Agency Law: Restatement of Agency
• Common law followed by most courts
Terminology
Nature of Agency: One party agrees to act on
behalf of another.
Examples: sales clerks, real estate agents, sports agents
Tom asks Bob to go and pick up his car from the auto
mechanic.
Principal: The Party for Whom the Agent Acts
Agent: Party Who Acts for Another
Master/servant
Relationship in which the master/principal exercises a great
deal of control over the servant/ agent. Most common form
is employer/employee relationship
Factors that control whether this type of relationship exists
• Level of supervision
• Level of control
• Nature of agent’s work
• Regularity of hours and pay
• Length of employment
Independent contractor
Hired to perform a task but is not directly
supervised
• Example: Lawyer
Agency Law
Three Parts to Agency Law
1. Creating the agency relationship
2. Relationship between principal and agent
3. Relationships of agent and principal to third
parties
Agency Creation
Creating the Agency Relationship: When the
Principal Hires Someone
Express Authority Agency
• Created by principal stating or writing that
agency exists and the authority thereof
• Requires oral or written agreement − must be in
writing if required by statute of frauds
Example: Agency contract is longer than one year
Anne, the owner of Blackacre, writes to Sam: “Please act as my broker
to sell Blackacre.” Sam puts up a “For Sale” sign on the property.
When does Sam become an agent for Anne?
Agency Creation
Principal Must Have Legal
Capacity
• Age
• Mental capacity
Capacity: Unincorporated Associations Do Not
Have Capacity
• Have no legal existence
• Members will be liable since there is no principal
The Capacity of Agent Becomes an Issue When it
Concerns
• Authority to enter contracts
• Potential liability to third parties
Types of Authority
1. Actual Authority
2. Implied Authority
3. Apparent Authority
4. Agency by Ratification
Actual Authority
Objective manifestation of authority by principal, followed by
the agent’s reasonable interpretation of that manifestation.
Two travelling salespeople, Bernice and Joe, are in a hotel bar. As Joe
gets another bowl of pretzels, Bernice says “it’s happy hour, get us
another round of drinks and charge them to me.” Joe orders the drinks.
What if its not actually happy hour?
Implied Authority
The Extension of Express Authority By Custom. Authority
that is not specifically expressed or defined in writing,
but which an employee or agent assumes to possess in
order to conduct business on behalf of an agency.
When John visits a local bar,
the server tells him he will
receive a free drink if he
orders an entrée. By making
this offer, the server has made
an oral contract with John on
behalf of the bar.
John assumes that the server
has the authority to offer a
free drink since he is an
employee of the business and
acting on behalf of the
owner.
Frustrated by Thomas
Beckett, the Archbishop
of Canterbury, Henry II
cries out “Will no one rid
me of this meddlesome
priest?”
Four of Henry’s barons
proceed to kill Beckett.
Later Henry insists that
he did not want Beckett
murdered. Were the barons
acting as Henry’s agents?
Apparent Authority
Exists when the agent takes actions for the
principal with a third party that the third party
reasonably believes the agent has the authority to
take
• Also called agency by estoppel or ostensible
authority
Examples: Failure to notify of an agent’s retirement,
allowing bank to use your name for another’s loan
Betty employs Veronica to manage her art supply business. Betty tells
Veronica she can’t buy more than $500 worth of craft paints from any
supplier. Betty implies to a vendor, however, that veronica has unlimited
authority to buy from him. Veronica buys $1,000 worth of craft paint
from the vendor.
A bank teller accepts a customer’s deposit of $9000 in cash. He
gives the customer a receipt, then goes on a “break.” He pockets
the $9000 and never returns. He did not have the actual authority
to do this, of course. Is the bank liable?
Thomas v. Weatherguard Construction Company,
Inc. (2015)
• What were the trappings of apparent authority?
• What were the signals that something was amiss?
• Who has liability?
Agency by Ratification
Principal reviews contract and decides to
honor it even though agent had no
authority to enter into it
An insurance company accepts premium payments for a life insurance
policy that was sold by an agent who was not authorized to solicit the
application. If they do so in full knowledge of the agent's misdeeds, this
receipt of premiums constitutes a ratification of the agent's act, making
the company liable for the insurance policy that agent sold.
