AGENCY AND THE
EMPLOYMENT RELATIONSHIP
Chapter 14
Meiners, Ringleb & Edwards
The Legal Environment of Business, 12th Edition
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AGENCY RELATIONSHIPS

Agency is created when a person or company (agent)
agrees to act for or in place of another person or
company (principal)
1. The principal creates authority in an agent
2. The agent receives authority & carries out the
principal’s instructions
3. Third parties make a contract or are involved in a
tort with the agent

Result: The principal is bound by the agent’s acts with a
third party
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CLASSIFICATION OF AGENTS

Agents are classified on the basis of the authority provided

Universal agents: Do all acts that can be legally
delegated, i.e. General Power of Attorney

General agents: Execute all transactions in connection
with a business, i.e. managers

Special agents: Execute a specific transaction or series of
transactions, i.e. a real estate agent

Agency coupled with an interest: Agent has paid for the
right to have authority for a business

Gratuitous agent: No payment is made to the agent, i.e. a
favor or a volunteer

Subagents: Agent delegates authority to other agents
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CREATING AN AGENCY




Agreement of the Parties
 May be oral or written
 The legal document called a power of attorney establishes agency
and creates an attorney-in-fact
Implied or Express Ratification by the Principal
 A principal accepts responsibility for acts of an agent going
beyond his/her authority
Agency by Estoppel
 Actions of the principal lead others to believe an agency exists –
the principal is estopped from denying the agency’s existence
Agency by Operation of Law
 The agent acts beyond the principal’s authority
 Necessity or emergencies create agency existence
 The agent may do the acts and bind the principal by operation of
law
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ACTS FOR THE PRINCIPAL
Actual Authority
o
Principal sends signals to
the agent to do
something with a third
party
o
Express Authority: Oral
or written instructions
create the authority
o
Implied Authority:
Principal’s conduct or
trade customs create
authority
Apparent Authority
o
Principal sends signals
to the third party that
what the agent does
binds the principal
o
There is the appearance
of authority that a third
party could reasonably
conclude
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CASE
COVE MANAGEMENT V. AFLAC, INC.






Galgano signed an “Associates Agreement” with AFLAC in 2004.
Authorized him to solicit applications for AFLAC insurance policies.
Agreement stated Galgano was an independent contractor. Without
authority to bind AFLAC for his “debts, faults or actions.” Also stated
that Galgano may not enter into contracts or incur debt on behalf of
AFLAC. Another agreement, signed in 2005: Stated Galgano did not
have authority to “rent any office space” or obligate AFLAC without
“specific written authorization”.
In 2009: Galgano leased office space from Cove Management. Lease
listed the tenant as AFLC and listed Galgano as guarantor for office to
be used for “insurance services”
Galgano signed as lessee and guarantor. Later he defaulted on lease
payment.
Cove sued AFLAC for losses. Cove noted that office was clearly listed
as an AFLAC office and engaged in business for AFLAC.
Cove asserted it had right to presume that Galgano had authority as
an agent to bind AFLAC to lease
District court dismissed the suit; Cove appealed.
(Continued)
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CASE
COVE MANAGEMENT V. AFLAC, INC.







Determination of Galgano’s authority will define him as either independent
contractor or an agent of AFLAC. Authority may be either actual or
apparent.
Cove argued that AFLAC clothed Galgano with apparent authority,
created liability in AFLAC as lessee under lease. Apparent authority
defined: “such authority as the principal knowingly permits the agent to
assume . . . or holds his agent out as possessing . . . .” The other party
has “reasonably and detrimentally relied on agent’s authority.”
Most evidence came into existence AFTER signing of the lease.
Court cannot consider: (1) When office was set up, the parking signed
had the AFLAC symbol and duck.(2) That there were AFLAC’s stylized
blue materials – in and out of office. (3) AFLAC was listed on the director
of the building.
Cove did not make any effort to determine if Galgano was independent
contractor or agent of AFLAC. Cove relied exclusively on statement and
representations of Galgano that he had authority to bind AFLAC to the
lease on premises.
HELD: Affirmed.
Galgano was not acting under apparent authority.
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PRINCIPAL’S DUTIES TO AN AGENT

Cooperation – with the agent in fulfilling the agency
purpose

Compensation – for services rendered


Unless agent agreed to work for free
Reimbursement – of ”reasonable” expenses

No reimbursement for agents “misconduct”

Working Conditions – as required by law and meet
legal obligations

Indemnify (pay back) – for legal liabilities incurred by
the agent

See Exhibit 14.2
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AGENT’S DUTIES TO THE PRINCIPAL

Loyalty – place the principal’s interest above the agent’s

Can’t compete with principle without permission.

Massachusetts Court: Held CEO would forfeit all compensation paid to him
during his disloyalty to the company

Obedience and Performance – to perform in compliance
with the principal’s instructions.

Reasonable Care & Skill – to perform as is ”reasonable
under the circumstances” (including emergencies).

Account – for the funds and property of the principal (avoid
mixing personal funds with the principal’s).

