Chapter 19 - Relationship of Principal and Agent

Murphy, while a guest at a motel operated by the Betsy-Len Motor Hotel Corporation, sustained injuries from a fall allegedly caused by negligence in maintaining the premises. At that time, Betsy-Len was under a license agreement with Holiday Inns, Inc. The license contained provisions permitting Holiday Inns to regulate the architectural style of the buildings as well as the type and style of the furnishings and equipment. The contract, however, did not grant Holiday Inns the power to control the day-to-day operations of Betsy-Len's motel, to fix customer rates, or to demand a share of the profits. Betsy-Len could hire and fire its employees, determine wages and working conditions, supervise the employee work routine, and discipline its employees. In return, Betsy-Len used the trade name "Holiday Inns" and paid a fee for use of the license and Holiday Inns' national advertising. Murphy sued Holiday Inns, claiming Betsy-Len was its agent. Is Murphy correct?

Creation of Agency. Decision for Holiday Inns. No. Betsy-Len is not the agent of Holiday Inns. At issue is whether the terms of the license agreement satisfied the level of control necessary to establish a principal-agent relationship. In this case, the regulatory provisions included regulations on the architectural style of the buildings and the type and style of furnishings and equipment, but did not give the defendant control over the day-to-day operations of Betsy-Len's motel and, therefore, did not constitute control within the definition of agency. Murphy v. Holiday Inns, Inc., 219 S.E.2d 874 (1975).

Brian Hanson sustained a paralyzing injury while playing in a lacrosse match between Ohio State University and Ashland University. Hanson had interceded in a fight between one of his teammates and an Ashland player, William Kynast. Hanson grabbed Kynast in a bear hug, but Kynast threw Hanson off his back. Hanson's head struck the ground, resulting in serious injuries. An ambulance was summoned, and after several delays, Hanson was transported to a local hospital where he underwent surgery. Doctors determined that Hanson suffered a compression fracture of his sixth spinal vertebrae. Hanson, now an incomplete quadriplegic, subsequently filed suit against Ashland University, maintaining that because Kynast was acting as the agent of Ashland, the university was therefore liable for Kynast's alleged wrongful acts . Was Kynast an agent of Ashland?

Creation of Agency. No. The relationship of principal and agent exists only when one party exercises the right of control over the actions of another and those actions are directed toward the attainment of an objective which the former seeks. William Kynast attended Ashland University, received no scholarship or compensation, voluntarily became a member of the university's lacrosse team for which games no attendance fee is charged. Kynast purchased his own equipment and received instruction from a coach while preparing and playing such games but was not otherwise controlled by the coach and participated in the game as a part of his total educational experience while attending school.Kynast and Ashland have a relationship typical of most students attending a university. A university such as Ashland offers classroom instruction in a great variety of subjects, as well as optional participation in events such as school clubs and sports. These offerings are designed to expand and enrich the overall educational experience. The student pays a fee and agrees to abide by the university's rules. In exchange, the university provides the student with a worthwhile education. This relationship does not constitute a principal-agent relationship. The student is a buyer of education rather than an agent. Hanson v. Kynast, 494 N.E.2d 1091 (1986).

Timothy retains Cynthia, an attorney, to bring a lawsuit upon a valid claim against Vincent. Recently enacted legislation has shortened the statute of limitations for this type of legal action. Cynthia fails to make herself aware of this new statute. Consequently, she files the complaint after the statute of limitations has run. As a result, the lawsuit is dismissed. What rights, if any, does Timothy have against Cynthia?

Duties of Agent to Principal: Duty of Diligence. Judgment would be for Timothy assuming that a lawyer acting reasonably would have had opportunity to discover the revised statute of limitations period. Subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances. Special skills or knowledge possessed by an agent are circumstances to be taken into account in determining whether the agent acted with due care and diligence. Moreover, if the agent claims to possess special skill or knowledge, the agent has a duty to act with the care, competence, and diligence normally exercised by agents with such skill or knowledge. Restatement, Section 8.08.

