Business Law II Chapter 30

tortious conduct

A principal and an agent are each personally liable for their own tortious conduct. Principals are liable for tortious conduct committed by agents while they are acting within the scope of authority given to them by the principal. The agent, however, is liable for the tortious conduct of the principal only if he or she directly or indirectly participates in or aids and abets the principal's conduct. (Was the act specifically requested or authorized by the principal? Was it the kind of act that the agent was employed to perform? Did the act occur substantially within the time period of employment authorized by the principal? Did the act occur substantially within the location of employment authorized by the employer? Was the agent advancing the principal's purpose when the act occurred?) (These remedies include recovery for medical expenses, lost wages, pain and suffering, emotional distress, and, in some cases, punitive damages)

Liability for an Independent Contractor's Torts

A principal can authorize an independent contractor to enter into contracts. Principals are bound by the authorized contracts of their independent contractors. (Example Suppose a client hires a lawyer as an independent contractor to represent her in a civil lawsuit against a defendant to recover monetary damages. If the client authorizes the lawyer to settle a case within a certain dollar amount and the lawyer does so, the settlement agreement is binding.) (If an independent contractor enters into a contract with a third party on behalf of the principal without express or implied authority from the principal to do so, the principal is not liable on the contract)

ratification of a contract.

A principal is bound on the contract only if the principle ratifies the contract—that is, accepts it as his or her own. (Example Henry hires April, a real estate broker, to find him a house in a specified area for $1 million or less. Henry specifies that the house must be at least 4,000 square feet and must be a two-story house, with 4 bedrooms and 4 bathrooms. Henry, the principal, gives April, the agent, authority to sign a contract on his behalf to purchase such a home. April finds a house she thinks Henry would want to own that is 6,000 square feet and costs $1.5 million. April signs a contract with the seller as the disclosed agent of Henry. Here, April has exceeded her authority, and Henry is not bound to purchase the house. April, on the other hand, is bound to the contract to purchase the house. If, however, Henry likes the $1.5 million house, he can ratify the contract with the seller. If Henry does so, he is bound to the contract with the seller.)

Contract Liability of Principals and Agents to Third Parties

Agency law imposes contract liability on principals and agents, depending on the circumstances. A principal who authorizes an agent to enter into a contract with a third party is liable on the contract. Thus, the third party can enforce the contract against the principal and recover damages from the principal if the principal fails to perform it. The agent can also be held liable on the contract in certain circumstances. Imposition of such liability depends on whether the agency is classified as fully disclosed, partially disclosed, or undisclosed.

Frolic and Detour

Agents sometimes act during the course of their employment to further their own interests rather than the principal's interests. An agent might take a detour to run a personal errand while on assignment for the principal. Negligence actions stemming from frolic and detour are examined on a case-by-case basis. Agents are always personally liable for their tortious conduct in such situations. Principals are generally relieved of liability if the agent's frolic and detour is substantial. If the deviation is minor, however, the principal is liable for the injuries caused by the agent's tortious conduct. (Example A salesperson stops at home for lunch while on an assignment for his principal. After lunch and while leaving his home in his car, the agent hits and injures a pedestrian. The principal would be liable if the agent's home were not too far out of the way from the agent's assignment. The principal would not be liable, however, if an agent who is on an assignment for his employer in Cleveland, Ohio, deviates from his assignment and drives to a nearby city to meet a friend and is involved in an accident. The facts and circumstances of each case determine its outcome.)

Self-Dealing

An agent who engages in undisclosed self-dealing with the principal has violated the duty of loyalty to the principal. If there has been undisclosed dealing by an agent, the principal can rescind the purchase and recover the money paid to the agent. As an alternative, the principal can ratify the purchase. (Example A real estate agent who is employed to purchase real estate for a principal cannot secretly sell his or her own property to the principal. However, the deal is lawful if the principal agrees to buy the property after the agent discloses ownership of the property.)

Agent Exceeding the Scope of Authority

An agent who enters into a contract on behalf of another party impliedly warrants that he or she has the authority to do so. If the agent exceeds the scope of his or her authority, the principal is not liable on the contract. The agent, however, is liable to the third party for breaching the implied warranty of authority. To recover, the third party must show (1) reliance on the agent's representation and (2) ignorance of the agent's lack of status.

(Case 30.2 STATE COURT CASE Employee's Intentional Tort) Burlarley v. Wal-Mart Stores, Inc.

Applying the motivation test, the appellate court held that Wal-Mart was not vicariously liable for the intentional tort of its cashier. The appellate court affirmed the trial court's grant of summary judgment in favor of Wal-Mart.

