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in whole or in part.
CHAPTER 8
AGENCY FORMATION AND DUTIES
in whole or in part.
CHAPTER 8: AGENCY FORMATION AND DUTIES 3
in whole or in part.
solely for the benefit of his or her principal. Under the duty of notification, an agent is required to
notify the principal of all matters that come to her or his attention concerning the subject matter
of the agency. “Assuming Taser was engaged in the research and development of a recording
device during Ward's employment, assuming Ward knew or should have known of those efforts,
and assuming Taser's device would compete with Ward's concept, substantial design and
development efforts by Ward during his employment” without informing Taser would constitute a
violation of the duty of notification.
Under the duty of obedience, when acting on behalf of the principal, an agent has a duty
to follow all lawful and clearly stated instructions of the principal. Any deviation from such
instructions is a violation of the duty. Depending on the scope of Ward’s employment—what he
was instructed to do—he might also have violated this duty. And under the duty of accounting,
an agent has a duty to keep and make available to the principal an account of all property and
funds received and paid out on behalf of the principal. If Ward expended any of Taser’s
resources on research and development of his own projects,, he might also have violated this
duty.
4A. If the judgment in the case of remand is again in Taser’s favor, what might be an
appropriate remedy? A principal has contract remedies for an agent’s breach of fiduciary
duties. The principal also has tort remedies if the agent engages in a tort—misappropriation,
misrepresentation, negligence, or deceit, for example. In addition, any breach of a fiduciary duty
by an agent may justify the principal’s termination of the agency.
Any of these remedies could be appropriate in the right circumstance. If Ward were held
to have violated the agent’s fiduciary duties, Taser could seek to impose a constructive trust. Or
Taser might seek to avoid the contract with Ward, or seek damages for the commission of a tort.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Agency relationship
Since Blatt hired Scott to assist in sales, Blatt is the principal and Scott is his agent. Both
represent Massachusetts Mutual Life, but that part of the relationship matters little here. Since
Blatt hired Scott to assist in sales, Blatt is the principal and Scott is his agent. Both represent
Massachusetts Mutual Life, but that part of the relationship matters little here.
2A. Key factor
The Restatement (Second) of Agency focuses on if the worker is “controlled by the other.” The
IRS also focuses on “the degree of control” the business has over the worker.
3A. Employment status
Scott is an independent contractor for Blatt. Since she is not under his direct supervision and
control, she is not an employee. She operated her own office and staff and sold Massachusetts
Mutual insurance and other insurance products.
4 UNIT TWO: AGENCY AND EMPLOYMENT
in whole or in part.
4A. Principal’s duty
A principal has a duty to cooperate with an agent and to assist the agent in performing duties.
The principal must not take actions that prevent performance. Blatt made it more difficult for
Scott to sell Massachusetts Mutual Life policies.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
All works created by independent contractors should be considered works for hire
someone for the creation of a software program, a photo, or a work of art, that created item
should become one-hundred percent the property of the entity that paid for its creation. There is
no logical reason that the paid-for item is a work for hire only if the person that created it is an
employee, but not if she or he is an independent contractor.
Independent contractors should be able to benefit fully from their creations. If, for
example, a painter, as an independent contractor, sells a work of art, that does not mean that
the new owner can sell photos and replicas of the art. If a software programmer in her contract
states clearly that she is selling the new program for use only in the buyer’s business, that does
not mean that the buyer can turn around and resell the same program to others at a profit. That
would be grossly unfair.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
1A. Winona contracted with XtremeCast, a broadcast media firm, to cohost an Internet-
streaming sports program. Winona and XtremeCast signed a new contract for each
episode. In each contract, Winona agreed to work a certain number of days for a certain
salary. During each broadcast, Winona was free to improvise her performance. She had
no other obligation to work for XtremeCast. Was Winona an independent contractor?
