Chapter 32 (Business Law)

Agent's Duties to --------> the Principal (5)

Generally, the agent owes the principal five duties-performance, notification, loyalty, obedience, and accounting.

Gratuitous Agents

1. Not all agency relationships are based on contract. In some situations, an agent acts gratuitously-that is, without payment. 2. A gratuitous agent cannot be liable for breach of contract because there is no contract. He or she is subject only to tort liability. 3. Once a gratuitous agent has begun to act in an agency capacity, he or she has the duty to continue to perform in that capacity. 4. A gratuitous agent must perform in an acceptable manner and is subject to the same standards of care and duty to perform as other agents.

Cooperation (P Duty to A)

1. A principal has a duty to cooperate with the agent to assist the agent in performing his or her duties. The principal must do nothing to prevent that performance. -Ex: when a principal grants an agent an exclusive territory, the principal creates an exclusive agency, in which the principal cannot compete with the agent or appoint or allow another agent to compete. If the principal does so, he or she violates the exclusive agency and is exposed to liability for the agent's lost profits.

Formation of the Agency Relationship

1. Agency relationships normally are consensual-that is, they come about by voluntary consent and agreement between the parties. 2. Generally, the agreement need not be in writing, and consideration is not required. 3. A person must have contractual capacity to be a principal. Those who cannot legally enter into contracts directly should not be allowed to do so indirectly through an agent. 4. However, anyone can be an agent regardless of whether he or she has the capacity to contract (including minors). 5. An agency relationship can be created for any legal purpose. 6. An agency relationship created for a purpose that is illegal or contrary to public policy is unenforceable. 7. An agency relationship can arise in four ways: by agreement of the parties, by ratification, by estoppel, and by the operation of law.

An Agency Relationship can Arise in Four ways... (4)

1. Agreement 2. Ratification 3. Estoppel 4. operation of Law

Notification (A Duty to P)

1. An agent is required to notify the principal of all matters that come to her or his attention concerning the subject matter of the agency. This is the duty of notification, or the duty to inform. 2. Generally, the law assumes that the principal is aware of any information acquired by the agent that is relevant to the agency-regardless of whether the agent actually passes on this information to the principal. It is a basic tenet of agency law that notice to the agent is notice to the principal.

Determination of Employee or Independent Contractor Status: Criteria Used by the Courts (7)

1. How much control does the employer exercise over the details of the work? - If employer exercises considerable control over the details and the day-to-day activities of the worker, indicates employee status. -Perhaps the most important factor weighed by courts in determining employee status. 2. Is the worker engaged in an occupation or business distinct from that of the employer? - If so, this points to independent-contractor, not employee, status. 3. Is the work usually done under the employer's direction or by a specialist without supervision? - If the work is usually done under the employer's direction, this indicates employee status. 4. Does the employer supply the tools at the place of work? - If so, this indicates employee status. 5. For how long is the person employed? -If the person is employed for a long period of time, this indicates employee status. 6. What is the method of payment-by time period or at the completion of the job? -Payment by time period, such as once every two weeks or once a month, indicates employee status. 7. What degree of skill is required of the worker? - If a great deal of skill is required, this may indicate that the person is an independent contractor hired for a specialized job and not an employee.

Rights and Remedies of Agents and Principals

1. In general, for every duty of the principal, the agent has a corresponding right, and vice versa. 2. When one party to the agency relationship violates his or her duty to the other party, the remedies available to the non-breaching party arise out of contract and tort law. 3. These remedies include monetary damages, termination of the agency relationship, an injunction, and required accountings.

Compensation (P Duty to A)

1. In general, when a principal requests certain services from an agent, the agent reasonably expects payment. the principal therefore has a duty to pay the agent for services rendered. -Ex: when an accountant or an attorney is asked to act as an agent, an agreement to compensate the agent for this service is implied. 2. The principal also has a duty to pay the compensation in a timely manner. Unless the agency relationship is gratuitous and the agent does not act in exchange for payment, the principal must pay the agreed-on value for the agent's services. If no amount has been expressly agreed on, then the principal owes the agent the customary compensation for such services.