Piedmont Electric Co. gave a list of delinquent accounts to Alexander, an employee, with instructions to discontinue electric service to delinquent customers. Among those listed was Todd Hatchery, which was then in the process of hatching chickens in a large, electrically heated incubator. Todd Hatchery told Alexander that it did not consider its account delinquent, but Alexander nevertheless cut the wires leading to the hatchery. Subsequently, Todd Hatchery recovered a judgment of $5,000 in an action brought against Alexander for the loss resulting from the interruption of the incubation process. Alexander has paid the judgment and brings a cause of action against Piedmont Electric Co. What may he recover? Explain.

Duties of Principal to Agent: Indemnification/Reimbursement. Judgment for Alexander. In general, a principal has an obligation to indemnify an agent whenever the agent makes a payment or incurs an expense or other loss while acting as authorized on behalf of the principal. The contract between the principal and agent may specify the extent of this duty. In the absence of any contractual provisions a principal has a duty to reimburse the agent when the agent makes a payment within the scope of the agent's actual authority. Restatement, Section 8.14 In collecting the accounts and discontinuing service Alexander was acting within his actual authority. A principal is under a duty to indemnify and reimburse his agent for expenses incurred by or resulting from authorized acts of the agent if not illegal or not known by the agent to be wrongful. Accordingly, Alexander has a right of reimbursement from Piedmont Electric Co. for $5,000.

Hunter Farms contracted with Petrolia Grain & Feed Company, a Canadian company, to purchase a large supply of the farm herbicide Sencor from Petrolia for resale. Petrolia learned from the U.S. Customs Service that the import duty for the Sencor would be 5 percent but that the final rate could be determined only upon an inspection of the Sencor at the time of importation. Petrolia forwarded this information to Hunter. Meanwhile, Hunter employed F. W. Myers & Company, an import broker, to assist in moving the herbicide through customs. When customs later determined that certain chemicals in the herbicide, not listed on its label, would increase the customs duty from $30,000 to $128,000, Myers paid the additional amount under protest and turned to Hunter for indemnification. Hunter refused to pay Myers, claiming that Myers breached its duty of care as an import broker in failing to inform Hunter that the 5 percent duty rate was subject to increase. Myers brought an action against Hunter, arguing that it was not employed to give advice to Hunter on matters of importation. Explain whether Myers had the duty to inform Hunter.

Duty of Diligence/Duty to Inform. Myers must show that the customs of the industry or profession is that importers bear no special duty to advise the importer unless requested to do so. They essentially draft papers to facilitate the process. Finally, Myers needs to prove that he had no information regarding the increased duty and thus had fulfilled his duty of disclosure to Hunter. In general, a principal has an obligation to indemnify an agent whenever the agent makes a payment or incurs an expense or other loss while acting as authorized on behalf of the principal. The contract between the principal and agent may specify the extent of this duty. In the absence of any contractual provisions a principal has a duty to reimburse the agent when the agent makes a payment within the scope of the agent's actual authority. Restatement, Section 8.14. On the other hand, subject to any agreement with the principal, an agent has a duty to the principal to act with the care, competence, and diligence normally exercised by agents in similar circumstances. Special skills or knowledge possessed by an agent are circumstances to be taken into account in determining whether the agent acted with due care and diligence. Moreover, if the agent claims to possess special skill or knowledge, the agent has a duty to act with the care, competence, and diligence normally exercised by agents with such skill or knowledge. Restatement, Section 8.08. Moreover, an agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know if: (1) the agent knows, or has reason to know, that the principal would wish to have the facts; or (2) the facts are material to the agent's duties to the principal. Restatement, Section 8.11. F.W. Myers & Company v. Hunter Farms, 319 N.W.2d 186 (1982).

Wilson engages Ruth to sell Wilson's antique walnut chest to Harold for $2,500. The next day, Ruth learns that Sandy is willing to pay $3,000 for Wilson's chest. Ruth nevertheless sells the chest to Harold. Wilson then discovers these facts. What are Wilson's rights, if any, against Ruth?

