The Legal Environment of Business PDF

# The Legal Environment of Business ### Authors - Chris A. Carr - Professor of Business Law and Public Policy - California Polytechnic University, San Luis Obispo - Jerry L. Furniss - Professor of Business Law - University of Montana - Michael V. Harrington - Corporate Attorney...

# The Legal Environment of Business ### Authors - Chris A. Carr - Professor of Business Law and Public Policy - California Polytechnic University, San Luis Obispo - Jerry L. Furniss - Professor of Business Law - University of Montana - Michael V. Harrington - Corporate Attorney - Jack K. Morton - Professor of Business Law - University of Montana ### Publisher - Abbott Publishing, LLP # Chapter 20: Agency Relationships - "The trouble with lawyers is that they convince themselves that their clients are right." - Charles Ainey (1963) ## Overview - Principal-Agent Relationship - Employer-Employee Relationship - Employer-Independent Contractor Relationship - Agency Formation - Duties of Principals and Agents - Liability Under Agency Relationships - Terminating the Agency Relationship - Revocable and Irrevocable Agencies ## It is often said that if businesspeople were forced to conduct their business affairs personally, most commercial activity in this country, and in the world, would collapse. Therefore businesses must rely on other parties to work for them: to operate the machinery, sell the goods, manage the corporation, and perform countless other tasks that comprise the business world. These and many other legal relationships between people are called agencies. ## In agency relationships, one party, called an agent, agrees to act for (represent) another, called a principal. The principal has the right to control the actions and conduct of the agent in matters entrusted to the agent. The agent has the fiduciary duty to act primarily for the principal's benefit. Therefore a fiduciary relationship is at the heart of agency and agency law. ## A depiction of the relationship between principal, agent and third party | | | | ----------------------- | -------------------------------------------------------------- | | **Principal** | Contract exists between Principal and Third Party | | Principal authorizes agent to deal with third party on Principal's behalf | | | **-Third Party** | | | **Agent** | Agent deals with third party | ## This chapter discusses the following: ### Who can act as an agent? - Persons who initiate agency relationships must have contractual capacity. - Minors, or those persons adjudicated mentally incompetent, lack contractual capacity and cannot appoint an agent to act on their behalf. - However, a court may appoint a guardian who will likely have the authority and capacity to handle the affairs of others with such incapacitation. - Even those persons who lack contractual capacity can act as agents in an agency relationship. - A minor can be hired to act on behalf of a competent adult in certain situations even though the minor lacks capacity to contract as an individual. - The minor could, for example, convey a contract offer or acceptance on behalf of the principal. ### Agency Relationships Cannot Be Established for unlawful Purposes - Agencies cannot be created for unlawful purposes. - An agency that is created to commit a crime or that violates public policy is illegal and void. - For example, a principal cannot legally hire an agent to rob a store, transport illegal drugs, or commit a murder. - Some specific agency relationships are expressly prohibited by statute. - Agents cannot be hired to vote in public elections or serve criminal sentences ### Agencies Can Be Established for Almost Any Lawful Purpose - However, agencies can be created for almost any lawful purpose. - For example, an attorney hired by a client to look after the client's legal interests acts as an agent. - So does a partner who acts on behalf of a partnership, a president of a corporation, a salesperson at a grocery store, or a contractor who builds a house. - To one degree or another, agency relationships exist in all business and commercial activity. ### Classifications of Agency and Employment - The employer "hires" three categories of persons: agents, employees, and independent contractors. Each category will be discussed below. #### 1. Principal/Agent - An agent is authorized to represent a principal in negotiations, formation of contracts, and/or various other tasks #### 2. Employer/Employee - An employer hires an employee; the employee is controlled by the employer and may or may not have agency authority #### 3. Employer/Independent Contractor - An employer hires an independent contractor; the independent contractor is not controlled by the employer and may or may not have agency authority ## Principal-Agent Relationship - In a principal-agent relationship, the agent is given express authority to act for the principal. - This authority may include the power to negotiate and enter into contracts and transact business with third persons. - Express authority is that authority which is explicitly stated, whether written or oral. - When the agent is given express authority to act on behalf and instead of the principal, the agent has derivative authority to carry out the business of the principal. - That is, an agent's authority is derived (comes from) from another person, the principal. - It is likely that the agent has implied authority to act as well, depending upon the circumstances surrounding the agreement. - Implied