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C H A P T E R 5
AGENCY
This chapter explains the law of agency relationships between employers and either
employees or independent contractors. It also elaborates on the liability created by
such relationships.
I. FORMATION OF AN AGENCY RELATIONSHIP. Two parties may agree,
consensually, to form a relationship in which one party acts as the agent of the
principal.
A. Express (Written or Oral).
II. TYPES OF AGENCY RELATIONSHIPS.
A. Employer-Employee. Key is “control”.
B. Principal (Client) -Independent Contractor.
C. Distinguishing Between Employees and Independent Contractors.
Determining whether an actor is an employee or contractor has
important legal consequences.
1. Respondeat Superior. Under the doctrine of respondeat
2. Scope of Employment Factors Include: (1) Employer’s control
3. Distinctions between Employees and Independent Contractors.
BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT 7TH ED—INSTRUCTOR’S MANUAL
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IV. FIDUCIARY DUTY. Agent Owes Duties of Loyalty, Obedience, and Care to
their principals.
CASE 5.1 Meinhart v. Salmon, 164 N.E. 545 (N.Y. 1928). Meinhard
entered a joint venture with Salmon to renovate a hotel.
CASE 5.2 EBCI, Inc. v. Goldman, Sachs, & Co., 83 2N.E.26 (N.Y. 2005),
EBCI (formerly e-Toys) retained an independent contractor
V. AGENT’S ABILITY TO BIND THE PRINCIPAL TO CONTRACTS ENTERED INTO
BY THE AGENT
A. Actual Authority can be express or implied. Implied means the ability
to do whatever is reasonable to effectuate the express authority.
1. Express Authority.
B. Apparent Authority. Created when a third party reasonably believes
an agent has authority to act on behalf of, and bind, the principal.
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VI. LIABILITY FOR TORTS OF AGENTS. Torts, civil injuries, may serve as
grounds for a lawsuit against the principal under the concept of respondeat
superior (vicarious liability) when an employer/principal is responsible for
acts or omissions of its agent.
A. Liability for Torts of Employees Acting Within The Scope of
Employment is determined by the following analysis:
1. Did Employee have Employer’s authorization to act?
4. Did the Employer have knowledge that the Employee would
perform the act?
5. Is the Employer liable for an employee’s “detour” or “frolic”?
CASE 5.3 O’Shea v. Welch, 350 F.3d 1101 (10th Cir.
2003), while delivering tickets to clients for his
employer, OSCO, Welch made a spur-of-the-
B. Liability for Torts of Employees Acting Outside the Scope of
Employment. Employer will be liable if:
1. Employer intended the employee’s conduct or its
consequences;
BAGLEY, MANAGERS AND THE LEGAL ENVIRONMENT 7TH ED—INSTRUCTOR’S MANUAL
2. Employee’s high rank in the company makes him or her the
employer’s alter ego;
5. The employee was aided in accomplishing the tort by the
existence of the agency relationship.
B. Liability for Torts of Independent Contractors. A principal may be
liable for the torts of independent contractors involving highly
dangerous acts or non-delegable duties, when a contractor’s actions are
VII. LIABILITY OF THE PRINCIPAL FOR VIOLATIONS OF LAW BY THE AGENT. A
company can be held vicariously liable for violations of civil law, even when
the employee is told not to violate the law.
RESPONSIBLE MANAGERS: TEACHING SUGGESTIONS
1. Given the growth of e-commerce, what safeguards and policies should
managers have in place to protect them from unintended contractual
liability from electronic agents?