TOPIC 11

withdrawal by both parties

the parties can terminate the agency relationship upon mutual consent.

frolic

when an employee abandons the employer's business objectives and pursues personal interests.

example of stakeholder functions question

I serve as director and officer. I make decisions as officer that should be reserved or the board of directors. I fail to submit major decisions to shareholder votes. This would show that I am not respecting corporate formalities and the entity form is a shell for my personal business activity.

disclosed principal

A disclosed principal's identity is known to third parties dealing with the agent.

Partially Disclosed Principal

A partially-disclosed principal is known by third-parties to exist, but her exact identity is unknown. This type of relationship exists when there is some benefit to the principal to remain anonymous to third parties interacting with the agent.

accounting

The agent has a duty to account to the principal for monies handled. Further, the agent may have a duty to account to third parties for whom money is handled. This includes situations where an agent collects too much money from a third party and is still in possession of those funds or when an agent intentionally collects funds that belong to the third party and the principal is undisclosed. ex, I am a financial advisor for ABC Corp. I am responsible for reporting and keeping accurate records regarding all money or value transferred or received in carrying out my job duties.

obedience

The agent has a duty to obey the reasonable instructions from the principal. ex. I work for ABC Corp selling insurance. ABC provides me detailed training and instructions on what types of policies to write and the client area that I can serve. I have a duty to obey these instructions as agent of my employer.

information and disclosure

The agent has a duty to protect all confidential information of the principal, such as trade secrets. Further, the agent has a duty to keep the principal fully informed of all material information acquired as a result of the agency relationship. ex. I am a sale agent for ABC Corp. I receive an offer from a customer to undertake a joint venture with ABC Corp. I have a duty to transmit this information to ABC Corp. I acquired this information as a result of the agency relationship, and it is obviously outside of my unilateral decision-making authority.

When and how does the agency relationship terminate?

The establishment, duration, and termination of the agency relationship is generally governed by the agreement between the principal and agent. In the absence of an express agreement, several default rules apply regarding the point at which the agency relationship terminates.

What is a "frolic and detour"?

a general defense to vicarious tort liability. It states that the principal should not be liable for the tortious acts of the agent when the agent is acting outside the scope of her employment and for the benefit of someone other than the employer. Plainly stated, an employee who is on a frolic or detour is no longer acting for the employer. ex. An employee providing services for her employer at the location of a client is an agent acting within the scope of her employment. If, however, the employee takes the company vehicle and goes on a personal errand that is not authorized, the employee is likely outside the scope of her employment. Suppose while running these errands she gets into an automobile accident that is her fault. The employer would be able to argue that the deviation from her duties as employee was a frolic and detour and relieved her of liability for the employee's tort.

an agent coupled with an interest

a type of special agent who earns compensation through performing her agency duties (rather than receiving compensation directly from the principal). For example, a sales agent who receives a commission on sales may be an agent coupled with an interest. This type of agency is subject to contract rules and cannot be terminated without violating the legal rights of the agent or principal.

agency

an agency relationship is one in which a party acts on behalf of and with the authority of another party.The "principal" appoints or authorizes the "agent" to act on her behalf. Thus, she is responsible for the actions of the agent taken in furtherance of her duties or per the instructions of the principal. The agent will interact with "third parties" on behalf of the principal. The agency relationship requires an understanding of the relationship between principal and agent, agent and third parties, and the principal and third parties' roles, responsibilities, and rights. ex. I hire Betty to negotiate a business deal on my behalf. I am the principal and Betty is my agent for this purpose. Betty will act as my representative in dealing with the third parties to this business deal.