authority is that authority that arises naturally out of the grant of express authority. - For example, suppose that Bill gives Susan the express (stated) authority to manage Bill's apartment complex for him. - Even though not expressly stated in the agreement or in-structions given by Bill, Susan would have the implied authority (necessary and understood even though not stated) to collect rents and issue receipts if that was understood to be within the normal scope of activities for a property manager. - Contracts entered into by the agent on behalf of the principal where the agent has proper authority are generally binding upon the principal. - Suppose, for ex-ample, that an actor enters into an agency agreement with a booking agent. - The agent will be given express authority to negotiate and sign contracts for the ac-tor to play certain roles on television or film, and make public and promotional appearances, etc. - The agent's contracts are binding and enforceable against the actor. - Contracts entered into by the agent on behalf of the principal where the agent has proper authority are generally binding upon the principal. ## Employer-Employee Relationship - When an employer hires an employee, the employee is usually hired to perform a specific function. - The terms of the employment and the directives of the employer control the employee's physical conduct on the job. - In an employment relationship, an agency is created only if the employee is given authority to act on behalf of the employer to enter into contracts and bind the employer legally. - Thus a clerk in a store will likely have very limited agency authority to sell goods at the price set by the employer, because that action is within the scope of express or implied authority granted, but will probably not be entitled to act as an agent for purposes of contracting for or ordering on behalf of the principal/employer. - Many employees have no agency author-ity to represent their employer. - Note that most state and federal employment laws apply whether or not an employer and employee create an agency relationship. - Thus Social Security laws, workers'compensation, unemployment, occupational safety laws, and other statutes apply to the employer-employee relationship. - They do not apply, however, to independent contractor relationships, discussed below. ## Employer-Independent Contractor Relationship - An independent contractor is a person who enters into a contract with another (an employer) to do something for that party. - The employer of an independent contractor does not control the actions of the independent contractor to any substantial degree. - Physicians, plumbers, roofers, artists, and pest exterminators are all examples of independent contractors. - The employer may, however, authorize the independent contractor to negotiate and enter into binding contracts on the employer's behalf, thus granting the in-dependent contractor limited agency authority, in which case the employer of the independent contractor is both employer and principal. - Physicians, dentists, attorneys, plumbers, real estate brokers - all can be independent contractors, hired by employers who give the professional limited agency authority to perform certain tasks and to represent the employer/principal. - Independent contractors who are professionals are sometimes called professional agents. - They have the authority to enter into contracts, binding their principals to them. ### It often becomes important to determine whether the parties have entered into an employer-employee relationship, or an employer-independent contractor relationship. - Recall that an employer of a worker who is classified as an employee has to provide workers' compensation, Social Security, etc. - An employer who hires an independent contractor will have no such liabilities. - Courts will look to a number of factors in making this determination, including: - Whether the person in question works for a number of clients, or just one - Whether the person has an office, hires employees, and controls the performance of their work - The length of time the party works for the principal - The method of payment, whether by time period or by the job - The degree of skill required to complete the job - The degree of control the employer asserts over the party hired to complete the task- does the employer control the means and methods of achieving the result or the result only - If a court examines all the circumstances and finds that the employer asserts very little day to day control over the worker, it will likely find that the worker is an independent contractor. - Conversely, if a substantial degree of control is found, the court will hold that an employer-employee relationship exists. ## Yelverton v. Lamm - 94 NCAPP 536, 380 SE2d 621 (1989) ### Facts - Patricia Yelverton died as a result of injuries sustained when an automobile owned and driven by Joseph Lamm crossed the centerline and stuck the automobile driven by Yelverton. - Yelverton's executor (Yelverton) brought suit against Lamm and Lamm's alleged employer, Premier Industrial Corp. (Premier). - Yelverton argued that Premier was vicariously liable for Lamm's alleged negligence and was also independently liable for its own acts of negligence. - Yelverton based its theory of liability on the notion that Lamm was an employee or agent of Premier. - However, Premier defended on the ground that Lamm was not its agent, servant, or employee, but was