Duty to Inform. An agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know if: (1) the agent knows, or has reason to know, that the principal would wish to have the facts; or (2) the facts are material to the agent's duties to the principal. Restatement, Section 8.11. An agent who breaches this duty is subject to liability to the principal for loss caused the principal by the agent's breach and may also be subject to termination of the agency relationship. Moreover, if the agent's breach of this duty constitutes a breach of the contract between the agent and the principal, the agent is also liable for breach of contract. However, if Ruth has reason to believe that Wilson desired only to sell the chest to Harold at the agreed upon price, then she fulfilled the terms of the agency. The problem may be interpreted either way.

Sierra Pacific Industries purchased various areas of timber and six other pieces of real property, including a ten-acre parcel on which five duplexes and two single-family units were located. Sierra Pacific requested the assistance of Joseph Carter, a licensed real estate broker, in selling the nontimberland properties. It commissioned him to sell the property for an asking price of $850,000, of which Sierra Pacific would receive $800,000 and Carter would receive $50,000 as a commission. Unable to find a prospective buyer, Carter finally sold the property to his daughter and son-in-law for $850,000 and retained the $50,000 commission without informing Sierra Pacific of his relationship to the buyers. After learning of these facts, Sierra Pacific brought an action against Carter. To what relief, if any, is Sierra Pacific entitled?

Fiduciary Duty of Agent. Sierra Pacific is entitled to relief based on Carter's breach of his fiduciary duty. An agent has a duty not to deal with the principal as or on behalf of an adverse party in a transaction connected with the agency relationship. Restatement, Section 8.03. An agent also has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know if: (1) the agent knows, or has reason to know, that the principal would wish to have the facts; or (2) the facts are material to the agent's duties to the principal. Restatement, Section 8.11 An agent must refrain from dual representation in a transaction unless he obtains the consent of both principals after full disclosure. Under most circumstances, then, if the agent is related to the buyer in a way that suggests a reasonable possibility that the agent himself could be acquiring an interest in the property, the relationship is a material fact that must be disclosed. Therefore, Sierra Pacific may recover the $50,000 commission paid to Carter plus any actual and proximately caused loss on the price it received for the property. Sierra Pacific Industries v. Carter, 104 Cal.App.3d 579, 163 Cal.Rptr. 764 (1980).

Parker, the owner of certain unimproved real estate in Chicago, employed Adams, a real estate agent, to sell the property for a price of $250,000 or more and agreed to pay Adams a commission of 6 percent for making a sale. Adams negotiated with Turner, who was interested in the property and willing to pay as much as $280,000 for it. Adams made an agreement with Turner that if Adams could obtain Parker's signature to a contract to sell the property to Turner for $250,000, Turner would pay Adams a bonus of $10,000. Adams prepared and Parker and Turner signed a contract for the sale of the property to Turner for $250,000. Turner refuses to pay Adams the $10,000 as promised. Parker refuses to pay Adams the 6 percent commission. In an action by Adams against Parker and Turner, what is the judgment?

Fiduciary Duty. Decision against Adams on both actions. Adams owes an overriding duty of utmost loyalty and good faith to Parker, his principal. An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship. Restatement, Section 8.01. The problem presents a flagrant violation of Adams's duty in this regard when he agreed with Turner to attempt to obtain Parker's signature to a contract to sell the property to Turner for $250,000 when Turner was willing to pay $280,000 for it. Even though authorized to sell the property for $250,000 he was under a duty to obtain a higher price if possible or at least inform the principal of Turner's willingness to pay a higher price. Adams's agreement with Turner, for all practical purposes, made him the agent of Turner as well as of Parker. A disloyal agent cannot recover compensation from either party. If permitted to recover the $10,000 from Turner, he would be under the duty of a fiduciary to account for the full $10,000 to Parker. A principal is entitled to recover secret profits from a disloyal agent.

Perry employed Alice to sell a parcel of real estate at a fixed price without knowledge that David had previously employed Alice to purchase the same property for him. Perry gave Alice no discretion as to price or terms, and Alice entered into a contract of sale with David on the exact terms authorized by Perry. After accepting a partial payment, Perry discovered that Alice was employed by David and brought an action to rescind. David resisted on the ground that Perry had suffered no damage because Alice had been given no discretion and the sale was made on the exact basis authorized by Perry. Discuss whether Perry will prevail.

