Chapter 31 Agency Formation and Duties

Introduction Agency=Principal and Agent. Agency is the most common and most important legal relationship. Understanding agency is crucial to understanding the legal environment of business.

Introduction [2] 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.

§ 1: Agency Relationships Agency is a “fiduciary” relationship based on trust and confidence. Distinguish Employee vs. Independent Contractor Relationships. Employer Employee Independent Contractor

Employee vs. Independent Contractor Relationship Factors Courts Consider: E’ee I.C. Does the Employer exercise a great degree of control over the details of the work? Yes No Is the worker engaged in an occupation or business distinct from Employer? Is the work usually done under Employer’s supervision? Does Employer provide the tools? Has the worker been employed a long time? Is the worker paid at the end of the job? Is there a great degree of skill required?

Employer Liability Determining whether the worker is an employee or an independent contract affects liability of Principal/Employer. Tax Liability: Employer liable if employee. Contract Liability: Employer not necessarily liable. Tort Liability: Employer liable for torts of employee within scope of employment.

§2: Formation of the Agency Relationship Consensual Agreement. No consideration required. Principal needs contractual capacity, Agent does not. For any legal purpose.

Types of Agencies Agency by Agreement. Agency by Ratification. Agency by Estoppel. Agency by Operation of Law. Necessaries for family. Emergency.

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.

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. Emergencies.

§ 3: Duties of Agents and Principals Agent’s Duties to Principal: Performance: reasonable diligence and skill (special skills). Notification to P. Loyalty (no conflict of interest). Obedience. Accounting.

Principal’s Duties to Agent Compensation (Express or Implied). Reimbursement and Indemnification. Cooperation. Provide safe working conditions.

§ 4: Remedies and Rights of Agents and Principals Agent’s Rights: Right to compensation, reimbursement, indemnification and cooperation. Agent can withhold performance and demand an accounting. Agent can recover damages for past services and future damages.

Principal’s Rights & Remedies Against Agent Contract remedies for breach of fiduciary duty and performance. Can sue in tort: libel, slander, trespass, deceit, fraud. Constructive Trust – money/ property agent steals from Principal. Avoidance of contract if agent does not do as told. Indemnification

Case 31.1: Graham v. James (Employment Status) FACTS: Graham sold CD‑ROM disks containing compilations of shareware, freeware, and public domain software. Graham asked James to create a file‑retrieval program for the disks. James agreed to do so in exchange for credit on the final product and built into the program a notice attributing authorship and copyright to himself. Later, Graham removed the notice, claiming that the program was a work for hire and the copyright was his. Graham used the program on other releases, and James sold the program to another pub­lisher. Graham sued alleging copyright infringement.

Case 31.1: Graham v. James (Employment Status) HELD: FOR JAMES. The court ruled that James was an independent contractor and that he owned the copyright. James “is a skilled computer programmer, he was paid no benefits, no payroll taxes were withheld, and his engagement by Graham was project‑by‑project.” The only factor in Graham’s favor was his general control over the work, but his actual participation was “minimal” and his instructions were “general.”

Case 31.2: Williams v. Inverness (Agency by Estoppel) FACTS: Inverness markets the Inverness Ear Piercing System, which includes a training course, an “eye-catching assortment of selling aids,” and release forms. Barrera, the owner of a jewelry cart in a mall, bought the system, took the course, and set up the displays. Williams paid Barrera to pierce Williams’s ear. The ear became infected, which led to complications. Williams sued Inverness and Barrera, claiming in part that Inverness was liable on a theory of agency by estoppel.

Case 31.2: Williams v. Inverness (Agency by Estoppel) HELD: FOR WILLIAMS. An agency by estoppel was created and Inverness was liable. “[A] jury reasonably could infer that Inverness knew, or should have known, that Barrera distributed Inverness’s release forms *  *  * , that Barrera was using the Inverness Ear Piercing System, that she displayed Inverness’s ‘eye-catching assortment of selling aids,’ and that she used Inverness’s training program.” Also, “Angela believed that Barrera was Inverness’s agent” and “relied on Inverness’s manifestations of agency,” and this reliance was “justifiable.”

Case 31.3: American Express v. Topel (Agent’s Duties to Principal) FACTS: Topel was a financial planner for American Express (AMEX), when he decided to resign and go to work for Multi-Financial Securities Corporation, an AMEX competitor. Before resigning, Topel encouraged his customers to sell their AMEX products and invest in Multi-Financial funds. He sent a letter to all of his clients in which he wrote that he was ending his relationship with AMEX and that their accounts would be assigned to another AMEX advisor. AMEX sued Topel alleging breach of fiduciary duty.

Case 31.3: American Express v. Topel (Agent’s Duties to Principal) HELD: FOR AMEX. Topel breached his fiduciary duty of loyalty by soliciting AMEX customers for his new competing business while working for AMEX. An agent has a duty to act solely for the benefit of the principal in all matters connected with an agency. “While an agent is entitled to make some preparations to compete with his principal after the termination of their relationship, an agent violates his duty of loyalty if he engages in pre‑termination solicitation of customers for a new competing business.”