employed solely as an independent contractor. - The relationship between Lamm and Premier was governed by a written contract entitled “Independent Agent Agreement” wherein Lamm, as "Independent Agent,” was given a non-exclusive right to sell Premier's products in a designated territory. - The Agreement also provided that all product orders were subject to Premier's acceptance. - Pursuant to the contract, Lamm was paid by commission only and all expenses incurred were to be paid by Lamm. - In addition Lamm was allowed to work on his own schedule and sell the products of different competing companies. - The agreement also made clear that Premier had no right to control Lamm. ### Decision - The court stated that the test for determining a worker's status is whether the employer has the right to control the worker with respect to the manner or methods of doing the work or the agents to be employed in it, or has the right merely to require certain results according to the parties' contract. - Because the facts of the case established Lamm as an independent contractor, the court held that there was not an employer-employee relationship or any other kind of relationship which would hold Premier liable in tort. - Lamm was deemed an independent contractor and Premier was not liable for his accident. ## Agency Formation - Typically agency relationships are formed by express agreement between the parties. - Often the agreement will be for a specific, stated purpose. - For example, a principal may enter into an agreement with an automobile consignment business to sell the principal's car. - The agent will use specific skills to get the best price possible on behalf of the principal, and take a percentage of the sale price (or commission) as the fee. - Express agreements can be either written or oral. - In certain situations, state Statutes of Fraud require that the agreement be in writing. - For example, many states require that real estate agents' listing (employment) contracts with homeowners be in writing. - Agency agreements may be exclusive. - In that case the principal agrees that one agent, and no others, will perform for the principal. - If the principal breaks this agreement and employs another agent, the exclusive agent may bring an action for breach of contract. - If an agency agreement is not exclusive, the principal is free to employ as many agents as desired - Perhaps the most common form of express agency agreement is the power of attorney (attorney in fact). - This written agreement gives an agent the power to act legally (in the legal shoes) on behalf of the principal. - Normally the power of attorney allows the agent to sign only specified legal documents such as deeds or leases and bind the principal. - The agent does not have to be an attorney to act as the principal's "attorney in fact." ### Powers of Attorney - Powers of attorney can be either general or special. - If an agent is operating under a general power of attorney, the agent is authorized to act broadly. - While the agent cannot act illegally or against public policy, the agent has no other limitations - An agent operating under a special power of attorney, however, is limited by the express terms of the agreement. - It may be that the agreement only allows the agent to buy or sell an automobile, or have access to one bank account. - The agent is liable for any actions undertaken outside the provisions of the agreement. - Powers of attorney may be durable, meaning that they have no expiration date and will remain in effect until voided by the principal. - They may also be limited to a specific period of time. - Further, powers of attorney may be conditional; that is, they will not take effect unless and until a certain event happens. - For example, many soldiers execute powers of attorney conditional upon them being deployed into active duty or overseas service. ### Implied Agency - Not all agency agreements are expressly created. - The conduct of the parties may create an implied agency agreement. - Since no terms or conditions are set forth, the extent of the agent's authority to act on behalf of the principal is determined by the facts and circumstances surrounding the "agreement." - Implied authority can be determined by examining, for example, the prior dealings of the parties, industry standards or customs typically utilized in similar situations, or the actions of the parties themselves. - Sometimes courts will examine the facts to determine what authority was necessary for the agent to carry out the implied duties. - Whatever the implied authority is determined to be, it cannot conflict with any express authority or with the specific limitations on express authority. ## Penthouse International, Ltd. v. Barnes - 792 F.2d 943 (9th Cir. 1986 ### Facts - Barnes was a hostess at a Hollywood club when she was asked to pose nude for Penthouse. - Dunas identified himself as a freelance photographer who sold photographs to Penthouse. - Barnes agreed, but on the condition that Penthouse would use a fictitious name to accompany Barnes's photographs. - Thereafter, Barnes signed a "Release, Authorization, and Agreement Form” which gave Penthouse the right to republish the photographs. - Dunas, as he had done with many other contracts, wrote "AKA” on the Penthouse contract to indicate that Penthouse could only publish the photographs if they were accompanied by a pseudonym, not Barnes's real name. - Almost a decade later, after becoming a famous television