Principal-Agent Relationship
Agent’s Responsibilities
Agent acts in the principal’s best interests as a
fiduciary
• Loyalty
• Trust
• Care
• Obedience
Agent cannot represent both sides
Cannot make a profit at principal’s expense
A real estate broker agrees to help Sam locate and purchase a new
house. The broker knows that Alice is interested in selling her house.
The broker contacts Alice and agrees to help her sell the house to Sam.
Is this okay?
Ralph works as a waiter in an upscale restaurant. None of Ralph’s
duties involve preparing food. One day, Ralph accidently reads the
restaurant's secret recipe for stuffed mushrooms. Ralph may not use the
recipe or disclose it to others even though his role as an agent does not
involve preparing food.
Lucini Italia Co. v.
Grappolini (2003)
Fiduciary Duties
• How was the agent playing both ends of
the deal here?
• What should the U.S. principal have done
to catch the problem earlier?
• Comment on the ethics of the agent
Post-Employment Agreements
• Covenants Not to Compete
• Must Be Necessary (Purpose for Restricting Employee’s
Post-Termination Work)
• Must Be Reasonable in Time and Geographic Scope
• Must Be Voluntary
Covenant Not to Compete. If the Executive is receiving
payments and benefits under Section 2 above (or subsequently
becomes entitled thereto because of a termination described in
Section 2(a)(ii)), then, for a period of one (1) year following the
Executives Termination Date, the Executive shall not directly or
indirectly engage in (whether as an employee, consultant,
proprietor, partner, director or otherwise), or have any
ownership interest in, or participate in a financing, operation,
management or control of, any person, firm, corporation or
business that is a Restricted Business in a Restricted Territory
without the prior written consent of the Board. For this purpose,
ownership of no more than 5% of the outstanding Voting Stock
of a publicly traded corporation shall not constitute a violation
of this provision.
Problems with non-compete agreements:
• Not Given Time to Negotiate
• Non-compete Terms are Not Part of Original Agreement
• No Consideration to Support Terms
• No Right to Discuss With Their Own Counsel
• California Issues – Loathe to Enforce
Garon Foods, Inc. v. Monteith (2013)
• Describe the length of employment
• Explain what Sarah did after she left her job
• What is the judge’s solution?
Rights and Duties
Agent: Obedience
• Follows principal’s instructions
• Need not do anything illegal
Agent: Duty of Care
• Give time and effort
• Follow through
Duties of Principal to Agent
1. Compensation: normally specified in the listing agreement
or employment contract.
2. Reimbursement: implies that the principal must reimburse
the agent for expenses made on the principal’s behalf.
3. Indemnification: arises when the agent suffers a loss through
no fault of his or her own while performing duties on behalf
of the principal.
Principal’s Liability
Principal’s Liability to Third Parties:
Principal has full liability for authorized acts of agent and those done
with apparent authority
• Disclosed principal − principal is fully liable; agent is not
unless the agent had no authority
• Partially disclosed principal − agent indicates there is a
principal but does not tell who it is; third party can hold
either liable
• Undisclosed principal − agent does not disclose there is a
principal; agent stands alone unless principal comes forward
Contract Liability of
Disclosed Principal
16-37
Contract Liability of Undisclosed
or Partially Disclosed Principal
Principal’s Liability
Liability of Principals for Torts
Must have master-servant relationship, not independent
contractor
Liable for torts of servants in scope of employment
• Scope = doing master’s work
• Doctrine of respondeat superior-let the master answer
• Not liable for torts committed while on frolic
Respondeat superior
“Let the master answer.” Doctrine that holds an employer or
principal legally responsible for the wrongful acts of an
employee or agent, if such acts occur within the scope of the
employment or agency.
Jurisdictional differences
Benefits Test
• When the employee’s social or recreational pursuits on the
employer’s premises after hours are endorsed by the express or
implied permission of the employer and are conceivably of
some benefit to the employer, then the employer is liable for
harm resulting from the employee’s actions.
