BUSINESS LAW TEXTBOOK - AGENCY

Question 1

Formation of an Agency

Answer 1

Agency relationships normally are consensual. They come about by voluntary consent and agreement between the parties. Normally, the agreement need not be in writing, and consideration is not required.

A person must have contractual capacity to be a principal. Those who cannot legally enter into contracts directly generally are not allowed to do so indirectly through an agent. (In some states, however, a minor can be a principal.) Any person can be an agent regardless of whether that person has the capacity to enter a contract (including minors). An agency relationship can be created for any legal purpose.

An agency relationship that is created for an illegal purpose or that is contrary to public policy is unenforceable. Example 27.3 Sharp (as principal) contracts with McKenzie (as agent) to sell illegal narcotics. The agency relationship here is unenforceable because selling illegal narcotics is a felony and is contrary to public policy. Similarly, it is also illegal for physicians and other licensed professionals to employ unlicensed agents to perform professional actions. Generally, an agency relationship can arise in four ways: by agreement of the parties, by ratification, by estoppel, or by operation of law.

Question 2

Agency by Agreement

Answer 2

Most agency relationships are based on an express or implied agreement that the agent will act for the principal and that the principal agrees to have the agent so act. An agency agreement can take the form of an express written contract or be created by an oral agreement, such as when a person hires a neighbor to mow his lawn on a regular basis.

An agency agreement can also be implied by conduct. Spotlight Case Example 27.4 Gilbert Bishop was admitted to Laurel Creek Health Care Center suffering from various physical ailments. During an examination, Bishop told Laurel Creek staff that he could not use his hands well enough to write or hold a pencil, but he was otherwise found to be mentally competent. Bishop’s sister offered to sign the admissions forms, but it was Laurel Creek’s policy to have the patient’s spouse sign the admissions papers if the patient was unable to do so.

Bishop’s sister then brought his wife, Anna, to the hospital to sign the paperwork, which included a mandatory arbitration clause. Later, when the family filed a lawsuit against Laurel Creek, the nursing home sought to enforce the arbitration clause. Ultimately, a state appellate court held that Bishop was bound by the contract and the arbitration clause his wife had signed. Bishop’s conduct had indicated that he was giving his wife authority to act as his agent in signing the admissions papers

Question 3

Agency by Ratification

Answer 3

On occasion, a person who is in fact not an agent (or who is an agent acting outside the scope of authority) may make a contract on behalf of another (a principal). If the principal affirms that contract by word or by action, an agency relationship is created by ratification. Ratification involves a question of intent, and intent can be expressed by either words or conduct. The basic requirements for ratification will be discussed later in this chapter.

Flashcard 22

Question 4

Agency by Estoppel

Answer 4

When a principal causes a third person to believe that another person is the principal’s agent, and the third person deals with the supposed agent, the principal is “estopped to deny” the agency relationship. In such a situation, the principal’s actions create the appearance of an agency that does not in fact exist.

The third person must prove that she or he reasonably believed that an agency relationship existed. Facts and circumstances must show that an ordinary, prudent person familiar with business practice and custom would have been justified in concluding that the agent had authority. Case Example 27.5 Aaron Riedel was experiencing severe back pain when he visited the emergency room at Lodi Community Hospital. The attending emergency room physician, an independent contractor, misdiagnosed Riedel’s condition. Riedel filed a suit against Lodi, alleging that the physician’s negligence was the proximate cause of his subsequent paraplegia. Lodi hospital argued that it was not liable because the physician was not its employee or agent. An Ohio jury disagreed, awarding Riedel $5.2 million in damages.

A state appellate court affirmed, holding that a hospital can, depending on the circumstances, be liable under the doctrine of agency by estoppel for the negligence of an independent contractor physician. Crucially, the court noted, the public is rarely aware of the technical employment arrangements between a hospital and its staff. In this case, Riedel

Question 5

Operation by Law

Answer 5

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Question 6

Performance

Answer 6

An implied condition in every agency contract is the agent’s agreement to use reasonable diligence and skill in performing the work. When an agent fails to do so, liability for breach of contract may result. The degree of skill or care required of an agent is usually that expected of a reasonable person under similar circumstances. Generally, this is interpreted to mean ordinary care. If an agent has claimed to possess special skill, however, failure to exercise that degree of skill constitutes a breach of the agent’s duty.

Not all agency relationships are based on contract. In some situations, an agent acts gratuitously— that is, not for monetary compensation. A gratuitous agent cannot be liable for breach of contract, because there is no contract, but it can be subject to tort liability. Once a gratuitous agent has begun to act in an agency capacity, the agent has the duty to continue to perform in that capacity. In addition, a gratuitous agent must perform in an acceptable manner and is subject to the same standards of care and duty to perform as other agents.