apparent authority

arises from the reasonable representations of the agent to third parties. That is, when the agent represents that she has authority to enter into a contract on behalf of the principal, her actions will bind the principal if a reasonable person would believe those representations. The 3rd party's belief must generally result from some action or inaction by the principal. ex. Gina works for ABC Corp. She has a generic title of manager. She is limited in her ability to sign purchase agreements on behalf of ABC Corp. She does, however, routinely negotiate the terms of purchase agreements with vendors. She then transmits the purchase agreements to her boss who signs them. The vendor never deals with anyone other than Gina. If Gina decides to start by personally signing the purchase agreement, ABC Corp will likely be bound by the contracts. By signing the agreements, she is representing to vendors that she has authority to do so. It is likely reasonable for vendors to believe that she has this authority, as Gina is the primary point of contact for negotiating the agreements.

what are the types of principals and how are they categorized

disclosed, partially-disclosed, and undisclosed principals categorized based upon whether their identity is disclosed to third parties with whom the agent interacts on their behalf.categorizations of principal are important in determining the rights and duties of the principal, agent, and third party.

ratification

a contract principle. If an individual undertakes actions on behalf of another, these actions may be outside of any express or implied authority. If, however, the principal acknowledges and accepts the agent's actions, this is known as "ratification" of the agency relationship. The principal ratifies the agent's actions, after the fact.

what are the duties a principal owes to the agent

duty to: compensate, reimburse, indemnify

undisclosed principal

The existence of an undisclosed principal is unknown to a third party. The third party believes that she is interacting only with the agent.

what. are the common rules for terminating an agency relationship?

withdrawal by either party, withdrawal by both parties. termination by th principal, renunciation by the agent, duties of the agent complete, death or incapacity, bankruptcy

what are the ways to form a principal-agent relationship?

express agreement, implied agency, ratification, by estoppel, by necessity

What are the questions that the court will ask in evaluating whether to pierce the corporate veil?

-business formalities: Did the business maintain formalities, such as organizational filings, meeting minutes, etc.? -business assets: Did the business owners intermingle personal and business funds or other assets? -business capitalization: Is the business adequately capitalized or does it have adequate liability protection in place? -stakeholder functions: Did business members comply with or routinely deviate from their roles and responsibilities?

Death or Incapacity

The agency relationship terminates upon the death or incapacity of either party.

bankruptcy

The agency relationship terminates upon the liquidation or reorganization of either party.

express agreement

A principal and agent may expressly agree to form an agency relationship. The agreement can be oral or in writing. The principal must simply confer the authority upon the agent to act on her behalf. The subject matter of the agency relationship must be legal. The agency has the express authority granted in the agency agreement and the implied authority to undertake tasks incidental to that objective.

To what extent is a principal bound in contract by the actions of the agent?

A principal is generally bound to third parties pursuant to the contracts entered into by the agent on behalf of the principal. This means that the principal is responsible for any obligations incurred by the agent that are within her authority. An agent has varying sources of authority when dealing with third parties. actual authority, implied authority, apparent authority, ratification

actual authority

A principal is generally bound to third parties pursuant to the contracts entered into by the agent on behalf of the principal. This means that the principal is responsible for any obligations incurred by the agent that are within her authority. An agent has varying sources of authority when dealing with third parties. ex, Arnold is an employee of ABC Corp. He signs an employee agreement indicating that he will sell products manufactured by ABC Corp directly to retailers. He has express authority to enter into any contracts with retailers for the sale of ABC-manufactured goods.

withdrawal by either party

A principal or agent may withdraw from the relationship at any time. This legal authority is separate from the contractual right to withdraw. ex. daisy hires Jeb as a sales agent for her new product line. Jeb will earn a commission on sales of the product. Jeb studies the product lines, develops a sales plan, and hits the road. Shortly after the relationship begins, Daisy decides to hire Luke and fire Jeb. Daisy's withdrawal terminates the agency relationship with Jeb. Jeb, however, may have the legal right to seek damages against Daisy for terminating the relationship.

by necessity

Agency by necessity arises when one party makes a decision on behalf of another person who is unable to do so. The decision must be essential in nature and it must be in the interest of the principal in making that decision. As such, the law will impute a de facto agency relationship where no actual agency exists. ex. Bill is hired to deliver Tom's goods. He drops the goods off at the fulfillment center. The center says that there is no contract in place and intends to reject the goods. Tom is out of country and cannot be reached. The goods will spoil if not accepted. Bill signs the warehousing agreement on Tom's behalf.