Are FedEx Drivers Independent Contractors?

FedEx considers the drivers it hires to be independent contractors and not employees and FedEx's contract with the drivers identifies them as independent contractors. (FedEx offers a package by which it sells drivers vehicles, uniforms, scanners, and other necessary equipment. The required uniform includes a uniform shirt with FedEx logo, uniform pants or shorts, dark shoes and socks, and, if the driver wears a jacket or cap, a uniform jacket and cap with the FedEx logo. FedEx deducts the cost of the clothes and equipment from the drivers' pay.) (FedEx provides a boilerplate contract that drivers must sign to be a FedEx driver. FedEx may terminate the contract at any time for cause, which would include violations of any of FedEx's rules and procedures. A driver can terminate the contract with 30 days written notice. Drivers are paid as independent contractors, and FedEx does not deduct federal or state income taxes, or social security or Medicare taxes, from the drivers' pay. Drivers are responsible for paying these taxes themselves.) (The U.S. court of appeals held that FedEx drivers were employees of FedEx and not independent contractors. The court of appeals stated, "Direct evidence of the right to control is the most important factor under Oregon law. We can find no difference at all between FedEx drivers' actual situation in so far as control is concerned and the situation of one hired to drive a delivery truck owned and operated by FedEx. Accordingly, we hold that plaintiffs are employees.)

fully disclosed principal

In a fully disclosed agency, . Thus, the principal, who is called a fully disclosed principal, is liable on the contract. The agent is not liable on the contract, however, because the third party relied on the principal's credit and reputation when the contract was made. (Example Poran Kawamara decides to sell her house and hires Mark Robbins, a real estate broker, to list and sell the house for a price of $1 million. They agree that Mark will disclose the existence of the agency and the identity of the principal to interested third parties. Mark shows the house to Heather, a prospective buyer, and discloses to Heather that he is acting as an agent for Poran. Heather agrees to buy the house, and Mark signs the contract on behalf of Poran. Poran, the principal, is liable on the contract, but Mark, the agent, is not.)

Misuse of Confidential Information

Misuse of Confidential Information In the course of an agency, the agent often acquires confidential information about the principal's affairs (e.g., business plans, technological innovations, customer lists, trade secrets). If the agent violates this duty, the principal can recover damages, lost profits, and any remuneration the agent received from another party to obtain the confidential information. The principal can also obtain an injunction ordering a third party to return the confidential information and to not use such information. There is no prohibition against using general information, knowledge, or experience acquired during an agency in later employment. (Example An agent works for a principal who owns and operates a bank that specializes in serving wealthy clients. Over many years, the bank has carefully developed a unique and selective list of wealthy individuals that it serves or is courting to serve. The agent quits his job at the bank and is hired by another bank. The agent takes the list of wealthy clients developed by his previous employer and discloses the list to his new employer. This is a violation of the agent's duty of loyalty.)

The courts generally apply one of the two following tests in determining whether an agent's intentional torts were committed within the agent's scope of employment:

Motivation test. Under the motivation test, if the agent's motivation for committing an intentional tort is to promote the principal's business, the principal is liable for any injury caused by the tort. If an agent's motivation for committing the intentional tort is personal, however, the principal is not liable, even if the tort takes place during business hours or on business premises. (Example Under the motivation test, an employer—the principal—is not liable if an employee, who is motivated by jealousy, injures someone on the job who dated her boyfriend. In this example, the motivation of the employee was personal and not work related.) Work-related test. Some jurisdictions have rejected the motivation test as being too narrow. These jurisdictions apply the work-related test instead. Under this test, if an agent commits an intentional tort within a work-related time or space—for example, during working hours or on the principal's premises—the principal is liable for any injuries caused by the agent's intentional torts. Under this test, the agent's motivation is immaterial. (Example Under the work-related test, an employer—the principal—is liable if an employee, who was motivated by jealousy, injures someone on the work premises and during work hours who dated her boyfriend. In this example, the motivation of the employee is not relevant. What is relevant is that the intentional tort was committed on work premises and during the employee's work hours.)