Example 27.6 Bryan’s friend Alice is a real estate broker. Alice offers to sell Bryan’s vacation home at no charge. If Alice never attempts to sell the home, Bryan has no legal cause of action to force her to do so. If Alice does attempt to sell the home, but then performs so negligently that a sale falls through, Bryan can sue Alice for negligence.

Question 7

Notification

Answer 7

An agent is required to notify the principal of all matters that come to the agent’s attention concerning the subject matter of the agency. This is the duty of notification, or the duty to inform.

Example 27.7 Lang, an artist, is about to negotiate a contract to sell a series of paintings to Barber’s Art Gallery for $25,000. Lang’s agent learns that Barber is insolvent and will be unable to pay for the paintings. The agent has a duty to inform Lang of this fact because it is relevant to the subject matter of the agency—the sale of Lang’s paintings.

Generally, the law assumes that the principal knows of any information acquired by the agent that is relevant to the agency—regardless of whether the agent actually passes on this information to the principal. It is a basic tenet of agency law that notice to the agent is notice to the principal.

Question 8

Loyalty

Answer 8

Loyalty is one of the most fundamental duties in a fiduciary relationship. Basically, the agent has the duty to act solely for the benefit of the principal and not in the interest of the agent or a third party. For instance, an agent cannot represent two principals in the same transaction unless both know of the dual capacity and consent to it.

The duty of loyalty also means that any information or knowledge acquired through the agency relationship is considered confidential. It would be a breach of loyalty to disclose such information either during the agency relationship or after its termination. Typical examples of confidential information are trade secrets and customer lists compiled by the principal.

In short, the agent’s loyalty must be undivided. The agent’s actions must be strictly for the benefit of the principal and must not result in any secret profit for the agent.

Example 27.8 Don contracts with Leo, a real estate agent, to negotiate the purchase of an office building. Leo discovers that the property owner will sell the building only as a package deal with another parcel, so he buys the two properties, intending to resell the building to Don. Leo has breached his fiduciary duty. As a real estate agent, Leo has a duty to communicate all offers to his principal and not to purchase the property secretly and then resell it to his principal. Leo is required to act in Don’s best interests and can become the purchaser in this situation only with Don’s knowledge and approval.

In the following case, an employer alleged that a former employee had breached his duty of loyalty by planning a competing business while still working for the employer.

In the Words of the Court: An agent is under the duty to act with entire good faith and loyalty for the furtherance of the interests of his principal in all matters concerning or affecting the subject of his agency. One aspect of this broad principle is that an employee is precluded from actively competing with his or her employer during the period of employment.

Know This: An agent’s disclosure of confidential information could constitute the business tort of misappropriation of trade secrets.

Question 9

Obedience

Answer 9

When acting on behalf of a principal, an agent has a duty to follow all lawful and clearly stated instructions of the principal. Any deviation from such instructions is a violation of this duty. During emergency situations, however, when the principal cannot be consulted, the agent may deviate from the instructions without violating this duty. Whenever instructions are not clearly stated, the agent can fulfill the duty of obedience by acting in good faith and in a manner reasonable under the circumstances.

Question 10

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Question 11

Reimbursement and Indemnification

Answer 11

Whenever an agent disburses funds at the request of the principal, the principal has the duty to reimburse the agent. The principal must also reimburse the agent for any necessary expenses the agent incurs in the reasonable performance of agency duties. Agents cannot recover for expenses incurred through their own misconduct or negligence, however.

Subject to the terms of the agency agreement, the principal has the duty to compensate, or indemnify, an agent for liabilities incurred because of authorized acts and transactions. For instance, if the principal fails to perform a contract formed by the agent with a third party and the third party then sues the agent, the principal must compensate the agent for any costs incurred in defending against the lawsuit.

Additionally, the principal must indemnify the agent for the value of benefits that the agent confers on the principal. The amount of indemnification is usually specified in the agency contract. If it is not, the courts will look to the nature of the benefits and the type of expenses to determine the amount. Note that this rule applies to acts by gratuitous agents as well. Suppose that a person finds a dog that becomes sick, takes the dog to a veterinarian, and pays for the veterinarian’s services. The finder is a gratuitous agent and is entitled to be reimbursed by the dog’s owner for those costs.

Question 12

Cooperation

Answer 12

A principal has a duty to cooperate with the agent and to assist the agent in performing agency duties. The principal must do nothing to prevent that performance. When a principal grants an agent an exclusive territory, for instance, the principal creates an exclusive agency and cannot compete with the agent or assign or allow another agent to compete. A principal who does so violates the exclusive agency and can be held liable for the agent’s lost profits.

