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Add. Case: Harts v. Farmers Ins. Exchange (Sup. Ct., Mich., 1999)--Harts bought auto
insurance through an agent who sold insurance exclusively for Farmers Ins. The policy did not
include optional uninsured motorist coverage. Harts suffered losses when hit by an uninsured
motorist. He sued Farmers and the agent for negligence for selling an inadequate policy
because it did not include uninsured motorist coverage. Harts knew about the availability of
such coverage and had been sent notices about the availability of coverage. Courts held for
Farmers; Harts appealed.
Decision: Affirmed. The agent was Farmers’ agent. “As such, under the common law, he had a
duty to comply with the various fiduciary obligations he owed to Farmers and to act for its
benefit. Because he was Farmers’ agent, he has no common-law duty to advise plaintiffs. The
common-law rule is premised on the nature of the relationship of the parties. The relationship
Add. Case: Everen Securities v. A.G. Edwards (App. Ct., Ill., 1999)--Everen sued two former
employees for breach of fiduciary duty. When they left Everen, and went to Edwards, they took
Everen’s client database. Since the parties were registered securities brokers, the court ordered
the claims submitted for binding arbitration to the NYSE. The arbitration panel ordered
defendants to pay Everen over $1.1 million. Defendants appealed the award.
Decision: Affirmed. Judicial review of arbitration is quite limited; the court confirms the
arbitration panel’s award. “Corporate officers owe a fiduciary duty of loyalty to their employer
Liability for Contracts—The rights and liabilities of the principal and agent are determined by
whether the principal is disclosed, partially disclosed, or undisclosed, and by whether the agent
acted with or without authority.
Add. Case: Livestock Producers v. Littleton (Ct. App., La., 1999)--Through fraud, Smith
obtained possession of cows owned by Littleton. Smith sold the cows at an auction run by
Livestock Producers (LPI). Littleton sued to recover for his cows that had been sold. Complex
litigation resulted in appeal.
Decision: “LPI was an agent acting for Smith, a dishonest principal. Smith was not a regular
customer of the business, the cattle had fresh brands not associated with Smith, and LPI ... made
Disclosed Principals—A disclosed principal is one whose identity is known by the third party at
the time a contract is entered into with the agent. Although a partially disclosed principal’s
identity is unknown to the third party, the third party knows the agent is acting for a principal
when the contract is made. When agents have actual authority, the principal is liable to a third
party for a contract made by an agent with actual authority to act for the principal. The agent has
no contractual liability for the nonperformance of the principal or the third party. When agents
have apparent authority the principal is contractually liable to a third party if the third party
enters into a contract that was presented to the third party by an agent with apparent authority to
act on behalf of the principal. Under such circumstances, the agent has violated the duty of
obedience to the principal. Hence, the agent is liable to the principal for any losses incurred due
to exceeding his or he authority.
Add. Case: E&C Computers v. Livingston (Ct. App., Fla., 1993)--MicroLine executed a
promissory note for $55,000 to E&C, signed by Livingston as president of MicroLine. MicroLine
later went bankrupt and E&C sued for payment against Livingston. E&C asserted he signed the
note in his personal capacity and was personally responsible. The court dismissed the claim;
E&C appealed.
Decision: Affirmed. When an authorized agent signs a contract which names the principal
(MicroLine), and contract shows that the agent signs in a representative capacity, the principal
Cyber Law: Computer Abuse by Employees
The Computer Fraud and Abuse Act makes it illegal to intentionally damage a protected
computer. When an employee damages an employer’s computer by sabotage or theft of
information, it is a breach of the duty of loyalty. The employer has a common-law action against
the employee as well as a statutory cause of action.
Undisclosed Principals—A principal whose identity is unknown by the third party. Unless the
agent reveals the agency or the identity of the principal, the agent is liable to the third party for
the principal’s nonperformance of the contract. If an agent had actual authority, the undisclosed
principal is bound to the contract just as if the identity had been disclosed at the time the contract
was made. The principal may hold the third party to the contract except when:
1. The undisclosed principal is expressly excluded as a party to the contract between the agent
and the third party.
2. The contract is a negotiable instrument. According to the UCC, if the identity of the principal
or existence of the agency relationship is not shown in the instrument, only the agent is liable.
3. The agent’s performance is personal to the contract.
CASE: Yim v. J’s Fashion Accessories (Ct. App., GA 2009)—Yim d/b/a Ho Tae which ordered
goods from J’s. Invoices were sent to Ho Tae. When not paid, J’s sued Yim. He claimed he was
an agent for a corporation, Hosung that d/b/a Ho Tae. J’s replied that Yim never disclosed the
existence of a corporation; J’s dealt with Yim who used the trade name Ho Tae. Trial court held
for J’s. Yim appealed, contending he was only an agent.
Decision: Affirmed. An agent who makes contacts without identifying a principal is personally
liable on the contract. To avoid liability, the agency must be disclosed. Using the trade name was
Question: Suppose the court agreed that Yim was an agent for Hosung. If Hosung did not have
the resources to pay the judgment, would J’s Fashion have any other legal argument to make?
