978-1305575080 Chapter 36 Solution Manual Part 1

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Chapter 36

AGENCY

RESTATEMENT

Agency is a relationship based on an express or implied agreement by which one person (agent) is authorized to act

under the control and for another (principal) in negotiating or making contracts. The acts of the agent obligate the

principal.

Employees are agents if they are employed in a capacity of making or negotiating contracts for their employers. An

independent contractor is bound to a principal by contract to finish a certain task, however, the independent contractor’s

schedule is not controlled by the other party to the contract.

Anyone who is competent to enter into a contract is competent to be a principal. An agent need not have legal capacity

to contract, although practical aspects would dictate otherwise. There are different types of agents: special agents

(authority limited to a specific transaction); general agent (given general business management authority) and universal

agent (given all authority that can be delegated). An agency coupled with an interest is one in which the agent has paid

something to act as an agent, as when a lender loans money and receives the right to vote the shares pledged to the

shareowner.

An agency relationship can be created by action of the parties through agreement, by the agent’s conduct with the

principal’s acquiescence, by ratification or by operation of law.

The scope of an agent’s authority is determined by several different sources. Express authority is what the principal tells

the agent or writes in their contract. Incidental and customary authority spring from the nature of the transaction and

business custom. Apparent authority arises from the words or conduct of the agent which would lead a third person to

reasonably believe the agent has the authority being exercised. If an agent acts without authority, the agent is liable on

any contracts entered into using the principal’s name. Third parties do have a duty to ask questions with respect to an

agent’s authority, particularly in those circumstances where the agent is put on notice as to some irregularity. Secret

limits on an agent’s authority (limitations known only to the principal and agent) are not binding on third parties.

Agents do not have extensive authority to delegate their responsibilities. They do have a duty of loyalty to their principals

and must act in the principal’s best interest. Agents also have duties of obedience, reasonable care, accounting and

supplying information.

Principals have the duties of honoring the terms of the agency contract, compensation and reimbursement of any

expenses of the agent in entering into the principal’s contracts and negotiations.

An agency relationship can be terminated by expiration of the agency contract, by agreement, by exercises of an option

to terminate, by revocation of the principal or by operation of law which includes incapacity, death, insanity or bankruptcy

of the principal.

STUDENT LEARNING OUTCOMES

LO.1: Explain the difference between an agent and an independent contractor.

LO.2: Explain three methods of creating an agency relationship.

LO.3: Recognize that third persons who deal with an agent are required to take notice of acts contrary to the interests

of the principal.

LO.4: List and explain the duties an agent owes the principal.

LO.5: Explain how the Uniform Durable Power of Attorney Act changes the common law rule on the incapacity of the

principal.

INSTRUCTOR’S INSIGHTS

Break the chapter down into five components – related Learning Outcomes are indicated in ( ):

1. What is the nature of the agency relationship?

Define agency and distinguish it from other relationships (LO.1)

2. How is an agency relationship created?

Discuss creation of an agency relationship by appointment of an agent (LO.2)

Discuss creation of an agency relationship by conduct (LO.2)

3. What is the scope of an agent’s authority?

Cover how an agent exercises authority (LO.3)

Discuss the duties and liabilities of the parties after termination of agency

4. What are the duties and liabilities of principles and agents?

Explain the duties of an agent and principals during an agency relationship (LO.4)

5. How is an agency relationship terminated?

Cover termination by act of the parties

Cover termination by operation of law

CHAPTER OUTLINE

I. What is the Nature of the Agency Relationship? (See Figure 36-1 in text)

Definitions and distinctions

1. Stress that it is important for the students to diagram problems involving agency relationships to make

2. Express – what is stated or written by parties

3. Implied – what is customary for agents in the industry

4. With regard to the creation of an agency relationship, impress on the students the importance of getting the

agency powers and duties in writing. If the agency agreement is complete, there will be very few questions

5. Employees and independent contractors

CASE BRIEF: Yelverton v. Lamm

380 S.E. 2d 621 (N.C. App. 1989)

FACTS:

Yelverton died when her car was struck by a car owned and driven by Lamm, which had crossed the

center divider. Yelverton’s executor sued Lamm and Lamm’s alleged employer, Premier Industrial

Products Inc., contending that Premier was vicariously liable for Lamm’s negligence. Premier

defended that Lamm was not its agent or employee, but was retained as an independent contractor.

Judgment was for Premier. Yelverton appealed.

