978-1285428222 Chapter 14 Lecture Note Part 1

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CHAPTER 14

AGENCY AND THE EMPLOYMENT RELATIONSHIP

AGENCY RELATIONSHIPS—An agency involves use of an agent for representation in

establishing relations between a principal and third parties. An agency relationship is created

whenever a person or company—the agent—agrees to act on behalf of and for, and to be subject

to the control of another person or company—the principal.

Classification of Agents—Agents may be classified on the basis of their authority. General

classifications include general, universal, and special agents. In addition, three special agency

relationships are also considered: agency coupled with an interest, gratuitous agents, and

subagents. Universal Agents—A principal may designate someone to do all acts that can be

legally delegated to an agent. Such an agent is called a universal agent.

General Agents—By authorizing a person to execute all transactions connected with a particular

business or trade, a principal designates a general agent.

Special Agents—In certain situations, a principal provides an agent with authority to execute a

specific transaction or to do some act. As a special agent, the agent has authority to represent the

principal only on the specified transaction or activity.

Agency Coupled with an Interest—When an agent has paid for the right to exercise authority for

a business, there is an agency coupled with an interest.

Gratuitous Agent—Although most agents receive compensation for their services, compensation

is not a necessary requirement for an agency relationship to exist. When a person volunteers

services with no expectation of compensation, she is a gratuitous agent. Both the principal and

the gratuitous agent must consent to the relationship.

Subagents—In some instances, a principal may find it advantageous to authorize an agent to

delegate authority. The persons appointed by the agent are referred to as subagents.

Creating an Agency—There is no particular formal procedure through which an agency

relationship is established. There must, however, be an affirmative indication by the parties to

enter into an agency relationship. The principal must manifest a desire for the agent to act on

behalf of the principal, and the agent must consent to do so.

Agency by Agreement of the Parties—An agency is usually formed by the consent and

agreement of the parties (the principal and agent). One legal document that expressly establishes

an agency relationship is the power of attorney.

Add. Case: Wright & Souza v. DM Properties (Ct. App., Neb., 1993)–Wright d/b/a Capital, a

loan brokerage service provider. It promised to procure financing of $7.5 million for property

owned by DM. DM would pay Capital $150,000 for this. Capital found a lender under terms DM

approved. The prospective lender was DM’s own bank. DM cut off Capital, saying that it would

not pay a broker to get a loan from its own bank. Capital sued for breach. DM argued Capital

breached its fiduciary duty as agent for its principal by not disclosing the material fact that

Capital was negotiating with DM’s bank. The court found for Capital. DM Appealed.

Decision: Affirmed. “Some of the factors to be used in determining whether an agency

relationship exists between the parties include: (1) the extent of control the employer exercises

over the details of the work, (2) whether the work is done under the supervision of the employer

Express or Implied Ratification by the Principal—This arises when a person who is not an agent

—or an agent who is acting beyond his authority—enters into a contract on behalf of a third

party (the alleged principal). The alleged principal is under no obligation to be bound by the

person’s actions. At her option, however, the alleged principal may accept to be bound to the

contract. As in the creation of an agency relationship, the ratification may occur expressly or by

implication.

Add. Case: Hardcore Concrete v. Fortner Insurance (Ct. App., Mo., 2007)—Hardcore wanted

insurance to cover theft of concrete forms used at construction sites. It asked Fortner for a

policy. Fortner contacted Med James about a policy. It got one from Lloyd’s. When the forms

were stolen and Hardcore filed a claim, it learned that Med James had provided the wrong

policy, so it was not covered. Hardcore sued Fortner and Med James. The jury held Med James

liable for breach and negligence. It appealed.

Decision: Reversed. Fortner worked for Hardcore, it was the agent. Fortner worked with Med

Add. Case: StreetScenes LLC v. ITC Entertainment Group (Ct. App., Cal., 2002)–Clark

occupied an executive office at ITC, and had full use of its facilities, but was not an employee.

StreetScenes, a group of investors, took a movie script to Clark, who said he would produce the

movie. He did, using ITC facilities. The budget was blown with no movie; StreetScenes sued

Clark and ITC. ITC defended that Clark was an independent producer who was not affiliated

with ITC and that ITC did not approve of his actions. The jury found ITC liable for $9 million

damages plus $8 million punitives; it appealed.