Example 27.11 Penny (the principal) creates an exclusive agency by granting Andrew (the agent) an exclusive territory within which Andrew may sell Penny’s organic skin care products. If Penny starts to sell the products herself within Andrew’s territory—or permits another agent to do so—Penny has failed to cooperate with the agent. Because she has violated the exclusive agency, Penny can be held liable for Andrew’s lost net profits.

Safe Working Conditions: A principal is required to provide safe working premises, equipment, and conditions for all agents and employees. The principal has a duty to inspect the working conditions and to warn agents and employees about any hazards. When the agent is an employee, the employer’s liability is frequently covered by state workers’ compensation insurance, and federal and state statutes often require the employer to meet certain safety standards.

Question 13

Agent’s Authority

Answer 13

An agent’s authority to act can be either actual (express or implied) or apparent. If an agent contracts outside the scope of the agent’s authority, the principal may still become liable by ratifying the contract.

Question 14

Express Authority

Answer 14

Express authority is actual authority declared in clear, direct, and definite terms. Express authority can be given orally or in writing.

Question 15

Equal Dignity Rule

Answer 15

In most states, the equal dignity rule requires that if the contract being executed is or must be in writing, then the agent’s authority must also be in writing. Failure to comply with the equal dignity rule can make a contract voidable at the option of the principal. The law regards the contract at that point as a mere offer. If the principal decides to accept the offer, the agent’s authority must be ratified, or affirmed, in writing.

Example 27.12 Parker (the principal) orally asks Austin (the agent) to sell a ranch that Parker owns. Austin finds a buyer and signs a sales contract on behalf of Parker to sell the ranch. Because a contract for an interest in realty must be in writing, the equal dignity rule applies here. Thus, the buyer cannot enforce the contract unless Parker subsequently ratifies Austin’s agency status in writing. Once Austin’s agency status is ratified, either party can enforce rights under the contract.

Modern business practice allows several exceptions to the equal dignity rule. An executive officer of a corporation normally is not required to obtain written authority from the corporation to conduct ordinary business transactions. The equal dignity rule also does not apply when an agent acts in the presence of a principal or when the agent’s act of signing is merely a formality. Thus, if the principal negotiates a contract but is called out of town the day it is to be signed and orally authorizes an assistant to act as agent to sign the contract, the oral authorization is normally sufficient.

Question 16

Power of Attorney

Answer 16

Giving an agent a power of attorney confers express authority on the agent. The power of attorney is a written document that is usually notarized. (A document is notarized when a notary public—an individual authorized by the state to attest to the authenticity of signatures—signs and dates the document and imprints it with a seal of authority.) Most states have statutory provisions for creating a power of attorney.

A power of attorney can be special (permitting the agent to do specified acts only), or it can be general (permitting the agent to transact all business for the principal). Because a general power of attorney grants extensive authority to an agent to act on behalf of the principal in many ways, it should be used with great caution. Ordinarily, a power of attorney terminates on the incapacity or death of the person giving the power.

Noll gives Carr a written power of attorney. Which of the following statements is correct regarding this power of attorney?

It must be signed by both Noll and Carr.

It must be for a definite period of time.

It may continue in existence after Noll’s death.

It may limit Carr’s authority to specific transactions.

It may limit Carr’s authority to specific transactions. A power of attorney delegates authority from the principal (Noll) to the agent (Carr). This authority may be general or it may be limited or specific. It must be signed only by the principal (the agent need not sign the power of attorney), and it has force and effect for an indefinite time, unless otherwise stated, but will not be effective after the death of the principal. (A Last Will and Testament is required or some other testamentary document such as a trust is required for disposition after death.)

Question 17

Implied Authority

Answer 17

Agents have the implied authority to do what is reasonably necessary to carry out their express authority (Express authority is actual authority declared in clear, direct, and definite terms. Express authority can be given orally or in writing) and accomplish the objectives of the agency. Actual authority can also be implied by custom or inferred from the position the agent occupies.

Example 27.13 Adam is employed by Pete’s Supermarket to manage one of its stores. Pete’s has not expressly stated that( Adam has authority to contract with third persons. Nevertheless, authority to manage a business implies authority to do what is reasonably required (as is customary or can be inferred from a manager’s position) to operate the business. It is reasonable to infer that Adam has the authority to form contracts to hire employees, to buy merchandise and equipment, and to advertise the products sold in the store.

Question 18

Apparent Authority

Answer 18

Actual authority (express or implied) arises from what the principal manifests to the agent. An agent has apparent authority when the principal, by either words or actions, causes a third
party to reasonably believe that an agent has authority to act, even though the agent has no express or implied authority.

Question 19

Pattern of Conduct

Answer 19

Authority usually comes into existence through a principal’s pattern of conduct over time.