independent contractor

Agency law considers an independent contractor to be a special form of agent of the principal. The independent contractor is hired to perform a service for the principal but is generally not under the direct control or supervision of the principal. In this way, the agent has very limited ability to represent or act on behalf of the principal outside of the context of the services contract.

implied agency

An agency may be implied from the facts or circumstances surrounding an individual's actions on behalf of another. If the principal acts in a way that demonstrates an intent for an individual to act on her behalf, this may imply an agency relationship. The parties to an agency relationship do not need to understand the law of agency or understand what it means to be a principal or agent.

duty to compensate

An agency relationship may be paid or gratuitous. The terms of an agency may be laid out in the agency agreement. If the agency agreement does not indicate the terms of compensation, the principal is obligated to provide the agent with reasonable compensation. ex. default rules in a relationship with a sales agent dictate that the agent will earn a reasonable commission on sales induced or completed.

To what extent are agents liable in contract to third parties and to the principals they represent?

An agent acting within the scope of her authority is not liable to third parties on obligations entered into on behalf of the principal. Even if the agent exceeds her express authority, her implied authority may bind the principal to the agreement and relieve her from any contractual liability to the third party. The important point is that the agent must act on behalf of the principal and disclose that relationship to the third party. If the agent is acting on behalf of a principal, but fails to disclose her agency status, it may subject her to liability to the third party. In some cases, it may also serve to bind the principal once the agency relationship is determined. ex. I work for ABC Corp. I enter into an agreement with 123 Corp on behalf of ABC Corp. I am not personally obligated to perform the contract. If I fail to tell 123 Corp that I work for ABC Corp (123 Corp believes that I have my own business), I am liable to 123 Corp if ABC Corp does not perform the contract. ABC Corp is obligated to perform the contract if my entering the contract was in my express, implied, or apparent authority. If I did not have express or implied authority, but 123 Corp realized I was acting on behalf of an agent, ABC Corp may be liable if I had apparent authority. In such a situation, ABC Corp may be able to sue me for any losses suffered.

duty of care

An agent has a duty to exercise due care and diligence when carrying out the responsibilities of the agency. This is often referred to as a duty to not act negligently in carrying out the principal's affairs. ex,I work for ABC Corp as an accountant. I represent ABC Corp in every action I undertake as part of my employment, such as preparing client taxes. I have a duty to ABC Corp and the client to exercise reasonable care in carrying out my job duties.

loyalty

An agent has the duty of loyalty to act for the principal's advantage and not to act to benefit herself at the principal's expense. An agent is expected to refrain from undertaking actions personally that would conflict with the purpose of the agency. An employee has a lower duty of loyalty with regard to opportunities that are outside of the employee's duties or responsibilities to the employer. Generally, this means that an agent may not simultaneously represent the principal and another party to a transaction. ex. I work for ABC Corp as a professional service provider. A potential client comes in to seek the services of ABC Corp. I cannot compete with ABC Corp by trying to convince the client to pay me to serve them personally rather than hire ABC Corp. I also have a side job selling supplies to construction contractors. This is a completely different line of business from ABC Corp. If it does not conflict with ABC Corp's services, I can offer my supplies for sale to the client without violating my duty of loyalty.

agency status of an employee

An employer hires an employee to work on behalf of the employer as part of or in support of the business's core functions. The employee generally works exclusively for the business in the functions for which she is hired. The employer exercises extensive control over the nature, time, and manner of work carried out by the employee. As such, the employee is a general agent of the business to the extent of her authority in the position. ex. : ABC Corp hires me as an internal accountant. I report to ABC Corp from 8:00 - 6:00 on 5 days per week. I work on any and all accounting functions assigned to me by my supervisor.