broadcaster, the National Enquirer and People Magazine published a rumor that Barnes had posed for Penthouse. - Seeking to profit from this, Penthouse attempted to republish the nude photographs of Barnes under her real name. - Penthouse requested a declaratory judgment from the court allowing the company to republish the nude photographs. - However, Barnes contended that because Dunas had implied agency to write "AKA" on the Penthouse contract, the contract modification was enforceable, thus, Penthouse was bound by the modified contract. ### Decision - In reaching its decision, the court considered two issues; whether Dunas had contracted on behalf of Penthouse and if he had, whether Dunas acted within the scope of his authority by modifying the contract. - Because Penthouse carried Dunas's name on its masthead, provided Dunas with Penthouse contracts, business cards, and had him solicit women to pose nude for the magazine, the court held that Dunas was an actual agent of Penthouse. - The court further reasoned that because Dunas had written “AKA” on many previous contracts without Penthouse's objection, Dunas had implied actual authority to modify the contract. - The court ruled that the contract modification was binding and Penthouse could not republish the nude photographs with Barnes's real name. ## Agency by Estoppel - Sometimes circumstances will dictate that an agent be granted incidental authority, which is an extension of and type of, implied authority. - For example, an express agency agreement may leave out a provision necessary for the agent to carry out the purpose of the agreement. - In that case, the agent will be deemed to have the incidental authority to perform. - Similarly, circumstances may arise that result in an emergency. - If the agent must take necessary steps as a result of the emergency (normally by acting to protect the principal), that authority will be implied. - Agency relationships may also be established by estoppel thereby creating what courts refer to as apparent authority. - When a principal causes one party to believe that another party is an agent, and the first party reasonably believes and relies upon the representation by dealing with the "agent," an agency by estoppel has been created. - The key in these situations is whether the principal's actions create the reasonable appearance that an agency exists. - Facts and circumstances surrounding the events, as well as customary business practices in the area, will determine whether the reliance upon the agency representation is reasonable. - As an example, suppose that a general store manager places a manager trainee near the main check-out counter. - A customer, relying on the appearance that the trainee is the person in charge requests and obtains a substantial price reduction on a product. - Even though the general manager secretly told the trainee not to give price reductions, the store is estopped from undoing the transaction because the store manager placed the trainee in a position such that a reasonable customer would believe that the trainee had authority. - In other words, the general manager has created the appearance that the trainee had proper authority. ## Types of Agency Relationships | Type of Agency | Created By | | ------------------- | --------------------------------------------------------------------------------------------------------------------------- | | Express Agency | written or oral statements; if written, referred to as a power of attorney | | Implied Agency | based on one of several factors; custom, prior dealings, industry practice, necessity | | Apparent Agency (Agency by Estoppel) | based on the appearance of agency by actions of the principal, not the agent; binds the principal even though the agent had no actual authority | | Ratification of prior agency action | created by the acceptance of a prior unauthorized act of the agent; treated as if the agency was created from the start | ## Agency by Ratification - The final way agency relationships may be created is by ratification. - Ratification creates "after the fact" authority. - Suppose that someone's spouse charges an item at a clothing store to the other spouse's account without the actual authority to do so. - If the spouse whose account was charged later accepts the fact that the charge occurred, the courts would treat the situation as if express authority existed from the start. - An agency by ratification has been created, and the principal is legally bound by the agent's performance. - Ratification can be either express or implied. - The principal's ratification is only binding if the principal knows all the terms of the contract. ## Philip Werlein, Ltd. v. Daniels - 538 So. 2d 722 (1989) ### Facts - Daniels and Julian were close friends who worked together. - One day after work, Daniels and Julian went to Werlein's, a retail electronic store, where Daniels applied for a credit account. - After Daniels' account was approved, Julian, with the authorization of Daniels, applied for credit by using Daniels' name and credit history. - Thereafter Julian went to Werlein's without Daniels and charged a television to Daniels' account. - Julian executed the retail installment contract by signing Daniels' name. - Daniels later saw the television at Julian's home. - Julian told Daniels she had charged the television to Daniels' account, whereby Daniels replied that Julian was to continue making payments on the account. - Julian defaulted on the payments, and