1. © 2007 West Legal Studies in Business, A Division of Thomson Learning Chapter 22 Agency Relationships

2. © 2007 West Legal Studies in Business, A Division of Thomson Learning 2 What is the difference between an employee and an independent contractor? How do agency relationships arise? What duties do agents and principals owe to each other? When is a principal liable for the agent’s actions with respect to third parties? When is the agent liable? What are some of the ways in which an agency relationship can be terminated? Learning Objectives

3. © 2007 West Legal Studies in Business, A Division of Thomson Learning 3 Introduction Agency= Principal and Agent. Understanding agency is crucial to understanding the legal environment of business. Principals use agents to be able to conduct multiple business operations simultaneously in various locations. The principal has the right to control the agent in matters entrusted to the agent.

4. © 2007 West Legal Studies in Business, A Division of Thomson Learning 4 Agency is a “fiduciary” relationship based on trust and confidence. Distinguish Employee vs. Independent Contractor Relationships. Agency Relationships Employer Employee Independent Contractor

5. © 2007 West Legal Studies in Business, A Division of Thomson Learning 5 x Is there a great degree of skill required? x Does the Employer exercise a great degree of control over the details of the work? I.C. E’ee Factors Courts Consider: (“X” = Yes) x Is the worker engaged in an occupation or business distinct from Employer? x Is the work usually done under Employer’s supervision? x Does Employer provide the tools? ? How is the worker paid and how long has he been employed? Employee vs. Independent Contractor Analysis

6. © 2007 West Legal Studies in Business, A Division of Thomson Learning 6 Employer Liability Determining whether the worker is an employee or an independent contract affects liability of Principal/Employer. –CASE 22.1 Nu-Look Design, Inc. v. Commissioner of Internal Revenue (2004). –Tax Liability: Employer liable if employee. –Contract Liability: Employer not necessarily liable. –Tort Liability: Employer liable for torts of employee within scope of employment. Employee Status and “Works for Hire”.

7. © 2007 West Legal Studies in Business, A Division of Thomson Learning 7 How Agency Relationships Are Formed Consensual Agreement. No consideration required. Principal needs contractual capacity, Agent does not. Can be for any legal purpose.

8. © 2007 West Legal Studies in Business, A Division of Thomson Learning 8 Types of Agencies Agency by Agreement. –Formed through express consent (oral or written) or implied by conduct. Agency by Ratification. –Principal either by act or by agreement ratifies conduct of a person who is not in fact an agent.

9. © 2007 West Legal Studies in Business, A Division of Thomson Learning 9 Types of Agencies Agency by Estoppel. –Principal causes a third person to believe that another person is the Principal’s Agent, and the third person acts to her detriment in reasonable reliance on that belief. Agency by Operation of Law. –Agency based on social duty is formed in certain situations when the Agent is unable to contact the Principal. –Necessaries for family. –Emergency.

10. © 2007 West Legal Studies in Business, A Division of Thomson Learning 10 Performance: reasonable diligence and skill (special skills). Notification to P. Loyalty (no conflict of interest). –CASE 22.2 American Express Financial Advisors, Inc. v. Topel (1999). Obedience. Accounting. Agent’s Duties to the Principal

11. © 2007 West Legal Studies in Business, A Division of Thomson Learning 11 Compensation (Express or Implied). Reimbursement and Indemnification. Cooperation. Provide safe working conditions. Principal’s Duties to Agent

12. © 2007 West Legal Studies in Business, A Division of Thomson Learning 12 Agent’s Authority Principal is liable for acts entered into by Agent when she gives Agent either actual or apparent authority: –Actual Authority: express or implied. –Apparent Authority: estoppel, emergency. –Ratification.

13. © 2007 West Legal Studies in Business, A Division of Thomson Learning 13 Express Authority Can be oral or written. –“Equal Dignity Rule”: if law requires written contract, Agent’s authority must be in writing. Failure to comply with the rule renders contract voidable. Exceptions: Officer acting for Corporation. Agent acts in Principal’s presence. Power of Attorney (ordinary v durable).

14. © 2007 West Legal Studies in Business, A Division of Thomson Learning 14 Implied Authority Inferred or conferred by custom, Agent’s position or what is reasonably necessary to carry out Agent’s express authority. What the Agent reasonably thinks the Principal means.

15. © 2007 West Legal Studies in Business, A Division of Thomson Learning 15 Apparent Authority Principal, by either word or act, causes 3rd party to reasonably believe that Agent has authority to act for Principal. If 3rd party changes legal position by relying on Principal’s representations, Principal is estopped from denying Agent had authority to contract.

16. © 2007 West Legal Studies in Business, A Division of Thomson Learning 16 Ratification Authority 1. Agent must act on behalf of Principal. 2. Principal must affirm entire deal. 3. Principal must affirm before 3rd party withdraws from transaction. 4.Principal and 3rd party must have legal capacity to contract when Agent made the deal. 5. Principals must know all the material facts involved in the transaction.

