Agency Law (Class Eighteen) PDF

Legal and Ethical Environment of Business Class Eighteen: Agency Law Agency Law: Agency Law deals with the rights and responsibilities that are created when one acts on behalf of another. It also deals with whether or not an agency relationship exists. Basic terminology: Prin...

Legal and Ethical Environment of Business Class Eighteen: Agency Law Agency Law: Agency Law deals with the rights and responsibilities that are created when one acts on behalf of another. It also deals with whether or not an agency relationship exists. Basic terminology: Principal – is the person that has another person acting for them Agent – is the person that is acting for someone else What is required to create an Agency relationship? 1) A principal 2) An agent 3) The parties mutually agree that the agent will act on behalf of the principal 4) The agent will be subject to the principal’s control 5) Thus, creating a fiduciary relationship Consent: Consent – same as with contract law, it is an agreement for the agent to act on behalf of the principal. Bob agrees to walk Sharon’s dog. Terry drove down the highway and struck a vehicle that has been stalled on the side of the highway. The crash killed the owner of the broken-down car. Terry called his lawyer Dave and asked what to do. Dave told Terry to meet him at the hospital and give a sample of his blood. Terry and Dave met, and Terry gave the sample. Although the test results showed that there was no alcohol in his system, it did show high levels of cocaine. The prosecutor charged Terry with manslaughter and sought to introduce the test results at trial. Dave argued that the hospital was his agent, and the attorney client privilege prevented the prosecutor from using the test results at trial. How did the court rule? Consent (continued): The court held that the hospital had not consented to an agency relationship and therefore was not an agent of the attorney and client. Therefore, the prosecutor could use the test results at trial. Terry was convicted. Control – the principal exercises control over the agent. As a result, the principal is responsible or liable for the acts of the agent. If there is no control, then there is no agency relationship. Fiduciary Relationship – a fiduciary relationship is based on trust. The beneficiary places confidence in the fiduciary who is obliged to act in good faith and do what is in the best interest of the beneficiary. The fiduciary can not act in his own best interest over that of his beneficiary. An agent has a fiduciary duty to his Principal. What is NOT required for an Agency Relationship: 1) Written Agreement – an agency relationship does not have to have a written agreement to be binding. Virtually all agency relationships may be oral agreements. There is, however, one exception: equal dignities rule – this rule applies when the agency relationship is to perform a task that must be in writing. In such a situation, the agency relationship must also be in writing. Thus “equal dignities.” Example: Theo wants to sell a piece of real estate to Winston. They sign a contract and set a closing date of November 1. Winston then finds out that the bank will lend the money until all of his application is complete and that will take three weeks. So, the closing date for the transaction is pushed back to November 24. Theo will be out of town on that date, so he has his friend Anthony act as his agent to appear at the closing and sign the Deed conveying the property to Winston. Since the statue of frauds requires that the real estate transaction be in writing, then the agency relationship for Anthony to be Theo’s agent must also be in writing under the equal dignities rule. What else is NOT required for an agency relationship? 2) Formal Agreement – as we learned above the agency relationship does not ordinarily require a written agreement, it also does not ordinarily require even a formal agreement. The principal and agent need not formally agree to the relationship. They do not even have to ever use the words “agent,” “agency,” or “principal.” The law only requires that they act like a principal and agent. What else is NOT required for an agency relationship? 3) Compensation – the last area that is not required to be an agency relationship is compensation. There is no requirement that the agent be paid. As you will recognize, this is very different from contract law which would require consideration. In the agency relationship no money need pass hands. Agency relationships establish duties between Principals and Agents: Duties that the Agent has to the Principal 1) Duty of Loyalty 2) Duty to Obey Instructions 3) Duty of Care 4) Duty to Provide Information Duty of Loyalty: 1) Duty of Loyalty – an agent has a fiduciary duty to act loyally for the principal’s benefit in all matters related to the agency relationship. The agent may not engage in self dealing or act for his own benefit over the benefit of the principal. Example: Musician George Harrison had an agent, Allen Klein. Bright Tunes sued Harrison claiming that Harrison’s hit song My Sweet Lord violated the copyright of the song He’s So Fine by the Chiffons. Klein met with Bright Tunes on behalf of Harrison to negotiate a settlement. During the discussions, Bright Tunes suggested that Harrison simply purchase the rights to the song He’s So Fine. During the negotiations, the agency contract between Harrison and Klein expired. Thereafter Klein purchased the rights to He’s So Fine for himself. After a trial, the Court found that Harrison owed 1.6 million for violating the copyright. Since Klein now owned the rights to the song, Harrison owed it to him. Harrison sued Klein for breach of his duty of loyalty as Harrison’s agent. Duty of Loyalty (continued): The Duty of Loyalty that the Agent has to the Principal also includes: a) Not secretly dealing with the Principal b) Engaging in appropriate behavior Example: ABC Book Publishing company hires Sadie as their agent to find up and coming authors that they might sign to do their publishing. Sadie secretly has been working on her own book and wants to get it published. Under her duty of loyalty, Sadie can not “sign herself” to the publishing deal and bind ABC. After a long flight from NY to LA two flight attendants from Delta Airlines went to a bar. After two hours of heavy drinking, they climbed on top of the bar and did a strip tease where they took off their company uniforms. Did they violate their duty of loyalty to Delta by engaging in inappropriate behavior? Other Duties of the Agent to the Principal: 2) Duty to Obey Instructions - an agent must obey the instructions of the principal unless the principal directs her to do something illegal or unethical. Principal Paula directs her real estate agent Angie to call her if the Smiths accepted the offer to sell Paula’s property. Angie has a duty to do what Paula told her to do. If Paula told Angie to tell the Smith’s that the house had a brand-new roof, when they both know