ISSUE:

Under the facts of this case, in his capacity as a “sales agent”, is Lamm an agent, an employee or an

independent contractor?

HOLDING: An independent contractor. The test in determining a worker’s status is whether the employer has the

right to control the worker with respect to the manner or methods of doing the work or has the right to

merely require certain results according to the party’s contract. If the employer has the right to control,

REASONING: Other courts have used tests that consider factors in addition to control as used in Yelverton. These

other factors include: whether the person in question was engaged in a distinct occupation or

business; the kind of occupation engaged in and whether it is usually done under the supervision of an

employer; the skill required of the occupation; whether the instrumentalities, tools and place of work

are supplied by the individual; the length of time involved; the method of payment for services; whether

the work is part of the regular business of the hirer; whether the parties believe they have created an

employment or contractor relationship; and whether the worker is in business for himself. While these

factors do not all have to be present and no one of them conclusive, the crucial factor still remains, the

extent of control that the hirer can impose on the person. See Chapman v. Black, 741 P. 2d 998

(Wash. 1987).

B. Who may be a principal

C. Who may be an agent

D. Classification of agents

1. Special agents perform specific acts or transactions

E. Agency coupled with an interest

II. How is an Agency Relationship Created?

A. Authorization by appointment

3. Referred to as a power of attorney or attorney in fact

CASE BRIEF: Taylor v. Ramsay-Gerding Construction Co.

196 P. 3d 532 (Or. 2008)

FACTS:

Hotel owner became concerned about possible rusting in the exterior stucco system manufactured by

ChemRex that was being installed at the hotel. The general contractor, Ramsay-Gerding, arranged a

meeting with ChemRex’s territory manager, McDonald, to discuss concerns. McDonald assured the

hotel owner that the system was “bulletproof against rust,” and stated that “you’re getting a five-year

warranty.” He followed up with a letter confirming the five-year warranty. A year later rust

discoloration appeared, and no one from ChemRex ever fixed the problem. Taylor sued ChemRex for

breach of warranty. ChemRex defended that McDonald did not have actual or apparent authority to

declare such a warranty.

ISSUE:

Did ChemRex (the principal) take sufficient action to create the appearance of authority on the part of

McDonald (the agent)?

REASONING: ChemRex clothed McDonald with the title of “territory manager” and gave him the authority to visit job

sites and resolve problems. Although it denies he had actual authority, ChemRex took sufficient steps

to create apparent authority to provide the five-year warranty on the stucco system. The actions of

ChemRex led the plaintiff to believe that McDonald was authorized to provide the warranty.

DISCUSSION POINTS: Have the students discuss how actual authority to perform some tasks can create apparent

authority to perform other related tasks using the Taylor v. Ramsay-Gerding Construction Co.

case.

B. Authorization by conduct

1. Principal’s conduct as to agent

2. Principal’s conduct as to third persons

a. Apparent authority involves no actual authority and is created by the principal

3. Acquiescence by principal

C. Agency by ratification

1. Discuss the elements necessary for ratification

5. Conditions for ratification

a. The agent must have purported to act on behalf of or as agent for the identified principal

b. The principal must have been capable of authorizing the act both at the time of the act and at the time

6. Form of ratification

7. Effect of ratification – as though the act had been originally authorized

D. Proving the agency relationship – burden on party who will benefit

III. What is the Scope of an Agent’s Authority?

A. Express authority

B. Incidental authority (implied authority) – acts reasonably necessary to carry out express authority

C. Customary authority (implied authority)

D. Apparent authority

CASE BRIEF: CSX Transportation, Inc. v. Recovery Express, Inc.

415 F. Supp. 2d 6 (D. Mass. 2006)

FACTS:

Recovery Express and Interstate Demolition (IDEC) are two separate corporations located at the same

business address in Boston. On August 22, 2003, Albert Arillotta, a “partner” at IDEC, sent an e-mail

to Len Whitehead, Jr., of CSX Transportation expressing an interest in buying “rail cars as scrap.”

