its a business law assignment

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UNIVERSITY OF TOLEDO LEGAL AND ETHICAL ENVIRONMENT OF BUSINESS Cohen

CHAPTER 10: AGENCY LAWCHAPTER 10: AGENCY LAW

General Agency

Critical thinking questions

Agency Formation

Agency Termination

“At-Will” Agency

Agency Relationships

Duties of the Parties

MEMORANDUM OPINION

CONCLUSIONS OF LAW

Liability

Contract Liability

Chapter Summary

Footnotes

PowerPoint

General Agency: Formation and Termination Duties of the Parties Liability: Contracts, Torts, and Injuries   Businesses need labor and labor can come in the form of an employee or an independent contractor—these workers have been given the legal name “agents.” The di�erence between an employee and an independent contractor can be signi�cant when it comes to the legal liability or obligations that either the employee or independent contractor might impose on the business. This chapter focuses on how agency relationships are created and terminated while understanding the connections between the types of agency as it pertains to employees and independent contractors. This chapter also addresses how principals may be liable for agents actions under the concept of respondeat superior, direct liability, and employer liability for harm to its employees during work.  

GENERAL AGENCY Agency law deals with the relationship between workers and their employers. Please note that in this de�nitional context, the term “employer” is a generic term not a legal term. If one can explain the di�erence between the generic de�nition of employer and de�nition of employer from a legal standpoint, then the reader has a solid foundation to understanding agency law (more on that later).   In general sense, businesses operate through agents on many di�erent levels, and everything a business does is

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done through agents. From the Chairman of the Board of Directors all the way down to a janitor, these persons represent the company in some capacity and these persons agree to be subject to the control of the company. So the agency relationship is consensual—both the agent (worker) and principal (company) agree that some type of agency relationship exists. And, in accordance with this “agreement,” the agent agrees to be under the control of the principal. From a contractual standpoint, these principal/agent agreements come in many forms and do not have to be in writing. Today however, most of these agreements are in writing, usually in the form of an employee handbook or an actual written contract, but agency relationships can be formed without a written agreement.   Why is understanding the agency relationship so important?  

Bailey v. Filco, Inc. 48 Cal. App. 4th 1552; 56 Cal. Rptr. 2d 333; 1996 Cal. App. LEXIS 817; 96 Cal. Daily Op. Service 6450;

96 Daily Journal DAR 10581; 61 Cal. Comp. Cases 750 August 28, 1996, Decided

  JUDGES: Opinion by Davis, with Puglia, P. J., and Nicholson, J., concurring. OPINION BY: DAVIS EXERPTS OF OPINION (COMPLIMENTS OF LEXIS NEXIS ACADEMIC, CERTAIN CITES OMITTED.) DAVIS, J.   TRIAL COURT FACTS: Plainti� Bailey was injured in an automobile accident with Shinn, who was an employee of defendant Filco, a retail business engaged in the sale and rental of electronic goods and appliances. Bailey sued Filco under a theory of respondeat superior. At the time of the accident, Shinn was on a paid break and was driving to obtain some cookies to eat back at work. The jury found that Shinn was not engaged within the scope of her employment at the time of the accident, and the court entered judgment for Filco. On appeal, Bailey contends

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that Shinn was acting within the scope of employment as a matter of law when the car accident occurred.   ISSUE ON APPEAL: This appeal presents the issue of whether, as a matter of law, Shinn was within her scope of employment when she drove during her 10-to-15 minutes unscheduled, paid break to purchase cookies to eat back at work. (“As a matter of law”—takes the decision out of the juries’ hand and puts it into the judge’s hand.)   HOLDING: Shinn committed the alleged tort (the car accident) outside the scope of her employment with Filco and therefore Filco does not have any liability for its employee under the theory of respondeat superior. Trial court judgment a�rmed.   APPELLATE COURT REVIEW OF ACCEPTED FACTS: During a paid, morning break while working at Filco, Shinn drove to The Cookie Tree to buy cookies for herself and at least one other employee to eat while on duty. Shinn did not notify a supervisor that she was taking her break or leaving the premises—nor did she have to—and no Filco supervisor sent Shinn to The Cookie Tree to buy the cookies or to run an errand for Filco. While driving down a four-lane city street, Shinn realized she had passed her destination, attempted to make a U-turn, and collided with Bailey’s car at approximately 10:50 a.m. Afterward, Shinn returned to work at Filco.   Shinn worked at Filco as a full time, hourly sales cashier. Her duties included ringing up merchandise, selling small appliances, and renting videos. Her duties did not include driving, and Shinn never used her car for work purposes. Filco did not request Shinn to bring a car to work.   Filco did not require that Shinn clock out for her two daily, 10-to-15-minute breaks. Filco did ask its hourly employees to clock out for lunch. Filco only asked Shinn to make sure another Filco employee was operating the cash register and waiting on customers before she left on a break. Otherwise, Filco operated with a “hands-o�” management style regarding breaks. The Filco management never

