as between employer and employee, an employee is not privileged to do.The limits of the scope of employment depend on the facts of each case. The ultimate question is whether or not it is just that harm resulting from an employee’s acts should be considered as a normal risk to be borne by the business in which the employee is employed. The factors to be considered in determining whether an unauthorized act is within the scope of employment are listed in the Restatement (Second) of Agency, Section 229. The following hypotheticals accompany the Restatement (Second) of Agency, Sections 229, 230, and 231, and illustrate the factors.Illustrations:1. P directs his woodchoppers to cut down specific trees, his directions being such that A, a woodchopper, mistakenly cuts an unspecified tree. While cutting, A negligently injures T. P is subject to liability to T.2. P employs A as a general farm hand, B as a milker of cows. He directs A not to do any mowing until instructed to do so. In the absence of P and thinking that the grass should be cut immediately, A and B cut the grass. If the cutting of grass is within the duties that A is employed to perform, the fact that P forbids cutting temporarily does not prevent it from being within the scope of A’s employment. It is not within the scope of B’s employment.3. A has been employed by P as a general assistant in a machine shop to do odd jobs around the place. As he develops more skill, he is assigned to a particular lathe. A assists another operative in this shop upon a difficult piece of work. The fact that A has not been directed to assist the other operative does not prevent his act in doing so from being within the scope of the employment.4. P operates a small store employing two clerks and a delivery boy. One of the clerks, during the absence of P and of the delivery boy, to oblige a customer, although his ordinary employment does not include such service, delivers a package to a point close to the store, using a bicycle supplied for the delivery boy’s use. It may be found that the conduct of the clerk was within the scope of employment.5. Same facts as in Illustration 4, except that P has no delivery boy, makes no deliveries, and A uses his own bicycle. The act was not within the scope of employment.6. P is the owner of an apartment house in a district in which the boys constantly annoy the janitor and interfere with his work. P discharges one janitor who had punished a neighbor’s boy for such interference and directs A, the new janitor, to leave boys alone. A does not touch the boys but puts broken glass at the place on the wall where boys customarily climb, in order to exclude them. If it is part of his job to prevent intrusions by defensive means and if his purpose is to prevent intrusions, such act is within the scope of his employment.7. Same facts as in Illustration 6, except that the janitor has in mind chiefly the punishment of a particular boy whom he dislikes. The addition of this element is sufficient to support a verdict that the act is not within the scope of employment.8. P, an engraver, requires all [employees] employed in finishing work to wash their hands in his wash room before beginning work. The washing of the hands by the employees as part of their daily work is within the scope of employment.9. P, employing ball players, requires them to eat what he directs and under his supervision. The conduct of the players during meals while under P’s control is within the scope of employment.10. P furnishes a lavatory in which employees may wash, if they wish, before or after working hours, P retaining no control over it except with regard to keeping it clean. An employee turns on the water to wash his hands after hours and fails to turn it off. This act is not within the scope of employment.11. P employs A as a chauffeur, requesting him to drive the car to A’s own garage for the night at the termination of the day’s work, in order that A can arrive early in the morning. In driving to and from the garage to P’s place of business, A is within the scope of employment.12. P employs A, who lives two miles from P’s office. Because A has difficulty in getting to the office on time, he persuades P to allow him to use an old car belonging to P. In driving to the office in this car A is not in the scope of employment.13. P employs men to do logging five miles from the nearest habitation. In order to be certain that they arrive on time, P habitually supplies and keeps in repair a truck which his workmen, who live in the nearest town, use in going to and from work. It is driven usually, but not invariably, by the one acknowledged to be the best driver. These facts will support a verdict that in driving to and from work, the driver is within the scope of employment.[14.] P directs his salesman, in selling guns, never to insert a cartridge while exhibiting a gun. A, a salesman, does so. This act is within the scope of employment.