agency status of an independent contractor

An independent contractor is not an employee; rather, she or it is a separate business that is hired to perform services for or on behalf of another person or business. One way of thinking of an independent contractor is that she has her own business that services the employer as a client or customer. The employer does not directly control the manner and method by which an independent contractor carries out her duties. Also, an independent contractor generally has more than one customer or client. As such, the independent contract is only a limited or special agent of the principal-employer. ex. I have my own professional accounting practice. I prepare the tax returns for any business or individual who pays me to do so. I do not have any employees. ABC Corp hires me to prepare its annual tax return. I promise to have the return completed within 1 month. I will invoice ABC Corp for my services. I am not an employee of ABC Corp. I am an independent contractor who is hired to perform a specific function for a limited amount of time. While I have a projected deadline, ABC Corp does not control the nature, time, and manner of the services I perform.

To what extent are principals liable for the torts committed by agents?

An individual is always liable for her own conduct. Whenever an individual is held liable for the actions of another, this is known as "vicarious liability". In the context of agency, the agent is acting vicariously for the principal. A principal is responsible for the tortious acts of an agent pursuant to a doctrine known as "respondeat superior". More specifically, an agent may create legal liability for the principal for actions taken by the agent "within the scope of the agency". In such cases, the principal and agent are "jointly and severally" liable for the harm caused by the agent's conduct. An act is within the scope of the agency if the purpose behind the action taken is to advance the interests of the principal. As such, if any act taken by an employee in an effort to advance the employer's interest is a tort, the employer may be liable for that conduct. ex. I am an employee of a corporation. While carrying out my duties, I act negligently and harm a third party. The third party sues the corporation and me. The corporation will be liable for my negligent act because I was acting within the scope of my job responsibilities when I committed the tort.

example of business capitalization question

As shareholder, director, and CEO, I routinely distribute any corporate profits to myself as a dividend. I leave very little funds in the corporation to finance operations. Further, I do not purchase liability insurance to cover potential legal liability, such as tort liability. If the court finds that the corporate entity form is intentionally underfunded, it may find that the entity is merely a shell for limited liability purposes.

termination by the principal

Either party may terminate the agency relationship, even if it violates a contractual agreement between the parties. A principal will be subject to a breach of contract action for terminating the agency relationship if the agent's status is part of an agreement that is supported by consideration and terminating the agency relationship will harm the agent's rights. ex. I enter into a contract with Ernest to package and sell his products on the Internet. In exchange for my effort, I will keep in percentage of the sale value. As such, the agency is coupled with an interest and cannot be revoked without breaching a contract.

duty to indemnify

Generally, a principal must indemnify an agent for liability incurred in the performance of her duties. This generally arises when the instructions of the principal subject the agent to liability to a third party.

To what extent are shareholders of the corporation personally liable for obligations of the corporation?

Generally, corporate shareholders are not liable for the debts or obligations of the corporation, including legal liability for torts or contract actions. Under certain circumstances, however, a court will disregard the corporate protections and hold shareholders personally liable. This situation arises when a plaintiff sues the corporate shareholder(s) alleging that the court should "pierce the corporate veil" of protection and hold shareholders liable for the corporate debts or obligations. This claim involves the "alter ego theory". Under this theory, a plaintiff must demonstrate that the purpose of the business entity is not to carry on business as a separate entity; rather, the corporate entity is simply a shell and should be considered one in the same with the shareholders. That is, the corporation is the alter ego of the shareholders and the limited personal liability protections should be disregarded. The court will ask questions in evaluating whether to pierce the corporate veil.

example of a business formalities

I am an officer and director of ABC Corp. I fail to file my state registration documents. I also fail to keep track of corporate records. I do not have established bylaws, and I fail to adhere to default governance rules. All of these facts can demonstrate an intent to use the corporation as a shell entity for my personal business activity.

example of business assets question

I pay my personal mortgage from the business bank account without noting whether the payment is a dividend or salary compensation. Also, I routinely pay corporate expenses from my personal bank account without noting that my payment is a capital contribution to the corporate entity. This can demonstrate the corporation is a shell.