Fiduciary Duty. Decision in favor of Perry. Although Alice had no discretion as to price or terms with respect to the sale of Perry's real estate she was representing two principals; she was a dual agent. In such cases, the interests of one of the principals are likely to suffer, particularly where, as in the problem, the agent represents both the buyer and the seller. Therefore, Alice has breached her fiduciary to both Perry and David. Upon discovery of the double or dual agency either of the principals may repudiate the contract made in their behalf by the common agent. If the contract has been performed, either party may have the transaction set aside. The agent is not entitled to compensation from either party. It appears that neither Perry nor David knew of the double agency. If one of the principals did not know that Alice was also the agent of the other party to the contract he has the absolute right to rescind the transaction upon learning the truth. It is not necessary for the principal to show any injury or intent to deceive.

In October 2009, Black, the owner of the Grand Opera House, and Harvey entered into a written agreement to lease the opera house to Harvey for five years at a rental of $300,000 a year. Harvey engaged Day as manager of the theater at a salary of $1,175 per week plus 10 percent of the profits. One of Day's duties was to determine the amounts of money taken in each night and, after deducting expenses, to divide the profits between Harvey and the manager of the particular attraction playing at the theater. In September 2014 Day went to Black and offered to rent the opera house from Black at a rental of $375,000 per year, whereupon Black entered into a lease with Day for five years at this figure. When Harvey learned of and objected to this transaction, Day offered to assign the lease to him for $600,000 per year. Harvey refused and brought an appropriate action against Day. Should Harvey recover? If so, on what basis and to what relief is he entitled?

Fiduciary Duty. Decree in favor of Harvey. An agent owes the principal a duty of loyalty which includes an obligation not to compete. During the agency relationship an agent must not compete with his principal or act on behalf or otherwise assist any of the principal's competitors. Restatement, Section 8.04. An agent may not use or disclose confidential information obtained in the course of the agency for his own benefit or those of a third party. Restatement, Section 8.05(2). In this case Day engaged in business activity with Black, and this activity would be characterized as being in conflict with the interests of Day's principal, Harvey.

Morris is a salesperson for Acme, Inc., a manufacturer of household appliances. Morris receives a commission on all sales made and no further compensation. He drives his own automobile, pays his own expenses, and calls on whom he pleases. While driving to make a call on a potential customer, Morris negligently collides with Hudson. Hudson sues Acme and Morris. Who should be held liable?

Nature of Agency. A principal is liable for the torts committed by an employee within the scope of his employment but ordinarily is not liable for torts committed by an independent contractor. The critical question in this case is whether Morris is an employee of Acme or is an independent contractor. Agents who are not employees are generally referred to as independent contractors, although the Third Restatement does not use this term. In these cases, although the principal has the right of control over the agent, the principal does not control the manner and means of the agent's performance. Acme had no control over Morris since Morris made the decision as to which customers to see, as well as driving his own car. Therefore, Morris is most likely an independent contractor and therefore Acme would not be liable to Hudson. Hudson would, however, be successful in a suit against Morris since persons are responsible for their own negligent conduct.

Tony Wilson was a member of Troop 392 of the Boy Scouts of America (BSA) and of the St. Louis Area Council (Council). Tony went on a trip with the troop to Fort Leonard Wood, Missouri. Five adult volunteer leaders accompanied the troop. The troop stayed in a building that had thirty-foot aluminum pipes stacked next to it. At approximately 10:00 p.m., Tony and other scouts were outside the building, and the leaders were inside. Tony and two other scouts picked up a pipe and raised it so that it came into contact with 7200-volt power lines that ran over the building. All three scouts were electrocuted, and Tony died. His parents brought a suit for wrongful death against the Council, claiming that the volunteer leaders were agents or servants of the Council and that it was vicariously liable for their negligence. The Council filed a motion for summary judgment, arguing as follows: the BSA chartered local councils in certain areas, and councils in turn granted charters to local sponsors such as schools, churches, or civic organizations. Local councils did not administer the scouting program for the sponsor, did not select volunteers, did not prescribe training for volunteers, and did not direct or control the activities of troops. Troops were not required to get permission from local councils before participating in an activity. Are the troop leaders agents of the Council? Explain.