Negligence

Principals are liable for the negligent conduct of agents acting within the scope of their employment. This liability is based on the common law doctrine of respondeat superior ("let the master answer"), which in turn is based on the legal theory of vicarious liability (liability without fault). In other words, the principal is liable because of the employment contract with the negligent agent, not because the principal was personally at fault. The doctrine of negligence rests on the principle that, if someone (i.e., the principal) expects to derive certain benefits from acting through others (i.e., an agent), that person should also bear the liability for injuries caused to third persons by the negligent conduct of an agent who is acting within the scope of employment. (Example Business Unlimited Corporation employs Harriet as its marketing manager. Harriet is driving her automobile to attend a meeting with a client on behalf of her employer. On her way to the meeting, Harriet is involved in an automobile accident that is caused by her negligence and several people are seriously injured. In this example, Harriet is personally liable to the injured parties. In addition, Business Unlimited Corporation is liable as the principal because Harriet was acting within the scope of her employment when she caused the accident.)

independent contractors

Principals often employ outsiders—that is, persons and businesses that are not employees—to perform certain tasks on their behalf. (. For example, lawyers, doctors, dentists, consultants, stockbrokers, architects, certified public accountants, real estate brokers, and plumbers are examples of people who commonly act as independent contractors) (the party that employs an independent contractor is called a principal.) (Example Jamie is a lawyer who has her own law firm and specializes in real estate law. Raymond, a real estate developer, hires Jamie to represent him in the purchase of land. Raymond is the principal, and Jamie is the independent contractor.)

Factors for Determining Independent Contractor Status

Section 2 of the Restatement (Second) of Agency defines independent contractor as "a person who contracts with another to do something for him 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." Independent contractors usually work for a number of clients, have their own offices, hire employees, and control the performance of their work.

(Case 30.1 STATE COURT CASE Scope of Employment) Matthews v. Food Lion, LLC

The court of appeals held that Hall was not acting within the scope of her employment at the time of the accident. The court of appeals affirmed the trial court's grant of summary judgment for Food Lion.

degree of control

The crucial factor in determining whether someone is an independent contractor or an employee is the degree of control that the principal has over that party. Critical factors in determining independent contractor status include the following: Whether the worker is engaged in a distinct occupation or an independently established business The length of time the agent has been employed by the principal The amount of time that the agent works for the principal Whether the principal supplies the tools and equipment used in the work The method of payment, whether by time or by the job The degree of skill necessary to complete the task Whether the worker hires employees to assist him or her Whether the employer has the right to control the manner and means of accomplishing the desired result (If an examination of these factors shows that the principal asserts little control, the person is an independent contractor. Substantial control indicates an employer-employee relationship. Labeling someone an independent contractor is only one factor in determining whether independent contractor status exists.)

Competing with the Principal

The reason for this rule is that an agent cannot meet the duty of loyalty when personal interests conflict with the principal's interests. The principal may recover the profits made by the agent as well as damages caused by the agent's conduct, such as lost sales. An agent is free to compete with the principal when the agency has ended unless the parties have entered into an enforceable covenant-not-to-compete. (Example An agent works as a salesperson for a principal who owns an automotive parts business. The agent's job is to sell the principal's automotive parts to auto repair shops and other purchasers. While doing so, the agent also works as a salesperson for a competing seller of automotive parts. This example demonstrates a conflict of interest, and the agent has violated the duty of loyalty.)

Intentional misrepresentations( fraud or deceit.)

They occur when an agent makes statements that the agent knows are not true.

coming and going rule(which is sometimes referred to as the going and coming rule)

Under the common law, a principal is generally not liable for injuries caused by its agents and employees while they are on their way to or from work. applies even if the principal supplies the agent's automobile or other transportation or pays for gasoline, repairs, and other automobile operating expenses. This rule is quite logical: Because principals do not control where their agents and employees live, they should not be held liable for tortious conduct of agents on their way to and from work. This rule applies even if the employer pays for the vehicle or vehicle expenses for the employee. (Example Sarah works as a professor at a university. Her home is 20 miles from the campus. One morning Sarah is driving to work when her negligence causes an automobile accident in which several pedestrians are injured. In this example, Sarah is personally liable for her negligence, but the university is not liable because of the coming and going rule.)

duty of loyalty

because the agency relationship is based on trust and confidence, an agent owes the principal a duty of loyalty in all agency-related matters. Thus, an agent owes a fiduciary duty not to act adversely to the interests of the principal. If this duty is breached, the agent is liable to the principal. The most common types of breaches of loyalty are discussed in the following paragraphs.

Undisclosed Agency

ccurs when a third party is unaware of the existence of an agency. The principal is called an undisclosed principal . Undisclosed agencies are lawful. They are often used when the principal feels that the terms of the contract would be changed if the principal's identity were known. (For example, a wealthy party may use an undisclosed agency to purchase property if she thinks that the seller would raise the price of the property if her identity were revealed.) In an undisclosed agency, both the principal and the agent are liable on the contract with the third party because the agent, by not divulging agency status, becomes a principal to the contract. The third party relies on the reputation and credit of the agent in entering into the contract. If the principal fails to perform the contract, the third party can recover against the principal or the agent. If the agent is made to pay the contract, he or she can recover indemnification from the principal. An undisclosed agency can be created either expressly or by mistake.

