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CHAPTER 32
AGENCY FORMATION AND DUTIES
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
ETHICS TODAY—CRITICAL THINKING
What choices do disgruntled Uber and Lyft drivers have? They can, as some have, seek
redress for their grievances by petitioning city councils to enforce certain city labor laws. They
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 32.1—CRITICAL THINKING
LEGAL
Five Star’s contract with AAA required Five Star to be available to provide service for
AAA members. Does this support Coker’s argument that Five Star was AAA's employee?
2 UNIT SEVEN: AGENCY AND EMPLOYMENT
CASE 32.2—CRITICAL THINKING
LEGAL ENVIRONMENT
Did Ward breach any duties owed to his employer in addition to his alleged breach of the
duty of loyalty? Discuss. In the Taser case, if Taser can prove its case, Ward was in breach
of the agent’s duty of loyalty. Taser might also allege that Ward breached the agent’s duty of
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Ward’s pre-termination activities focused on a product that was not
designed to compete with Taser’s products. Would these efforts have breached his duty
of loyalty? Why or why not? In these circumstances, assuming that Ward’s activities did not
CASE 32.3—LEGAL REASONING QUESTIONS
1. What is the advantage to a principal of an exclusive agency agreement? What was the
advantage to Jones of his agreement with Woolston? Discuss. In an exclusive agency
agreement, a principal agrees not to enter into a similar agreement with another agent. Often,
CHAPTER 32: AGENCY FORMATION AND DUTIES 3
2. Why, in addition to damages representing the full commission on the contract, was
the plaintiff awarded attorney’s fees and costs? In a breach of contract suit, as in most
other cases, a court generally does not award attorney's fees to prevailing parties. Of course,
3. Jones’s agreement with Woolston provided that on the purchase of property, NRT
“will, whenever feasible, seek compensation from the seller or the seller’s agent.” The
court determined that it was not feasible. Why? In the NRT case, the court determined that,
despite a contract clause providing for the agent’s (Woolston’s) recovery of her commission
from the seller of the property bought by the buyer (Jones), such a recovery was not feasible
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
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.
4 UNIT SEVEN: AGENCY AND EMPLOYMENT
3A. Employment status
Scott is an independent contractor for Blatt. Since she is not under his direct supervision and
4A. Principal’s duty
A principal has a duty to cooperate with an agent and to assist the agent in performing duties.
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
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
ANSWERS TO ISSUE SPOTTERS
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?
CHAPTER 32: AGENCY FORMATION AND DUTIES 5
2A. Dimka Corporation wants to build a new mall on a specific tract of land. Dimka
contracts with Nadine to buy the property. There is a substantial difference between the
price that Dimka is willing to pay and the price at which the owner is willing to sell. When
Nadine learns of this, she wants to buy the land and sell it to Dimka herself. Can she do
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
32-1A. Agency formation
Agency is usually a consensual relationship in that the principal and agent agree that the agent
will have the authority to act for the principal, binding the principal to any contract with a third
party. If no agency in fact exists, the purported agent’s contracts with third parties are not
binding on the principal. In this case, no agency by agreement was created. Brown may claim
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
32-2A. Duty of loyalty
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
fundamental concept of the fiduciary relationship. The agent must act solely for the benefit of
the principal, not in the agent’s own interest or in the interest of another person. One of the
6 UNIT SEVEN: AGENCY AND EMPLOYMENT
32–3A. Employee versus independent contractor
A court might hold that Hemmerling and Happy Cab have an employment relationship primarily
on the basis of control. Happy Cab clearly has the right to control the methods or means used
by Hemmerling in the course of operating the taxicab by virtue of its exclusive control over the
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
32-4A. Agency by ratification
To impose liability for the acts of one’s employees or agents under respondeat superior, some
relationship must exist between the principal and agent or between the employer and employee.
Barrs’ argument is not correct. The evidence that Mr. Acree, the presumed landowner.
instructed Hall, his alleged employee, to clear the land by controlled burn, was insufficient to
establish that an actual agency relationship existed between the parties. Hall was the property
32–5A. Employment relationships
The facts support a conclusion that Jonathan was an independent contractor and not an
employee. In deciding whether a worker is categorized as an employee or an independent
contractor, the courts consider generally the amount of control that the employer exercises over
the details of the work. Is the work done under the employer’s direction or by a specialist without
supervision? Control indicates employee status.
CHAPTER 32: AGENCY FORMATION AND DUTIES 7
32–6A. Agent’s duties to principal
The Millers are referring to the duty of loyalty that an agent owes a principal. And yes, if the
Millers can prove their allegations, Verchota was in breach of this duty. The Millers might also
allege that Verchota breached the agent’s duty of notification. Under the duty of loyalty, an
agent has the duty to act 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.
32–7A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Determining employee status
No, Cox is not liable to Cayer for any injuries or damage that she sustained in the accident with
Ovalles. Generally, an employer is not liable for physical harm caused to a third person by the
8 UNIT SEVEN: AGENCY AND EMPLOYMENT
32–8A. Agency relationships
According to criteria used by the courts, the installers and technicians who contract with
Standard to install and service the company’s products in its customers’ homes are classified as
independent contractors. In deciding whether a worker is an employee or an independent
contractor, courts consider a number of factors, including the following.
1. The degree of control that the employer exercises over the work.
The degree of control is the most important factor.
Standard sold home heating, cooling, and security systems, scheduled appointments with
its customers for installation and service, and contracted with installers and technicians to do the
work. The company required an installer or technician to finish by a certain time, but otherwise
encouraged each individual to “exercise independent judgment and control in the execution of
any work.”
CHAPTER 32: AGENCY FORMATION AND DUTIES 9
32-9A. A QUESTION OF ETHICS—Agency formation and duties
(a) A jury ruled in favor of Western on all its claims, and the court awarded damages
of $280,000 against EO and $70,000 against Costello, plus costs and interest. EO and Western
appealed to a state intermediate appellate court, which affirmed the lower court’s ruling, The
(b) EO contended in part that it had not aided or abetted Costello's breach of his
fiduciary duty “because there is no evidence . . . that Costello owed Western a fiduciary duty.”
The trial court told the jury that “[a] fiduciary relationship exists whenever one person is
entrusted to act for the benefit of or in the interest of another and has the legal authority to do
so. If . . . Jim Costello was acting as an agent of Western with respect to his employment as a
(c) On the appeal from the judgment against the defendants, the appellate court
included an award of more than $50,000 in punitive damages. The court stated that punitive
damages are justified when an act causing a plaintiff's injuries was performed “with an evil
intent, and with the purpose of injuring the plaintiff, or with such a wanton and reckless disregard
10 UNIT SEVEN: AGENCY AND EMPLOYMENT
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
32-10A. Agent’s duties to principal
(a) Merrill and Warren were in an agency relationship in this case, with Merrill acting
(b) Under the fiduciary duty that an agent owes a principal, and that thus Merrill owed
Warren, she was required to place his interests above her own in the real estate transaction.
Also, an agent is charged with a duty to disclose all material facts that might affect a principal's