Spotlight Case Example 27.14 Gilbert Church owned Church Farm, Inc., a horse breeding farm in Illinois managed by Herb Bagley. Church Farm’s advertisements for the breeding rights to one of its stallions, Imperial Guard, directed all inquiries to “Herb Bagley, Manager.” Vern and Gail Lundberg contacted Bagley and executed a preprinted contract giving them breeding rights to Imperial Guard “at Imperial Guard’s location.” Bagley handwrote a statement on the contract that guaranteed the Lundbergs “six live foals in the first two years.” He then signed it “Gilbert G. Church by H. Bagley.”

The Lundbergs bred four mares, which resulted in one live foal. Church then moved Imperial Guard from Illinois to Oklahoma. The Lundbergs sued Church for breaching the contract by moving the horse. Church claimed that Bagley was not authorized to sign contracts for Church or to change or add terms, but only to present preprinted contracts to potential buyers. The jury found in favor of the Lundbergs and awarded $147,000 in damages. A state appellate court affirmed. Church was bound by Bagley’s actions because Church had allowed circumstances to lead the Lundbergs to believe Bagley had the authority. In other words, Bagley had apparent authority to modify and execute the contract on behalf of Church.

Question 20

Apparent Authority and Estoppel

Answer 20

A court can apply the doctrine of agency by estoppel, introduced earlier in the chapter, when a principal has given a third party reason to believe that an agent has authority to act. If the third party honestly relies on the principal’s representations to the third party’s detriment, the principal may be estopped (prevented) from denying that the agent had apparent authority.

In the following case, a condominium owner argued that the condominium association that managed the units could not enforce bylaws that some of its own board members had violated. The owner argued, in essence, that the board members were agents acting with apparent authority of the association.

Decision and Remedy A state intermediate appellate court
affirmed the lower court’s judgment. Estoppel does not apply to bind a principal when an agent’s actions are outside the scope of the agent’s authority. The board members who leased their units to third parties in violation of the bylaws were themselves in violation of the restrictions. Their actions were outside the scope of their authority and did not bind the Association.

Question 21

Emergency Powers

Answer 21

Sometimes, an unforeseen emergency demands action by the agent to protect or preserve the principal’s property or rights, but the agent is unable to communicate with the principal. In that situation, the agent has emergency power.

Example 27.15 Rob is an engineer for Pacific Drilling Company. While Rob is acting within the scope of his employment, he is severely injured in an accident on an oil rig many miles from home. Acosta, the rig supervisor, directs Thompson, a physician, to give medical aid to Rob and to charge Pacific for the medical services.

Acosta, an agent, has no express or implied authority to bind the principal, Pacific Drilling, for Thompson’s medical services. Because of the emergency situation, however, the law recognizes Acosta as having authority to act appropriately under the circumstances

Question 22

Ratification

Answer 22

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Question 23

Liability in Agency Relationships

Answer 23

Frequently, a question arises as to which party, the principal or the agent, should be held liable for contracts formed by the agent or for torts or crimes committed by the agent. We look here at these aspects of agency law.

Question 24

Liability for Contracts

Answer 24

Liability for contracts formed by an agent depends on how the principal is classified and on whether the actions of the agent were authorized or unauthorized. Principals are classified as disclosed, partially disclosed, or undisclosed.

A disclosed principal is a principal whose identity is known by the third party at the time the contract is made by the agent.

A partially disclosed principal is a principal whose identity is not known by the third party, but the third party knows that the agent is or may be acting for a principal at the time the contract is made. Example 27.16 Sarah has contracted with a real estate agent to sell certain property. She wishes to keep her identity a secret, but the agent makes it clear to potential buyers of the property that the agent is acting in an agency capacity. In this situation, Sarah is a partially disclosed principal.

An undisclosed principal is a principal whose identity is totally unknown by the third party, and the third party has no knowledge that the agent is acting in an agency capacity at the time the contract is made.

Question 25

Authorized Acts

Answer 25

If an agent acts within the scope of authority, normally the principal is obligated to perform the contract regardless of whether the principal was disclosed, partially disclosed, or undisclosed. Whether the agent may also be held liable under the contract, however, depends on the status of the principal.

Question 26

Disclosed or Partially Disclosed Principal.

Answer 26

A disclosed or partially disclosed principal is liable to a third party for a contract made by an agent who is acting within the scope of the agent’s authority. (See this chapter’s Business Law Analysis feature for illustration.) If the principal is disclosed, an agent has no contractual liability for the nonperformance of the principal r the third party. If the principal is partially disclosed, in most states the agent is also treated as a party to the contract, and the third party can hold the agent liable for contractual nonperformance. 13 This legal doctrine can also be used to protect the partially disclosed principal against the tortious behavior of a negligent third party.