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scheduled Shinn’s breaks. Filco never required Shinn to remain on the premises during a break, obtain a supervisor’s permission to take a break or leave the store on break, or even notify a supervisor that she was taking a break. Filco did not prohibit Shinn from using her car during a break. Filco management considered an employee on break to be free from work, and there is no evidence Shinn was ever asked to assist with customers while on her break. Filco provided a break room for its employees, complete with co�ee, cokes, and a place to sit and relax; on previous occasions, Shinn had used this break room. However, use of the break room did not change the fact that the employee was on break.   Under the theory of respondeat superior, an employer is vicariously liable for an employee’s torts committed within the scope of employment. (Perez, supra, 41 Cal. 3d at p. 967; Mary M. v. City of Los Angeles (1991) 54 Cal. 3d 202, 208 [285 Cal. Rptr. 99, 814 P.2d 1341]; Lisa M. v. Henry Mayo Newhall Memorial Hospital (1995) 12 Cal. 4th 291, 296 [48 Cal. Rptr. 2d 510, 907 P.2d 358]).   But an employer is not vicariously liable under respondeat superior for the torts committed by an employee not within the scope of employment.   So after reading this brief case summary, lets answer these questions:

1. In the state of California, for an employer to be vicariously liable for the employee’s actions (torts),

when must the employee’s actions occur?1

2. What was Shinn’s job and her duties thereunder?2

3. Why did the appellate court �nd in favor of the

defendant employer?3

Critical thinking questions In the Filco case, imagine these changes in the fact patterns and decide whether or not the appellate court’s decision would change and why?

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  What if Shinn was picking up cookies for an o�ce party during her break and hit Bailey?

Scope of Employment versus authorized company activity.

What if the facts were identical, but Shinn took a company car (with permission or without permission)?

Scope of Employment? Other?

  Based on the above case, it should be clear that determining the worker’s (agent) relationship with the principal (employer) is key in determining potential legal liability of the principal under various circumstances where the agent does something wrong, bad, or harmful or even bene�cial. In this instance, the court has already determined that there was an employer/employee relationship, which then led to the question, was the employee acting within the scope of employment? Why? Because if the employee was acting within the scope of employment, then the employer would have been liable for the employee’s actions.  

Agency Formation Forming an agency relationship between agent and principal is pretty straightforward. First, both parties agree that the agent will act on behalf of the principal. Because not all agents are treated equally, determining the authority of the agent to act on behalf of the principal is a di�erent issue and will be addressed later in this chapter. As in the Filco case above, the court seems to address this issue by stating that employees have the right to act within the scope of employment. Again, this is not always as simple as reviewing the duties of a checkout clerk because a third party might not know the agents scope of employment.   Further, or secondly, the agent agrees to act under the direction and control of the principal. In regards to both

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requirements for agency formation, the agreements do not necessarily have to be in writing (although most are) and the agreements may be express or implied depending on the circumstances. If the agency relationship is formalized in writing, then it is good practice to enumerate the lawful things the agent may do for the principal. Examples of lawful things that an agent may do for a principal: Negotiate and execute contracts, pay bills, settle disputes, and so on.  

Agency Termination Agency relationships can be terminated in various ways. Typical ways in which agency relationships are terminated include but are not limited to (1) expiration (stated term of the agency ends), (2) agency purpose is achieved (hired to sell a car and the car is sold), (3) principal revokes or �res agent (with or without cause), (4) agent resigns or quits the principal, or lastly (5) when the agency terminates by operation of law.   Agencies that terminate by operation of law may include the death of agent (maybe even principal but not if the agent would be caused undue hardship [state by state de�nition of undue hardship]), capacity issues (either party becomes legally mentally incapacitated), in certain bankruptcies, when the agency cannot be performed (destruction of the agency’s subject matter—selling a car, the car is destroyed in accident), unanticipated event or circumstance (hurricane), or changes in the law make the agency illegal (selling as an agent into a country where a new embargo is created).   And in order to terminate the agency relationship appropriate notice must be given in a reasonable amount of time, otherwise the terminating party who does not give notice may be liable to the nonterminating party for damages sustained maintaining the agency while the other party had abandoned it.  

