The Legal Environment Of Business: A Critical Thinking Approach
15-1
Chapter 15
Agency Law
Introduction
Chapter Fifteen addresses these questions:
• What is an agency relationship and what are the types of agency relationships?
• How is an agency relationship created?
• What are the duties of agents and principals?
• When are principals and agents liable to third parties?
• How are principal-agency relationships terminated?
• What are the global dimensions of agency law?
Achieving Teaching Excellence
Assignments to Promote Critical Thinking
For instructors who want to create assignments that promote critical thinking in the legal
environment of business classroom, this section lists several alternatives. Incorporating
assignments that promote critical thinking will help students recognize the need to engage in
critical thinking in their other college courses, and in their everyday lives. By creating additional
assignments that promote critical thinking, instructors will continue on their quest to achieve
Teaching Excellence. Here is a list of five critical thinking assignments that instructors can
adapt to meet their needs at different times in the semester:
• Send students to the library to find two arguments that support a student’s opinion about a
specific legal issue. Have them write an essay in which they explain why (from a critical
The Legal Environment Of Business: A Critical Thinking Approach
15-2
References
• M. Neil Browne & Stuart M. Keeley, “Getting Started as a Teacher of Critical Thinking.”
Chapter Overview, Topic Outline, and Discussion Questions
Chapter Overview
Agency law has become more prominent in the complex postindustrial society. In an earlier
period, when business owners (principals) did most or all of their business on a one-to-one basis
with their customers, agents and third parties played a very small role in the business
Topic Outline
I. Definition and Types of Agency Relationships
A. Definition of Agency
B. Types of Agency Relationships
1. Principal–Agent
2. Employer–Independent Contractor
The Legal Environment Of Business: A Critical Thinking Approach
15-3
II. Creation of an Agency Relationship
A. Expressed Agency or Agency by Agreement
B. Agency by Implied Authority
C. Agency through Ratification by Principal
D. Agency by Estoppel or Apparent Authority
III. Duties of Agents and Principals
A. Principal’s Duties to Agent
2. Duty of Reimbursement and Indemnification
4. Duty to Provide Safe Working Conditions
B. Agent’s Duties to Principal
1. Duty of Loyalty
a. Cousins v. Realty Ventures, Inc.
2. Duty of Obedience
4. Duty of Performance
a. Gossels v. Fleet National Bank
IV. Principals’ and Agent’s Liability to Third Parties
A. Contractual Liability
1. McBride v. Taxman Corp.
B. E-Commerce: Intelligent Agents
1. Auer v. Paliath
G. Criminal Liability
V. Termination of the Principal-Agency Relationship
VI. Global Dimensions of Agency Law
A. Japan
VII. Summary
Discussion Questions for Chapter Fifteen
The Legal Environment Of Business: A Critical Thinking Approach
1. Explain relationships between respondeat superior and the agency relationship.
An agency is defined as a fiduciary relationship between two persons in which both
2. Explain why someone might think this statement is true: Employers would prefer to hire
independent contractors than employees.
3. Explain relationships between an exclusive agency contract and a power of attorney.
An exclusive agency contract is a type of agreement whereby the principal agrees that it will
4. Explain relationships between agency by ratification by principal and agency by apparent
authority.
An agency by ratification is formed when an unauthorized act of an agent is accepted by a
5. Agents have legal obligations toward the principals. Which of these duties is the hardest for
agents to comply today?
15-5
6. Explain why someone might think this statement is true: The doctrine of respondeat
superior has important implications for employers.
7. Evaluate this statement: Employers are regularly held responsible for their employees’
crimes.
8. How does the North American Free Trade Agreement (NAFTA) relate to agency law?
Answers to Critical Thinking about the Law Questions, Case Summaries,
Answers to Review Questions, Review Problems, and Case Problems
Suggested Answers to Critical Thinking about the Law Questions
1. Probably, the most important ethical norm to a business is efficiency, which means to
minimize costs or to get the most from a particular input. Agents are expected to be efficient.
2. A judge would care about the relationship between the parties trying to figure out whether
an agency relationship exists. What is the person called? How is the person presented to
other people? What was said to or about the person’s authority? What traditions has that
particular employer followed in the past?
Case Summary—Coker v. Pershad
The Legal Environment Of Business: A Critical Thinking Approach
15-6
AAA North Jersey, Inc. contracted with Five Star Auto Service to perform towing and auto
repair services for AAA. Terence Pershad, the driver of a tow truck for Five Star, responded to a
call to AAA for assistance by the driver of a car involved in an accident in Hoboken, New
Jersey. Pershad got into a fight with Nicholas Coker, a passenger in the car, and assaulted Coker
Suggested Answers to Critical Thinking about the Law Questions
1. The plaintiff made two arguments in support of its contention that Five Star was an
employee of AAA. First, it argued that AAA controlled the means and method of the work
2. If the facts had demonstrated that AAA controlled the manner and means of Five Star’s
Case Summary—Penthouse International v. Barnes
In this case, the court explained the extent to which implied authority will be granted to an
agent. The case involved Penthouse’s relationship with Dunas, an independent contractor. This
independent contractor had made an agreement with Barnes, who posed nude for him, that if her
The Legal Environment Of Business: A Critical Thinking Approach
15-7
Suggested Answers to Critical Thinking about the Law Questions
2. The strongest part of the reasoning is that Dunas was indeed an agent. The most
questionable part of the reasoning is whether Dunas exceeded his authority when he
modified the contract.
Case Summary—Motorsport Marketing, Inc. v. Wiedmaier, Inc.