that the roof is old and it leaks, then Angie does not have to obey Paula’s instruction. Other Duties of the Agent to the Principal: 3) Duty of Care – an agent has a duty to act with reasonable care under the circumstances. If the agent has special talents or skills, then the agent has to act with a higher standard in conformity with those skills. If the agent has no special skills, then there may be a lower standard of care. 4) Duty to Provide Information – the agent has a duty to provide any and all information that the principal may want to know that is in her possession. If the Smith’s made a counteroffer, then Angi has a duty to tell Paula. What Remedies does the principal have against the agent who fails in any of these duties? a) Damages – the principal may due the agent for damages that were caused by the breach of the duty b) Profits – if the agent breaches the duty of loyalty and personally gains due to the agency relationship, the principal may sue for those profits c) Rescission – the principal may rescind or cancel a contract or agreement that the agent wrongfully entered. Duties of Principals to Agents: 1) Duty to Compensate if required by the oral or written agreement 2) Duty to Indemnify 3) Duty to Cooperate 1) Duty to Compensate the Agent is just that. The principal has to pay the agent for her work that is done a part of the agency relationship unless it is a gratuitous agency. Duties of Principals to Agents (continued): 2) Duty to Indemnify – the principal has a duty to indemnify the agent for any reasonable expenses incurred by the agent as part of his duties. These expenses fall into 3 categories: a) Ordinary expenses and damages – often this involves simply reimbursing the agent for costs paid. Example: the agent drives to another state to consummate the sale of an automobile for the principal. The principal should reimburse the agent for his mileage. b) Certain Tort claims to 3rd parties - principals have a duty to indemnify an agent against a 3rd party if the claim is based on the agent’s behavior and the agent did not realize he was committing a tort. Example: William owns 7 of the 8 trailers that are on State Street. He hires Fred to clean out all of his trailers and take whatever is inside to the dump. William forgets to tell Fred that he doesn’t own the 8th trailer. Fred cleans out all 8 trailers and takes everything inside to the dump. When the owners of the 8th trailer return home from vacation and find an empty residence, they sue Fred. William has a duty to indemnify Fred for any losses sustained in the lawsuit. Duty to Indemnify (continued): c) Certain Contracts – the principal must indemnify the agent against 3rd parties as a result of entering into a contract on the principal’s behalf Example: Carter wanted to purchase tennis racquets for his sporting goods store. He hired Donald to purchase 500 racquets from Wilson Corp. When the racquets arrived, they were made of wood instead of the modern-day graphite. Donald complained and Wilson said they thought he wanted old vintage racquets. Carter refused to pay, and Wilson Corp sued Donald on the contract. Donald lost the case and sued Carter. The Courts would hold that Carter owed a duty to Donald to indemnify him for his loss. Duty to Cooperate: 3) Duty to Cooperate – the principal has a duty to cooperate with the agent. That cooperation involves three main components: a) The principal must furnish the agent with the opportunity to work b) The principal can not unreasonably interfere with the agent’s ability to accomplish his task. c) The principal must perform his part of the contract if any Principals Liability to 3rd Parties: Principals are ordinarily liable to 3rd parties for the acts of their agents whether the acts involve contracts or torts. 1) Principals Liability for Contracts Principals are liable for contracts their agents enter into with 3rd parties provided (1) the agent had authority, OR (2) the principal ratified the contract. In order to consider liability, particularly whether the agent had “authority,” we must consider the different types of authority and the effect thereof. Authority: Express Authority – the principal grants express authority by words or conduct that, reasonably interpreted causes the agent to believe the principal desires him to act on the principal’s behalf Implied Authority – the agent’s authority to engage in a contract with a 3rd party includes any other acts that are reasonably necessary to accomplish it. The agent’s authority to do those other acts is implied. Apparent Authority – the principal is liable to a 3rd party even when the agent does not have authority to engage in certain activity if the agent reasonably believes that the agent is authorized, or if it is apparent to the 3rd party. Example: James was a stock-broker with Goldman Sachs. James gave a seminar at GS offices to a group of 50 potential investors. James handed out brochures listing certain investments that he recommended. One of the investments was a stock that was not registered, and that GS did not recommend or even follow. One of the potential investors signed up with James and purchased some of the unregistered stock. A short while later the stock crashed and lost all its value. The investor sued. The Courts would hold that GS, as the principal, was liable to the 3rd party even though James did not have the express or implied authority to sell the stock, but to the 3rd party, James had the apparent authority. Principals Liability for Negligent Physical Torts: Respondeat superior – let the master answer General Rule: A principal is liable for physical torts negligently committed by an employee acting within the scope of his employment (in this instance we are using the “employee” as a substitute for “agent.”) The issue of liability is determined based on the classification of the agent. Is the agent and Employee or an Independent Contractor Principals Liability for Negligent Physical Torts (continued): Whether an agent is an Employee, or an Independent Contractor will determine if the principal is liable to the 3rd party. If the agent is an EMPLOYEE, the principal IS LIABLE. If the agent is an INDEPENDENT CONTRACTOR, the principal is not. So, the classification will determine liability. How do Courts determine what class the agent is? Principals Liability for Negligent Physical Torts (continued): Courts will look to the amount of control the principal has over the agent. The more control, the more the agent is an employee. The less control the more likely the agent is an independent contractor. Courts will consider whether: 1) The principal supervises details of the work 2) The principal supplies the tools and place of work 3) The agent works full time for the principal 4) The agent receives a salary or hourly wages, not a fixed price for the job 5) The work is part of the regular business of the principal 6) The principal and agent believe they have an employer-employee relationship 7) The principal is in business