Other Legal Relationships: Employment vs. Independent Contractor. No. Under the doctrine of respondeat superior an employer is liable for those negligent acts or omissions of his employee which are committed within the scope of his employment. Liability based on respondeat superior requires some evidence that a master-servant relationship existed between the parties. The test to determine if respondeat superior applies to a tort is whether the person sought to be charged as master had the right or power to control and direct the physical conduct of the other in the performance of the act. If there was no right to control, there is no liability; for those rendering services but retaining control over their own movements are not servants. The relationship of servant and master begins only when the person charged as master has the right to direct the method by which the master's service is performed. Whether a party is liable under the doctrine of respondeat superior depends on the facts and circumstances in evidence in each particular case and no single test is conclusive of the issue of the party's interest in the activity and his right of control. In the instant action, Council neither controlled the actions of the troop leaders nor ran the program at Fort Leonard Wood. There was no vicarious liability on the part of Council for the leaders' actions while on the trip to Fort Leonard Wood. The trial court did not err in granting Council's motion for summary judgment.

Western Rivers Fly Fisher (Western) operates under license of the U.S. Forest Service as an "outfitter," a corporation in the business of arranging fishing expeditions on the Green River, Utah. Michael D. Petragallo, is licensed by the Forest Service as a guide to conduct fishing expeditions but cannot do so by himself, because the Forest Service licenses only outfitters to float patrons down the Green River. Western and several other licensed outfitters contact Petragallo to guide clients on fishing trips. Because the Forest Service licenses only outfitters to sponsor fishing expeditions, every guide must display on the boat and vehicle he uses the insignia of the outfitter sponsoring the particular trip. Petragallo may agree or refuse to take individuals Western refers to him, and Western does not restrict him from guiding expeditions for other outfitters. Western pays Petragallo a certain sum per fishing trip and does not make any deductions from his compensation. Petragallo's responsibilities include transporting patrons to the Green River, using his own boat for fishing trips, providing food and overnight needs for patrons, assisting patrons in fly fishing, and transporting them from the river to their vehicles. Robert McMaster contacted Western and arranged for a fishing trip for himself and two others. Jaeger, was a member of McMaster's fishing party. McMaster paid Western, which set the price for the trip, planned the itinerary for the McMaster party, rented fishing rods to them, and arranged for Petragallo to be their guide. When Petragallo met the McMaster party, he answered affirmatively when Jaeger asked him if he worked for Western. While driving the McMaster party back to town at the conclusion of the fishing trip, Petragallo lost control of his vehicle, injuring Jaeger, who brought suit against Western, Petragallo, and others. Western claims that because Petragallo is an independent contractor and was never its employee, it is not liable for Petragallo's acts in causing Jaeger's injuries. Is Petragallo an independent contractor? Explain.

Other Legal Relationships: Employment vs. Independent Contractor. The facts in this case provide evidence for both conclusions (independent contractor and employee), and therefore is not a case for summary judgment. On the one hand, the facts suggest Petragallo is an independent contractor. Western engages Petragallo to guide particular fishing trips, for a set sum, allowing him to conduct the trips in his own discretion. Petragallo may even choose to refuse to guide patrons Western has referred to him. Western's actions appear to involve setting up the parameters of a fishing trip and place "only minimal restrictions or controls" upon Petragallo. [Citation.] Also, Western and Petragallo seem to operate as if Petragallo were an independent contractor, as Western has the right to hire Petragallo or any other available guide as it sees fit, pays him per trip, expects him to furnish his own equipment, and treats him as an independent contractor for tax purposes. Moreover, although Petragallo must operate under Western's license, as required by the Forest Service, Western does not control through its license the manner in which Petragallo conducts fishing trips. Apparently, once Western sets up a fishing trip and engages Petragallo as a guide, it relies upon and expects Petragallo to use his own discretion in doing everything else to ensure patrons have an enjoyable experience, including using his own expertise, vehicle, boat, and equipment. [Citation.] However, on the other hand, the facts may indicate Petragallo is an employee. It is actually a judgment call as to how much control Western has over Petragallo through its advertising and arranging of fishing expeditions. Although Petragallo may refuse to guide patrons, Western apparently contacts Petragallo only after it has planned the fishing trip, without involving him, and may provide him with a set itinerary. Also, Forest Service licensing regulations place Western in a position of having the ultimate right to control Petragallo's work as, without solicitations from Western and other outfitters, Petragallo would be prohibited completely from conducting fishing expeditions.