Case Example 27.17 Tomex, a Danish food corporation, hired Mitsui O.S.K. Lines to deliver 53,000 pounds of frozen pork from Chicago to a supermarket chain in the Dominican Republic. Mitsui contracted with ConGlobal Industries, Inc., to provide a refrigerated shipping container for the pork. ConGlobal employees allegedly set the temperature of the container too high, causing the pork to thaw and destroy its value. Tomex’s insurer sued ConGlobal for breach of contract. ConGlobal argued that the case should be dismissed because it never had any direct contact with Tomex and did not know that Mistui was acting as Tomex’s agent.

The court rejected this argument, reasoning that ConGlobal had to be aware that Mitsui was acting as an agent for some other party, even if it did not know specifically about Tomex. In other words, it was highly unlikely that Mitsui, a shipping company, owned the pork. Under Illinois law, a contract with a “partially disclosed principal” exists when a “third party knows that the agent is contracting on behalf of a principal but does not know the identity of that principal.” Therefore, in this case, Tomex (the partially disclosed principal) could properly sue ConGlobal (the third party) to enforce a contract entered into by Mitsui (the agent).

Question 27

Undisclosed Principal

Answer 27

Sometimes, neither the fact of agency nor the identity of the principal is disclosed, but the agent is acting within the scope of authority. In this situation, the undisclosed principal is bound to perform just as if the principal had been fully disclosed at the time the contract was made. The agent is also liable as a party to the contract. When a principal’s identity is undisclosed and the agent is forced to pay the third party, however, the agent is entitled to be indemnified (compensated) by the principal. The principal, although undisclosed, had a duty to perform, and failure to do so will make the principal ultimately liable.

Once the undisclosed principal’s identity is revealed, the third party generally can elect to hold either the principal or the agent liable on the contract. At the same time, the undisclosed principal can require the third party to fulfill the contract, except under any of the following circumstances:

1. The undisclosed principal was expressly excluded as a party in the contract.
2. The contract is a negotiable instrument signed by the agent with no indication of signing in a representative capacity.
3. The performance of the agent is personal to the contract, allowing the third party to refuse the principal’s performance.

Question 28

Unauthorized Acts

Answer 28

If an agent has no authority but nevertheless contracts with a third party, the principal cannot be held liable on the contract. It does not matter whether the principal was disclosed, partially disclosed, or undisclosed.

In general, the agent is liable on the contract. Example 27.18 Scranton signs a contract for the purchase of a truck, purportedly acting as an agent under authority granted by Johnson. In fact, Johnson has not given Scranton any such authority. Johnson refuses to pay for the truck, claiming that Scranton had no authority to purchase it. The seller of the truck is entitled to hold Scranton liable for payment.

If the principal is disclosed or partially disclosed, the agent is liable to the third party only if the third party relied on the agency status. The agent’s liability here is based on the breach of an implied warranty of authority, not on the breach of contract itself.15 If the third party knows at the time the contract is made that the agent does not have authority—or if the agent expresses to the third party uncertainty as to the extent of the agent’s authority—then the agent is not personally liable.

Question 29

Liability for Torts and Crimes

Answer 29

Obviously, individuals, including agents, are liable for their own torts and crimes. Whether a principal can also be held liable for an agent’s torts and crimes depends on several factors. In some situations, a principal may be held liable for the torts of an agent.

Question 30

Principal’s Tortious Conduct

Answer 30

A principal conducting an activity through an agent may be
liable for harm resulting from the principal’s own negligence or recklessness. Thus, a principal may be liable for giving improper instructions, authorizing the use of improper materials
or tools, or establishing improper rules that resulted in the agent’s committing a tort.

Example 27.19 Paul knows that Audra is not qualified to drive large trucks. Paul nevertheless tells her to use the company truck to deliver some equipment to a customer. If Audra causes an accident that injures someone, Paul (the principal) will be liable for his own negligence in giving improper instructions to Audra.

Question 31

Principal’s Authorization of Agent’s Tortious Conduct

Answer 31

A principal who authorizes an agent to commit a tort may be liable to persons or property injured thereby, because the act is considered to be the principal’s. Example 27.20 Preston directs his agent, Ames, to cut the corn on specific acreage, which neither of them has the right to do. The harvest is therefore a trespass (a tort), and Preston is liable to the owner of the corn.

Note also that an agent acting at the principal’s direction can be liable as a tortfeasor (one who commits a tort), along with the principal, for committing the tortious act even if the agent was unaware of the wrongfulness of the act. Assume in Example 27.20 that Ames, the agent, was unaware that Preston had no right to harvest the corn. Ames can nevertheless be held liable to the owner of the field for damages, along with Preston.

Question 32

Liability for Agent’s Misrepresentation

Answer 32

A principal is exposed to tort liability whenever a third person sustains a loss due to the agent’s misrepresentation. The principal’s liability depends on whether the agent was actually or apparently authorized to make representations and whether the representations were made within the scope of the agency. The principal is always directly responsible for an agent’s misrepresentation made within the scope of the agent’s authority.

