29.1 Nature: Chapter 29 - Agency
29.1 Nature: Chapter 29 - Agency
29.1 Nature: Chapter 29 - Agency
An agent can legally bind the principal to third parties only when the agent acts
within the authority conferred by the principal. Authority is either actual or
apparent. An agent that purports to contract without authority to bind the
principal or without disclosure of the principal's identity is liable to the third
party. Agents who commit torts are personally liable regardless of the principal's
liability. A principal is liable for an agent's tort if the tort resulted from the
principal's own negligence or if the agent's act was done within the scope, and
during the course, of employment. A large volume of civil litigation concerns a
principal's liabilities for the actions of an agent.
Chapter 29 -- Outline
29.1 Nature
A. Fundamentals
B. Types of Agents
C. Types of Principals
D. Employees vs. Independent Contractors
29.5 Termination
A. Termination by Acts of the Parties
B. Termination by Operation of Law
C. Agency Coupled with an Interest
D. The Effect of Termination on Authority
4)
c. If the identity of a principal becomes known to the third party, and
the third party thereafter consents to the principal's performance of a
contract involving personal services or credit, the principal may
enforce it.
1) EXAMPLE: Absent consent of the third party, the principal is not
permitted to tender his/her own performance if the contract is for
personal services of the agent.
d. Once the principal is discovered by the third party, (s)he may look to
the principal for performance.
e. If the agent acts outside the scope of actual authority, the
undisclosed principal is usually not liable to the third party.
f. The undisclosed principal may ratify a contract formed beyond the scope
of the agent's actual authority by accepting the benefits of the
contract or by other affirmative conduct. But see module 29.1,
subtopic C.3.b.
1) Even a nonexistent principal may ratify most contracts. Such a
ratification ordinarily is tantamount to an assignment by the agent
of a contract to which the agent was a party.
a) A nonexistent principal exists when a person represents to a
third party that (s)he is acting as an agent, but the purported
principal has not, in fact, established the purported agency
relationship.
D. Employees vs. Independent Contractors. An agent is typically either an
employee of the principal or an independent contractor. Very important legal
consequences hinge on this distinction. Ordinarily, to the extent that a person
has the right to control or exercises control over another, (s)he is liable for
the other's conduct.
1. Except in the case of a gratuitous or noncontractual relationship, agents
are either employees or independent contractors.
a. The distinction between employees and independent contractors depends
on the quantum of control retained or exercised by the principal over
the agent.
1) The principal-employer has actual control over the physical efforts
of an employee.
2) In contrast, the principal engaging an independent contractor lacks
such control. The independent contractor is responsible only for
the finished product of his/her labor.
b. The degree of control a principal exerts, and whether it results in the
agent's having employee or independent contractor status, may not be
clear. The status of the agent is a factual determination based on
considerations such as the following:
1) The parties' agreement regarding the degree of control to be
exercised by the principal
2) The amount of control and direction the principal actually exerts
over the agent's work
3) The level of exclusivity of the agent's services performed for the
principal
4) The relationship between the nature of the principal's business and
the occupation and work of the agent
5) The specialization required for the task
6) The manner in which the agent is compensated, e.g., for completion
of work or upon expiration of time
7) The party that provides the agent's place of work, tools, and
supplies, and otherwise pays the agent's overhead expenses
8) The duration of the relationship
c. EXAMPLE 1: The University of North wants to build a wall in front of
its law school. UN purchases the necessary tools and supplies and
hires a crew of workers. The workers are paid by the hour and
supervised by the manager of the UN physical plant. The workers are
employees.
d. EXAMPLE 2: The University of West wants to build a wall in front of its
law school. UW engages Buildem High, Inc., to construct the wall.
Buildem High provides its own tools, materials, and workers. Buildem
High is paid a comprehensive fixed amount upon completion of the wall.
Buildem High is an independent contractor.
2. The distinction between an employee and an independent contractor is crucial
to determining the principal's liability for the agent's torts. To the
extent that a person has the right to control another, (s)he may be liable
for the results of the other's conduct.
a. Under the doctrine of respondeat superior , an employer is liable for
employees' torts if they were committed within the scope and during the
course of employment.
1) This liability of the employer is vicarious liability.
With respect to the employer, it is strict liability.
2)
b. A principal is usually not liable for the torts of an independent
contractor. But exceptions exist, and the principal is liable for
his/her tortious selection of an independent contractor. Refer to
module 29.4.
29.2 RIGHTS AND DUTIES A. Contractual Duties and Duties Implied by
Law
B. Agent's Duties to the Principal
C. Principal's Remedies for Agent's Breach
of a Duty
D. Principal's Duties to the Agent
E. Agent's Remedies for Principal's Breach
of a Duty
A. Contractual Duties and Duties Implied by Law. The majority of agency
relationships are formed by contract; the parties must perform according to the
terms of the agreement. Additionally, the law of agency establishes certain
fundamental duties owed by the agent and the principal to each other. These
duties supplement contractual duties. Ordinarily, parties may modify or
eliminate, by agreement, one or all of these fundamental duties.
