Chapter 32
Agency Formation
and Duties
See Separate Lecture Outline System
INTRODUCTION
Up to this point, most of the material has considered when a person may be liable for something that he or she did. With
this chapter, the text goes a step further to ask when and under what circumstances a person may make another person liable.
That is, when can the actions of an agent bind a principal? As importantly, when does the law consider a person an agent?
One of the most common, important, and pervasive legal relationships is that of agency. In an agency relationship
between two parties, one party (the agent) agrees to represent or act for the other (the principal). A principal has the right to
control an agent’s conduct in matters entrusted to the agent. Generally, the law of agency is based on the maxim that “one
acting by another is acting for himself?”
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ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 32.
Business Law Digital Video Library
CHAPTER OUTLINE
I. Agency Relationships
An employee or an independent contractor may act in the capacity of an agent.
A. EMPLOYER-EMPLOYEE RELATIONSHIPS
An employee is one whose physical conduct is controlled, or subject to control, by an employer. The key feature is
the employer’s right to control the employee in the performance of tasks involved in the employment. An
employee can be an agent if the employee has an appointment or contract for hire with authority to represent
the employer.
ADDITIONAL BACKGROUND—
§ 2. Master; Servant; Independent Contractor
(1) A master is a principal who employs an agent to perform service in his affairs and who controls or has the right to
control the physical conduct of the other in the performance of the service.
(2) A servant is an agent employed by a master to perform service in his affairs whose physical conduct in the
(3) An independent contractor is a person who contracts with another to do something for him but who is not
controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the
Comment:
a. Servants and non-servant agents. A master is a species of principal and a servant is a species of agent.
§ 14 N. Agent and Independent Contractor
One who contracts to act on behalf of another and subject to the other’s control except with respect to his physical
§ 25. Applicability of General Agency Rules
The rules applicable generally to principal and agent as to the creation of the relation, delegability and capacity of the
parties apply to master and servant.
Comment:
master and servant is the same as between a principal and a non-servant agent and is created in accordance with the
same rules, and the rules * * * applicable to principals and agents are applicable to masters and servants.
B. EMPLOYER-INDEPENDENT CONTRACTOR RELATIONSHIPS
An employee is one whose physical conduct is controlled, or subject to control, by an employer. The key feature is
the employer’s right to control the employee in the performance of tasks involved in the employment. An
employee can be an agent if the employee has an appointment or contract for hire with authority to represent
the employer.
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ENHANCING YOUR LECTURE—
HOW CAN AN EMPLOYER USE
INDEPENDENT CONTRACTORS?
As an employer, you may at some time consider hiring an independent contractor. Hiring workers as independent
contractors instead of as employees may help you reduce both your potential tort liability and your tax liability.
MINIMIZING POTENTIAL TORT LIABILITY
One reason for using an independent contractor is that doing so may reduce your susceptibility to tort liability. If,
however, an independent contractor’s words or conduct leads another party to believe that the independent
contractor is your employee, you may not escape liability for the contractor’s tort.
To minimize the possibility of being legally liable for negligence on the part of an independent contractor, you
should inquire about the contractor’s qualifications before hiring him or her. The degree to which you should
investigate depends, of course, on the nature of the work. A more thorough investigation is necessary when the
contractor’s activities present a potential danger to the public (as in delivering explosives).
REDUCING TAX LIABILITY
Another reason for hiring independent contractors is that you need not pay or deduct Social Security and
unemployment taxes on their behalf. The independent contractor is the party responsible for paying these taxes.
Additionally, the independent contractor is not eligible for any retirement or medical plans or other fringe benefits that
you provide for yourself and your employees, and this is a cost saving to you.
independent contractor simply because you designate him or her as such. If the IRS determines that you exercise
significant control over the assistant, the IRS may decide that the assistant is, in fact, an employee.
1. Check the qualifications of any independent contractor you plan to use to reduce the possibility that you might be
legally liable for the contractor’s negligence.
2. It is best to require in any contract with an independent contractor that the contractor assume liability for harm to
a third person caused by the contractor’s negligence.
