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Chapter 35 – The Agency Relationship


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Chapter 35 – The Agency Relationship

  1. 1. C H A P T E R 35The Agency Relationship I’ve got an ego and all that, but I know I need help. So I go and hire the very best people. H. Ross Perot, EDS founder Inc. magazine (Jan. 1989) 35-1
  2. 2. Learning Objectives• Know how an agency relationship is created and terminated• Distinguish employees from nonemployee agents• Recognize when an agent risks breaching a fiduciary duty 35-2
  3. 3. Overview• Agency is a two-party relationship in which one party (agent) is authorized to act on behalf of, and under the control of another party (principal) – MDM Group Associates, Inc. v. CX Reinsurance Co : agent owes a fiduciary duty to principal, but not vice versa Aspen, Colorado 35-3
  4. 4. Creation of Agency• Anybody may be an agent or principal, but the agreement is voidable by minors and the mentally incapacitated• Certain duties are non-delegable 35-4
  5. 5. Agency Authority• An agent can bind his principal only when the agent has authority to do so• Two forms: actual or apparent authority• Actual authority is express or implied – Express authority is created by the principal’s actual words (written or oral) • Example: “I want to hire you as my real estate agent to sell my house.” 35-5
  6. 6. Implied Authority• Agent has implied authority to do whatever it is reasonable to assume that the principal wanted the agent to do given principal’s statements and surrounding circumstances – Example: a person hired as general manager in a restaurant will have broad authority to run the business while a person hired as a cashier will have limited authority 35-6
  7. 7. Apparent Authority• Apparent authority arises when principal’s conduct leads a third party to believe that an agent (who lacks actual authority) is authorized to act a certain way and the third party reasonably relies on the appearance (cloak) of authority• To protect third parties, agency law allows agents to bind a principal on the basis of apparent authority 35-7
  8. 8. Employee or Independent Contractor?• An agency-based case may depend on whether a person who contracts with the principal is an employee (servant) or independent contractor• No clear distinction, but the “Reid” factors (listed in Eisenberg v. Advance Relocation & Storage, Inc.) aid in decision making: right to control physical details of the work, skill required, source of tools, location, schedule control, duration of relationship, payment method, benefits, tax treatment of hired party, uniqueness of work… 35-8
  9. 9. Employee or Independent Contractor?• In Eisenberg v. Advance Relocation & Storage, Inc. , the court disregarded Eisenberg’s short tenure and found that she was an employee: – She loaded trucks for a moving company that supplied all tools and paid her an hourly wage, and the company controlled the way she performed her assigned tasks• As an employee, Eisenberg had the right to file a sexual harassment lawsuit under Title VII of the Civil Rights Act of 1964 35-9
  10. 10. Duties of Agent to Principal• Since agency is a fiduciary relationship of trust and confidence, an agent has a duty of loyalty to the principal• Agent must (1) avoid conflicts of interest with the principal, (2) maintain confidentiality of information received from the principal – The duty of confidentiality survives agency 35-10
  11. 11. Duties of Agent to Principal• Conflicts of interest include self-dealing, competition with the principal, or acting for another party – These duties end after the period of agency 35-11
  12. 12. ABKCO Music Inc. v. Harrisongs Music, L • Facts: – 1971: George Harrison, managed by ABKCO Music (A.B. Klein), was sued by the copyright holder of hit song, “He’s So Fine” (Bright Tunes), which claimed Harrison’s song, “My Sweet Lord,” infringed on their copyright – Klein tried unsuccessfully to settle the suit, then his contract with Harrison expired – At the copyright trial in 1976, Harrison found liable for infringement, but damages issue remained 35-12
  13. 13. ABKCO Music Inc. v. Harrisongs Music, Ltd.• Facts: – 1978: After agency termination, Klein (ABKCO) used Harrison’s information in negotiations to purchase Bright Tunes and all rights to lawsuit • ABKCO became the plaintiff in 1979 trial for damages – At trial, Harrison counterclaimed for damages from ABKCO’s breach of the duty of loyalty – Trial court found a breach of duty and reduced ABKCO’s recovery; ABKCO appealed 35-13
  14. 14. ABKCO Music Inc. v. Harrisongs Music, Ltd.• Legal Reasoning and Issue: – An agent has a duty not to use confidential knowledge acquired in employment to compete with principal and the duty exists after the employment – However, using information based on general business knowledge is not covered by the rule – Did Klein use confidential information from his agency to purchase Bright Tunes? 35-14