Example 27.21 Arnett is a demonstrator for Moore’s products. Moore sends Arnett to a home show to demonstrate the products and to answer questions from consumers. Moore has given Arnett authority to make statements about the products. If Arnett makes only true representations, all is fine, but if she makes false claims, Moore will be liable for any injuries or damages sustained by third parties in reliance on Arnett’s false representations.

Question 33

Liability for Agent’s Negligence

Answer 33

A principal may also be liable for harm an agent caused to a third party under the doctrine of respondeat superior,16 a Latin term meaning “let the master respond.” This doctrine, which is discussed in this chapter’s Landmark in the Law feature, is similar to the theory of strict liability. It imposes vicarious liability, or indirect liability, on the employer—that is, liability without regard to the personal fault of the employer—for torts committed by an employee in the course or scope of employment.

When an agent commits a negligent act, both the agent and the principal are liable. Example 27.22 BDI Communications hires Pinnacle to provide landscaping services for its property. An herbicide sprayed by Pinnacle employee Hoggatt enters BDI’s building through the air-conditioning system and causes Catherine, a BDI employee, to suffer a heart attack. If Catherine sues, both Pinnacle (principal) and Hoggatt (agent) can be held liable for negligence. As Pinnacle’s agent, Hoggatt is not excused from responsibility for tortious conduct just because he is working for a principal.

Question 34

The Doctrine of Respondeat Superior

Answer 34

The idea that a master (employer) must respond to third persons for losses negligently caused by the master’s servant (employee) first appeared in Lord Holt’s opinion in Jones v. Hart (1698).a By the early nineteenth century, this maxim had been adopted by most courts and was referred to as the doctrine of respondeat superior.

Theories of Liability The vicarious (indirect) liability of the master for the acts of the servant has been supported primarily by two theories. The first theory rests on the issue of control, or fault—the master has control over the acts of the servant and is thus responsible for injuries arising out of such service. The second theory is economic in nature—the master receives the benefits or profits of the servant’s service and therefore should also suffer the losses. Moreover, the master is better able than the servant to absorb such losses.

The control theory is clearly recognized in the Restatement (Third) of Agency, which defines a master as “a principal who employs an agent to perform service in his [or her] affairs and who controls, or has the right to control, the physical conduct of the other in the performance of the service.” Accordingly, a servant is defined as “an agent employed by a master to perform service in his [or her] affairs whose physical conduct in his [or her] performance of the service is controlled, or is subject to control, by the master.”

Limitations on the Employer’s Liability There are limitations on the master’s liability for the acts of the servant. As discussed in the text, an employer (master) is responsible only for the wrongful conduct of an employee (servant) that occurs in “the scope of employment.” Generally, the act must be of a kind that the servant was employed to do, it must have occurred within “authorized time and space limits,” and it must have been “activated, at least in part, by a purpose to serve the master.”

Application to Today’s World The courts have accepted the doctrine of respondeat superior for some two centuries. This theory of vicarious liability has practical implications in all situations in which a principal-agent (master-servant, employer employee) relationship exists. Today, the small-town grocer with one clerk and the multinational corporation with thousands of employees are equally subject to the doctrine.

Question 35

Determining the Scope of Employment.

Answer 35

The key to determining whether a principal may
be liable for an agent’s torts under the doctrine of respondeat superior is whether the torts are committed within the scope of employment. In determining whether a particular act occurred within the course and scope of employment, the courts consider the following factors:
1. Whether the employee’s act was authorized by the employer.
2. The time, place, and purpose of the act.
3. Whether the act was one commonly performed by employees on behalf of their employers.
4. The extent to which the employer’s interest was advanced by the act.
5. The extent to which the private interests of the employee were involved.
6. Whether the employer furnished the means or instrumentality (for instance, a truck or a machine) by which the injury was inflicted.
7. Whether the employer had reason to know that the employee would do the act in question and whether the employee had ever done it before.
8. Whether the act involved the commission of a serious crime.

Question 36

The Distinction between a “Detour” and a “Frolic.”

Answer 36

A useful insight into the “scope of employment” concept may be gained from the judge’s classic distinction between a “detour” and a “frolic” in the case of Joel v. Morison.17 In this case, the English court held that if a servant merely took a detour from his master’s business, the master is responsible. If, however, the servant was on a “frolic of his own” and not in any way “on his master’s business,” the master is not liable.

