CHAPTER 5
Agency
INTRODUCTION
This chapter explains the law of
agency relationships between
employers and employees, and of
agency relationships with
independent contractors. It also
elaborates on the liability that can
be created by such relationships.
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FORMATION OF AN AGENCY
RELATIONSHIP
Two parties consensually agree to form a
relationship in which one party agrees to act
on behalf of the other party.
• Implied By Conduct.
• Agency by Ratification of Principal.
• Agency By Estoppel.
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TYPES OF AGENCY
RELATIONSHIPS
 Employer-Employee – the employer has the
right to control the conduct of the employee.
Also referred to as the master-servant
relationship.
 Independent Contractor – the independent
contractor’s conduct is not fully controlled
by the person paying for the services. The
independent contractor may or may not be an
agent.
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DISTINGUISHING BETWEEN
EMPLOYEES AND INDEPENDENT
CONTRACTORS
1. Employer’s control over details of work.
2. Distinction between occupation of independent
contractor and employer.
3. Level of supervision.
4. Degree of skill required.
5. Provision of tools and work space.
6. Length of time worker is engaged.
7. Method of payment.
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FIDUCIARY DUTY
 Agent Owes Fiduciary Duty to Principal – the
agent agrees to act on behalf of the principal.
 Duty of Loyalty – an agent has a duty to act
solely for the benefit of his or her principal in all
matters directly related with the agency
undertaking.
 Duty of Care – the agent has a duty to act with
care, including a duty to avoid mistakes, whether
through negligence, recklessness, or intentional
misconduct.
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FIDUCIARY DUTY
Case 5.1 Synopsis. Scranton Gillette Comm. v. Dannhausen, (IL 1999).
Eugene H. McCormick was vice president of Scranton Gillette
Communications and publisher of Greenhouse Product News. While still
the publisher of Greenhouse Product News and advocating for its
redesign, McCormick was making plans to resign and to launch his own
rival greenhouse publication. Not only did he not disclose this
information to his employer, he also tried to persuade several other
employees to come work with him on his new venture. One of these
employees was Laurie Dlugos, who worked in sales. Scranton sued
McCormick and Dlugos for breach of fiduciary duty. ISSUE: Is an
employee liable for breach of fiduciary duty if he works on a competing
business venture without disclosing it to his current employer? HELD:
For Plaintiff, McCormick and Dlugos violated their fiduciary duties.
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FIDUCIARY DUTY
Case 5.2 Synopsis. Northeast General Corp. v. Wellington
Advertising, Inc., (N.Y. 1993).
Northeast General, through its agents, entered into an
agreement with Wellington Advertising relating to the sale of
Wellington Advertising. Northeast was to act as a nonexclusive,
independent banker and consultant for the purposes of finding
buyers for Wellington. In return, Northeast would get a finder’s
fee if the deal was completed within three years. ISSUE: Does
this relationship create a fiduciary relationship thus obligating
Northeast to divulge information about the bad reputation of a
potential buyer? HELD: No. Judgment for Wellington reversed
and Wellington ordered to pay finder’s fee to Northeast. The
court said it did not, but the dissent thought that an agency was
created.
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AGENT’S ABILITY TO BIND THE PRINCIPAL
TO CONTRACTS ENTERED INTO BY THE
AGENT.
 Actual Authority – principal gives consent for the agent to
act for and bind the principal. Cconsent is express or
implied.
 Apparent Authority – when a third party reasonably believes
the agent has authority to act for and bind the principal.
 Ratification – principal is bound to an agent’s unauthorized
acts by affirmation of the prior acts. Express or implied.
 Undisclosed Principal – if a third party does not know the
agent is acting for a principal, the principal will nonetheless
be bound by any contract the agent enters into with actual
authority.
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AGENT’S ABILITY TO BIND THE PRINCIPAL
TO CONTRACTS ENTERED INTO BY THE
AGENT.
Case 5.3 Synopsis. Pohl v. United Airlines, Inc. (7th Cir. 2000).
Michael Pohl, an aircraft inspector for United Airlines, sued United for
alleged violations of the Uniformed Services Employment and
Reemployment Rights Act. He alleged discrimination based on his
military status, retaliation, and failure to properly credit his employee
stock ownership account. The case settled through Pohl’s attorney but
Pohl refused to sign and he appealed. ISSUE: Under what
circumstances does an attorney have the authority to enter into a
settlement agreement on behalf of his client? HELD: For United
because Pohl’s attorney had actual authority to settle the case on his
behalf.
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LIABILITY FOR TORTS
OF AGENTS
Scope of Employment (Respondeat Superior). Employer may
be vicariously liable under respondeat superior if Employee
committed tort within the course and scope of employment.