Tube Art was involved in moving a reader board sign to a new location. Tube Art's service manager and another employee went to the proposed site and took photographs and measurements. Later, a Tube Art employee laid out the exact size and location for the excavation by marking a four-by-four square on the asphalt surface with yellow paint. The dimensions of the hole, including its depth of six feet, were indicated with spray paint inside the square. After the layout was painted on the asphalt, Tube Art engaged a backhoe operator, Richard F. Redford, to dig the hole. Redford began digging in the early evening hours at the location designated by Tube Art. At approximately 9:30 P.M., the bucket of Redford's backhoe struck a small natural gas pipeline. After examining the pipe and finding no indication of a break or leak, he concluded that the line was not in use and left the site. Shortly before 2:00 A.M. on the following day, an explosion and fire occurred in the building serviced by that gas pipeline. As a result, two people in the building were killed, and most of its contents were destroyed. Massey and his associates, as tenants of the building, brought an action against Tube Art and Richard Redford for the total destruction of their property. Will the plaintiffs prevail? Explain.

Other Legal Relationships: Employment vs. Independent Contractor. Yes, Massey will prevail. A number of factors may be taken into account in determining whether one who performs services for another is an employee or an independent contractor. The crucial consideration is "the extent of control which, by the agreement, the master may exercise over the details of the work." An employee is subject to the employer's control or right of control regarding the employee's physical conduct in performing the services. Independent contractors are not subject to such control or right of control. In this case, Redford was essentially self-employed, was free to work for other contractors, and chose the time of day to do the assigned work. Tube Art, however, not only had the right to control Redford's activities, but it did control them. Specifically, it exercised control over the most important decisions associated with the project: the size and location of the hole. Redford simply dug the hole in accordance with the placement and dimensions dictated by Tube Art. Redford was an employee of Tube Art, and Tube Art is therefore responsible for his actions. Massey v. Tube Art Display, Inc., 15 Wn. App. 782, 551 P.2d 1387 (1976).

Harvey Hilgendorf was a licensed real estate broker acting as the agent of the Hagues in the sale of eighty acres of farmland. The Hagues, however, terminated Hilgendorf's agency before the expiration of the listing contract when they encountered financial difficulties and decided to liquidate their entire holdings of land at one time. Hilgendorf brought this action for breach of the listing contract. The Hagues maintain that Hilgendorf's duty of loyalty required him to give up the listing contract. Are the Hagues correct in their assertion?

Termination of Agency by Revocation. No, the Hagues are not correct. Judgment for Hilgendorf. Since agency is a consensual relationship, a principal has the power to terminate an agency that is not coupled with an interest even though the term of the agency has not yet expired. But without a legal reason for doing so, the principal does not have the right to terminate an unexpired agency contract and may subject himself to liability for doing so. Although an agent's duty of loyalty does require him to place the principal's interests first in dealing with third parties, in the contract of agency itself between the agent and the principal each is acting in his own behalf. The Hagues' financial difficulties did not give them the legal right to terminate the agency relationship, and Hilgendorf was under no duty to relinquish his role as their agent simply because the principal encountered financial problems. Therefore, Hilgendorf may recover damages for breach of the listing contract. Hilgendorf v. Hague, 29 N.W.2d 272 (1980)