Employer-Independent Contractor Relationship

1. Independent contractors are not employees, because those who hire them have no control over the details of their work performance. 2. Building contractors and subcontractors are independent contractors, because a property owner who hires a contractor and subcontractor to complete a project does not control the details of the way they perform their work. 3. Truck driver's who own their vehicles and hire out on a per-job basis are independent contractors, but truck drivers who drive company trucks on a regular basis usually are employees. 4. the relationship between a principal and an independent contractor may or may not involve an agency relationship. 5. Ex: a homeowner who hires a real estate broker to sell her house has not only contracted with an independent contractor (the broker) but also established an agency relationship for the specific purpose of selling the property. 6. Ex: an insurance agent, is both an independent contractor and an agent of the insurance company for which he sells policies. 7. Ex: an insurance broker normally is an agent of the person obtaining insurance and not of the insurance company.

Loyalty (A Duty to P)

1. Loyalty is one of the most fundamental duties in a fiduciary relationship. Basically, the agent has the duty to act solely for the benefit of his or her principal and not in the interest of the agent or a third party. -Ex: an agent cannot represent two principals in the same transaction unless both know of the dual capacity and consent to it. -Maintain Confidentiality -Actions Must Benefit the Principal

Agency by AGREEMENT

1. Most agency relationships are based on an express or implied agreement that the agent will act for the principal and that the principal agrees to have the agent so act. 2. An agency agreement can take the form of an express written contract or be created by an oral agreement. 3. An agency agreement can also be implied by conduct.

Employer-Employee Relationship

1. Normally, all employees who deal with third parties are deemed to be agents. 2. Ex: a salesperson in a department store is an agent of the store's owner (the principal) and acts on the owner's behalf. 3. Any sale of goods made by the salesperson to a customer is binding on the principal. 4. Most representations of fact made by the salesperson with respect to the goods sold are binding on the principal. 5. Agency law and employment law overlap considerably, because employees who deal with third parties generally are deemed to be agents of their employers. 6. Agency law has a broader reach than employment law, because agency relationships can exist outside an employer-employee relationship. 7. Employment laws (state and federal) apply only to the employer-employee relationship. 8. Statutes that govern Social Security, withholding taxes, workers' compensation, unemployment compensation, and workplace safety apply only when an employer-employee relationship exists (not independent contractors). 9. Laws that prohibit employment discrimination apply only to employers and employees (not independent contractors).

Agency by RATIFICATION

1. On occasion, a person who is in fact not an agent (or who is an agent acting outside the scope of her or his authority) may make a contract on behalf of another (a principal). If the principal approves or affirms that contract by word or by action, an agency relationship is created by ratification. 2. Ratification involves a question of intent, and intent can be expressed by either words or conduct.

Duties of Agents and Principals

1. Once the principal-agent relationship has been created, both parties have duties that govern their conduct. 2. As discussed previously, the principal-agent relationship is fiduciary-based on trust. Ina fiduciary relationship, each party owes the other the duty to act with the utmost good faith.

Agency by ESTOPPEL

1. Sometimes, a principal causes a third person to believe that another person is the principle's agent, and the third person acts to his or her detriment in reasonable reliance on that belief. 2. When this occurs, the principal is "estopped to deny" (prevented from denying) the agency relationship. 3. An agency estoppel arises when the principal's actions have created the appearance of an agency that does not in fact exist.

Determination of Employee or Independent Contractor Status: Criteria Used by the IRS

1. The IRS has established its own criteria for determining whether a worker is an independent contractor or an employee. 2. the most important factor is the degree of control the business exercises over the worker. 3. The IRS tends to closely scrutinize a firm's classification of its workers because employers can avoid certain tax liabilities by hiring independent contractors instead of employees. 4. Even when a firm has classified a worker as an independent contractor, the IRS may decide that the worker is actually an employee. 5. If the IRS decides that an employee is miss-classified, the employer will be responsible for paying any applicable Social Security, withholding, and unemployment taxes. -Ex: Microsoft was once ordered to pay back payroll taxes for hundreds of temporary workers who had contractually agreed to work for Microsoft as independent contractors.

Created by the Principal's Conduct (Refers to Estoppel)

1. The acts or declarations of a purported agent in and of themselves do not create an agency by estoppel. Rather, it is the deeds or statements of the principal that create an agency by estoppel. 2. Thus, in Case in Point 32.7, if Marsha Wiedmaier had not signed the credit application on behalf of the principal-corporation, then Motorsport would not have been justified in believing that Michael was Wiedmaier's agent.

Actions Must Benefit the Principal

1. The agents loyalty must be undivided. 2. The agent's actions must be strictly for the benefit of the principal and must not result in any secret profit for the agent.