[15.] A, P’s chauffeur, to avoid a rough spot in the road while upon an errand for P, unlawfully drives upon the sidewalk. This conduct is within the scope of employment.b.The Distinction between a “Detour” and a “Frolic”If 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.c.Employee Travel TimeCommutes to and from work or meals is normally outside the scope of employment unless traveling is part of the job.d.Notice of Dangerous ConditionsKnowledge of a dangerous condition discovered by an employee and pertinent to the employment situation is imputed to the employer.5.Liability for Agent’s Intentional TortsThe 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 employee in a position to commit those acts. A principal may also be liable for allowing an agent to commit reckless acts.6.Liability for Independent Contractor’s TortsA principal is generally not expected to bear responsibility for an independent contractor’s torts (unless exceptionally hazardous activities are involved, in which case strict liability is imposed.7.Liability for Agent’s CrimesAn agent is liable for his or her own crimes, and a principal is not, absent participation by conspiracy or other action. In some states, a principal may be liable for an agent’s regulatory violations.Enhancing Your Lecture—???? Islamic Law and Respondeat Superior?????The doctrine of respondeat superior is well established in the legal systems of the United States and most Western countries. As you have already read, under this doctrine employers can be held liable for the acts of their agents, including employees. Middle Eastern countries, in contrast, do not follow this practice. Islamic law holds to a strict belief that responsibility for human actions lies with the individual and cannot be vicariously extended to others. This belief and other concepts of Islamic law are based on the sayings of Muhammad, the seventh-century prophet and founder of Islam.For Critical AnalysisHow would U.S. society be affected if employers could not be held vicariously liable for their employees’ torts?VI.Termination of Agency RelationshipsA.Termination by Act of the PartiesAn agency relationship may be terminated by—?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 renunciation of authority, the principal by revocation of authority. Both parties have the power, but they may not possess the right.1.Wrongful TerminationWrongful termination may subject an agent or principal to a suit for damages for breach.2.Agency Coupled with an InterestAn agency that a principal may not revoke is an agency created for the agent’s benefit, or an agency coupled with an interest.3.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 persons who have heard about the agency but who have not dealt with the agent, constructive notice is sufficient.?An agent’s actual authority continues until the agent receives notice of termination; an agent’s apparent authority continues until the third person learns that the authority has been terminated.B.Termination by Operation of LawAn agency relationship may be terminated by—1.Death or InsanityEither party’s death or insanity terminates an agency. Some states require the agent’s knowledge of the principal’s death to terminate the agency. An agent’s transactions after the principal’s death normally are not binding on the principal’s estate.2.ImpossibilityWhen the specific subject matter of an agency is destroyed or lost, the agency terminates.3.Changed CircumstancesWhen 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 terminates.4.BankruptcyThe bankruptcy of either party usually terminates an agency.5.WarWar between a principal’s country and an agent’s country terminates an agency.Teaching Suggestions1.When an independent contractor is injured on the job, he or she is responsible for the loss. When an independent contractor is out of work, can he or she collect unemployment compensation? Call your state’s unemployment office for information on state procedures for paying unemployment compensation when an independent contractor (and an employee who is labeled an “independent contractor”) loses his or her job and applies for benefits. Students should find this interesting.2.When considering an agency problem, students may find it helpful to determine first whether the parties are in an employer-employee relationship. To categorize the relationship, they should pay careful attention to its terms. Second, they should determine whether the identity of the principal is to be disclosed. Whether or not the identity of the principal is disclosed can be an important factor in assessing liability. Third, they should remember that an agent is responsible for his or her own actions (wrongs). The principal may be sued for the actions of the agent, but if that happens, the principal can seek indemnification from the agent.3.Hypotheticals that may be used to illustrate and discuss the principles of actual and apparent authority include the following.Mark writes to Tom directing Tom to act as Mark’s agent for the purchase of grain. Mark adds a postscript telling Tom to make no purchase until after communicating with Mark. Mark sends a copy of the letter without the postscript to Jane, a farmer and prospective seller. Does Tom have actual authority to buy grain for Mark? Does Tom have apparent authority to buy grain for Mark from Jane? The answer to the first question is no; the answer to the second question is yes. The Restatement (Second) of Agency, Section 8, Comment a, says, “Apparent authority results from a manifestation by a person that another is his agent, the manifestation being made to a third person and not, as when authority is created, to the agent. It is entirely distinct from authority, either express or implied.”Imagine that in the previous question Tom never receives the letter from Mark. Jane, however, does receive the letter, without the postscript. Under those circumstances, does Tom have actual authority to buy grain for Mark? Does Tom have apparent authority to buy grain for Mark from Jane? The answers to these questions are the same as the answers to the same questions in the previous problem, for the same reasons. It is what a person manifests