Decision: Affirmed. ITC did not repudiate Clark’s actions, that constituted ratification given that

Add. Case: Watson v. Schmidt (Sup. Ct., La., 1931–On October 6th, Watson, plaintiff and

principal, wired her agent, Holman (defendant), informing him that he should sell a horse

named Easter for $300. On October 16th, Holman wired Watson: “We are lucky. Sold Kadiak for

$2,000.” It was not until December 26th that Watson brought an action contending that Holman

was without authority to sell the more valuable Kadiak. The lower court found for Watson, and

Holman appealed.

Decision: Reversed. A principal who accepts in silence the benefits of a sale, made by an agent

Add. Case: Amer. Multi-Cinema v. Talayna’s (Ct. App., Mo., 1993)–American operated movie

theaters and Talayna’s operated restaurants. The ad manager for American was contacted by

Westergard, manager of a Talayna’s restaurant who asked about advertising in the theaters. A

promotion plan was developed, and approved by Westergard, who said he needed approval

before signing a contract. A contract was signed by Westergard as “authorized person,” but did

not indicate his position with Talayna’s. Ads on American’s screens said that patrons would

receive discounts at Talayna’s if they presented their movie ticket stub. The ads were shown at a

rate of 3000 per week. The promotion went well for six months. Talayna’s stopped paying, so

American ended the promotion and demanded payment. Westergard was fired and replaced by

Rob who told American that the “fees would be taken care of” but they were not. In a suit for the

unpaid fees, the court found for American. Talayna’s asserted that the court erred in finding it

liable for the contract signed by Westergard because there was not competent evidence other

than the statements of Westergard to support that he was Talayna’s agent and, if he was its agent,

that his actions were not within the scope of the agency. American countered that Westergard

had apparent authority.

Decision: Affirmed. Talayna’s ratified the contract; “ratification is the affirmance of a contract

already made. The existence of agency and the authority of the agent can be and often is implied

by proof of facts, circumstances, words, acts, and conduct of the party to be charged. The intent

Agency by Estoppel—In an agency by estoppel, an agency relationship is created by the words

or actions of a “principal.” Although a person has not entered into an agency relationship, the

words or actions of the “principal” may lead the person to reasonably believe that he has

authority to act as an agent on behalf of the “principal.”

Add. Case: Huntington Natl. Bank v. Amer. Natl. Bank (Ohio App., 1993)–American Natl.

sold mortgages to Brokers Mutual. American used a title company called Abstract as its agent in

the selling. Abstract was owned by Nemecek, a VP of American. Nemecek was embezzling from

American. The scheme fell apart. Brokers Mutual sued Huntington. It paid, and sued American

as the principal of Abstract. The court found for Huntington. American appealed, arguing that

Nemecek’s actions were not within his actual or apparent scope of authority as an officer of

American. Because Nemecek owned Abstract, Brokers should have inquired if Nemecek had

authority to bind American in deals involving Abstract. Since they did not, Brokers should be

responsible for the check.

Decision: Affirmed for Huntington. The issue was apparent authority or agency by estoppel.

Agency by estoppel was established by (1) the fact that American officials testified that Nemecek

Agency by Operation of Law—The courts impose an agency relationship when a necessity or

emergency exists, and the actions of the “agent” are viewed as being in the public interest. Under

some emergency situations, the agent is allowed by law to operate outside her authority.

Acts for the Principal—An agent’s ability to transact business for a principal depends on the

scope of authority given to the agent. The scope of authority is determined from the oral or

written expressions of the principal, the principal’s conduct, or the customs of trade or business

for which the agent is employed. An agent can possess actual authority and apparent authority.

Actual Authority—Sometimes called real authority; it is given by the principal to the agent.

Actual authority confers upon an agent the power and the right to change the principal’s legal

status. Express authority is based on instructions given by the principal to an agent, either orally

or in writing. Implied authority is the power to do what is reasonable and customary to carry out

the agency purpose.