1. Did Employee have Employer’s authorization to act?
2. To what extent were the Employer’s interests advanced?
3. Did the Employer provide the instrumentality that caused
the injury?
4. Did the Employer have knowledge that the Employee would
perform the act?
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LIABILITY FOR TORTS
OF AGENTS
Case 5.4 Synopsis. Riley v. Standard Oil (N.Y. 1921).
Riley was hit by a Standard Oil truck driven by Million and
severely injured. Million was instructed to drive the truck
from a mill to a freight yard and back. On the way back,
Million detoured to his sister’s house, which was about four
blocks out of the way. ISSUE: Was Million acting as an agent
at the time of the accident? HELD: For Plaintiff, the court
ruled that he was acting within the scope of his duty, so
Standard Oil was liable for his actions.
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LIABILITY FOR TORTS
OF AGENTS
 View from Cyberspace: Intelligent Agents and Click-Wrap
Agreements.
 Liability for Torts of Employees Acting Outside the Scope of
Employment. The employer will be liable if:
 It intended the employee's conduct or its consequences;
 The employee's high rank in the company makes her the employer's alter ego;
 The employee’s action can be attributable to the employer’s own negligence
or recklessness;
 The employee uses apparent authority to act or to speak on behalf of the
employer and there was reliance upon apparent authority; or
 The employee was aided in accomplishing the tort by the existence of the
agency relationship.
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LIABILITY FOR TORTS
OF AGENTS
Case 5.5 Synopsis.Burlington Industries, Inc. v. Ellerth, 524 U.S. 742 (1998).
Kimberly Ellerth worked as a salesperson at Burlington Industries, where
she was subjected to sexual harassment by her supervisor, Ted Slowik.
Slowik had authority to make hiring and promotion decisions subject to the
approval of his supervisor. When Ellerth was being considered for a
promotion, Slowik expressed reservations during an interview with her
because she was not “loose enough.” Burlington had a policy against
sexual harassment, but Ellerth did not inform any authority about Slowik’s
conduct. Ellerth quit her job, then sued Burlington for sexual harassment
and constructive discharge. The complaint was dismissed on the grounds
that Burlington neither knew nor should have known about Slowik’s
conduct. The appeals court reversed, and Burlington appealed.
Continued -
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LIABILITY FOR TORTS
OF AGENTS
Case 5.5 Synopsis. (continued) Burlington Industries, Inc. v.
Ellerth, 524 U.S. 742 (1998).
ISSUE: Is an employer vicariously liability for a supervisor’s
creation of a hostile work environment when the employer
neither knew nor should have known of the harassment?
HELD: For Ellerth. Burlington was liable for the
supervisor’s harassment and could not take advantage of
the possible affirmative defense because it did not have
adequate policies in place to prevent sexual harassment.
Burlington had no written policy prohibiting harassment and
provided employees no process whereby they could
complain to someone other than the immediate supervisor.
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LIABILITY OF THE PRINCIPAL FOR
VIOLATIONS OF LAW BY THE AGENT
A company may be liable even when the employee is told not to violate the
law. Case 5.6 Synopsis. Jones v. Federated Financial Reserve Corp., 144
F.3d 961 (6th Cir. 1998). Karen Jones was married briefly to Randy Lind. Due
to fear of his harassment, she refused to give him her new address or phone
number. Lind obtained his ex-wife’s address from his friend Janice Caylor,
who had obtained this information through her employer Federated
Financial Reserve Corporation. Federated. It obtained approximately 25,000
credit reports annually through its on-line credit report request system.
TRW supplies the credit reports to Federated, which certifies that it will use
the reports only for specified permissible business purposes. ISSUE: May
an employer be liable under the Fair Credit Reporting Act for its employee’s
actions under a theory of apparent authority? HELD: Perhaps. Case
remanded for a new trial to determine whether the Employer may be liable
for negligence or willful violation of the Fair Credit Reporting Act.
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THE RESPONSIBLE MANAGER:
WORKING WITH AGENTS
A manager has a duty to act solely for
the benefit of his or her employer in all
matters related to its business. This
duty includes an obligation to notify the
employer of all relevant facts- all that
the agent knows, the principal should
know.
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REVIEW
1. Which is the superior type of agency authority, and why?
2. Adams has had Baker working for her for over six months.
One day, tremendous damage is caused and lives are lost
due to Baker’s actions. It has always been unclear what
relationship Adams and Baker had. Given these events, what
relationship will each probably now claim and why?
3. When would a party ratify another person’s actions and
make him or her an agent?
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