to a third person that results in apparent authority.4.The different policy considerations involved in contract and tort law may be underscored to explain the differences in the parties’ contract and tort liability. When a party enters into a contract, he or she decides whether or not to contract; when a party is the victim of a tort, he or she often had no choice in the matter.5.It may be useful to compare the events that terminate an agency with the events that discharge a contract (Chapter 12) or the events that terminate an offer (Chapter 9).6.You might explain that no area of the law is more pervasive than the law of agency, which affects virtually everyone everyday. When confronted with legal problems to analyze your students may find it helpful to remember how common agency relationships are. Agency law applies in the context of professional partnerships, for example. Also involved are banks involved in the check collection process, corporate shareholders, and gas stations, car dealers, and other franchisors and franchisees, as well as those for whom “agent” is part of their job title (insurance agents, travel agents, and so on).7.It should be made clear, if it is not apparent from a reading of this chapter, that the legal term “agent” encompasses more individuals than those with the word “agent” as part of a job title (insurance agents, travel agents, literary agents, and so on) to include anyone who serves in a representative capacity, including virtually all employees.Cyberlaw LinkDoes the speed of communication via the Internet play have any effect on the duties of principals and agents? How can the problems of anonymity and accountability, in terms of agency law, be dealt with in cyberspace?Discussion Questions1.Why is agency law essential to the existence and operation of a corporation? An agent acts for a principal. Agency law is essential to the existence and operation of a corporate entity, because only through its agents can a corporation function and enter into contracts. Corporate officers, for example, are agents.2.What are some of the factors that can determine whether an individual is considered an employee or an independent contractor? The factors include: (1) the amount of control an employer exercises over the details of the work; (2) whether the individual is in an occupation or business distinct from that of the employer; (3) whether work is normally subject to the employer’s direction or may be done by a specialist without supervision; (4) whether the employer supplies the tools; (5) the period for which the individual is hired; (6) the method of payment—by time period or at the completion of the job; and (7) the degree of skill required to do whatever it is the individual was hired to do. (Building contractors and truck drivers who own their equipment and hire out on a per job basis are independent contractors.) 3.What are some other advantages of being an independent contractor? What might be some disadvantages? The principal advantage of being an independent contractor is probably the degree to which the independent contractor controls the performance of his or her work. Among the disadvantages is the financial risk that an independent contractor takes compared to the relative financial security of an employee.4.How is an agency relationship created? An agency relationship can be created by oral agreement or by written contract, or can be implied from conduct (a hotel’s permitting an individual to park its guests’ cars manifests willingness that the individual do so, and the individual can infer authority to act as a valet, and as an agent for that purpose, from the hotel’s conduct, for example). An agency relationship may be created by operation of law. State law often makes state officials agents for service of process, and in most states, a corporation must designate an agent for service (who sometimes must be the state’s secretary of state). Courts have granted agents emergency power under unusual circumstances, when principals could not be reached, and failure to act would have caused the principals substantial loss. Agencies have also been held to occur in family relationships, when, for example, a spouse charged necessaries to the other spouse. An agency relationship is created by ratification when a principal affirms a contract made by a person who is not an agent, or who is an agent acting outside the scope of his or her authority. An agency is created by estoppel when a principal causes a third person to believe that another is the principal’s agent, and the third person deals with the other.5.What are the general duties that agents and principals owe each other? An agency relationship is fiduciary: each party owes the other a duty to act in good faith and to disclose material facts having a bearing on the relationship. Are there situations in which the duty of loyalty to one’s employer could come into conflict with other duties? The duty of loyalty is a fundamental duty in an agency relationship (like the duty to act in good faith), and it is difficult to imagine that it could conflict with other duties. There might be a circumstance in which an agent would need to choose between this duty and the duty to exercise his or her special skills, or a conflict might arise in which an agent would have to disobey a principal’s instructions to follow the duty of loyalty.6.What effect do a principal’s representations giving apparent authority to an agent have on the principal’s liability? If a third party changes position in reliance on a principal’s