Yes, Winona was an independent contractor. Independent contractors are not employees,
because those who hire them have no control over the details of their performance. An
independent contractor is a person who contracts with another—the principal—to do something
but who is neither controlled by the other nor subject to the other’s right to control with respect to
the performance. Thus, whether a person hired by another is an employee or an independent
contractor depends on the extent of control—the greater the employer’s control over the work,
the more likely it is that the worker is an employee.
2A. Dimka Corporation wants to build a new mall on a specific tract of land. Dimka
contracts with Nadine to buy the property. When Nadine learns of the difference between
CHAPTER 8: AGENCY FORMATION AND DUTIES 5
in whole or in part.
the price that Dimka is willing to pay and the price at which the owner is willing to sell,
she wants to buy the land and sell it to Dimka herself. Can she do this? Discuss. No.
Nadine, as an agent, is prohibited from taking advantage of the agency relationship to obtain
property that the principal (Dimka Corporation) wants to purchase. This is the duty of loyalty that
arises with every agency relationship.
ANSWERS TO BUSINESS SCENARIOS AND BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
8-1A. Agency formation
(Chapter 8—Page 142)
that an agency by estoppel was created; however, this argument will fail. Agency by estoppel is
applicable only when a principal causes a third person to believe that another person is the
estoppel, because such actions should not reasonably lead a third person to believe that the
purported agent has authority. In this case, Wade’s declarations and allegations alone led
8-2A. Duty of loyalty
(Chapter 8—Page 145)
Upon creation of an agency, the agent owes certain fiduciary duties to the principal. Two such
duties are the duty of loyalty and the duty to inform or notify. The duty of loyalty is a
matter of the agency. Failure to disclose to Peter the knowledge of the shopping mall and the
increased market value of the property also was a breach of Alice’s fiduciary duties. When an
agent breaches fiduciary duties owed to the principal by becoming a recipient of a contract, the
contract is voidable at the election of the principal. Neither Carl nor Alice can hold Peter to the
in whole or in part.
in whole or in part.
in whole or in part.
in whole or in part.
in whole or in part.
CHAPTER 8: AGENCY FORMATION AND DUTIES 3
in whole or in part.
solely for the benefit of his or her principal. Under the duty of notification, an agent is required to
notify the principal of all matters that come to her or his attention concerning the subject matter
of the agency. “Assuming Taser was engaged in the research and development of a recording
device during Ward's employment, assuming Ward knew or should have known of those efforts,
and assuming Taser's device would compete with Ward's concept, substantial design and
development efforts by Ward during his employment” without informing Taser would constitute a
violation of the duty of notification.
Under the duty of obedience, when acting on behalf of the principal, an agent has a duty
to follow all lawful and clearly stated instructions of the principal. Any deviation from such
instructions is a violation of the duty. Depending on the scope of Ward’s employment—what he
was instructed to do—he might also have violated this duty. And under the duty of accounting,
an agent has a duty to keep and make available to the principal an account of all property and
funds received and paid out on behalf of the principal. If Ward expended any of Taser’s
resources on research and development of his own projects,, he might also have violated this
duty.
4A. If the judgment in the case of remand is again in Taser’s favor, what might be an
appropriate remedy? A principal has contract remedies for an agent’s breach of fiduciary
duties. The principal also has tort remedies if the agent engages in a tort—misappropriation,
misrepresentation, negligence, or deceit, for example. In addition, any breach of a fiduciary duty
by an agent may justify the principal’s termination of the agency.
Any of these remedies could be appropriate in the right circumstance. If Ward were held
to have violated the agent’s fiduciary duties, Taser could seek to impose a constructive trust. Or
Taser might seek to avoid the contract with Ward, or seek damages for the commission of a tort.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Agency relationship
Since Blatt hired Scott to assist in sales, Blatt is the principal and Scott is his agent. Both
represent Massachusetts Mutual Life, but that part of the relationship matters little here. Since
Blatt hired Scott to assist in sales, Blatt is the principal and Scott is his agent. Both represent
Massachusetts Mutual Life, but that part of the relationship matters little here.