Arillotta represented himself to be “from interstate demolition and recovery express” in the e-mail. And

the e-mail address from which he sent his inquiry was “albert@recoveryexpress.com.” Arillotta went to

the CSX rail yard, disassembled the cars and transported them away. Thereafter, CSX sent invoices

for the scrap railcars totaling $115,757.36 addressed to IDEC at its Boston office shared with

Recovery Express. Whitehead believed Arillotta was authorized to act for Recovery Express, based

on the e-mail’s domain name – recoveryexpress.com. Recovery claims that Arillotta never worked for

it. Recovery’s President Thomas Trafton allowed the “fledgling” company to use telephone, fax, and e-

mail services at its offices, but never shared anything with IDEC – assets, funds, books of business, or

financials. CSX sued Recovery for the invoice amount on the doctrine of “apparent authority.” IDEC is

not defunct. Recovery claims that Arillotta never worked for it, and it is not liable.

ISSUE:

Did Arillotta’s use of Recovery Express’ domain name give him apparent authority to enter into the

contract on behalf of Recovery?

REASONING: Issuance of an e-mail address with Recovery’s domain name to an individual who shared office space

with Recovery did not give the individual, Albert Arillotta, apparent authority to enter contracts on

Recovery’s behalf. No reasonable person could conclude that Arillotta had apparent authority on the

basis of an e-mail domain name by itself.

E. Effect of proper exercise of authority – binding contract between principal and third person

F. Duty to ascertain extent of agent’s authority

1. Students should not forget that a third person who deals with a person claiming to be an agent cannot rely

2. Agent’s acts adverse to principal – What does the third person know about the authority?

3. Death of third person – When was the death?

G. Limitations on agent’s authority

1. Obvious limitations – no binding contract exists

2. Secret limitations

a. They are not binding on a third person

b. Some students have a problem with secret limitations on the agent’s authority. The belief here is that

CASE BRIEF: Humlen v. United States

49 Fed. CI. 497 (2001)

FACTS:

The FBI approached Humlen for assistance in securing the conviction of a drug trafficker. Humlen

executed an agreement with the FBI to formalize his status as an informant. The agreement he signed

contained compensation figures significantly less than those he had been promised by the FBI agents

with whom he was dealing. Humlen claims that the agents assured him that he would receive the

extra compensation they had discussed with him, despite the wording of the contract. Based on

information provided by Humlen, an arrest was made and Humlen sought the remainder of his

promised monetary reward from the FBI. The FBI refused to pay him any more than the contract

stipulated. When no additional payment was forthcoming, Humlen sued the US government.

ISSUE:

Is the government bound by the promises of its agents?

REASONING: The government, unlike private parties, cannot be bound by the apparent authority of its agents.

When an agent exceeds his authority the government can disavow the agent’s words and is not bound

by an implied contract. As a general rule, FBI agents lack the requisite actual authority – either

express or implied – to contractually bind the US to remit rewards to confidential informants.

IV. What are the Duties and Liabilities of Principals and Agents?

A. Duties and liabilities of agent during agency

1. Give the students a quick review of the areas composing fiduciary duty. It is a lot like the scouting oath,

“Trustworthy, Loyal, Helpful, Friendly, Courteous, Kind, Obedient, Cheerful, Thrifty, Brave, Clean and

2. Loyalty

CASE BRIEF: Mosionzhnik v. Chowaiki

972 N.Y. S. 2d 841 (Sup. Ct. App. Div. 2013)

FACTS: On July 23, 2008, Luba Mosionzhnik, a 25% shareholder and vice president of the Gallery, was

summoned to a meeting by Ezra Chowaiki, a 25% shareholder and president of the Gallery, and

financial backer David Dangoor, a 50% shareholder. She was accused of a myriad of improprieties,

and fired from her employment. Section 42 of the Shareholders Agreement provided that upon

termination of an employee who owned stock he or she would be required to sell their shares to the

Gallery. Mosionzhnik admitted to committing the most egregious of the alleged improper acts. She

secretly opened a Swiss bank account which she used to divert approximately $500,000 related the

Gallery’s art sales and used over $13 million of art consigned by the Gallery’s clients as collateral for

loans without the clients’ consent. Rather than deny these allegations, at her deposition, Mosionzhnik

testified that her actions were not improper and noted that “plenty of advisors take a kickback . . . .

That’s not ethical, but it happens because it’s the art world.” With respect to illegally using client art

as collateral, her defense is that Chowaiki also did so, and told her that such a thing was

accepted practice in the industry. The Holtz accounting firm determined that Mosionzhnik’s shares

were worth $170,000. the Gallery seeks to recover from Mosionzhnik for her improprieties. She

seeks to keep the $500,000 in the Swiss bank account and believes her shares are worth

$4,367,200 as valued by her experts, “GMSL.”