“At-Will” Agency

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Generally, if an agency agreement does not have a set termination, then that agency is considered “at-will.” The rules regarding at-will agencies can vary state to state, but the typical rule as that either principal or agent can terminate the agency, for any reason or no reason, by providing proper notice to the other party. Either party may terminate the relationship for any reason because the law of agency holds that these relationships are voluntary. Naturally, the at-will agency concept has variations and depends on the type of agency created. Usually, the discussion surrounds the employer/employee agency relationship and thus the courts provide some exceptions to the at-will agency.   Termination against Public Policy: Courts may hold an employer liable for tortious discharge and allow the employee to get her old job back or receive damages when the termination (�ring) is against public policy and therefore unlawful. A typical example where an at-will termination is against public policy occurs when an employee is �red as retaliation for whistleblowing or exercising protected rights. If an at-will employee is �red for participation in organizing labor (union), then that is a violation of public policy whereby the employer may be held liable for damages to the terminated employee. See Christensen v. Grant County Hosp. Dist. No.1, 150 Wn.2d 1002, 77 P.3d 650, 2003 Wash. LEXIS 672 (2003) where the court held that a claim of wrongful discharge that violates public policy is di�erent than enforcing an employer/employee contract. This type of cause of action stems from the employer’s duty to treat its employees in accordance with public policy. So in these types of cases, the court is not concerned with enforcing the employee’s contract (although there may be a breach of contract claim by either party) but rather the public’ s interest in stopping employers from violation employees’ rights in a way deemed o�ensive to public policy.   Breach of Contract: As discussed in Chapter 9, an employer/employee agency relationship may be expressly formed by a contract—the contract may also be implied between the employer/employee. In many companies, the

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employee/employer contract is formed via the employee handbook, which creates an implied contract and forms the basis of the agreement between the parties. In instances where the employee is a senior or executive level employee, then employer and employee may have a written contract between the two parties that speci�cally outlines the relationship. If either party terminates that implied or express contract, then the breaching party will likely be liable to the other if written policies are not followed. This is typical breach of contract, which most states have a substantial legislative and court history outlining how these breaches of contract are handled.   Bad Faith Termination: When an employee is �red and the �ring is in bad faith, then the courts often treat the situation similarly to the violation of public policy. For example, in most states an employee handbook creates an implied contract between employer and employee. Most of these employee handbooks will speci�cally state that the relationship between employer and employee is at-will and that either party may terminate the relationship for any reason or no reason. However, if the actual reason for terminating the agency involves bad faith, then the court may rule in favor of the terminated employee. An example of bad faith termination may be getting rid of a long-term employee simply to replace the employee with a lower cost employee—without giving the current employee the opportunity to negotiate salary or providing some form of severance package. In other words, some states will impose a standard on the employer that the employer must have just cause for the termination. What just cause means has many variations from state to state.   Each state varies in its treatment of at-will laws by recognizing any of the above theories or a combination thereof. But the one overriding law that impacts the at- will doctrine in the every state is the 14th Amendment of the Constitution which makes it illegal to �re anyone based on race, color, religion, nation of origin, gender, and other various reasons protected by the civil rights laws in the country. If a court determines that an employee

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relationship is terminated in such a manner as to discriminate against one of the protected classes of people in the 14th Amendment, then it is likely that the employer will be liable for damages to the employee and may be even required to hire the employee back to the company.  