Safe Worker Conditions (P Duty to A)

1. The common law requires the principal to provide safe working premises, equipment, and conditions for all agents and employees. The principal has a duty to inspect working areas and to warn agents and employees about any unsafe situations. When the agent is an employee, the employer's liability is frequently covered by state worker's compensation insurance. In addition, federal and state statutes often require the employer to meet certain safety standards.

Agency by OPERATION OF LAW

1. The courts may find an agency relationship in the absence of a formal agreement in other situations as well. This may occur in family relationships, such as when one spouse purchases certain basic necessaries and charges them to the other spouse's account. 2. The court often rule that a spouse is liable for payment for the necessaries because of either a social policy or a legal duty to supply necessaries to family members. 3. Agency by operation of law may also occur in emergency situations. If an agent cannot contact the principal and failure to act would cause the principal substantial loss, the agent may take steps beyond the scope of her or his authority. -Ex: a railroad engineer may contract on behalf of his or her employer for medical care for an injured motorist hit by the train.

Standard of Care

1. The degree of skill or care required of an agent is usually that expected of a reasonable person under similar circumstances. Generally, this is interpreted to mean ordinary care. 2. If an agent has represented herself or himself as possessing special skills, however, the agent is expected to exercise the degree of skill claimed. Failure to do so constitutes a breach of the agent's duty.

Maintain Confidentiality

1. The duty of loyalty also means that any information or knowledge acquired through the agency relationship is confidential. It is a breach of loyalty to disclose such information either during the agency relationship or after its termination. -Ex: trade secrets and customer lists compiled by the principal

Agency by Agreement: Example 32.6

A hotel expressly allows only Boris Renke to park cars, but Renke has no employment contract there. The hotel's manager tells Renke when to work, as well as where and how to park the cars. The hotel's conduct manifests a willingness to have Renke park it's customer's cars, and Renke can infer from the hotel's conduct that he has authority to act as a parking valet. Thus, there is an implied agreement that Renke is an agent of the hotel and provides valet parking services for hotel guests.

Reimbursement and Indemnification (P Duty to A)

1. The principal has a duty to reimburse the agent for any funds disbursed at the principal's request. The principal must also reimburse the agent for necessary expenses incurred in the course of the reasonable performance of her or his agency duties. Agents cannot recover for expenses incurred as a result of their own misconduct or negligence, though. 2. Subject to the terms of the agency agreement, the principal has the duty to indemnify (compensate) an agent for liabilities incurred because of authorized and lawful acts and transactions. -Ex: If the agent, on the principal's behalf, forms a contract with a third party, and the principal fails to perform the contract, the third party may sue the agent for damages. In this situation, the principal is obligated to compensate the agent for any costs incurred by the agent as a result of the principal's failure to perform the contract. 3. Additionally, the principal must indemnify the agent for the value of benefits that the agent confers on the principal. The amount of indemnification usually is specified in the agency contract. If it is not, the courts will look to the nature of the business and the type of loss to determine the amount. -This rule applies to acts of gratuitous agents as well.

The Third Party's Reliance Must be Reasonable (Refers to Estoppel)

1. The third person must prove that he or she reasonably believed that an agency relationship existed. 2. Facts and circumstances must show that an ordinary, prudent person familiar with business practice and custom would have been justified in concluding that the agent had authority.

Employee Status and "Works for Hire"

1. Under the Copyright Act, any copyrighted work created by an employee within the scope of her or his employment at the request of the employer is a "work for hire"; the employer owns the copyright to the work. 2. In contrast, when an employer hires an independent contractor-a freelance artist, writer, or computer programmer, for example-the independent contractor normally owns the copyright. 3. An exception is made if the parties agree in writing that the work is a "work for hire" and the work falls into one of nine specific categories, including audiovisual and other works.

Accounting (A Duty to P)

1. Unless the agent and principal agree otherwise, the agent must keep and make available to the principal an account of all property and funds received and paid out on the principal's behalf. 2. This includes gifts from third parties in connection with the agency. -Ex: a gift from a customer to a salesperson for prompt deliveries made by the salesperson's firm, in the absence of a company policy to the contrary, belongs to the firm. 3. The agent has a duty to maintain a separate account for the principal's funds and must not intermingle these funds with the agent's personal funds. If a licensed professional (such as an attorney) violates this duty, he or she may be subject to disciplinary proceedings carried out by the appropriate regulatory institution (such as the state bar association). Of course, the professional will also be liable to the principal (the professional's client) for failure to account.