2A. Key factor
The Restatement (Second) of Agency focuses on if the worker is “controlled by the other.” The
IRS also focuses on “the degree of control” the business has over the worker.
3A. Employment status
Scott is an independent contractor for Blatt. Since she is not under his direct supervision and
control, she is not an employee. She operated her own office and staff and sold Massachusetts
Mutual insurance and other insurance products.
4 UNIT TWO: AGENCY AND EMPLOYMENT
in whole or in part.
4A. Principal’s duty
A principal has a duty to cooperate with an agent and to assist the agent in performing duties.
The principal must not take actions that prevent performance. Blatt made it more difficult for
Scott to sell Massachusetts Mutual Life policies.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
All works created by independent contractors should be considered works for hire
someone for the creation of a software program, a photo, or a work of art, that created item
should become one-hundred percent the property of the entity that paid for its creation. There is
no logical reason that the paid-for item is a work for hire only if the person that created it is an
employee, but not if she or he is an independent contractor.
Independent contractors should be able to benefit fully from their creations. If, for
example, a painter, as an independent contractor, sells a work of art, that does not mean that
the new owner can sell photos and replicas of the art. If a software programmer in her contract
states clearly that she is selling the new program for use only in the buyer’s business, that does
not mean that the buyer can turn around and resell the same program to others at a profit. That
would be grossly unfair.
ANSWERS TO ISSUE SPOTTERS IN THE EXAMPREP FEATURE
AT THE END OF THE CHAPTER
1A. Winona contracted with XtremeCast, a broadcast media firm, to cohost an Internet-
streaming sports program. Winona and XtremeCast signed a new contract for each
episode. In each contract, Winona agreed to work a certain number of days for a certain
salary. During each broadcast, Winona was free to improvise her performance. She had
no other obligation to work for XtremeCast. Was Winona an independent contractor?
Yes, Winona was an independent contractor. Independent contractors are not employees,
because those who hire them have no control over the details of their performance. An
independent contractor is a person who contracts with another—the principal—to do something
but who is neither controlled by the other nor subject to the other’s right to control with respect to
the performance. Thus, whether a person hired by another is an employee or an independent
contractor depends on the extent of control—the greater the employer’s control over the work,
the more likely it is that the worker is an employee.
2A. Dimka Corporation wants to build a new mall on a specific tract of land. Dimka
contracts with Nadine to buy the property. When Nadine learns of the difference between
CHAPTER 8: AGENCY FORMATION AND DUTIES 5
in whole or in part.
the price that Dimka is willing to pay and the price at which the owner is willing to sell,
she wants to buy the land and sell it to Dimka herself. Can she do this? Discuss. No.
Nadine, as an agent, is prohibited from taking advantage of the agency relationship to obtain
property that the principal (Dimka Corporation) wants to purchase. This is the duty of loyalty that
arises with every agency relationship.
ANSWERS TO BUSINESS SCENARIOS AND BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
8-1A. Agency formation
(Chapter 8—Page 142)
that an agency by estoppel was created; however, this argument will fail. Agency by estoppel is
applicable only when a principal causes a third person to believe that another person is the
estoppel, because such actions should not reasonably lead a third person to believe that the
purported agent has authority. In this case, Wade’s declarations and allegations alone led
8-2A. Duty of loyalty
(Chapter 8—Page 145)
Upon creation of an agency, the agent owes certain fiduciary duties to the principal. Two such
duties are the duty of loyalty and the duty to inform or notify. The duty of loyalty is a
matter of the agency. Failure to disclose to Peter the knowledge of the shopping mall and the
increased market value of the property also was a breach of Alice’s fiduciary duties. When an
agent breaches fiduciary duties owed to the principal by becoming a recipient of a contract, the
contract is voidable at the election of the principal. Neither Carl nor Alice can hold Peter to the
in whole or in part.
in whole or in part.
in whole or in part.
in whole or in part.