Agency Relationships The two main types of agency are the employee and independent contractor. The employee is described as someone who is under the control of the employer. The relationship is traditionally described as the master servant and one that is ongoing. Conversely, an independent contractor is hired to complete a project or a task for his principal, and the project usually has a very speci�c term. The independent contractor is not under the control and supervision of her employer.   In some instances, even though the principal and agent desire to create a relationship where the agent is an independent contractor, the parties must look at state law and the facts to determine what type of relationship has been created. For example, company’s like Walmart or FedEx desire that their long haul drivers are independent contractors. However, many states have labor laws that make those drivers employees by statute. Therefore, a contract between the principal and agent that calls for the relationship to be one of an independent contractor is over ruled by state law and imposes a master/servant or employer/employee relationship on the parties. Federal courts support this state contention when state legislatures call these relationships employer/employee. See Estrada v. FedEx Ground Package System, Inc. 154 Cal. App. 4th 1, 2007 Cal. App. LEXIS 1302 (2nd Dist. Div. 1 2007) and In re FedEx Ground Package System, Inc. 792 F.3d 818, 2015 U.S. App. LEXIS 11770 (7th Cir. 2015).   In both cases above, FedEx wanted the workers to be independent contractors to save money and reduce liability. FedEx saves money by not having to pay independent contractors bene�ts such as paid vacation or

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health insurance. FedEx also saves money by not having to match social security payments to the federal government on behalf of the employee as well as pay workers compensation, unemployment insurance, and other government mandated taxes on the employee payroll (see Figure 10.1). And principals are almost never liable for the physical acts of their agents/independent contractors and so in this instance with FedEx, if an independent contractor FedEx driver gets in an accident, then FedEx would most likely not be liable for the drivers actions and therefor would save on both liability insurance premiums and damages to the injured party.   To make it clear, FedEx put into all of its driver contracts that they were to be independent contractors. In California and Kansas, the courts said the contract terms with its workers were irrelevant because state law and thus public policy identi�es these types of drivers as employees and contracts cannot change the nature of this relationship. The federal district court in the Kansas upheld the Kansas court’s ruling of the same nature. Thus, it is important to understand the law in each state where the worker relationship is created because each state will have its own speci�c set of laws dealing with this very speci�c issue (Table 10.1).  

Table 10.1 Employee versus Independent Contractor.

  EMPLOYER/EMPLOYEE PRINCIPAL/INDEPENDECONTRACTOR

Respondeat superior liability

Yes No

Provide work tools

Yes No

Provide workplace/o�ce

Yes No

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  EMPLOYER/EMPLOYEE PRINCIPAL/INDEPENDECONTRACTOR

Withholding federal, state, local income

taxes

Yes Noa

Withhold social security/Medicare

Yes No

Provide bene�ts Yes No

Unemployment compensation

Yes No

Worker’s compensation

Yes Nob

Minimum wage and overtime

laws apply

Yes No

  aIndependent contractor receives a gross amount from employer, and then must report the income on the personal tax return and pay taxes directly. bSome states may require worker’s compensation payments under some conditions to independent contractors depending on activity.   Key factors to help determine if a hired worker is an employee or independent contractor may be found in the Internal Revenue Service code. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to self-employment tax. An attorney or accountant providing independent services to multiple clients is an obvious example of an independent contractor.

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  The following information can be found directly on the Internal Revenue Service web site and has been reformatted and edited for convenience. For speci�c language from the Code of Federal Regulations on the common law de�nition of employee and independent contractor, please see Title 26. Chapter I. Subchapter C. Part 31. Subpart B. Section 31.3121(d)-1. Common law facts that provide evidence of the degree of control and independence fall into three categories:   A. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Factors to review include the following:   Types of Instructions Given: An employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.

Time and place of work. Types of tools and equipment. What workers to hire or to assist with the work. Where to purchase supplies and services. What work must be performed by a speci�ed individual. What order or sequence to follow when performing the work.

  Degree of Instruction: Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions re�ects less control, indicating that the worker is more likely an independent contractor.   Evaluation System: If an evaluation system measures the details of how the work is performed, then these factors would point to an employee. If the evaluation system

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measures just the end result, then this can point to either an independent contractor or an employee.   Training: If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is an employee. Periodic or on- going training about procedures and methods is even stronger evidence of an employer–employee relationship. However, independent contractors ordinarily use their own methods.   B. Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job. The �nancial control factors fall into the categories of

Signi�cant investment Unreimbursed expenses Opportunity for pro�t or loss Services available to the market Method of payment

  Signi�cant Investment: An independent contractor often has a signi�cant investment in the equipment he or she uses in working for someone else. However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered employees. There are no precise dollar limits that must be met in order to have a signi�cant investment. Furthermore, a signi�cant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.   Unreimbursed Expenses: Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also