B. Agent's Duties to the Principal. The agent owes five basic duties to the
principal. They arise by operation of law regardless of whether they are
expressed in the agency agreement. The duties are set forth below.
1. Duty of obedience
a. The agent must follow all lawful and explicit instructions of the
principal and not act outside his/her authority.
b. If the principal's instructions are not clear, the agent must act in
good faith and in a reasonable manner considering the surrounding
circumstances.
c. If an emergency arises and the agent cannot contact the principal, the
agent may deviate from the principal's instructions to the extent the
deviation is warranted.
2. Duty of care and diligence
a. The agent must use the care and skill of a reasonable person in like
circumstances.
b. The agent must use any special skills or knowledge (s)he has.
1) EXAMPLE: Mac Farmer appointed Ben Broker to sell his tomatoes at the
best available price. Broker took the tomatoes to market and sold
them to the first wholesale buyer he encountered. A wholesale buyer
in the next stall was paying 10 cents per pound more for tomatoes.
Broker breached his duty of care and diligence.
3. Duty of notification
a. The agent must use reasonable efforts to notify the principal of all
information (s)he possesses that is relevant to the subject matter of
the agency and that (s)he knows or should know will be imputed to the
principal.
1) EXAMPLE: Al was a broker authorized to sell Ed's mangos for $10 per
pound. The day after Al was authorized to sell, the price of mangos
rose to $12 per pound. Al sold them for $10 without consulting Ed.
Al breached his duty of notification because a reasonable person
would have known that Ed would want to be informed of a 20% change
in market price.
4. Duty to account
a. The agent must account for money or other property received or expended
on behalf of the principal.
b. The agent must not commingle his/her own money or property with money
or property received from or for the principal.
1) EXAMPLE: Paula, an attorney, acted as Carol's agent in selling a
plot of land. Paula received the sales proceeds on behalf of
Carol. Paula deposited them in her business checking account.
Several weeks later, Paula sent Carol a check for the sales proceeds
net of her expenses. Paula did not explain how she had arrived at
the amount of the check. Paula breached her duty to account because
she did not keep the sales proceeds segregated from her own funds
and did not account to Carol for the money retained for expenses.
5. Fiduciary duty
a. The agent must act with utmost loyalty and good faith solely for
his/her principal's interest.
b. The agent must not compete with the principal.
c. The agent must not represent the principal if (s)he has a conflict of
interest, but the principal may consent to representation by the agent
if (s)he has full knowledge of all material facts.
1) EXAMPLE: Celia is representing Nancy in a real estate transaction.
Carmen approaches Celia and asks that she represent her in the same
transaction. If Celia agrees to represent Carmen, she breaches her
duty to Nancy. If Celia agrees to represent Carmen, who does not
know that Celia represents Nancy, Celia breaches her duty to Carmen
as well.
d. The agent may not buy from him/herself for the principal without
permission.
e. The agent may not make secret profits on transactions entered into for
the principal.
1) EXAMPLE: Principal authorized Agent to sell a product for $6 per
can. Agent sold the product for $9 per can and pocketed $3 per
can. Principal was unaware of the profits made by Agent. Agent
breached a fiduciary duty by making secret profits.
C. Principal's Remedies for Agent's Breach of a Duty. The agent is customarily
liable to the principal for losses resulting from the agent's breach of a duty.
1. A constructive trust in favor of the principal will be imposed on any
profits obtained by the agent as a result of breaching his/her fiduciary
duty. In effect, the agent holds the profits in trust for the benefit of
the principal. The principal may recover the profits by suing the agent.
2. If the principal is sued for the agent's negligence, or the agent ignores
the principal's instructions, the principal has a right to indemnification
from the agent.
D. Principal's Duties to the Agent. Most agency relationships are governed by
contract. Thus, most duties are specifically set forth in the agreement.
Additionally, the law implies certain duties from the existence of an agency
relationship. The most fundamental of such duties are discussed below.
1. The principal has a duty to compensate the agent for his/her services unless
the agent agrees to act gratuitously for the principal. If the duty to
compensate is not expressed in the agency agreement, it will be implied. If
the rate or amount of compensation is not expressed, compensation in an
amount equal to the reasonable value of the agent's services will be
implied.
a. EXAMPLE: An agreement listing a single family residence to be marketed
by a real estate broker does not provide for compensation to the
broker. The agreement does not expressly state that brokerage will be
gratuitous. A court will hold that reasonable compensation was
intended and may measure it by the commission rate usually charged by
real estate brokers in the locale for facilitating sales of single
family residences.
2. The principal has a duty to reimburse the agent for authorized payments made
or expenses incurred by the agent on behalf of the principal.
a. Authorization may be implied from the customs of the business or the
course of dealings between the principal and the agent.