Notify – as to all facts of the agency purpose.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CASE
BEARDEN V. WARDLEY CORPORATION





Bearden listed some rental property for sale with real estate agent,
Gritton who worked for Wardley Corp. (real estate firm). After listing
property Gritton told Bearden he wanted to buy the property for
$89,000. Bearden agreed. Contract called for Gritton to pay Bearden
$400/mo., followed by balloon payment after five years. Bearden would
keep title until balloon payment was made.
Unknown to Bearden, Gritton gave warranty deed with other documents
for Bearden to sign. She signed; he had signature improperly notarized;
recorded the deed and title was transferred to Gritton.
Gritton doesn’t keep up on payments.
Bearden hires a lawyer; lawyer discovers Gritton’s fraud and that
Gritton had also borrowed money against the property and it was in
foreclosure for lack of payments to lender. Bearden paid $60,000 to
keep property from being lost.
Sued Gritton and Wardley for breach of contract, fraud, & breach of
fiduciary duty.
(Continued)
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CASE
BEARDEN V. WARDLEY CORPORATION
Jury awarded $75,000 damages + $25,000 punitive damages
+ $50,000 attorney fees, costs, etc. against Gritton &
Wardley. Wardley and appealed.
 HELD: Affirmed.
 Listing contract was with Wardley, with “fiduciary duties to
seller” clause in it. Wardley’s internal policy prohibited agents
to purchase properties they listed.
 Gritton was employed by Wardley: Knew of listing
agreement; Knew Gritton had purchased the property never
questioned Gritton about violating internal policy re: purchase
of listed property; Never asked Gritton to stop representing
Bearden; Never informed Bearden of Gritton’s internal policy
violations.
 Wardley breached its duty of care to Bearden and is liable.

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CYBER LAW
“COMPUTER ABUSE BY EMPLOYEES”

Citrin worked for a real estate development company to help identify
properties that the company may buy.

He decided to go into business for himself – compete with employer.

To cover his tracks, he installed a program to scrub his company computer
clean of all information.

Some of the files would show he was collecting information for himself;
others were company files he developed.

His computer had the only copy – valuable info. was destroyed.

Company sued him for violating the Computer Fraud and Abuse Act – that
holds it illegal to intentionally damage a protected computer.

Federal Appeals Court held Citrin breached his duty of loyalty.

When he breached his duty by planning his own gain, he no longer had an
agency relationship that gave him access to company files.

He then was liable for destroying files by accessing a computer he had no
right to use.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LIABILITY FOR CONTRACTS
1. Disclosed principal: Identity of principal is known by the third party
at time of making of contract with agent.
2. Principal is liable to a third party for the contract of the agent if the
agent has actual authority.
3. If there is apparent authority, the principal is contractually liable to
a third party.

However, the principal may sue the agent for losses if agent
has breached a duty.
4. Undisclosed principal: Identity of principal is unknown to third party.
5. An agent is liable to a third party if there is an undisclosed
principal.

Agent may be indemnified by principal if agent acted within
scope of his authority.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CASE
YIM V. J’S FASHION ACCESSORIES, INC.
Benjamin Yim did business under trade name Ho Tae.
Ordered goods from J’s Fashion. Invoices were sent to
Ho Tae.
 Account not paid. Fashion sued Yim. He denied liability,
saying he acted as an agent for a corporation-principal,
Hosung Enterprise, Inc.
 Hosung did business under name Ho Tae.
 Fashion said that at no time did Yim disclose existence of
corporation entity with whom they were dealing.
 Fashion thought they were always dealing with Yim with
trade name Ho Tae.
 Trial court entered summary judgment against Yim.
 He appealed, saying he was only an agent for Hosung
Enterprises.

(Continued)
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CASE
YIM V. J’S FASHION ACCESSORIES, INC.

HELD: Affirmed.

Agent who makes a contract without giving identity of
principal becomes personally liable.

There is a duty to disclose the principal’s identity.

Agent must be specific in disclosure.

Use of a trade name is not necessarily a disclosure of
principal’s identity.

At no point did Yim indicate he was acting other than an
individual doing business as Ho Tae.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
TERMINATING AN AGENCY

Either party may terminate (unilateral termination)

Agent says, “I quit!”

Principal says, “You’re fired!”

Specific date set for agency to end

Purpose of agency is fulfilled

Notice of termination must be made to 3rd parties to end
an agent’s apparent authority

Termination by operation of law

Principal or agent dies

Subject matter of the agreement is lost or destroyed
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
THE ESSENTIAL EMPLOYMENT RELATIONSHIP

Principal-Agent


Master-Servant or Employer-Employee


Agent acts on behalf of the principal; Agent has a degree of
personal discretion; Principal is usually liable;
Master-servant is old term still often used; Now the term
employer-employee is used more; Servant’s conduct is
controlled by employer; The servant can also be an agent
(distinction is sometimes blurred); Employer is usually liable
Employer-Independent Contractor (I/C)

Not an employment relationship; Employer has no control
over the details of the I/C’s performance; Some contractors
are not agents; However, sometimes they can be agents
(attorneys, auctioneers); Usually employer is not liable for
the I/C’s torts
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CASE
FRANCE V. SOUTHERN EQUIPMENT CO.
Hensley did business under trade name Royalty Builders.
Hired 16-year-old Robert France to do roofing work.
 Southern Equipment needed a new metal roof on a
building. Accepted bid form Quality Metal Roof. Quality
hired Royalty to work and Quality supplied materials.
 While working on roof, France fell and suffered head
injuries. He sued Southern (and others) for exposing him
to an inherently dangerous job of roofing.
 Court granted summary judgment for Southern.
 France appealed. Affirmed.
 Royalty Builders was an independent contractor.
Southern had no control over the work done by Royalty
Builders. Southern Equipment could not be held
vicariously liable as Royalty Builder’s (thereby France’s)
employer.