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incur unreimbursed expenses in connection with the services that they perform for their business.   Opportunity for Pro�t or Loss: The opportunity to make a pro�t or loss is another important factor. If a worker has a signi�cant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work). Having the possibility of incurring a loss indicates that the worker is an independent contractor.   Services Available to the Market: An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.   Method of Payment: An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. An independent contractor is usually paid by a �at fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.   C. Type of Relationship: Are there written contracts or employee type bene�ts (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.   The factors, for the type of relationship between two parties, generally fall into the categories of

Written contracts Employee bene�ts Permanency of the relationship Services provided as key activity of the business

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Written Contracts: Although a contract may state that the worker is an employee or an independent contractor, this is not su�cient to determine the worker’s status. The Internal Revenue Service is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self- employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.   Employee Bene�ts: Employee bene�ts include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not grant these bene�ts to independent contractors. However, the lack of these types of bene�ts does not necessarily mean the worker is an independent contractor.   Permanency of the Relationship: If you hire a worker with the expectation that the relationship will continue inde�nitely, rather than for a speci�c project or period, this is generally considered evidence that the intent was to create an employer–employee relationship.   Services Provided as Key Activity of the Business: If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities. For example, if a law �rm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer–employee relationship.   D. Liability for Incorrect Classi�cation of Employee as Independent Contractor: If a business treats an employee as an independent contractor and it has no reasonable basis for the treatment, then the company may be liable for employment taxes for that worker. Internal Revenue Code section 3509 provides more details regarding this liability. Further, the company may be liable for any injuries resulting from employees work for the employer during the scope of business.  In some

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instances, principals may be liable for the actions of its independent contractors under the following conditions:

a. The activity performed by the independent contractor is ultra-hazardous, like demolition work

b. Principal engages the independent contractor to do work that is illegal

c. Principal retains some right of control or supervision d. Principal knows that independent contractor is

doing something bad, wrong, or illegal and does nothing to stop him or adequately supervise

e. Principal negligently hires independent contractor, like hiring a driver who has three Driving Under the In�uence(s) and the driver gets drunk on the job and kills someone in an accident

  States are getting more and more aggressive about attaching liability to the hiring party when independent contractors cause damage or harm to third parties, which is a signi�cant break from precedent.  

DUTIES OF THE PARTIES The primary duty established by an agency relationship is for the agent to act in the best interest of the principal showing a good faith duty of loyalty and providing the principal the con�dence that agent is acting in her best interests. This is called a �duciary duty, which is applicable in many environments. For example, an attorney (agent) has a �duciary duty to her client (principal) and the attorney must act in the best interest of the client above all else. The �duciary duty applies to employees and independent contractor as well.   When the agent is engaged and acts within the scope of the agency on behalf of the principal, then the agent’s actions are the equivalent of principal’s actions. So the agent is held to a very high standard of conduct. The agent’s �duciary duty can be broken down into eight subcategories:

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A. Good Faith: Carry out the duties in a conscientious manner being transparent in all dealings and never gaining a pro�t at the principal’s expense.

B. Duty of Loyalty: Agent must protect principal’s best interest and not compete with the principal’s interest during the term of the agency.

C. Use Reasonable E�orts to Comply with Contracts: Agent must use commercially reasonable e�ort to ful�ll the obligations of the agreement with the principal. Commercially reasonable means follow the “industry standard” for performance.

D. Duty of Care: Agent must at all times try to minimize any losses or damages to its principal.

E. Duty to Follow Instructions That Are Lawful: Follow directions, unless unlawful or present unreasonable peril in executing the instructions.

F. Duty to Not Commingling of Funds: If the agent receives funds on behalf of principal then those funds should be turned over directly to the principal or if received into the agent’s account—the account should be a segregated escrow account. Lawyers for example must receive client’s funds to an escrow account in the client’s name and failure to do so and comingling occurs—the attorney is subject to disbarment.

G. Duty to Provide a Full and Accurate Financial Reporting Including Money Received: Agent must keep up to date and adequate �nancial records during engagement with principal.

H. Duty to Give Notice: Agent is required to disclose any material facts to principal upon discovery.

  Failure to abide by these �duciary requirements could lead to legal liability on the agent to the principal.   The principal conversely has duties to the agent as well. These duties are mainly spelled out contractually as there are very few if any common law duties by principal to agent except to abide by the terms of the agreement. The contract terms usually include duty of good faith, speci�ed compensation, reimbursing the agent for reasonable

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expenses and losses in carrying out the terms of the agreement, indemnifying agent for liability under the agreement, and the term of the agreement among other things. If the agent is an employee then the principal must provide the employee with a safe working environment, which is generally governed by the Occupational Safety and Health Act (OSHA). And if an employee is insured on the job, then the employee will be entitled to worker’s compensation.   If the agent or the principal breaches her duties as stated above, then the breaching party may be liable to the nonbreaching party for damages.   The case below addresses breach of �duciary duty by the agent to the principal and how this court disposes of such actions.   Case summary (with author edits) and sources provided courtesy of Lexis Nexis Academic.  