1) EXAMPLE: Jane has managed 12 rental properties for Jack during the
past 5 years. Jack acquires another rental property and asks Jane
to manage it. Jane agrees and insures the property in the same
manner as she has insured Jack's other properties. Jane's authority
to insure the property may be implied because she obtained insurance
on the other 12 properties.
3. The principal has a duty to indemnify the agent for losses suffered or
expenses incurred while the agent acted as instructed in a legal transaction
or in a transaction the agent did not know to be wrongful.
4. The principal has a duty not to act in a manner that will impair the agent's
performance.
5. An agency relationship does not relieve the principal of the general duty of
care (that of a reasonable person under the circumstances) owed by one
person to another.
6. The principal has a duty to disclose known risks involved in the task for
which the agent was engaged if (s)he knows or should know of the risk and
knows or should know the agent is unaware of the risk.
7. The principal has a duty to provide an agent who is an employee with
reasonably safe working conditions.
a. The principal has a duty to inspect the premises and warn the agent of
unsafe conditions.
E. Agent's Remedies for Principal's Breach of a Duty. The agent has normal tort
and contract remedies available, such as damages and injunctive relief. The
agent may also
1. Terminate the agency relationship
Counterclaim if the principal sues
2. Demand an accounting
3.
3)
c. A principal who negligently selects an independent contractor or
negligently allows an independent contractor to perform an activity
that causes injury is liable for his/her own negligence.
1) Thus, if the principal knows of tortious conduct of the independent
contractor and ignores it, the principal may be liable for injury
caused by the conduct.
d. The principal is liable for representations made by an independent
contractor on behalf of the principal when the independent contractor
is acting with either actual or apparent authority.
e. The tort liability of a principal for acts of an independent contractor
is not based on respondeat superior (as it may be in the case of an
employee) but on the principal's own negligence or strict liability.
D. Agent's Contractual Liability.
1. The agent is liable on contracts unless (s)he has authority and the
principal's identity is known to the third party.
a. EXAMPLE 1: Wes Hardin authorized Tom Brown to contract with Alice for
the purchase of Alice's restaurant. Brown explained to Alice that he
was representing a principal and identified Wes. Brown and Alice
entered into a contract. Wes refused to consummate the purchase.
Brown is not liable because he had authority and represented a
disclosed principal.
2. If an authorized agent represents a partially disclosed principal, the agent
and principal have joint and several liability.
a. If the principal is undisclosed, the traditional rule applies the
doctrine of election; that is, the third party may, after learning of
the existence and identity of the principal, elect to hold the agent or
the principal liable, but the election of one releases the other.
However, many states now impose joint and several liability in these
circumstances.
b. EXAMPLE 2: The facts are the same as in the previous example, but Brown
did not identify Wes by name. Brown merely referred to Wes as "my
client." Brown may be liable on the contract because he was
representing a partially disclosed principal, and Alice did not know
the principal's identity.
3. The agent may assume liability on any contract by
a. Making the contract in his/her own name
Participating as a comaker of the contract with his/her principal
b. Guaranteeing the principal's performance
c.
4. Implied warranty of authority. An agent, by purporting to represent a
principal, implicitly warrants that (s)he has actual authority for his/her
conduct (e.g., entering into a contract on behalf of the principal).
a. The agent also warrants that the principal is legally competent but not
that the principal is able to, or will, perform a contract.
b. Thus, the agent may be liable to a third party for breach of the
implied warranty of authority.
5. An agent is also subject to liability to the principal for breach of the
underlying principal-agent contract, e.g., for acting beyond the scope of
actual authority.
a. The principal-agent contract gives rise to a fiduciary duty. The agent
may be liable for breach of this duty.
1) Transactions between agent and principal may be voidable by the
principal.
2) A constructive trust for the benefit of the principal may be imposed
on property held or acquired by the agent.
E. Agent's Tort Liability. The agent is liable for his/her torts.
c.
4. Termination
a. An agency coupled with an interest may be terminated
1) According to the terms of the agreement whereby it is granted
By surrender of the authority by the beneficiary of the agency
2) Upon destruction of the subject matter of the agency
3)
b. But an agency coupled with an interest is usually not terminated by
1) Revocation by the principal
Death of the principal
2) Loss of legal capacity of the principal
3)
5. An agency coupled with an interest is an agency in form but not in theory.
The relationship is created primarily to benefit the agent rather than the
principal.
D. The Effect of Termination on Authority. Actual authority ceases to exist upon
termination, whether by act of the parties or by operation of law.
1. Apparent authority ceases to exist upon termination of the agency by
operation of law. Notice to third parties is not required.
2. Apparent authority continues to exist until the third party receives notice
of the termination, if the termination is by an act of the parties.
a. Actual notice to the third party is required if the
1) Third party previously dealt with the agent
Agent was specially credited to the third party
2) Agent and the third party had begun to deal
3)
b. Constructive notice, e.g., in a trade journal, is sufficient for other
third parties.
3. If the authorization of the agent was written, the revocation of
authorization must be written (equal dignities rule).