Chapter 31
Agency Formation
and Duties
Introduction
Agency=Principal and Agent.
Agency is the most common and most
important legal relationship.
Understanding agency is crucial to
understanding the legal environment of
business.
Introduction [2]
Principals use agents to be able to
conduct multiple business operations
simultaneously in various locations.
The principal has the right to control the
agent in matters entrusted to the agent.
§ 1: Agency Relationships
Agency is a “fiduciary” relationship based on trust
and confidence.
Distinguish Employee vs. Independent Contractor
Relationships.
Employer
Employee
Independent
Contractor
Employee vs. Independent
Contractor Relationship
Factors Courts Consider:
E’ee
I.C.
Does the Employer exercise a great degree of control over the
details of the work?
Yes
No
Is the worker engaged in an occupation or business distinct
from Employer?
No
Yes
Is the work usually done under Employer’s supervision?
Yes
No
Does Employer provide the tools?
Yes
No
Has the worker been employed a long time?
Yes
No
Is the worker paid at the end of the job?
No
Yes
Is there a great degree of skill required?
No
Yes
Employer Liability
Determining whether the worker is an
employee or an independent contract
affects liability of Principal/Employer.
Tax Liability: Employer liable if employee.
Contract Liability: Employer not necessarily
liable.
Tort Liability: Employer liable for torts of
employee within scope of employment.
§2: Formation of the
Agency Relationship
Consensual Agreement.
No consideration required.
Principal needs contractual capacity,
Agent does not.
For any legal purpose.
Types of Agencies
Agency by Agreement.
Agency by Ratification.
Agency by Estoppel.
Agency by Operation of Law.
Necessaries for family.
Emergency.
Agency By Agreement
Formed through express consent (oral or
written) or implied by conduct.
Agency by Ratification
Principal either by act or by agreement
ratifies conduct of a person who is not in
fact an agent.
Agency by Estoppel
Principal causes a third person to believe
that another person is the Principal’s
Agent, and the third person acts to her
detriment in reasonable reliance on that
belief.
Agency by Operation of Law
Agency based on social duty is formed in
certain situations when the Agent is
unable to contact the Principal.
Necessaries.
Emergencies.
§ 3: Duties of Agents and
Principals
Agent’s Duties to Principal:
Performance: reasonable diligence and skill
(special skills).
Notification to P.
Loyalty (no conflict of interest).
Obedience.
Accounting.
Principal’s Duties to Agent
Compensation (Express or Implied).
Reimbursement and Indemnification.
Cooperation.
Provide safe working conditions.
§ 4: Remedies and Rights of
Agents and Principals
Agent’s Rights:
Right to compensation, reimbursement,
indemnification and cooperation.
Agent can withhold performance and demand
an accounting.
Agent can recover damages for past services
and future damages.
Principal’s Rights &
Remedies Against Agent
Contract remedies for breach of fiduciary
duty and performance.
Can sue in tort: libel, slander, trespass,
deceit, fraud.
Constructive Trust – money/ property
agent steals from Principal.
Avoidance of contract if agent does not
do as told.
Indemnification
Case 31.1: Graham v. James
(Employment Status)
FACTS:
Graham sold CD-ROM disks containing
compilations of shareware, freeware, and public
domain software.
Graham asked James to create a file-retrieval
program for the disks. James agreed to do so in
exchange for credit on the final product and built
into the program a notice attributing authorship
and copyright to himself.
Later, Graham removed the notice, claiming that
the program was a work for hire and the copyright
was his. Graham used the program on other
releases, and James sold the program to another
publisher.
Case 31.1: Graham v. James
(Employment Status)
HELD: FOR JAMES.
The court ruled that James was an independent
contractor and that he owned the copyright.
James “is a skilled computer programmer, he was
paid no benefits, no payroll taxes were withheld,
and his engagement by Graham was
project-by-project.”
The only factor in Graham’s favor was his general
control over the work, but his actual participation
was “minimal” and his instructions were “general.”
Case 31.2: Williams v. Inverness
(Agency by Estoppel)
FACTS:
Inverness markets the Inverness Ear Piercing
System, which includes a training course, an “eyecatching assortment of selling aids,” and release
forms.
Barrera, the owner of a jewelry cart in a mall,
bought the system, took the course, and set up the
displays.
Williams paid Barrera to pierce Williams’s ear.
The ear became infected, which led to
complications.
Williams sued Inverness and Barrera, claiming in
part that Inverness was liable on a theory of
Case 31.2: Williams v. Inverness
(Agency by Estoppel)
HELD: FOR WILLIAMS.
An agency by estoppel was created and Inverness was liable.
 “[A] jury reasonably could infer that Inverness knew, or
should have known, that Barrera distributed Inverness’s
release forms * * * , that Barrera was using the
Inverness Ear Piercing System, that she displayed
Inverness’s ‘eye-catching assortment of selling aids,’
and that she used Inverness’s training program.”
Also, “Angela believed that Barrera was Inverness’s
agent” and “relied on Inverness’s manifestations of
agency,” and this reliance was “justifiable.”
Case 31.3: American Express v. Topel
(Agent’s Duties to Principal)
FACTS:
Topel was a financial planner for American
Express (AMEX), when he decided to resign and
go to work for Multi-Financial Securities
Corporation, an AMEX competitor.
Before resigning, Topel encouraged his customers
to sell their AMEX products and invest in MultiFinancial funds. He sent a letter to all of his
clients in which he wrote that he was ending his
relationship with AMEX and that their accounts
would be assigned to another AMEX advisor.
AMEX sued Topel alleging breach of fiduciary
duty.
Case 31.3: American Express v. Topel
(Agent’s Duties to Principal)
HELD: FOR AMEX.
Topel breached his fiduciary duty of loyalty by
soliciting AMEX customers for his new competing
business while working for AMEX.
An agent has a duty to act solely for the benefit of
the principal in all matters connected with an
agency. “While an agent is entitled to make some
preparations to compete with his principal after the
termination of their relationship, an agent violates
his duty of loyalty if he engages in pre-termination
solicitation of customers for a new competing
business.”