The Detroit Lions, Inc., a corporation and Billy Sims, Plainti�s, v. Jerry A. Argovitz, Individually and as President of the

Houston Gamblers, Inc., a corporation, et al., Defendants Civil No. 83CV5649DT

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF MICHIGAN, SOUTHERN DIVISION

580 F. Supp. 542; 1984 U.S. Dist. LEXIS 19582 February 10, 1984

  Citation: Detroit Lions, Inc. v. Argovitz, 580 F. Supp. 542, 1984 U.S. Dist. LEXIS 19582 (E.D. Mich. Feb. 10, 1984)   JUDGES: DeMascio OPINION BY: DeMASCIO (One judge means “trial court,” multiple judges means appellate court) OPINION  

MEMORANDUM OPINION (Edited for Publication)

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Billy Sims signed a contract with the Houston Gamblers on July 1983, and then signed a second contract with the Detroit Lions on December 1983. Shortly thereafter, the Lions and Sims �led a complaint in state court of Michigan seeking to void earlier contract between Sims and the Gamblers because the defendant Argovitz breached his �duciary duty to Sims when negotiating the Gamblers’ contract and because Argovits committed fraud and misrepresentation. (Plainti�’s �led original lawsuit in Michigan state court. Defendant removed the action to federal district court under diversity jurisdiction (why do you suspect?)). (See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 85 L. Ed. 1477, 61 S. Ct. 1020 [1941])   For the reasons that follow, we have concluded that Argovitz’s breach of his �duciary duty during negotiations for the Gamblers’ contract was so pronounced, so egregious, that to deny rescission would be unconscionable (The parties stipulated to Texas law —what does that mean?). In March 1983, Argovitz told Sims that he had applied for a Houston franchise in the newly formed United States Football League (USFL). In May 1983, Sims attended a press conference in Houston at which Argovitz announced that his application for a franchise had been approved. The evidence indicates that Sims had little to no idea of Argovitz’s �nancial interest in the Gamblers nor could the defendant expect Sims to comprehend the rami�cations of Argovitz’s interest in the Gamblers or that it would create an untenable con�ict of interest, a con�ict that would inevitably breach Argovitz’s

�duciary duty to Sims.4 Argovitz knew that he could not act as Sims’ agent under any circumstances when dealing with the Gamblers.   Even so, Argovitz continued his negotiations with the Lions on behalf of Sims while waiting approval of his Gamblers franchise application. On April 5, 1983, Argovitz o�ered Sims’ services to the Lions for $6 million over a four-year period. The Lions quickly responded with a counter o�er on April 7, 1983, in the face amount of $1.5 million over a �ve-year period. The negotiating process was working. The Lions were trying to determine what Argovitz really

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believed the market value for Sims really was. On May 3, 1983, with his Gamblers franchise assured, Argovitz signi�cantly reduced his o�er to the Lions. He now o�ered Sims to the Lions for $3 million over a four-year period,

one-half the amount of his April 5, 1983 o�er.5

  At this point, the negotiations between the Lions and Argovitz were progressing normally, not “laterally” as Argovitz represented to Sims. The Lions were not “dragging their feet.” The evidence establishes that at this point, the Lions and Argovitz were very close to reaching an agreement on the value of Sims’ services.   Regardless Argovitz decided to seek an o�er from the Gamblers. Bernard Lerner, one of Argovitz’s partners in the Gamblers agreed to negotiate a contract with Sims. In Argovitz’s words, Sims would make the Gamblers’ franchise and so its implied at the very least that Argovitz told Lerner what would be required to sign Sims.   Sims and his wife went to Houston to negotiate with a team that was partially owned by his own agent, and Sims’ believed the Lions was not negotiating in good faith and did not want his services based on his agent’s statements. All the information Sims had up to that date