Daniels received notice that the account had become delinquent, to which she responded that the money order was in the mail. - When Daniels was contacted the second time, she asked for a "payout balance" on the account. - A few months later, Daniels notified Werlein that she had neither authorized the purchase of the television, nor ratified the unauthorized act. - Werlein then brought suit against Daniels for the unpaid balance on the credit sale. ### Decision - The court applied the general rule that when a person's signature is executed by another person outside his presence or without express authority or knowledge, that person must be proven to have ratified the unauthorized act to be bound by the signature. - Because Daniels told Julian to continue to make payments on the account, and because of her statement to Werlein's that the money order was in the mail, Daniels was judged to have possessed a clear intent to ratify the unauthorized act. - As a result, the court concluded that Daniels was bound by the signature. ## Duties of Principals and Agents - We have seen that the relationship between principals and agents is fiduciary in nature. - Because the relationship is based on trust, each party owes the other the duty to act in good faith, to perform their duties to the best of their abilities, and with the best interests of the other in mind. - These duties are described in greater detail below, beginning with the duties of agents. ### 1. The Duty of Loyalty - All agents owe the principals that employ them the duty of loyalty. - This means that an agent must act for the benefit of the principal, not for the benefit of the agent. - An agent cannot represent two principals with competing interests (though it is possible, but unlikely, that the principals might agree to a dual agency arrangement). - All information gleaned through the agency relationship must remain confidential. - An agent's duty of loyalty precludes the agent from disclosing any confidential information, such as trade secrets, profit margins, business plans, sales prices, etc. - An agent should not look to profit personally from the agency, at least without the knowledge and consent of the principal. - For example, suppose a third party conveys a business proposal or offer to an agent. - If the agent accepts the offer for the agent's personal gain, rather than convey the offer to the principal, the agent has usurped the opportunity and violated the duty of loyalty. ### 2. The Duty of Performance - Agents also owe principals a duty of performance. - This is the duty to act with reasonable care, skill, and diligence. - This duty is met by utilizing the ordinary, reasonable, and prudent standards customarily used in a comparable situation. - For example, if the agent is a real estate agent, the agent will be held to the same standard of performance a "reasonable and prudent" real estate agent would be held to under similar circumstances. - A small percentage of agency relationships are not formed by contract, but are created out of gratuity, meaning that the agent acts for purposes other than money. - As an example, suppose that Joe, a great negotiator is asked by a friend to negotiate a contract on the friend's behalf. - Joe agrees to perform the negotiation without compensation. - Since the parties did not meet the consideration requirement of contract law (Joe, the negotiator was not promised compensation for his work), no contract exists. - Since there is technically no contract in this instance, there can be no liability for breach of contract in the event the agent fails to perform. - However, gratuitous agents still face liability if their performance is careless, negligent, or otherwise substandard. - Suppose that the gratuitous agent, Joe, agrees to negotiate contracts on his friend's behalf for one year. - Further suppose that six months into the negotiations, Joe, the negotiator, quits. - Since the negotiator is not bound by a contract with his friend, his friend cannot sue for breach of employment contract. - However, if Joe, the negotiator, had entered into an employment contract with his friend, who agreed to pay Joe to work for one year, failing to carry out his promise to work for one year would result in a breach of contract. ## Ellison v. Alley - (TENN) 841 SW 2d 605 (1992) ### Facts - Donald Alley, a real estate broker, had a listing to sell a farm for at least $200,000. - The buyer agreed to pay $380,000 for the Ellison farm. - At the closing of the real estate deal, Alley had arranged the transaction in such a manner that the buyer thought that the purchase price of the farm of $380,000 was being paid to the seller. - The seller collected $200,000. - Alley had paid himself the difference of $180,000. - Neither the seller nor buyer knew of Alley's secret profit. - Once the seller discovered this, he brought suit against Alley to recover the $180,000. - Alley defended on the ground that he was entitled to his money as well as a commission and that the seller had received the $200,000 that he had initially asked for. ### Decision - The State Supreme Court ruled that if an agent's actions in a sale transaction amount to either bad faith or misconduct, the agent is not entitled to a commission on the sale. - Here, it is clear that Alley acted with bad faith and manipulated the real estate deal in such a way as to wrongfully conceal the ill-gained profit of $180,000. - It is also important to note that the agent's fiduciary