representations, the principal may be estopped from denying that the agent had authority. When a principal goes beyond mere statements or actions to “clothe” an agent with, for instance, possession and apparent ownership of the principal’s property, the agent can deal with the property as if he or she were the owner. When land is involved, possession is not a sufficient indicator of ownership, but if an agent also has a deed to the land and sells the land against the principal’s wishes to an innocent buyer, the principal ordinarily cannot cancel the sale or assert a claim to title.7.What happens if a principal does not ratify an agent’s unauthorized act? Absent ratification, a principal is not bound. An agent’s unauthorized agreement with a third party is an unaccepted offer, which the third party can revoke without liability (although the agent may be liable for misrepresenting his or her authority) and which the third party’s death or incapacity will void. An intervening, extraordinary circumstance may allow a ratification to be set aside to permit a third party to revoke (if a house is destroyed between the time an agent contracts for its sale and the principal ratifies the contract, for instance, the buyer may avoid the sale despite ratification).8. Are undisclosed principals and their agents liable under contracts made by the agents with third parties? If an agent signs a contract without revealing the agency relation or the principal, and the principal does not perform, the third party can hold the agent liable, although if the agent acted within the scope of authority, he or she is entitled to indemnification. If an agent acts within the scope of authority, an undisclosed principal is bound to perform unless (1) the undisclosed principal was expressly excluded as a party in the contract; (2) the contract is a negotiable instrument; (3) the agent’s performance is personal to the contract, permitting a third party to refuse the principal’s performance; or (4) the third party would not have contracted with the principal, the agent or the principal knew it, and the third party cancels the contract. Once an undisclosed principal’s identity is revealed, a third party can hold either principal or agent liable.9.For purposes of the doctrine of respondeat superior, what are factors for determining whether an act is within the scope of employment? Factors for determining whether an act is within the scope of employment include: (1) whether the employer authorized the act; (2) the act’s time, place, and purpose; (3) whether the act is one commonly performed by employees on behalf of their employers; (4) the extent to which the act advanced the employer’s interest; (5) the extent to which the employee’s private interests were involved; (6) whether the employer furnished the means or instrumentality by which injury was inflicted; (7) whether the employer had reason to know that the employee would commit the act in question and whether the employee had done it before; and (8) whether the act involved the commission of a serious crime.10.What notice is required to third parties when an agency terminates? When an agency terminates by operation of law, there is no duty to notify third persons, unless the agent’s authority is coupled with an interest. If the parties terminate an agency, the principal must inform any third parties who are aware of the agency that it has terminated. A principal is expected to notify directly any third person who the principal knows has dealt with an agent. For third persons who have heard about the agency but have not dealt with the agent, constructive notice is sufficient. An agent’s apparent authority continues until the third person learns that the authority has been terminated. A writing revoking an agent’s written authority must be shown to all who saw the writing that established the agency. When written authorization contains an expiration date, the date’s passing is sufficient notice to third parties.Activity and Research Assignments1.Divide students into groups (four to five students per group) and have them compile lists of the jobs held by members of the group. Ask them to discuss with each other the rights and responsibilities of each job to determine whether the student is an agent and an employee or an independent contractor, or only an agent, an employee, or an independent contractor. Have each group share its conclusions with the class. Discuss with the class the difference between employees and independent contractors. Are there students with jobs in which they are referred to as “independent contractors,” when in fact they are employees?2.Ask students to talk to insurance agents, sales representatives, realtors, purchasing agents, and others to learn of some their experiences in the law of agency, looking particularly for events that relate to the material discussed in this chapter. Have the students share what they learn with the class.Explanations of Selected Footnotes in the TextFootnote 8: ATM Corp. of America, Inc. (ATM), manages settlement services for national lenders. Francis Azur was its president and chief executive officer. Michelle Vanek, Azur's personal assistant at ATM, reviewed his credit-card statements, among other duties. Over a seven-year period, Vanek took unauthorized cash advances from Azur’s credit-card account with Chase Bank. The charges appeared on at least sixty-five monthly billing statements. When Azur discovered Vanek's fraud, he terminated her and closed the account. Azur filed a suit in a federal district court against Chase, seeking