came from Argovitz.6 Lerner o�ered Sims a $3.5 million �ve-year contract, which included three years of skill and injury guarantees among other things.   Burrough testi�ed that Sims would have accepted that o�er on the spot because he was �nally receiving the guarantee that he had been requesting from the Lions, guarantees that Argovitz dropped without too much quarrel. Argovitz and Burrough took Sims and his wife into another room to discuss the o�er. Argovitz did tell Sims that he thought the Lions would match the Gamblers �nancial package and asked Sims whether Argovitz should telephone the Lions. But, it is clear from the evidence that neither Sims nor Burrough believed that the Lions would match the o�er. We �nd that Sims told Argovitz not to call the Lions because Sims believed the Lions’ organization disrespected him, a feeling that was facilitated and clearly

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known by Argovitz. When Sims went back to Lerner’s o�ce, he agreed to become a Gambler on the terms o�ered. At that moment, Argovitz irreparably breached his �duciary duty. As agent for Sims he had the duty to telephone the Lions, receive its �nal o�er, and present the terms of both o�ers to Sims. Then and only then could it be said that Sims made an intelligent and knowing decision to accept the Gamblers’ o�er. And at the very least, Argovitz should have received a call from the Lions to hear their �nal o�er but did not do that either. And when he declined to accept the Lion’s call, Argovitz’s

breached his �duciary duty even further.7

  Two expert witnesses testi�ed that an agent should telephone a team that he has been negotiating with once he has an o�er in hand and that this is the most important factor in negotiations. The evidence here convinces us that Argovitz’s negotiations with the Lions were ongoing and it had not made its �nal o�er and it was Argovitz duty to receive the �nal o�er from the Lions. Argovitz did not want to follow through with this �duciary duty because he did not want to risk losing Billy Sims to the Lions because he was an owner in the Gamblers.   Other factors showing Argovitz knowing breach of �duciary duty to Sims was on display when Argovitz asked Sims to sign certain papers including a waiver of any claim that Sims might have against Argovitz for his blatant breach of his �duciary duty brought on by his glaring con�ict of interest without giving an unsophisticated Sims the opportunity to have an attorney review the paperwork. In spite of his �duciary relationship, he had Sims sign a waiver without advising him to obtain independent counseling.   The court concludes that Argovitz’s breach of his �duciary duty was so egregious that a court of equity cannot permit him to bene�t by his own wrongful breach. We conclude that Argovitz’s conduct in negotiating Sims’ contract with the Gamblers rendered it invalid.  

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CONCLUSIONS OF LAW (SUMMARIZED) The self-interest of the agent is considered a vice which renders the transaction voidable at the election of the principal without looking into the matter further than to ascertain that the interest of the agent exists. Once it has been shown that an agent had an interest in a transaction involving his principal antagonistic to the principal’s interest, fraud on the part of the agent is presumed. The burden of proof then rests upon the agent to show that his principal had full knowledge, not only of the fact that the agent was interested, but also of every material fact known to the agent, which might a�ect the principal and that having such knowledge, the principal freely consented to the transaction. It is not su�cient for the agent merely to inform the principal that he has an interest that con�icts with the principal’s interest. Rather, he must inform the principal “of all facts that come to his knowledge that are or may be material or which might a�ect his principal’s rights or interests or in�uence the action he takes.” Anderson v. Gri�th, 501 S.W. 2d 695, 700 (Tex. Civ. App. 1973). Argovitz clearly had a personal interest in signing Sims with the Gamblers that was adverse to Sims’ interest—he had an ownership interest in the Gamblers and thus would pro�t if the Gamblers were pro�table, and would incur substantial personal liabilities should the Gamblers not be �nancially successful. Since this showing has been made, fraud on Argovitz’s part is presumed, and the Gamblers’ contract must be rescinded unless Argovitz has shown by a preponderance of the evidence that he informed Sims of every material fact that might have in�uenced Sims’ decision whether or not to sign the Gamblers’ contract, which he did not. Important facts to disclose to eliminate the breach of the �duciary duty requirement:

Disclose the relative values of the Gamblers’ contract and the Lions’ o�er that Argovitz knew could be obtained. Disclose the signi�cant �nancial di�erences between the USFL and the National Football League (NFL) not only in terms of the relative �nancial stability of the

