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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