obligation is not fulfilled by getting the minimum price, but rather by obtaining the best possible price. - Because Alley acted with bad faith and beyond the bounds of ethical conduct, he is not entitled to a reasonable commission. - Accordingly, Alley's profit was awarded to the seller. ### 3. The Duty of Notification - A third duty of agents is the duty of notification. - Under the law, notice to the agent constitutes notice to the principal. - In other words, any third parties who advise agents of offers, proceedings, deadlines, or any other information are deemed to have relayed the information to the principal as well, since the agent is duty-bound to forward the same information to the principal being represented. - Thus, agents have an absolute duty to notify their principals of all they learn relevant to the agency relationship. ## Jeffery Allen Industries, Inc. v. Sheldon F. Good & Company - 153 ILL. APP. 3d 120, 505 N.E. 2d 1104 (1987) ### Facts - Kulwin granted Sheldon, a real estate agent, the exclusive right to sell a building. - If a cooperating broker secured the purchaser, the commission from the sale was to be divided in half between Sheldon and a cooperating broker. - Sheldon secured Collier as a purchaser. - Collier agreed to pay $350,000, with the seller providing the financing. - Kulwin later learned that before the building was sold, another buyer, TLC, through another broker had discussed with Sheldon an offer of $350,000 in cash. - When the cash offer was presented to Kulwin, Kulwin was forced to reject it because she had already accepted Collier's earlier offer. - Kulwin sued Sheldon for breach of an agent's duty to disclose. - Kulwin claimed that Sheldon had not informed her of all the material facts in order to avoid sharing the commission with the broker that had obtained TLC as a purchaser. ### Decision - The court applied the general rule that an agent must make known to the principal all material facts which could affect the transaction and the subject matter of his agency. - The court ruled that another buyer's willingness to make a cash offer for the building was a material fact. - This information could have allowed Kulwin to secure a better deal than the one she had made with Collier. - Thus, the court held that Sheldon's failure to inform Kulwin of TLC's cash offer constituted a breach of Sheldon's fiduciary duty. - Judgment was given in favor of Kulwin. ### 4. The Duty of Obedience - Agents also have the duty of obedience. - They are obligated to follow all lawful instructions given by the principal in order to advance the objectives of the agency. - To ignore an instruction violates the duty of obedience and could lead to liability - In the event of an emergency situation there may not be enough time for an agent to ask for or receive appropriate instructions from a principal. - Under those circumstances the agent may take reasonable and necessary steps to handle the situation, keeping in mind the need to act appropriately to preserve and protect the principal's interest or properties. - Further, it may be necessary in an emergency for an agent to deviate from a principal's instructions in order to protect the principal's interests. - An agent does not violate the duty of obedience if emergency circumstances leave no other reasonable alternative. ### 5. The Duty to Account - Agents also have the duty to provide an accounting of the agent's activities, as well as records of all transactions, properties, and monies paid and received. - Depending upon the nature of the agency itself, the accounting may be very simple or it may be detailed and voluminous . - In either event, the agent must see that all bookkeeping records are in order and promptly and timely delivered to the principal for inspection and review. - The agent is forbidden from commingling personal funds with the client's funds. ## Duties of the Principal to the Agent - The principal in an agency relationship also owes certain duties to the agent: ### 1. The Duty to Compensate - Normally the principal has a duty to compensate the agent, especially where the agency is contractual in nature and the contract requires such compensation. - If the agreement expressly sets forth how much money will be paid, and under what conditions, the principal has a duty to follow those provisions. - If the agreement is silent as to compensation, the agent is entitled to reasonable and customary compensation for the services, payable in a timely manner. - Compensation is thus said to be implied from the actions of the parties in creating the agency. - As stated earlier, some agency relationships are gratuitous. - In those instances an agent does not desire or expect to be compensated for services ### 2. The Duty of Reimbursement and Indemnification - A principal owes an agent the duties of reimbursement and indemnification. - This means that the agent should be paid for any and all reasonable expenses incurred in carrying out the purposes of the agency and within the scope of the agency. - The expenses must be necessary to discharge the agent's duties. - Pursuant to the agent's duty to account, the principal has the right to review the agent's claims for reimbursement before payment. - Some states hold that payment of an agent's expenses is required only when the agency agreement expressly authorizes them - The duty to indemnify requires that the principal must protect the agent from any losses the agent suffers during the agency. - This normally