3. Require that independent contractors working for you carry liability insurance. Examine the policy to make sure
4. Make sure that independent contractors do not represent themselves as your employees to the rest of the world.
5. Regularly inspect the work of the independent contractor to make sure that it is being performed in accordance
with contract specifications. Such supervision on your part will not change the worker’s status as an independent
1. Criteria Used by the Courts
To decide whether an individual is an employee or independent contractor, courts consider the following—
• How much control does the employer have over the details of the work (the most important factor)?
• How distinct are the occupations of the individual and employer?
• Does the employer supervise the work?
• Does the employer supply the tools at the place of work?
• What is the length of the employment?
• How is the individual paid (periodically or by project)?
• What skill does the work require?
CASE SYNOPSIS—
Case 32.1: Lopez v. El Palmar Taxi, Inc.
El Palmar Taxi, Inc., requires its drivers to supply their own cabs, which must display El Palmar’s logo. The drivers
pay gas, maintenance, and insurance costs, and a fee to El Palmar. They are expected to follow certain rules—dress
neatly, for example—and to comply with the law, including licensing regulations, but they can work when they want for
as long as they want. El Palmar might dispatch a driver to pick up a fare, or the driver can look for a fare. Mario Julaju
drove a taxi under a contract with El Palmar that designated him an independent contractor. El Palmar sent Julaju to
pick up Maria Lopez and her children. During the ride, Julaju’s cab collided with a truck. To recover for their injuries, the
Lopezes filed a suit in a Georgia state court against El Palmar. The employer argued that it was not liable because Julaju
was an independent contractor. The court ruled in El Palmar’s favor. The plaintiffs appealed. In
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Notes and Questions
Could El Palmar be liable under a theory of “apparent agency” or agency by estoppel (discussed later in
this chapter)? Possibly. Under this theory, an employer who represents that a person is the employer’s agent and
causes a third person justifiably to rely on this representation is subject to liability for harm caused to the third person
by the apparent agent. Thus, despite the contract between El Palmar and Julaju—which passengers are unlikely to
know about—if the employer had led the Lopezes to believe that it was “a safe, efficient supplier of transportation”
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and that Julaju was its employee, the employer might be liable for their injuries. Important factors include that El
Palmar advertised its services in the local phone book, its drivers had El Palmar business cards to distribute to the
public, the Lopezes called El Palmar to arrange for a taxi, and Julau’s cab displayed El Palmar’s logo.
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 32.1
Suppose that El Palmar had limited its driver to a set schedule in a specific area of the city and allowed
him to pick up only certain passengers. Would these facts have established Julaju as an employee? Why or
why not? These facts could be sufficient to establish Julaju as an employee in this case. They would indicate that the
employer retained and exercised a great deal of control over its driver’s work. Control is the most important factor in
determining whether a person is an employee.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases in which the status of a worker as an employee or an independent contractor affected the
employer’s liability for the worker’s actions include the following.
• Guillaume v. Hall Farms, Inc. 914 N.E.2d 784 (Ind.App. 2009) (a harvesting contractor who supplied a crew of
farm laborers to a produce distributor was an “independent contractor” of the distributor, who did not control the
contractor or its crew, for purposes of determining (whether the distributor was liable for the injuries of one of the
laborers).
personal injury).
3. Employee Status and “Works for Hire”
An employee’s work of intellectual property belongs to the employer, but an independent contractor’s
similar effort is the employer’s only if the parties agreed to exchange the rights.
II. Formation of the Agency Relationship
An agency relationship must be based on an affirmative indication that the agent agrees to act for the principal and the
principal agrees to have the agent so act. It may be created for any legal purpose. In most states, the principal—but not
the agent—must have contractual capacity. The text notes two exceptions to oral agency agreements—
CASE SYNOPSIS—
Case 32.2: Laurel Creek Health Care Center v. Bishop
Gilbert Bishop was admitted to Laurel Creek Health Care Center. He indicated to Laurel Creek that he was
physically incapable of signing admission documents but was of sound mental capacity and wanted his wife to sign the
documents on his behalf. When he told this to his sister, she brought Anna in to sign the documents, which contained a
provision for mandatory arbitration. While at the hospital, Gilbert died. His brother and personal representative,
Colson Bishop, filed a suit in a Kentucky state court against Laurel Creek for negligence. Laurel Creek asked the court to
order the parties to proceed to arbitration. The court denied the request. Laurel Creek appealed.