Dual Agency

ccurs when an agent acts for two or more different principals in the same transaction. This practice is generally prohibited unless all the parties involved in the transaction agree to it. If an agent acts as an undisclosed dual agent, he or she must forfeit all compensation received in the transaction. Some agents, such as middlemen and finders, are not considered dual agents. This is because they only bring interested parties together; they do not take part in any negotiations. (Example A real estate broker is hired by a homeowner to sell the owner's house. The real estate broker is approached by a person interested in purchasing the house. The broker agrees to accept compensation from the proposed purchaser if the broker can get the seller to agree to a lower price than the asking price. The real estate broker accomplishes this and recovers a fee from both the seller and buyer of the house. The agent has violated her duty of loyalty by acting as a double agent.)

Liability for Intentional Torts

include acts such as assault, battery, false imprisonment, and other intentional conduct that causes injury to another person. A principal is not liable for the intentional torts of agents and employees that are committed outside the principal's scope of business. (Example If an employee attends a sporting event after working hours and gets into a fight with another spectator at the event, the employer is not liable. This is because the fight was a personal affair and outside the employee's business responsibilities.)

A partially disclosed agency

occurs if an agent discloses agency status but does not reveal the principal's identity and the third party does not know the principal's identity from another source. The nondisclosure may be because the principal instructs the agent not to disclose his or her identity to the third party or the agent forgets to tell the third party the principal's identity. In this kind of agency, the principal is called a partially disclosed principal. (oth the principal and the agent are liable on third-party contracts. This is because the third party must rely on the agent's reputation, integrity, and credit because the principal is unidentified. If the agent is made to pay the contract, the agent can sue the principal for indemnification. The third party and the agent can agree to relieve the agent's liability.) (Example A principal, Nigel Jones, and an agent, Marcia McKee, agree that the agent will represent the principal to purchase a business and that the agent will disclose the existence of the agency and identity of the principal to third parties. The agent finds a suitable business and contracts to purchase the business on behalf of the principal, but the agent mistakenly signs the contract "Marcia McKee, agent," omitting the principal's name. This is a partially disclosed agency. The principal is liable on the contract with the third party, and the agent is also liable.)

innocent misrepresentation

occurs when an agent negligently makes a misrepresentation to a third party. A principal is liable for the intentional and innocent misrepresentations made by an agent acting within the scope of employment. The third party can either (1) rescind the contract with the principal and recover any consideration paid or (2) affirm the contract and recover damages. (Example Assume that a car salesperson is employed to sell the principal's car and the principal tells the agent that the car was repaired after it was involved in a major accident. If the agent intentionally tells the buyer that the car was never involved in an accident, the agent has made an intentional misrepresentation. Both the principal and the agent are liable for this misrepresentation.)

Usurping an Opportunity

ometimes an agent is offered a business opportunity or another opportunity that is meant for the principal or that the principal is entitled to be informed about and have the opportunity to accept or reject A third-party offer to an agent must be conveyed to the principal. The agent cannot appropriate the opportunity for him- or herself unless the principal rejects it after due consideration. If the agent does so, the principal can recover the opportunity from the agent. (Example An agent works for a principal that is in the business of real estate development. The principal is looking for vacant land to purchase to develop. A third party who owns and wants to sell his vacant land tells an agent of the principal of the availability of the land. The agent, without informing the principal, purchases the land for personal use. This is a violation of the agent's duty of loyalty.)

Dual-Purpose Mission

ometimes principals request that agents run errands or conduct other acts on their behalf while the agent or employee is on personal business. (That is, the agent is acting partly for him- or herself and partly for the principal. Most jurisdictions hold both the principal and the agent liable if the agent injures someone while on such a mission. Example Suppose a principal asks an employee to drop off a package at a client's office on the employee's way home. If the employee negligently injures a pedestrian while on this dual-purpose mission, the principal is liable to the pedestrian.)

agent's signature

on a contract entered into on the principal's behalf is important. It can establish the agent's status and therefore his or her liability. For instance, in a fully disclosed agency, the agent's signature must clearly indicate that the agent is acting as an agent for a specifically identified principal. (Examples Proper agent's signatures include "Catherine Adams, agent for Juan Perez" and "Juan Perez, by Catherine Adams, agent."

fully disclosed agency

results if a third party entering into a contract knows (1) that the agent is acting as an agent for a principal and (2) the actual identity of the principal. The third party has the requisite knowledge if the principal's identity is disclosed to the third party by either the agent or some other source. the contract is between the principal and the third party