Characteristics Test
• If the employee's action is common enough for that job that the
action could be fairly deemed to be characteristic of the job,
then the employer will be liable for harm resulting from the
employee’s actions.
Factors
• Was the act carried out while the employee was on the clock?
• Was the act carried out as part the employee’s job duties, or
the agent’s responsibilities?
• Was the act of the same nature as the employee’s job
responsibilities?
• Was the employee motivated to commit the act for the
purpose of benefitting the employer?
Independent Contractors
Individuals performing work for someone else, though not
considered legal employees but independent contractors, are not
working within the scope of employment for the sake of
vicarious liability.
Illegal Acts
The commission of an illegal act is not within the scope of
employment. Any damages caused by the act, or during the
commission of the act, are not considered an employer’s
responsibility in most cases.
Steve is employed as a security
guard at a large, and very busy,
pawn shop. Steve’s job is to walk
around the shop, creating a
presence to reduce theft. A
customer starts an argument
with Steve, and is ushered out
the door by another security
guard. Steve, however, becomes
angry and follows the man out
into the parking lot, and
punches him, and then a fight
ensues.
Several days later, the customer
files a small claims lawsuit
seeking payment for medical
bills, as well as for pain and
suffering.
Frolic or detour
• A detour occurs when an employee or agent makes
a minor departure from his employer's charge.
• A frolic is a major departure when the employee is
acting on his own and for his own benefit.
Mario negligently crashes a company van into Luigi’s car while
delivering a box of rare turtle shells for his employer Princess Toadstool.
Is the Princess liable?
What if the accident occurred while Mario was driving to lunch?
What if Mario had taken the van to pick up the his nephews, the
Koopalings, from school?
Principal’s Liability
Principles are Generally Not Liable for the Torts of
Independent Contractors
Exceptions:
• Inherently dangerous activities
• Negligent hiring of independent contractor
• Principal provided specifications for project or job
Scope of Employment
Lange v. National Biscuit Co. (1973)
What test does the court give for determining scope of employment?
Faverty v. McDonald’s Restaurant of
Oregon, Inc. (1995)
Why would a restaurant association have an interest in the outcome of
the case?
Negligent Hiring
Liability if There was Failure to screen
• Failure to do background check
Liability if There was Negligent Retention
Failure to take action
when employee engages
in dangerous behaviors
or takes risk
• Knowledge
+
inaction
=
Liability
Agency Termination
Due To:
• Definite duration of time
• Agent quits/is fired
• Principal dies/is incapacitated
Need to give public or
constructive notice
(trade publication)
• Actual notice
(letters)
• Without notice,
agent will have
lingering
apparent
authority
Termination of At-Will
• Has No Definite Ending Date
• Usually There is No Formal Written Contract
• Used to be They Could be Fired at Any Time
Termination of At-Will
The Do’s and Don’ts of Firing At-Will
Employees
Do:
• Conduct regular reviews of employees, using objective,
uniform measures of performance
Don't:
• Make oral promises of job security to employees who might
later be laid off
Danger: Breach of contract suit
Termination of At-Will
Do:
• Give clear, business-related reasons for any dismissal,
backed by written documentation when possible
Don't:
• Put pressure on an employee to resign in order to avoid
getting fired
Danger: Coercion suit
Termination of At-Will
Do:
• Seek legal waivers from older workers who agree to
leave under an early-retirement plan, and make sure
they understand the waiver terms in advance
• Don't:
• Make derogatory remarks about any dismissed
worker, even if asked for a reference by a prospective
employer
Danger: Defamation suit
Termination of At-Will
Do:
• Follow any written company guidelines for
termination, or be prepared to show in court why
they're not binding in any particular instance
Don't:
• Offer a fired employee a face-saving reason for the
dismissal that's unrelated to poor performance
Danger: Wrongful discharge suit
The Implied Contract
In some states personnel manuals will be a
contract if employees rely on its procedures
Dillon v. Champion Jogbra, Inc. (2002)
• Were there representations about her
continuing employment?
• What should the company have done
differently?