Obedience (A Duty to P)

1. When acting on behalf of the principal, an agent has a duty to follow all lawful and clearly stated instructions of the principal. Any deviation from such instructions is a violation of this duty. 2. During emergency situations, however, when the principal cannot be consulted, the agent may deviate from the instructions without violating this duty. 3. Whenever instructions are not clearly stated, the agent can fulfill the duty of obedience by acting in good faith and in a manner reasonable under the circumstances.

Disputes Involving Employment Law: Case in Point 32.1

A Puerto Rican television station, WIPR, contracted with Victoria Alberty-Velez to cohost a television show. Alberty signed a new contract for each episode and was committed to work for WIPR only during the filming of the episodes. WIPR paid her a lump sum for each contract and did not withhold any taxes. When Alberty became pregnant, WIPR stopped contracting with her. She filed a lawsuit claiming that WIPR was discriminating against her in violation of federal anti-discrimination laws, but the court found in favor of WIPR. Because the parties had used repeated fixed-length contracts and had described Alberty as an independent contractor on tax documents, she could not maintain an employment discrimination suit.

Performance (A Duty to P)

An implied condition in every agency contract is the agent's agreement to use reasonable diligence and skill in performing the work. When an agent fails to perform his or her duties, liability for breach of contract may result. -Standard of Care -Gratuitous Agents

Formation of the Agency Relationship: Example 32.4

Archer (as principal) contracts with Burke (as agent) to sell illegal narcotics. The agency relationship is unenforceable because selling illegal narcotics is a felony and is contrary to public policy. If Burke sells the narcotics and keeps the profits, Archer cannot sue to enforce the agency agreement.

Employee Status and "Works for Hire": Case in Point 32.3

Artisan House, inc., hired a professional photographer, Steven H. Lindner, owner of SHL Imaging, Inc., to take pictures of its products for the creation of color slides to be used by Artisan's sales force. Lindner controlled his own work and carefully chose the lighting and angles used in the photographs. When Artisan published the photographs in a catalogue and brochures without Lindner's permission, SHL filed a lawsuit for copyright infringement. Artisan claimed that its publication of the photographs was authorized because they were works for hire. The court, however, decided that SHL was an independent contractor and owned the copyright to the photographs. Because SHL had not given Artisan permission (a license) to reproduce the photographs in other publications, Artisan was liable for copyright infringement.

Gratuitous Agents: Example 32.8

Bower's friend Alcott is a real estate broker. Alcott offers to sell Bower's vacation home at no charge. If Alcott never attempts to sell the home, Bower has no legal cause of action to force her to do so. If Alcott does attempt to sell the home to Friedman, but then performs so negligently that the sale falls through, Bower can sue Alcott for negligence.

Laurel Creek Health Care Center v. Bishop (Case 32.2)

Decision and Remedy: The Kentucky Court of Appeals reversed the trial court's judgement and remanded the case for further proceedings consistent with its opinion. An actual agency relationship between Bishop and his wife, Anna, had been formed, and the trial court had erred when it found otherwise.

Coker v. Pershad (Case 32.1)

Decision and Remedy: a state intermediate appellate court affirmed the lower court's ruling. AAA could not be held liable for the actions of Five Star, its independent contractor, because "AAA did not control the manner and means of Five Star's work." (Page 626-627)

Actions Must Benefit the Principal: Case in Point 32.10

Don Cousins contracted with Leo Hodgins, a real estate agent, to negotiate the purchase of an office building. While working for Cousins, Hodgins discovered that the property owner would sell the building only as a package deal with another parcel. Hodgins therefore bought the two properties intending to resell the building to Cousins. When Cousins found out, he sued. The court held that Hodgins had breached his fiduciary duties. As a real estate agent, Hodgins had a duty to communicate all offers to his principal and not to secretly purchase the property and then resell it to his principal. Hodgins was required to act in Cousin's best interests and could only become the purchaser in this situation with Cousin's knowledge and approval.