Example 27.23 While driving his employer’s vehicle to call on a customer, Mandel decides to stop at a store—which is one block off his route—to take care of a personal matter. Mandel then negligently runs into a parked vehicle owned by Chan. In this situation, because Mandel’s detour from the employer’s business is not substantial, he is still acting within the scope of employment, and the employer is liable. But suppose instead that Mandel decides to pick up a few friends for cocktails in another city and in the process negligently runs into Chan’s vehicle. In this situation, the departure from the employer’s business is substantial—Mandel is on a “frolic” of his own. Thus, the employer normally is not liable to Chan for damages.

Question 37

Employee Travel Time

Answer 37

The time an employee spends going to and from work or to and from meals is usually considered outside the scope of employment. If travel is part of a person’s position, however, as it is for a traveling salesperson or a regional representative of a company, then travel time is normally considered within the scope of employment. Thus, for such an employee, the duration of the business trip, including the return trip home, is within the scope of employment unless there is a significant departure from the employer’s business. What factors determine the liability of an employer for a worker’s negligence while driving? This question was at the center of the dispute in the following case.

Question 38

Notice of Dangerous Conditions

Answer 38

The employer is charged with knowledge of any dangerous
conditions discovered by an employee and pertinent to the employment situation. Example 27.24 Brad, a maintenance employee in Martin’s apartment building, notices a lead
pipe protruding from the ground in the building’s courtyard. Brad neglects either to fix the pipe or to inform Martin of the danger. John trips on the pipe and is injured. The employer is charged with knowledge of the dangerous condition regardless of whether or not Brad actually informed him. That knowledge is imputed to Martin by virtue of the employment relationship.

Question 39

Liability for Agent’s Intentional Torts

Answer 39

Most intentional torts that employees commit have no relation to their employment. Thus, their employers will not be held liable. Nevertheless, under the doctrine of respondeat superior, the employer can be liable for an employee’s intentional torts that are committed within the course and scope of employment, just as the employer is liable for negligence. For instance, a department store owner is liable when a security guard who is a store employee commits the tort of false imprisonment while acting within the scope of employment. Similarly, a nightclub owner is liable when a “bouncer” commits the tort of assault and battery while on the job.

In addition, an employer who knows or should know that an employee has a propensity for committing tortious acts is liable for the employee’s acts even if they ordinarily would not be considered within the scope of employment. For instance, if the employer hires a bouncer knowing that he has a history of arrests for assault and battery, the employer may be liable if the employee viciously attacks a patron in the parking lot after hours.

An employer may also be liable for permitting an employee to engage in reckless actions that can injure others. Example 27.25 The owner of Bates Trucking observes an employee smoking while filling containerized trucks with highly flammable liquids. Failure to stop the employee will cause the owner to be liable for any injuries that result if a truck explodes.

Question 40

Liability for Independent Contractor’s Torts

Answer 40

Generally, an employer is not liable for physical harm caused to a third person by the negligent act of an independent contractor
in the performance of the contract. This is because the employer does not have the right to control the details of an independent contractor’s performance.

Courts make an exception to this rule when the contract involves unusually hazardous activities, such as blasting operations, the transportation of highly volatile chemicals, or the use of poisonous gases. In such situations, strict liability is imposed, and an employer cannot be shielded from liability merely by using an independent contractor.

Question 41

Liability for Agent’s Crimes

Answer 41

Agents are liable for their own crimes. A principal or employer
is not liable for an agent’s crime even if the crime was committed within the scope of authority or employment, unless the principal participated by conspiracy or other action. In some jurisdictions, under specific statutes, a principal may be liable for an agent’s violation in thecourse and scope of employment. For instance, a principal might be liable when an agent, during work, violates criminal regulations governing sanitation, prices, weights, or the sale of liquor.

Question 42

Termination of an Agency

Answer 42

Agency law is similar to contract law in that both an agency and a contract can be terminated by an act of the parties or by operation of law. Once the relationship between the principal
and the agent has ended, the agent no longer has the right (actual authority) to bind the principal. For an agent’s apparent authority to be terminated, third persons may also need to be notified that the agency has been terminated.

Question 43

Termination by Act of the Parties

Answer 43

An agency may be terminated by certain acts of the parties. Bases for termination by acts of the parties include lapse of time, achievement of the purpose of the agency, occurrence of a specific event, mutual agreement, and at the option of one party (see Exhibit 27–3).

When an agency agreement specifies the time period during which the agency relationship will exist, the agency ends when that time period expires. If no definite time is stated, then the agency continues for a reasonable time and can be terminated at will by either party. What constitutes a reasonable time depends on the circumstances and the nature of the agency relationship.

The parties can, of course, mutually agree to end their agency relationship. In addition, as a general rule, either party can terminate the agency relationship without the agreement of the other. The act of termination is called revocation if done by the principal and renunciation if done by the agent. Note, however, that the terminating party may face liability if the termination is wrongful.