Fashion could then argue that the court should pierce the veil of Hosung Enterprise, as it was a
Add. Case: Dana v. Boren (Ct. App., Wash., 2006)—Dana and Kupers were members of an
LLC that bought specialty wood for musical instruments. The LLC members were in dispute and
a court ordered the LLC to stop all sales until matters were resolved. Dana suspected Kupers
was selling wood on the side (a violation of his obligation as a member of the LLC). He hired a
P.I., Wilson, to see what was going on. He found that Boren, a friend of Kupers, was selling
wood. Wilson bought from Boren. Dana then sued Kupers and Boren for breach and fraud. Trial
court dismissed because the contract Wilson made was for an undisclosed principal who was not
a party to the deal. Dana appealed.
Decision: Reversed and remanded. Dana was an undisclosed principal who had the right to
enforce the contract made by Wilson. Wilson made the contract at the request of Dana, not for
Add. Case: Unisource Worldwide v. Barth (Ct. App., Mo., 2003)--Barth took over a printing
business that bought paper from Unisource. The business retained the name Creative Printing.
Barth put the business in a corporation called Barth Enterprises. Unisource granted credit to
Creative Printing, in an application submitted from Barth as president. Creative ran up a big
debt and its check bounced, so Unisource sued Barth. Court held that Barth Enterprises, not
Barth personally, was liable, but the corporation was broke. Unisource appealed.
Decision: Reversed. Barth did not disclose that he was an agent for Barth Enterprises.
Unisource had no reason to suspect that. Paperwork was from Creative Printing, not Barth
Add. Case: Burch v. Hancock (Ct. App., Tx., 2001)--Burch was president of Deja Vu, a
corporation that owned Rocking D, a ranch. He hired Hancock to work on the ranch and got
into a dispute with him about how much he owed him for work done. Hancock sued Burch for
nonpayment. The court held for Hancock. Burch appealed that he could not be personally liable
since he was an agent of Deja Vu.
Decision: Affirmed. Burch was an undisclosed agent; Hancock had no way to know that he was
Add. Case: Eater, Waste & Land, d/b/a Westec v. Lanham (Sup. Ct., Colo., 1998)--Lanham
and Clark were managers and members of an LLC that contacted Westec about doing
engineering work for construction of a restaurant. Westec did not know that they represented an
LLC. Based on an oral contract, Westec did work and submitted a bill for $9,183 that was not
paid. Westec sued Lanham, Clark, and their company. At trial, the LLC admitted liability but the
court ruled that Lanham and Clark were not liable. Westec appealed.
Decision: Reversed. “When a third party sued a manager or member of an LLC under an
agency theory, the principles of agency law apply notwithstanding the LLC Act’s statutory notice
Add. Info: Principals and Agents Under a Civil Law System Agency relationships differ in
important ways in civil law and common law countries: Undisclosed Principal—Under the
common law an undisclosed principal is bound to contracts with third parties if the agent
forming the contract had actual authority to enter into those contracts. The principal may hold
the third party to the contract. Under civil law, the principle of lack of communication among
parties that have no knowledge of each other’s existence prevails, and the principal is not bound.
The principal is not able to hold the third party to the contract unless the third party had
knowledge of the principal’s existence.
Terminating an Agency—The agency relationship is largely consensual. Thus, when the
principal withdraws or when consent otherwise ends, the agency is terminated and the agent’s
authority to act for the principal ceases. However, it may be necessary to give notice of the
termination to third parties to end the agent’s apparent authority. The parties may amend their
agreement to terminate the agency or to extend it beyond its original time. If the specific time
period of the agency lapses, the agency terminates. Occasionally, parties enter into an agency
with no time specified for termination. It normally continues until terminated by one or both of
the parties, or if inactive, after a reasonable time. If the purpose of the agency relationship is
achieved, the agency terminates. Various occurrences automatically end an agent’s ability to act
on behalf of the principal, including the death of the principal or agent, if the subject matter of
the agreement is destroyed, if economic conditions significantly impact the subject matter of the
agency, or the bankruptcy of the principal or agent.
Add. Case: Professional Business Services v. Rosno (Sup. Ct., Neb., 2004)--PBS does
accounting and payroll for health care firms. Accountant Rosno worked for PBS on a
year-by-year employment agreement. After three years, he said he was quitting to set up his own
firm and would take some clients with him. PBS fired him on the spot and cut off payments for
leave time and other benefits. A second appeal to the Nebraska high court resulted in
complicated litigation.
Decision: An agent has a duty to his principal to act for the benefit of the principal. That means
the agent may not compete with the principal. While an agent may compete after leaving the
THE ESSENTIAL EMPLOYMENT RELATIONSHIP—An agency creates certain rights and
duties generally not present in other legal relationships. Two important legal relationships that
are similar to the agency relationships, but legally distinct, are the master-servant (or
employment) and employer-independent contractor relationships.