  15. 15. ABKCO Music Inc. v. Harrisongs Music, Ltd.• Holding: – Evidence showed that Klein gave Bright Tunes confidential earnings schedules belonging to Harrison and that Klein’s former position aided in his purchase of Bright Tunes pending litigation – Sufficient evidence exists to state that Klein’s conduct did not meet the standard of a former fiduciary – Judgment affirmed 35-15
  16. 16. Other Agent Duties• Agents must obey the principal’s reasonable instructions for agency business, exercise the degree of care and skill standard for the job, promptly communicate to the principal matters reasonably relevant or material to the agency business, and duty to account – No duty to obey illegal or unethical orders 35-16
  17. 17. Sanders v. Madison Square Garden L.P.• Employee (Sanders) sued former employer for discrimination and defendant employer responded with “faithless servant” doctrine, arguing that Sanders acted unethically by tax fraud or by operating a side business• Faithless servant doctrine applies if worker’s disloyal acts were related to performance of duties and employer suffered damages – Employer failed to prove either point 35-17
  18. 18. Duties of Principal to Agent• A written agency contract normally states the duties the principal owes the agent, but law implies certain duties on the principal: To compensate the agent To reimburse the agent for money spent in the principal’s service To indemnify the agent for losses suffered in conducting the principal’s business 35-18
  19. 19. Termination of Agency• Termination by act of the parties includes: – At a time or event stated in the agreement – When agency was created to achieve a special purpose and the purpose was achieved – By mutual agreement of the parties – At the option of either party 35-19
  20. 20. Termination of Agency• Termination by operation of law includes: – Serious breach of the agent’s duty of loyalty – Principal’s permanent loss of capacity or agent’s loss of capacity to perform agency business – Change in value of agency property or subject matter (including loss or destruction) – Changes in law making the agency illegal – Changed business conditions or outbreak of war 35-20
  21. 21. Termination of Agency• Termination by operation of law also includes: – Impossibility of performance by the agent – Death or bankruptcy of principal or agent• Exception: if agent’s power is coupled with an interest, agency does not terminate by the principal’s revocation, loss of capacity by principal or agent, or death of either principal or agent 35-21
  22. 22. Gniadek v. Camp Sunshine at Seba• Plaintiff attended summer camp and was assaulted by former camp counselor two months after summer season ended• Actual authority terminated at season’s end• Apparent authority ceased when plaintiff learned the counselor left camp’s employ• Therefore, defendant camp was not liable for former counselor’s assault on plaintiff 35-22
  23. 23. Effect of Agency Termination• After agency terminates, agent’s express and implied authority ends – Caution: ex-agents may retain apparent authority that could bind a former principal• Principals should reduce risk of liability for third parties relying on ex-agent’s apparent authority by actual or constructive notice to third parties about agency termination 35-23
  24. 24. Test Your Knowledge• True=A, False = B – Agency is a contract in which an agent is authorized to act on behalf of, and under the control of, a principal. – All employees are agents, and all agents are employees. – Agents may bind a principal on the basis of apparent authority. – Agency may be created unintentionally. 35-24
  25. 25. Test Your Knowledge• True=A, False = B – All duties are delegable. – An agent’s duty of confidentiality continues after the agency ends. – To be considered actual authority, the authority must be expressed in words orally or in writing. – Agency is a fiduciary relationship. 35-25
  26. 26. Test Your Knowledge• Multiple Choice – Principals have the following duties to agent: a) Duty to compensate b) Duty to reimburse for reasonable expenses for doing agency business c) Duty to indemnify the agent for losses suffered due to agency’s business d) Both A and B e) All of the above 35-26
  27. 27. Test Your Knowledge• Multiple Choice – Manuel asked his friend Sunil, a good salesman, to sell his car and Sunil agreed. Does an agency relationship exist? a) Yes, Sunil is an agent for Manuel b) Yes, but only if there is a written contract describing the agency’s purpose c) No, since friends cannot engage in an agency relatioship d) No, unless Sunil sells Manuel’s car 35-27
  28. 28. Thought Questions• Have you been an agent or a principal?• Do you think the agency rules of liability are fair?• What are the ethical issues involved in an agency relationship? 35-28