Wiedmaier, Inc. owns and operates a truck stop in Missouri. The owners are Marsha
Wiedmaier and her husband Jerry. Their son Michael had no interest in the company but worked
for it as a fuel truck operator. In April 2003, Michael faxed a credit application to Motorsport’s
sales manager, Lesa James. Marsha signed the form as “Secretary-Owner” of Wiedmaier; after
Motorsport filed suit in Missouri state court against Wiedmaier and others to collect the
unpaid amount. The court entered a judgment in favor of Motorsport, assessing liability against
the defendants for the outstanding balance of $93,388.58, plus $13,406.38 in interest and
$25,165.93 in attorney’s fees. The defendants appealed to the state intermediate appellate court.
The Missouri Court of Appeals concluded that Motorsport had shown that each of the
criteria for establishing Michael’s apparent agency had been satisfied. First, the credit application
Case Summary—Cousins v. Realty Ventures, Inc.
In the Cousins case, the court decided whether the defendants Leo Hodgins and his real
estate company, Realty Ventures, Inc., breached their fiduciary duties to the plaintiffs,
prospective buyers of an office building in Louisiana. The court concluded that the defendants
The Legal Environment Of Business: A Critical Thinking Approach
15-8
Case Summary—Gossels v. Fleet National Bank
In the Gossels case, the court decided whether Fleet National Bank (agent) misrepresented
themselves to an investor, Gossels (principal). Gossels invested euros from Germany in the
Boston branch of Fleet National Bank. The Fleet bank teller, however, did not inform Gossels
that Fleet paid internal checks at a “retail exchange rate” and then misinformed Gossels not to
Case Summary—McBride v. Taxman Corp.
This case deals with contractual liability. Walgreen’s entered into a contract with Taxman to
operate a store in a shopping center in which Taxman was the property manager. Part of the
contract stipulated swift removal of snow and ice. Taxman contracted out that job to Artic.
Case Summary—Auer v. Paliath
This case involved alleged fraud in the sale of several rental properties. After a jury trial,
Jamie Paliath, a real estate broker for Keller Williams Home Town Realty, was found liable to
Torri Auer for fraud in the inducement of Auer’s purchases of the properties. Home Town Realty
appealed from the trial court’s judgment.
The Court of Appeals of Ohio affirmed the trial court’s judgment. The court concluded that
based on the evidence, it was established as a matter of law that Paliath acted within the scope of
The Legal Environment Of Business: A Critical Thinking Approach
15-9
Case Summary—Gaddy v. Douglass
This case deals with the principle-agent relationship. Gaddy was the doctor of a woman
known as Ms. M, who passed away. Douglass is a relative. When Ms. M’s medical condition
Suggested Answers to Critical Thinking about the Law Questions
1. Gaddy showed that he had Ms. M’s wishes in mind because he used her assets wisely and
2. Basically, if Gaddy had not been protecting her rights, then he would not have been awarded
Answers to Review Questions
15-1. Traditionally, the doctrine of respondeat superior said that the master was responsible for
15-2. Apparent authority differs from actual authority in that the principle communicates
15-3. Agency by implied authority is an agency relationship in which customs and
circumstances, rather than a detailed formal agreement, determine the agent’s authority.
Unless the agency contract says otherwise, courts have generally allowed agents to:
a. Receive payments of money due the principal;
The Legal Environment Of Business: A Critical Thinking Approach
15–10
15-4. Factors that distinguish agents and independent contractors are:
• The degree of control the employer has over the agent
• Whether the hired persons had a distinct occupation or profession
15-5. Principals are normally responsible for the acts of their agents if those acts come within
the scope of the agents’ employment. Therefore, a principal’s liability for an agent’s
15-6. Agency by ratification is an agency relationship in which an unauthorized agent commits
the principal to an agreement and the principal later accepts the unauthorized agreement,
Answers to Review Problems
15-7. Both Wilson and A & B were unaware of the actual value of the land till the time they
were about to make the deal. However, A & B can argue that an implied agreement had
15-8. Alice violated her duty of loyalty to Peter. Courts have often indicated that the agent’s
most important obligation is fiduciary. The fiduciary obligation includes loyalty to the
15-10. ABC Tire Corp. is likely liable for Thomas’ injuries. Even though Arnez took a “frolic
and detour” to visit his former roommate, he was rushing to his next customer
The Legal Environment Of Business: A Critical Thinking Approach
15–11
15-11. The Sylvester’s should sue Beck for fraud. Fraud is difficult to prove, but what Beck did
15-12. Peter cannot cancel the contract. Arguably, the broker acted unethically by engaging in
Answers to Case Problems
15-13. The Court of Appeals of Texas found that the trial court’s judgment was supported by the
theory of apparent authority. Cameron was unsure of the scope of Bailey’s authority and
sought confirmation, and in doing so established a reasonable belief in Bailey’s authority.
This was supported by Cameron’s testimony regarding Bailey stepping away to make a
15-14. The court granted Hercules’ motion for summary judgment, concluding that D. Hays
Trucking, Inc. was an independent contractor, and therefore Hercules could not be held
liable for Hays’ negligence. Hays determined the time, manner, and method of the work.
15-15 An agent for Trinity Mortgage set up the homeowners with a loan for construction with
15-16. The court enforced the settlement agreement. A settlement agreement entered by an
attorney without his client’s consent is enforceable against the client. The court noted that
Thinking Critically about Relevant Legal Issues
1. The author concludes that agency relationships should be treated like contracts. He believes
that without the contract aspect, they are too hard to define. He uses many analogies; some
2. One would need to know the amount of agency relationships and those that are the most
3. The opposition would obviously argue that agency relationships are completely different
from contracts and should be treated as such. Because of their nature, they are harder to