Packer owned and operated a fruit cannery in Southton, Illinois. He stored a substantial amount of finished canned goods in a warehouse in East St. Louis, Illinois, owned and operated by Alden, in order to have goods readily available for the St. Louis market. On March 1, he had 10,000 cans of peaches and 5,000 cans of apples in storage with Alden. On the day named, he borrowed $5,000 from Alden, giving Alden his promissory note for this amount due June 1, together with a letter authorizing Alden, in the event the note was not paid at maturity, to sell any or all of his goods in storage, pay the indebtedness, and account to him for any surplus. Packer died on June 2 without having paid the note. On June 8, Alden told Taylor, a wholesale food distributor, that he had for sale, as agent of the owner, 10,000 cans of peaches and 5,000 cans of apples. Taylor said he would take the peaches and would decide later about the apples. A contract for the sale of 10,000 cans of peaches for $6,000 was thereupon signed "Alden, agent for Packer, seller; Taylor, buyer." Both Alden and Taylor knew of the death of Packer. Delivery of the peaches and payment were made on June 10. On June 11, Alden and Taylor signed a similar contract covering the 5,000 cans of apples, delivery and payment to be made June 30. On June 23, Packer's executor, having learned of these contracts, wrote Alden and Taylor stating that Alden had no authority to make the contracts, demanding that Taylor return the peaches, and directing Alden not to deliver the apples. Discuss the correctness of the contentions of Packer's executor.

Termination of Agency: Death. Packer's executor is incorrect as to the first contract for the sale of the peaches, but correct as to the second contract for the sale of the apples. A power given as security "is a power to affect the legal relations of its creator that is created in the form of a manifestation of actual authority and held for the benefit of the holder or a third person." Restatement, Section 3.12. A power given as security creates neither a relationship of agency nor actual authority, although the power enables its holder to affect the legal relations of the creator of the power. Restatement, Section 3.12, comment b. The power arises from a manifestation of assent by its creator that the holder of the power may, for example, dispose of property or other interests of the creator. The Restatement's definition includes, but is more extensive than, the rule in some states regarding an agency coupled with an interest, in which the holder (agent) has a security interest in the power conferred upon him by the creator (principal). For example, an agency coupled with an interest would arise where an agent has advanced funds on behalf of the principal and the agent's power to act is given as security for the loan. Unless otherwise agreed, a power given as security may not be revoked. In addition, the incapacity of the creator or of the holder of the power does not terminate the power. Nor will the death of the creator terminate the power, unless the duty for which the power was given terminates with the death of the creator. Restatement, Section 3.13(2). A power given as security is terminated by an event that discharges the obligation secured by it or that makes execution of the power illegal or impossible. Restatement, Section 3.13(1). Thus, in the example above, when the creator repays the loan, the power is terminated. Packer's grant of authority to Alden to sell the canned goods was an agency coupled with an interest of the agent in the subject matter. Alden had an interest in the prospective proceeds of the execution of the agency in that he could pay himself therefrom the debt owed to him. He also had an interest in the subject matter of the agency, the canned goods, in that he had possession thereof. Since the interest was not only in the proceeds but also in the subject matter he had a true "agency coupled with an interest" and it was irrevocable even by the death of the principal. The result is different with respect to the second contract for the apples. A power given as security is terminated by an event that discharges the obligation secured by it. Restatement, Section 3.13(1). Alden, as a result of the concluded sale of the peaches, had $6,000 which more than covered the indebtedness to him. He therefore had no further interest in the proceeds of the sale of the apples even though he still had possession thereof. At the time he made the contract to sell the apples, he no longer had an agency coupled with an interest, and hence, no agency because the death of the principal terminated the agency.

Palmer made a valid contract with Ames under which Ames was to sell Palmer's goods on commission from January 1 to June 30. Ames made satisfactory sales up to May 15 and was about to close an unusually large order when Palmer suddenly and without notice revoked Ames's authority to sell. Can Ames continue to sell Palmer's goods during the unexpired term of her contract?

Termination of Agency: Revocation of Authority. No. A principal may revoke an agent's authority at any time by notifying the agent. Restatement, Section 3.10. If, however, such revocation constitutes a breach of contract, the agent may recover damages from the principal. Although Palmer did not have the right to terminate the agency before June 30, he had the power. Since the authority of an agent is based upon the consent of the principal, the agency is terminated upon the withdrawal of such consent. Therefore, upon Palmer's revocation of Ames's authority to sell, Ames no longer had the actual authority to sell Palmer's goods. Ames, however may sue Palmer and recover damages for breach of the agency contract.