Disputes Involving Tort Liability: Case in Point 32.2

El Palmar Taxi, Inc., requires its drivers to supply their own cabs, which must display El Palmar's logo. The drivers pay gas, maintenance, and insurance costs, and a fee to El Palmar. They are expected to comply with the law, including licensing regulations, but they can work when they want for as long as they want. Mario Julaju drove a taxi under contract with El Palmar that described him as an independent contractor. El Palmar sent Julaju to pick up Maria Lopez and her children. During the ride, Julaju's cab collided with a truck. To recover from their injuries, the Lopez's sued El Palmar. The employer argued that it was not liable because Julaju was an independent contractor. The court held in favor of El Palmar. An employer normally is not responsible for the actions of an independent contractor with whom the employer contracts. Here, the employment contract has clearly specified that Julaju was an independent contractor, and there were no facts indicating that he was an employee (or that the employer controlled his activities).

The Third Party's Reliance Must be Reasonable: Case in Point 32.7 (Refers to Estoppel)

Marsha and Jerry Wiedmaier owned Wiedmaier, Inc., a corporation that operated a truck stop. Their son, Michael, did not own any interest in the corporation but had worked at the truck stop as a fuel operator. Michael decided to form his own business called Extreme Diecast, LLC. To obtain a line of credit with Motorsport Marketing, Inc., which sells racing memorabilia, Michael asked his mother to sign the credit application form. After Marsha had signed as a "Secretary-Owner" of Wiedmaier, inc., Michael added his name to the list of corporate owners and faxed the form to Motorsport. Later, when Michael stopped making payments on the merchandise he had ordered, Motorsport sued Wiedmaier, Inc., for the unpaid balance. The court ruled that Michael was an apparent agent of Wiedmaier, Inc., because the credit application had caused Motorsport to reasonably believe that Michael was acting as Wiedmaier's agent in ordering merchandise.

Notification: Example 32.9

Perez, an artist, is about to negotiate a contract to sell a series of paintings to Barber's Art Gallery for $25,000. Perez's agent learns that barber is insolvent and will be unable to pay for the paintings. The agent has a duty to inform Perez of Barber's insolvency because it is relevant to the subject matter of the agency, which is the sale of Perez's paintings.

Principal's Duties to--------->the Agent (4)

The principal also has duties to the agent. These duties relate to compensation, reimbursement and indemnification, cooperation, and safe working conditions.

Agency by Agreement: Example 32.5

Reese asks Grace, a gardener, to contract with others for the care of his lawn on a regular basis. If Grace agrees, an agency relationship exists between Reese and Grace for the lawn care.

Exclusive Agency: Example 32.11

River City Times Company (the principal) grants Emir (the agent) the right to sell its newspapers at a busy downtown intersection to the exclusion of all other vendors. This creates an exclusive territory within which only Emir has the right to sell those newspapers. If River City Times allows another vendor to sell its papers in that area, Emir can sue for lost profits.

Disputes Involving Employment Law

Sometimes, workers may benefit from having employee status-for tax purposes and to be protected under certain employment laws. For example, federal statutes governing employment discrimination apply only when an employer-employee relationship exists. -Significant incentive for workers to claim they are employees.

Taser International, Inc. v. Ward (Case 32.3)

Summary judgement was found improper because a genuine issue of material fact exists as to the extent of Ward's pre-termination design and development efforts. For the foregoing reasons, the grant of summary judgement entered in favor of Taser was reversed and the court remanded for further proceedings. (pages 632-633)

Exclusive Agency

When a principal grants an agent an exclusive territory in which the principal cannot compete with the agent or appoint or allow another agent to compete.

Disputes Involving Tort Liability

Whether a worker is an employee or an independent contractor can also affect the employer's liability for the worker's actions.

Independent Contractor (Section 2 of the Restatement (Third) of Agency)

a person who contracts with another to do something for him, or her, but who is not controlled by the other nor subject to the other's right to control with the respect to his, or her, physical conduct in the performance of the undertaking. He, or she, may or may not be an agent

The Restatement (Third) of Agency

an authoritative summary of the law of agency and is often referred to by judges in their decisions and opinions

Agency relationships commonly exist between employers and ____________. Agency relationships may sometimes also exist between employers and ______________ _______________ who are hired to perform special tasks or services.

employees; independent contractors

fiduciary (adjective)

means that the relationship involves trust and confidence (ex; fiduciary relationship)

fiduciary (noun)

refers to a person having a duty created by his or her undertaking to act primarily for another's benefit in matters connected with the undertaking

agency

the fiduciary relation that results from the manifestation of consent by one person to another that the other shall act in his, or her, behalf and subject to his, or her, control, and consent by the other so to act (on behalf and instead of)