Question 44

Wrongful Termination

Answer 44

Although both parties have the power to terminate an agency relationship, they may not always possess the right to do so. Wrongful termination can subject the canceling party to a suit for breach of contract. Case Example 27.26 Smart Trike, Ltd., a Singapore manufacturing company based in Israel, contracted with a New Jersey firm, Piermont Products, LLC, to distribute its products in the United States and Canada. The parties’ contract required six months’ notice of termination, during which time Smart Trike was to continue paying commissions to Piermont for products that were sold. When Smart Trike terminated the agreement without providing the required notice, Piermont sued for breach of contract. The court held in favor of Piermont. Under the terms of the agreement, Piermont was entitled to receive commissions for products of Smart Trike that it had sold during the six months after the notice of termination.

Question 45

Termination by Act of Parties

Answer 45

Question 46

Agency Coupled with an Interest

Answer 46

A special rule applies to an agency coupled with an interest, in which the agent has some legal right (an interest) in the property that is the subject of the agency. Because the agent has an additional interest in the property beyond the normal commission for selling it, the agent’s position cannot be terminated until the agent’s interest ends.

An agency coupled with an interest is not an agency in the usual sense because it is created for the agent’s benefit instead of for the principal’s benefit. Example 27.27 Sylvia owns Harper Hills. She needs some cash right away, so she enters into an agreement with Shaquille under which Shaquille will lend her $10,000. In return, she will grant Shaquille a one-half interest in Harper Hills and “the exclusive right to sell” it. The loan is to be repaid out of the sale’s proceeds. Shaquille is Sylvia’s agent, and their relationship is an agency coupled with an interest. The agency was created when the loan agreement was made for the purpose of securing the loan. Therefore, Shaquille’s agency power is irrevocable.

An agency coupled with an interest should not be confused with a situation in which the agent merely derives proceeds or profits from the sale of the subject matter. Many agents are paid a commission for their services, but the agency relationship involved does not constitute an agency coupled with an interest. For instance, a real estate agent who merely receives a commission from the sale of real property does not have a beneficial interest in the property itself.

Question 47

Notice of Termination

Answer 47

No particular form is required for notice of agency termination to be effective. If the agent’s authority is written, however, it normally must be revoked in writing. The principal can personally notify the agent, or the agent can learn of the termination through some other means.

When an agency is terminated by act of the parties, it is the principal’s duty to inform any third parties who know of the existence of the agency that it has been terminated. If the principal knows that a third party has dealt with the agent, the principal is expected to notify that person directly.

Although an agent’s actual authority ends when the agency is terminated, an agent’s apparent authority continues until the third party receives notice (from any source) that such authority has been terminated. Example 27.28 Manning bids on a shipment of steel, and Stone is hired as an agent to arrange transportation of the shipment. When Stone learns that Manning has lost the bid, Stone’s authority to make the transportation arrangement terminates.

Question 48

Termination by Operation of Law

Answer 48

Termination of an agency by operation of law occurs in the circumstances discussed here. Note that when an agency terminates by operation of law, there is no duty to notify third persons.

1. Death or insanity. The general rule is that the death or mental incompetence of either the principal or the agent automatically and immediately terminates an ordinary agency relationship. Knowledge of the death is not required. Example 27.29 Gary sends Tyron to China to purchase a rare painting. Before Tyron makes the purchase, Gary dies. Tyron’s agent status is terminated at the moment of Gary’s death, even if Tyron does not know that Gary has died. (Some states have enacted statutes that change this common law rule to require an agent’s knowledge of the principal’s death before termination.)
2. Impossibility. When the specific subject matter of an agency is destroyed or lost, the agency terminates. Example 27.30 Blake employs Pedro to sell Blake’s house, but before any sale takes place, the house is destroyed by fire. In this situation, Pedro’s agency and authority to sell Blake’s house terminate. Similarly, when it is impossible for the agent to perform the agency lawfully because of a change in the law, the agency terminates.
3. Changed circumstances. When an event occurs that has such an unusual effect on the subject matter of the agency that the agent can reasonably infer that the principal will not want the agency to continue, the agency terminates. Example 27.31 Robert hires Miles to sell a tract of land for $40,000. Subsequently, Miles learns that there is oil under the land and that the land is worth $1 million. The agency and Miles’s authority to sell the land for $40,000 are terminated.
4. Bankruptcy. If either the principal or the agent petitions for bankruptcy, the agency is usually terminated. In certain circumstances, as when the agent’s financial status is irrelevant to the purpose of the agency, the agency relationship may continue. Insolvency (the inability to pay debts when they become due or when liabilities exceed assets), as distinguished from bankruptcy, does not necessarily terminate the relationship.
5. War. When the principal’s country and the agent’s country are at war with each other, the agency is terminated. In this situation, the agency is automatically suspended or terminated because there is no way to enforce the legal rights and obligations of the parties.