A state intermediate appellate court reversed and remanded. There are three steps to the creation of an agency
that Anna come to the hospital to sign the papers for him. Second, the agent’s actions establish the agent’s consent to
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Notes and Questions
If Gilbert had not had sound mental capacity, would the result have been different? A person must have
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ANSWER TO “THE ECONOMIC DIMENSION” QUESTION IN CASE 32.2
Which party benefited from the court’s ruling? Why? At the heart of this case was Laurel Creek’s desire to
arbitrate the negligence claim instead of having to defend against negligence in a lawsuit. Economically, this makes
sense from Laurel Creek’s perspective. After all, defending against a lawsuit is a costly undertaking for a party, even if
the party wins the suit. In contrast, arbitration is (usually) a less expensive and less time-consuming process.
Bishops’ perspective, however, if they were fairly certain that they could win their suit for negligence, they could
ANSWER TO “THE LEGAL DIMENSION” QUESTION IN CASE 32.2
Laurel Creek argued that even if there was no actual agency relationship, an implied agency relationship
existed. Is this argument valid? Why or why not? One could argue that the statements made by Gilbert and Rachel
on Gilbert’s admission to the hospital and the subsequent events evidenced the creation of an implied agency. Rachel
had offered to sign the admission paperwork, but the hospital staff told her that it was the hospital’s policy to have the
patient’s spouse sign the paperwork and requested that Anna sign the papers. Gilbert’s actions in directing Rachel to
bring Anna was communicated to Laurel Creek staff, and they acted in reliance on Gilbert’s expression of authority,
whether actual or implied. Indeed, Laurel Creek had argued, in the alternative, that even if an actual agency did not
exist, an implied agency had been created. The court agreed that, “at the very least,” an implied agency had been
formed.
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D. AGENCY BY OPERATION OF LAW
Agency may be created by operation of law. The text points out that courts have granted agents emergency
power under unusual circumstances and that agency has been held to arise in family relationships.
ADDITIONAL BACKGROUND—
Designated Agents for Service of Process
For businesses, some state statutes make state officials (a state’s secretary of state) the businesses’ agents for
service of process. This is an agency created by operation of law. Most states require a corporation to designate a
Sections 304, 305, 402).
MCKINNEY’S CONSOLIDATED LAWS OF NEW YORK ANNOTATED
BUSINESS CORPORATION LAW
CHAPTER 4 OF THE CONSOLIDATED LAWS
ARTICLE 3—CORPORATE NAME AND SERVICE OF PROCESS
§ 304. Statutory designation of secretary of state as agent for service of process
(a) The secretary of state shall be the agent of every domestic corporation and every authorized foreign corporation
upon whom process against the corporation may be served.
(b) No domestic or foreign corporation may be formed or authorized to do business in this state under this chapter
unless in its certificate of incorporation or application for authority it designates the secretary of state as such agent.
(c) Any designation by a domestic or a foreign corporation of the secretary of state as such agent, which designation is
in effect on the effective date of this chapter, shall continue. Every domestic or foreign corporation, existing or
§ 305. Registered agent for service of process
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(a) In addition to such designation of the secretary of state, every domestic corporation or authorized foreign
corporation or foreign corporation of any type or kind formed, or authorized to do business in this state, under this
chapter or under any other statute of this state.
(b) Any such designation of a registered agent may be made, revoked or changed as provided in this chapter.
(c) A registered agent may resign as such agent. A certificate, entitled “Certificate of resignation of registered agent of
(1) That he resigns as registered agent for the designating corporation.
(2) The date the certificate of incorporation or the application for authority of the designating corporation was filed by
the department of state.
(3) That he has sent a copy of the certificate of resignation by registered mail to the designating corporation at the post
office address on file in the department of state specified for the mailing of process or if such address is the address of
incorporation.
the thirty days or thereafter.
§ 402. Certificate of incorporation; contents
(a) A certificate, entitled “Certificate of incorporation of ………… (name of corporation) under section 402 of the
(8) If the corporation is to have a registered agent, his name and address within this state and a statement that the
registered agent is to be the agent of the corporation upon whom process against it may be served.
III. Duties of Agents and Principals
An agency relationship is fiduciary.
A. AGENT’S DUTIES TO THE PRINCIPAL
An agent’s duties are implied from the agency relationship whether or not the identity of the principal is disclosed
to a third party.