©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
EMPLOYMENT-AT-WILL





Employers: Can hire & fire who you want
Employees: May work-at-will or quit when they want
 Employees may sue for wrongful discharge under employment
contract, BUT must establish contract had limits to employer’s
rights to discharge
Can be contractual limits to at-will
There may be a general public policy against dismissal
Exceptions:
 Refusing to violate laws
 Important public duty (jury duty)
 Public right (filing for workers’ compensation)
 “Whistle Blowing”
 Breach of employment contract through express contract; implied
contract; or implied covenant of good faith and fair dealing
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CASE
GUZ V. BECHTEL NATIONAL, INC.

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Guz worked for Bechtel (BNI) 1971-1993 with a good employment
record under employment at will. Termination would be for unsatisfactory
performance or due to a layoff.
Budget for Guz’s division was cut; he and others were terminated. The
company was doing well. Guz’s duties were transferred to other
employees. He applied for other positions at BNI but was rejected.
He sued, alleged breach of implied contract to be terminated only for
good cause and breach of implied covenant of good faith & fair dealing.
Trial court dismissed suit, saying he was an at-will employee. Appeals
court reversed, holding that his longevity, raises, etc. warranted a retrial.
HELD: Reversed in favor of BNI.
Employment relationship is contractual and parties may define for
themselves causes for termination. Here, there is no evidence that BNI
had additional terms to employment security and BNI had the right to
reorganize and terminate employees as they wished.
Successful service, in and of itself, does not create a contractual
guarantee for employment security.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
EMPLOYMENT HANDBOOKS

Explain company policies, benefits and procedures

Discuss grounds for discipline and dismissal

May limit rights of employers to dismiss employees
under Employment-At-Will Doctrine

May be interpreted as creating express or implied
contract between employer and employee

Some employers place bold disclaimer in front of
handbook saying it is not a contract – have
employees sign
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
SOCIAL MEDIA

Companies adjusting to new
technologies/innovations

Improper actions can bring
lawsuits or bad image




Section 230 of Communications
Decency Act (CDA) provides
immunity for content posted/
submitted by 3rd parties if
company is merely a publisher
This will not help content posted by
company employees
To minimize liability, companies
restrict unofficial company social
media endeavors:

Limit who can post official social
media; Limit want can be posted

Have means for addressing
infringement & other claims

Companies may restrict links to
outside sites (i.e. You Tube)

Editing offensive content is
important

Even if employee is not
tweeting in official capacity

Problems with sending e-mails that
could create sexual harassment

Employee still within “scope of
employment”

Companies may want to restrict
employees’ non-work blogs

Under employment-at-will firms can
impose restrictions.
Reasonable person could expect
that tweeter was authorized by the
company

Fire those who break the rules.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
PRINCIPAL’S LIABILITY
o
If the principal directs the agent to do tortious acts, then the
principal is liable.
o
Principal may give actual authority or instructs to do a certain
act.
o
Principal ratifies agents conduct.

Vicarious Liability

“Liability for unauthorized acts of the agent”

Was the agent acting “within the scope of his/her employment”?

Courts use the doctrine of respondeat superior.

Rare for an employer to be liable for acts committed by an
independent contractor.

Employers may be liable for torts of employees due to negligent
hiring or supervision.
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CASE
ARMSTRONG V. FOOD LION, INC.

Armstrong went to Food Lion store with his mother, Tillie, to buy food.

Three men in Food Lion uniforms approached Ronnie. One, Brown,
had been in a fight with Ronnie 2 years before. He attacked Ronnie
with a box cutter. Another employee, Cameron, also attacked Ronnie.

When Tillie came to help Ronnie, Cameron punched her and knocked
her down. Another shopper helped Tillie and called for assistance.

Armstrong sued Food Lion for numerous torts.

Trial held for Food Lion; appeals court affirmed. Armstrong appealed.

HELD: Affirmed. Respondeat superior does not apply here.

Acts of the employees were for an independent purpose than service
to their employer at the store.

Brown and Cameron were not furthering Food Lion’s business in any
manner when they attacked the Armstrong.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
NEGLIGENT HIRING

Negligent Hiring: Intentional torts committed by an
employment who is not acting in the scope of
employment

Obligations to check background of an employee


Since no longer that costly, duty arises by employee to do
background checks
Obligation to check independent contractor for doubtful
history. i.e.

Child molester: Should not be in routine contact with children

Bad driving record: Should not be permitted to drive a company
truck
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.