17. © 2007 West Legal Studies in Business, A Division of Thomson Learning 17 Liability for Contracts Principal’s liability for Agent’s contract depends on whether Agent’s actions were authorized or unauthorized. Principals are classified as: –Disclosed: identity known to 3rd party. –Partially Disclosed: 3rd party knows he is dealing with Agent, but doesn’t know Principal’s identity. –CASE 22.3 McBride v. Taxman Corp. (2002). –Undisclosed: 3rd party does not know he is dealing with an Agent, and Principal’s identity is totally unknown.

18. © 2007 West Legal Studies in Business, A Division of Thomson Learning 18 Liability: Authorized Acts Disclosed or partially disclosed Principal is liable to 3rd party if Agent acts within scope of authority. Agent has no liability to 3rd P for disclosed Principal’s non-performance. (Agent may be liable if Principal is partially disclosed).

19. © 2007 West Legal Studies in Business, A Division of Thomson Learning 19 Liability: Undisclosed Principal If undisclosed Principal, no liability unless: –Principal expressly excluded. –Contract is a negotiable instrument. –Agent’s performance is personal. –3rd party would have contracted if he knew the Principal’s identity.

20. © 2007 West Legal Studies in Business, A Division of Thomson Learning 20 Unauthorized Acts Unauthorized acts outside of Agent’s express, implied or apparent authority. If Agent has no authority, Principal is not liable, but Agent is liable.

21. © 2007 West Legal Studies in Business, A Division of Thomson Learning 21 Liability for E-Agents Authorized versus Unauthorized Acts. The Uniform Electronic Transactions Act. –E-Agents may enter into binding agreements on behalf of the principal. –An E-Agent must provide confirmation of order to prevent errors.

22. © 2007 West Legal Studies in Business, A Division of Thomson Learning 22 Principal’s Liability For Agent’s Torts Agent is liable to 3rd party for his own torts. Principal may be liable for Agent’s torts if they result from: –Principal’s own tort. –Principal’s authorization of tort. –Agent’s unauthorized but fraudulent conduct made within scope of agency. –Respondeat Superior 

23. © 2007 West Legal Studies in Business, A Division of Thomson Learning 23 Liability for Agent’s Negligence Applies only to Employer-Employee relationships. Principal/Employer is vicariously liable for Agent/Employee’s negligent torts if committed within the Agent’s “course and scope of employment” (respondeat superior). Distinction between Detour vs. Frolic.

24. © 2007 West Legal Studies in Business, A Division of Thomson Learning 24 Principal Liability: Scope of Employment XDid the act involved a serious crime? XDid Employer have reason to know Employee would do the act? XDid Employer furnish instrumentality (tools)? XDid act advance Employer’s interests? XWas act commonly performed by Employees? ??The Time place and purpose of act (factually based) XWas Employee’s act authorized by Employer? Employer NOT Liable Employer Liable Factors: For Principal to Be Liable, Agent’s Act must have occurred within the Course and Scope of Employment. (X = Yes) FrolicDetour Was the act a detour or frolic?

25. © 2007 West Legal Studies in Business, A Division of Thomson Learning 25 Liability for Agent’s Intentional Torts Principal liable for intentional torts committed within the scope of employment. Employee is a tortfeasor as well. Employer is liable for Employee’s acts which Employer knew or should have known the Employee had a propensity to commit.

26. © 2007 West Legal Studies in Business, A Division of Thomson Learning 26 Liability for Independent Contractor’s Torts First determine whether worker is employee or independent contractor. General rule: Employer is not liable for acts of independent contractors because Employer no right to control. Exception: hazardous activities Independent Contractor is liable for her own torts.

27. © 2007 West Legal Studies in Business, A Division of Thomson Learning 27 Worke r P Generally Not Liable (unless strict liability) Outside CSE-P Not Liable Within CSE -P Liable “ Course and Scope of Employment” Independent Contractor Employee Factors Principal Liability: Review

28. © 2007 West Legal Studies in Business, A Division of Thomson Learning 28 Liability for Agent’s Crimes General Rule: Agent is liable, Principal is not, unless: –Principal authorized or participated in crime. –Some jurisdictions hold Principal liable for violating statutes.

29. © 2007 West Legal Studies in Business, A Division of Thomson Learning 29 How Agency Relationships Are Terminated Agency can be terminated by: –An Act of the Parties; or –By Operation of Law. Once agency terminated Agent has no actual authority to bind the Principal, but may have apparent authority to bind Principal.

30. © 2007 West Legal Studies in Business, A Division of Thomson Learning 30 Termination By Act of the Parties Lapse of Time. Purpose Achieved. Occurrence of a Specific Event. Mutual Agreement. Termination by One Party. Notice of Termination.

31. © 2007 West Legal Studies in Business, A Division of Thomson Learning 31 Termination By Operation of Law Death or Insanity of either Principal or Agent: automatic. Impossibility. Changed Circumstances. Bankruptcy. War.