occurs when an agent is held liable for the misconduct of the principal, or if a third party secures a judgment against an agent on a contract that was authorized by the agent but breached by the principal. ## Duties a Principal Owes an Agent - Compensation - Reimbursement and Indemnification ## Liability Under Agency Relationships - Liability issues falling under agency relationships can generally be grouped under these categories: - liability for contracts; - liability for torts; - and liability for crimes, each discussed below. ### 1. Liability for Contracts - Principals authorize agents to negotiate and enter into contracts with third parties. - The third party may then enforce the rights under the contract, including the option of bringing an action for breach and seeking damages or other remedies . - Under certain circumstances an agent may also be held liable under a contract. - The scope of an agent's liability depends upon whether the agency agreement is classified as fully disclosed; partially disclosed; or undisclosed. #### A. Fully Disclosed Agency - Under a fully disclosed agency, a third party who enters into a contract with an agent knows that the agent is representing a principal, and knows the identity of the principal. - It does not matter how the third party learns the identity of the principal, or from whom the third party learns it. - In a fully disclosed agency, only the principal is liable for breach of contract. - There is one exception to this general rule: if an agent personally guarantees that a principal will perform under the contract, that agent could face liability on the contract as a guarantor. #### B. Partially Disclosed Agency - Under a partially disclosed agency, a third party who enters into a contract with an agent knows that the agent represents a principal, but does not know the identity of the principal (the agent has not disclosed the identity of the principal and the third party has not learned it from any other source). - Even if the agent has the authority to disclose the identity of the principal and does not, the agency is still deemed partially disclosed - Under a partially disclosed agency, both principal and agent face liability for breach of contract. - A third party may bring an action against either party, or both. - The agent faces liability because the third party does not know the identity or reputation of the principal, and the third party relies upon the honesty, integrity, and reputation of the agent in entering into the contract. - However, if a third party successfully sues an agent, the agent may seek indemnification against the principal. - Further, a third party and an agent can agree to release the agent from potential liability at the time the contract is entered into. #### C. Undisclosed Agency - Under an undisclosed (non-disclosed) agency a third party is unaware of either the existence of an agency or the identity of a principal. - While both principal and agent face liability for breach of contract under undisclosed agencies, the third party must choose only one to sue. - This requirement by a number of jurisdictions seems fair since the third party intended to contract with only one party. - Technically, when an agent does not disclose agency status when entering into a contract, the agent acts as a principal. - Again, if the agent is held liable, the agent may seek indemnification from the unnamed principal. ### 2. Liability for Torts - Under the legal doctrine of respondeat superior, a principal/employer becomes liable for an agent's/employee's negligent torts if the torts are committed within the scope of the agency. - The Latin phrase respondeat superior means “let the master respond," and is based upon the social principle that holds persons responsible for their actions, even if they hire someone to act for them. - Further, public policy dictates that an injured person must have an avenue for relief- and it is more likely that a principal is in a better financial position (deeper pockets) to address the concerns of a plaintiff. - For purposes of imposing liability upon the principal, it is important to determine if the employee/agent acted within the scope of the agency (or employment). - Courts will consider the following factors when making this determination: - Whether the act committed by the agent was authorized in some way by the principal; - The time and place of the act; - The purpose of the act; - The degree to which the principal's interests were benefited by the act; - The extent to which the private interests of the agent were involved; - Whether the principal/employer furnished the means or equipment by which the injury occurred; and - Whether the principal/employer knew or should have known that the agent was committing the alleged act. - Courts are frequently required to determine who is liable if an agent is negligent while on the way to work. - The common law rule is that a principal is not liable for any negligent acts committed by an agent on the way to work. - This is based on the idea that since a principal cannot control where the agent lives, the principal should not be held liable for what may occur on the way to work. - Similarily, an agent may commit a negligent tort to further personal interests during the course of the agency. - For example, suppose that an agent takes a lunch break, or runs an errand, or briefly deals with a personal issue during the time the agent is technically supposed to be working for a principal.