Apparent Authority—A principals can be bound by the unauthorized acts of an agent if the agent

appears to have authority to act. This arises when the principal creates an appearance of authority

in an agent that leads a third party to conclude reasonably that the agent has authority to perform

certain acts for the principal. Apparent authority cannot be created by an agent, but can exist only

when the principal acts so as to lead a reasonably prudent third person to believe that the agent

has certain authority.

CASE: Cove Management v. AFLAC (App. Ct., Ill., 2013)—Galgano was an authorized agent

for AFLAC insurance as an independent contractor. He rented office space from Cove and stated

on the agreement that AFLAC would guaranty payment. When Galgano later defaulted on the

lease, Cove demanded payment from AFLAC, which refused. Cove sued and lost; it appealed.

Decision: Affirmed. Cove claims Galgano was an agent with apparent authority to enter into a

lease for AFLAC since his office was AFLAC branded. But there is no showing of such authority

Questions: 1. What should Cove Management have done to avoid this situation?

Anyone can walk into any office with good-looking business cards and stationery, claiming to

represent any company. Hence, especially in commercial dealings, the seller (or landlord) should

2. Did Galgano breach a duty he owed to AFLAC?

Galgano breached his contract with AFLAC and breached his duty as their agent. His power was

to obtain insurance contracts, not much more. So he is liable on the debt owed to Cove, but is

Add. Case: Town Center Shopping Center v. Premier Mortgage Funding (Ct. App., KS

2007)—Town Center leased space in a shopping center to Empire Leasing for two years (Lease

1). It could not be released without permission of Town Center. Empire ignored that provision

and leased the premises to Premier (Lease 2). The lease was signed by Premier’s manager, Bayer,

although she did not have authority to sign such a lease. Nevertheless, the president of Premier

signed Lease 2. Premier then realized Town Center needed to approve the lease, so Bayer signed

another lease (Lease 3) that she sent to Town Center. Premier’s president did not sign Lease 3.

Premier quit in the middle of the lease. Town Center sued for breach and won; Premier appealed.

Decision: Affirmed. Bayer did not have actual authority to enter into any of the leases. But she

Add. Case: Powell v. MVE Holdings (Ct. App., Minn., 2001)–Powell was CEO of CAIRE and

a shareholder. CAIRE was a subsidiary of MVE. MVE was bought by a group of investors.

Powell retained his stock and was kept as CEO by the new owners. Later, O’Halloran, the

president of MVE, decided to replace Powell, who resigned in exchange for a severance

package. Soon after, O’Halloran was fired and MVE was merged into another company. Powell

contended that at the time of his resignation, O’Halloran promised Powell that MVE would pay

$3.45 million for Powell’s stock, far greater than the market value. MVE refused to pay, so

Powell sued. The court found that a contract to buy the stock existed and ordered MVE to pay

Powell. MVE appealed, contending O’Halloran did not have authority to enter into such a

contract.

Decision: Affirmed for Powell. A principal is bound by an agent’s actual authority and by

authority that the principal has apparently delegated to an agent. To find apparent authority: (1)

the principal must have held the agent out as having authority, or must have knowingly

permitted the agent to act on its behalf, (2) third parties must have had actual knowledge that the

Add. Case: Dymburt v. Rao (D., N.J., 1995)–Dymburt hired Dr. Tan to be her obstetrician for

the birth of her child. Tan, a solo practitioner, had an arrangement with two other doctor. Each

worked every third weekend covering each others’ patients. The covering doctor is not paid by

the other doctors; they were swapping hours on call. Dymburt went into labor when Dr. Rao was

on duty. The child died at birth. Dymburt sued Rao and Tan for negligence. Tan moved for

summary judgment, arguing that any negligence by Rao cannot be imputed to her as a matter of

law.

Decision: Motion granted. “The Court finds that Dr. Tan and Dr. Rao were not engaged in an

agency relationship. Thus, Dr. Rao’s liability resulting from her own negligence may not be

imputed on Dr. Tan. Both doctors are independent contractors in the sense that they are solo

Duties of the Agency Parties—Parties in an agency relationship share specific duties that

govern their conduct and behavior toward each other. Each party, for example, is required to act

in good faith toward the other and to share relevant information.