by estoppel

If a third-party reasonably relies on an agent's representation that she has authority to act on behalf of the principal, the principal may be bound by the actions of the agent. Generally, the principal must act or fail to act in a manner that causes a third party to reasonably believe that an agency relationship exists, when in fact there is no agency. Agency by estoppel is based upon principles of fairness. It would be unfair to detriment a third party who reasonably believed that the agent had authority to act on behalf of the principle, and the principal was the source or cause of that belief. ex. Bill is James' agent. James terminates the agency relationship. Nonetheless, unbeknownst to James, Bill continues to transact with third parties on James' behalf. James fails to notify third parties of Bill's termination. James may be bound to any agreement entered into by Bill.

duties of the agent complete

If the purpose of the agency ceases to exist, the agency relationship terminates. This often arises when the agent discharges all of her agency obligations. Further, it could arise when the subject matter of the agency no longer exists. ex. You higher me to represent you in the sale of your real estate. The real estate is the subject of an eminent domain action and is taken by the government. The agency relationship terminates when the purpose of my agency is gone.

implied authority

Implied authority concerns the authority to enter into obligations that a reasonable person would imply from the agent's position, title, or past course of dealings. If an employee has the title of vice president, it implies a great deal of authority to act on behalf of the business. Further, if an employee entered into a previous contract on behalf of the principal, it may imply that she can enter into similar contracts in the future. ex. Beth is hired by ABC Corp with the title of Senior Sales Manager. 123 Corp seeks to purchase a shipment of supplies manufactured by ABC Corp. Even if Beth is expressly prohibited in her employment agreement from entering into direct sales agreements, it is reasonable for a retailer to believe that a person with her title has that authority. If a retailer is unaware of Beth's limitations and Beth signs a sales contract on behalf of ABC Corp, ABC Corp will be bound by the contract. Beth may be liable to ABC Corp, but her title implies this authority to transact with third parties in this manner.

duty to reimburse

The principal must reimburse the agent for a reasonable amount expended in carrying out her duties. Reasonable reimbursement includes the cost of travel, meals, lodging, incidental expenses, etc

what are the types of agents

The principal will lay out the "scope of the agency", including the responsibilities and limitations of the agent. Agents generally fall into two categories

ratification

While an agent may bind the principal to the extent of her authority, the principal is also bound if she ratifies the conduct of the agent that is beyond her express, implied, or apparent authority. That is, if the principal accepts or takes advantage of the agent's actions, she impliedly ratifies those actions as taken on her behalf. In such a situation, this expands the implied and apparent authority of the agent when undertaking future actions.

What is the agency status of an employee as compared to an independent contractor?

While both are independent contractors, and employees are agents of the principal. This distinction is important for determining a principal's liability for the agent's actions. Generally, absent specific instructions to do a task leading to liability, an employer is not liable for the actions of an independent contractor taken on behalf of the principal.

limited agent

has a special purpose and limited authority to act on behalf of the principal. Unless specifically limited by the principal, actions done in furtherance of that purpose are within the scope of the agent's authority. ex.I hire a real estate agent to represent me in the purchase of a business. She is my limited agent for that purpose. Her authority to act on my behalf is limited to this situation.

general agent

has broad authority to act on behalf of the agent. The scope of the agency is not limited to a special purpose. eex. Arthur is my employee. He serves a operations manager. As such, he is my general agent with regard to all aspects of operations falling under his responsibility. His authority to act as my agent is not limited to a specific task; rather, it is pursuant to his responsibilities in his position.

what are the two categories that agents generally fall into

limited agent and general agent

what are the duties of the agent to the principal

loyalty, duty of care, information and disclosure, obedience, accounting.

both a frolic and detour.....

must be present to relieve an employer from liability for the agent's actions.

detour

occurs when an employee substantially deviates from an employer's instructions or rules

renunciation by the agent

the agent can renounce the business of the principal and terminate her agency status and authority. This may, however, violate a contractual relationship between the parties. ex. I enter into a contract to serve as your agent. I may terminate the agency by renouncing my duties. Unless I have a justification, my actions will likely violate my contractual obligations to you.