1. Performance
The degree of skill or care required of an agent is that expected of a reasonable person under similar
2. Notification
3. Loyalty
An agent must act solely for the benefit of the principal. Thus, an agent cannot represent two principals in
the same transaction unless both know of the dual capacity and consent; an agent who owns property
cannot sell it to the principal without first disclosing the ownership; and an agent authorized to buy cannot
buy from himself or herself, and an agent authorized to sell cannot sell to himself or herself, without the
principal’s consent. Knowledge acquired through an agency relationship is confidential.
CASE SYNOPSIS—
Case 32.3: Taser International, Inc. v. Ward
Taser International, Inc., develops and makes electronic control devices and accessories, including video and audio
recording devices. Steve Ward was Taser’s vice president of marketing when he began to explore the possibility of
developing and marketing devices of his own design, including a clip-on camera. He talked to patent attorneys and a
product development company and completed most of a business plan before he resigned from Taser. Ward then
formed Vievu LLC to market a clip-on camera. Taser filed a suit in an Arizona state court against Ward, alleging a breach
of the duty of loyalty. The court issued a summary judgment in Taser’s favor. Ward appealed.
…………………………………………………………..……………….…………………………………………………..
Notes and Questions
Short of resigning his employment based on no more than a desire to work for himself, could Ward have
CHAPTER 32: AGENCY FORMATION AND DUTIES 793
ANSWERS TO QUESTIONS AT THE END OF CASE 32.3
1. Why was it unclear whether Ward’s pretermination actions constituted direct competition with his
employer or were mere planning activities? The court found it difficult to draw the line between “mere
preparation” and “active competition” in this case because of the nature of Taser’s business. Taser was not just in the
business of selling electronic devices, including audio/video devices, but also in researching and developing such
products. Coming up with ideas for new products was thus part of Ward’s job at Taser. As Taser argued, Ward had
been “developing a rival design during employment, knowing full well Taser has sold such a device and continues to
develop a second generation product.” Thus, the question was not clear cut. In the eyes of the court, there were
several questions of fact that precluded summary judgment. For example, to what extent, if any, did Ward use Taser’s
time, facilities, or resources in his pre-termination efforts? Although an employee may, in the absence of a
2. Suppose that Ward’s planning and development efforts were focused on a product that in no way would
compete with Taser’s products. Would such efforts have breached his duty of loyalty to Taser in any way?
4. Obedience
5. Accounting
An agent must account for all property and money received and paid out on behalf of the principal. The
1. Compensation
2. Reimbursement and Indemnification
A principal must reimburse an agent for sums disbursed at the principal’s request or for necessary expenses
3. Cooperation
A principal must cooperate with and assist an agent in performing his or her duties.
4. Safe Working Conditions
A principal must provide safe premises, equipment, and conditions (and warn about unsafe areas).
IV. Rights and Remedies of Agents and Principals
A. AGENT’S RIGHTS AND REMEDIES AGAINST THE PRINCIPAL
For every duty of a principal, an agent has a corresponding right.
2. Demand for an Accounting
An agent can withhold further performance and demand that a principal give an accounting.
3. No Right to Specific Performance
When an agency is not contractual, an agent can recover for past services and future damages but has no
1. Constructive Trust
2. Avoidance
3. Indemnification
A third party can sue a principal for an agent’s negligent conduct, and sometimes an agent must indemnify
the principal for the damages. The same is true if an agent violates a principal’s instructions.
TEACHING SUGGESTIONS
1. When an independent contractor is injured on the job, he or she is responsible for the loss. When an in-
dependent contractor is out of work, can he or she collect unemployment compensation? Call your state’s
2. When considering an agency problem, students may find it helpful to determine first whether the parties are in an
employer-employee relationship. To categorize the relationship, they should pay careful attention to its terms.
3. It should be made clear, if it is not apparent from a reading of this chapter, that the legal term “agent”
4. You might explain that no area of the law is more pervasive than the law of agency, which affects virtually
everyone everyday. When confronted with legal problems to analyze your students may find it helpful to remember
how common agency relationships are. Agency law applies in the context of professional partnerships, for example.
Cyberlaw Link
Does the speed of communication via the Internet play have any effect on the duties of principals and
agents?
1. Why is agency law essential to the existence and operation of a corporation? An agent acts for a principal.
2. What is a principal–agent relationship? In a principal–agent relationship, the parties have agreed that the agent will
3. Define an employer–employee relationship. The details of an employee’s conduct in employment are subject to an
4. What are some of the factors that can determine whether an individual is considered an employee or an
independent contractor? The factors include: (1) the amount of control an employer exercises over the details of the work; (2)
whether the individual is in an occupation or business distinct from that of the employer; (3) whether work is normally subject
to the employer’s direction or may be done by a specialist without supervision; (4) whether the employer supplies the tools; (5)
5. How is an agency relationship created? An agency relationship can be created by oral agreement or by written
contract, or can be implied from conduct (a hotel’s permitting an individual to park its guests’ cars manifests willingness that the
individual do so, and the individual can infer authority to act as a valet, and as an agent for that purpose, from the hotel’s
conduct, for example). An agency relationship may be created by operation of law. State law often makes state officials agents
for service of process, and in most states, a corporation must designate an agent for service (who sometimes must be the
6. What are the policy reasons for holding a principal liable on a theory of agency by estoppel? Equity is the
7. What are the general duties that agents and principals owe each other? An agency relationship is fiduciary: each
8. What are an agent’s rights and remedies against a principal? For every duty of a principal, an agent has a
9. What are a principal’s rights and remedies against an agent? A principal has general contract remedies (and may
10. Are there situations in which the duty of loyalty to one’s employer could come into conflict with other duties?
11. What are some advantages to being an independent contractor? What might be some disadvantages? The
principal advantage of being an independent contractor is probably the degree to which the independent contractor controls
798 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
the performance of his or her work. Among the disadvantages is the financial risk that an independent contractor takes
compared to the relative financial security of an employee.