Principal’s Duties to an Agent—The law of agency places primary emphasis on the duties the

agent owes to the principal since the acts central to the agency relationship are to be performed

by the agent. Unless the parties have agreed otherwise, the principal is presumed to have these

duties: Duty to Cooperate with the Agent—The principal must perform obligations that allow the

agent to function successfully. Duty to Compensate the Agent—Even if a specific compensation

is not set, the principal has a duty to pay the reasonable value of the services provided. Duty to

Reimburse the Agent’s Reasonable Expenses—The principal must cover reasonable travel

expenses and authorized payments to third parties. Duty to Indemnify the Agent for Losses—The

principal must insure losses suffered by the agent in the course of performing duties that are

incurred in the normal course of business.

Agent’s Duties to the Principal—The agent’s duties to the principal arise from the fact that the

agent is a fiduciary of the principal. The agent occupies a position of trust, honesty, and

confidence with respect to the principal. In addition to specific responsibilities the principal and

agent agree upon in the agency relationship, the law imposes fiduciary duties on agents. Those

duties include: Duty of Loyalty—Agent must place the interests of the principal first in any

dealings with third parties; the agent may not place his or her interest first when representing a

principal. Duty of Obedience and Performance—Agent must follow the instructions of the

principal, unless illegal or unethical, even if the agent thinks the principal is being foolish. Agent

may violate instructions in case of emergency. Duty of Reasonable Care—Agent must use skill

expected of one in such a position. Duty to Account—All finances must be reported to the

principal; agent owes any profits personally earned to the principal unless allowed. Funds should

not be mingled. Duty to Inform—Agent must inform principal of facts relevant to the agency as

events progress.

CASE: Bearden v. Wardley Corp. (Ct. App. Utah, 2003)—Bearden listed a house for sale

through Wardley. Gritton was a realtor who worked for Wardley and handled the property.

Gritton bought it from Bearden on a balloon note due in five years. He used fraud to get Bearden

to sign the deed to him. When Gritton fell behind on payments, Bearden’s lawyer discovered the

fraud. She sued Gritton and Wardley for breach of contract, breach of fiduciary duty and fraud.

She won damages, punitive damages, and attorney fees. Gritton was broke, so Wardley paid the

whole judgment and appealed.

Decision: Affirmed. Gritton was Wardley’s agent. Wardley failed to follow its own procedure by

Questions: 1. There was no evidence that Wardley participated in Gritton’s fraud, so why should

it be liable?

Gritton was authorized by Wardley to sign clients. His action, of having a client become a client

of Wardley, means that Wardley assumed the responsibility of being Bearden’s agent and had to

2. Suppose Gritton had told Wardley he wanted to buy the property he had listed. What should

Gritton have done?

By allowing Gritton to buy the property, he was assuming multiple roles in a transaction that

Add. Case: Howard v. Estate of Harper (Sup. Ct., Miss., 2006)–Thead and Harper were placed in a Benchmark

Care nursing home when they were suffering from age-related dementia and other health problems. After their

deaths, their estates sued the administrator of the nursing home for breach of fiduciary duty in connection with

alleged poor medical treatment at the home. Proceedings were stayed while questions of law were considered by the

Mississippi high court.

Decision: While a nursing home owner can be held liable in tort for negligence in the care of residents, an

administrator does not owe the same duty of care to residents that the owner does. Administrators are not medical

Add. Case: Green v. H&R Block (Ct. App., Mary., 1999)–H&R Block was sued in a class

action suit on behalf of all in Maryland for whom H&R prepared taxes and participated in its

“Rapid Refund” program by obtaining a “Rapid Anticipation Loan.” H&R obtained its clients

loans based on the refund expected. The suit alleged that H&R failed to disclose how it

financially benefited by arranging these loans, and that was a breach of its fiduciary duty in an

agency relationship that existed as a tax preparer. The court dismissed the suit; plaintiffs

appealed.

Decision: Reversed. An agent has a duty to his principal to act solely for the benefit of the

principal in all matters connected with his agency. The duties of an agent are loyalty to the

interest of his principal and the need to avoid conflict between that interest and self-interest. An