reimbursement. The court issued a judgment in Chase’s favor. Azur appealed. In Azur v. Chase Bank, USA, the U.S. Court of Appeals for the Third Circuit affirmed. Azur vested Vanek with apparent authority to use the credit card “by enabling the continuous payment of the credit card charges over a period of time.” This “led Chase to reasonably believe that the fraudulent charges were authorized. .??.??. Chase reasonably believed that a prudent business person would oversee his employees” by, for example, reviewing his own credit-card statements, even if only occasionally.Suppose that Vanek has made at least some of the withdrawals with Azur’s knowledge but without his express consent. Would the court’s decision have been different? Why or why not? Probably not, because apparent authority exists when the principal cause a third party reasonably to believe that the agent has the authority to act. If Azur had not expressly consented to the withdrawals, but had allowed what he might have seen as few in number to occur—perhaps because he valued Vanek’s services—Chase might have even more reasonably believed that Vanek acted under apparent authority.The TILA is essentially a consumer-protection law. How does allowing a credit card company to avoid liability—if a card user has apparent authority to use the card—protect consumers? Indeed, the “apparent authority” provision of the TILA does not protect consumers. Rather, it is a limitation on the cardholder’s protections under the TILA. The provision protects credit providers from bearing the burden of loss when a fraud is committed that is largely beyond the ability of the credit provider, such as Chase in this case, to detect or control. Despite Chase’s best efforts—including the use of a computerized fraud-detection system known as FALCON, apparently the best system in the industry, and messages left on three occasions on Azur’s home telephone number’s voicemail (to which, apparently, Vanek ultimately responded)—Chase was unable to detect Vanek’s fraud. As the court in this case noted, by including the “apparent authority” provision in the TILA, “Congress recognized that the cardholder is oftentimes in the best position to identify fraud committed by its employees.” Certainly, in this case the cardholder (Azur) was in a better position than Chase was to prevent the fraud perpetrated by Vanek.Footnote 14: Bobby Williams bought a car at Sherman Henderson’s auto repair business in Monroe, Louisiana, for $3,000. Although the car’s owner was Joe Pike, the owner of Justice Wrecker, Henderson negotiated and made the sale. 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. Williams filed a suit in a Louisiana state court against Pike and Henderson. The court awarded Williams $2,000, plus costs, adding that if he had returned the car, it would have awarded him the entire price. Pike and Henderson appealed. In Williams v. Pike, a state intermediate appellate court affirmed. A state permit to sell the car had been issued to Pike and showed that Justice Wrecker was the owner. The car was displayed for sale at Henderson’s business and he 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 choose to hold either Pike or Henderson liable for the condition of the car, which was a breach of warranty because it did not fulfill the purpose for which it was intended.If Henderson had disclosed the fact of his agency relationship but not the identity of the principal, would the result in this case have been the same? Yes, most likely, if Henderson had only partially revealed his agency with Pike to Williams, the result would have been the same. A partially disclosed principal is liable to a third party for a contract made by the agent. 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 this case, Williams could thus have held Henderson liable even if the fact of the agency had been revealed.If an apparent agent does not in fact have the authority to act on the principal’s behalf, does the principal have an ethical responsibility to inform an unaware third party? A principal’s ethical duty to notify a third party could depend on the specific circumstances. But if a principal acts to lead a third party reasonably to believe that an agency relationship exists, and the third party changes positions in reliance, it seems fair to impose legal liability on the principal. It seems likewise fair to hold the principal to an ethical responsibility to inform an unsuspecting third party in those same circumstances that no agency actually exists.Is Henderson entitled to be compensated by Pike for any amount of the judgment that he pays to Williams? Yes. As stated in the text, when neither the fact of an agency relationship nor the identity of the principal is disclosed, the undisclosed principal is bound to perform just as if he or she had been fully disclosed at the time of 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, or compensated, by the principal.Suppose that Henderson had fully disclosed the fact of his agency relationship and the identity of his principal. Would the result have been different? Why or why not? Yes, the result would likely have been different if Henderson had fully disclosed his agency relationship with Pike to Williams. Pike would still have been liable, but Henderson would not. A disclosed principal is liable to a third party for a contract made by the agent. If the principal is disclosed, the agent has no contractual liability for the nonperformance of the principal. ................
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