ACTIVITY AND RESEARCH ASSIGNMENT
Divide students into groups (four to five students per group) and have them compile lists of the jobs held by members
of the group. Ask them to discuss with each other the rights and responsibilities of each job to determine whether the student
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 8: Wiedmaier, Inc., owns and operates Wiedmaier Truck Stop in Missouri. The owners are Marsha Wiedmaier
and her husband Jerry. Their son Michael worked for Wiedmaier as a fuel truck operator. Motorsport Marketing, Inc., sells
racing collectibles and memorabilia to retail outlets. Michael faxed Motorsport a credit application, which Marsha signed as
“Secretary–Owner” of Wiedmaier, after which Michael added himself to the list of owners. Michael formed Extreme Diecast,
LLC, which he told Motorsport was part of Wiedmaier, and began ordering merchandise. When the payments ceased,
Motorsport filed a suit in a Missouri state court against Wiedmaier to collect. The court entered a judgment in favor of
How might the outcome of this case have been different if Motorsport had suspected that Wiedmaier would have
disapproved of Michael’s dealings with Motorsport? In this circumstance, it is likely that the defendants would not have
been liable on the ground of Michael’s apparent authority to act as an agent for Wiedmaier. In the actual facts of the case,
Motorsport did not know that Wiedmaier would have disapproved of Michael’s transactions. “Rather, Motorsport acted with a
reasonable, good faith belief that Michael was acting as an agent for Wiedmaier, Inc.”
CHAPTER 32: AGENCY FORMATION AND DUTIES 799
Footnote 9: Don Cousins sought commercial real estate in Louisiana, for Eagle Ventures, Inc., to invest in. Cousins
engaged the services of Leo Hodgins, a real estate agent, and owner of Realty Ventures, Inc. (RVI). On Eagle’s behalf, Hodgins
offered $90,000 to Westinghouse Credit Corp. to buy an office building at 3330 Lake Villa Drive. Westinghouse would sell the
building only with its neighboring property at 4141 Veterans Boulevard for $425,000. Hodgins estimated the two properties’
worth to be about $1 million. Without telling Eagle, Hodgins, his brother Paul, and RVI formed 4141 Vets Limited Partnership to
buy the buildings for $420,000. Hodgins then offered to sell 3330 to Eagle for $175,000. Cousins and others filed a suit in a
Louisiana state court against RVI and others, alleging breach of fiduciary duties. A jury awarded plaintiffs damages of $1.75
Suppose that the agent was not aware that his actions breached a fiduciary duty owed to his principal. Would
the agent’s lack of awareness have affected the outcome in this case? Why or why not? The agent’s lack of awareness of
his fiduciary duty would not likely have affected the outcome of this case because “ignorance of the law is no excuse.” No one
knows all of the details of all of the laws that he or she is subject to, and anyone may violate some prescription or fail to fulfill
some proscription unawares. That rarely, if ever, excuses liability for wrongful acts, however
What steps do the facts in the Cousins case indicate that an investor might want to consider when dealing
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What are the chief differences among the relationships of principal and agent, employer and employee, and
employer and independent contractor? What are the factors that indicate whether an individual is an employee or an
independent contractor? Principal–agent. A principal and agent agree that the agent will act on behalf of and in place of the
2. What are the ways in which a principal–agent relationship can be formed? A principal–agent relationship can be
created by agreement—oral or written—or can be implied from conduct. A principal–agent relationship may be created by
ratification when a principal affirms, by act or agreement, a contract made by a person who is not an agent or who is an agent
acting outside the scope of his or her authority. A principal–agent relationship may be created by estoppel when a principal
REVIEWING—
AGENCY FORMATION AND DUTIES
James Blatt hired Marilyn Scott to sell insurance for the Massachusetts Mutual Life Insurance Co. Their contract
stated, “Nothing in this contract shall be construed as creating the relationship of employer and employee.” The
contract was terminable at will by either party. Scott financed her own office and staff, was paid according to
performance, had no taxes withheld from her checks, and could legally sell products of Massachusetts Mutual’s
competitors. But when Blatt learned that Scott was simultaneously selling insurance for Perpetual Life Insurance Corp.,
1. Who is the principal and who is the agent in this scenario? By which method was an agency relationship
formed between Scott and Blatt? Since Blatt hired Scott to assist in sales, Blatt is the principal and Scott is his agent.
2. What facts would the court consider most important in determining whether Scott was an employee or an
independent contractor? The Restatement (Second) of Agency focuses on if the worker is “controlled by the
3. How would the court most likely rule on Scott’s employee status? Scott is an independent contractor for
4. Which of the four duties that Blatt owed Scott in their agency relationship has probably been breached? 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.
DEBATE THIS:
All works created by independent contractors should be considered works for hire under copyright law. It
only stands to reason that when a business or an individual pays 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.