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Leagues, but also in terms of the fringe bene�ts available to Sims. Disclose the agent’s 29% ownership in the Gamblers; disclose Argovitz’s $275,000 annual salary with the Gamblers; disclose Argovitz’s 5% interest in the cash �ow of the Gamblers. Disclose that Argovitz and Burrough failed to even attempt to obtain for Sims valuable contract clauses, which they had given to other clients from the Gamblers. Disclose that Sims had great leverage to get a better deal, and that Argovitz could get a bidding war that could have advantageous results for Sims. Under Texas law, Sims can walk from the Gamblers deal because the above were not provided and Sims was NOT aware of the material facts and nondisclosures outlined above. The defenses claim of rati�cation and waiver must be rejected because of above. Defendants asserted defenses of estoppel and latches are also without merit. Rescission is the appropriate remedy because of Argovitz’s egregious and careless conduct which serves as a reminder of the wisdom of the maxim: no man can faithfully serve two masters whose interests are in con�ict.

  Judgment will be entered for the plainti�s rescinding the Gamblers’ contract with Sims.   IT IS SO ORDERED   What can be learned from the case above? Simple: An agent that receives any bene�t whatsoever from her engagement on behalf of the principal where the principal is unaware of the agent’s bene�t, then the agent could be accused of a breach of �duciary duty, con�ict of interest, breach of duty of loyalty or and fraud.    

LIABILITY

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A legal question that often arises in agency law relates to which party, principal, or agent, is liable to the other or third parties for activities engaged in by the agent on behalf of the principal. Three areas of liability, which create the most legal tra�c involve contracts, torts, and injuries on the job.  

Contract Liability In general, agents can negotiate and sign contracts on behalf of principals. For a simple example, an employee with authority negotiates a contract with a third party on behalf of her employer and then she signs the agreement after it is negotiated. This act by the agent does not come into question, generally, unless either party is unhappy with the agreement or cannot perform the contract as negotiated and a breach of contract occurs. The law does not create much distinction between the employee/agent or the independent contractor/agent in these contractual issues as the employee and independent contractor are treated similarly.   To determine whether the principal or and agent has liability for a contract two issues must be resolved. First, one must determine the type of principal in the transaction. And second, one must determine the type of authority that the agent holds. After making these two determinations, then one can determine which party, principal, or agent, has liability for the contract.   First, three types of the principal de�nitions exist. The agent represents the principal and so the principal type is relevant to the third parties rights or the agent’s liability. The types of principals can be one of the following: (1) Disclosed Principal, (2) Undisclosed Principal, or (3) Unidenti�ed Principal.   When the agent discloses the principal (disclosed principal) and if the third party is fully aware that the agent represents the principal, then the agent is generally not personally liable under the contract to the third party. (Please note: when the agent signs a contract on behalf of

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the principal, then the agent should clearly mark the contract when signing that she is acting as an agent for the principal. Example: By: Vice President, ABC, Inc.) Exception to this general rule: if the agent misrepresents her capacity and does not have the authority to enter into agreements on behalf of the principal, then the agent could be personally liable for the contract under breach of warrant of authority claim. When anyone signs a contract, common law often dictates that the signer is also attesting that she has the authority to sign the contract, and thus if she does not have the proper authority to sign the contract—it is a breach of warranty. Also, if the agent intends to be bound personally by the terms of the contract, then the agent may be bound to the third party. This may occur when the agent gives assurances, such as “I’m sure I can get this done for you, I guarantee it . . . ” In that instance, the agent is opening herself up to a “warranty” in which she may be personally liable on the contract if the principal cannot deliver. The principal may also be liable as well.   An undisclosed principal is completely unknown to the third party at the time the contract is signed. A principal may seek to remain undisclosed so that she may negotiate a fair or reasonable market price on a transaction or hide participation in an investment or simply to provide an anonymous donation to a charity by using an agent. An undisclosed principal is not uncommon. For example, a wealthy individual seeking to acquire property might use an agent to purchase the property to get the best price on the property or to avoid disclosure of her ownership. In such an instance, if the undisclosed principal fails to ful�ll the contract that the agent has signed, and there is no reason for the third party to believe that there is an undisclosed principal, then the agent would be liable to the third party for breach of contract.   The law also provides the third party the ability to sue the undisclosed principal if that undisclosed principal is later disclosed. The agent also has the right to sue the principal for breach of contract, too.

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  Conversely, the agent may sue the third party for breach of contract as well, and if the contract is assignable, then the undisclosed principal will also have the right to sue the third party.   And unidenti�ed principal is treated slightly di�erent by the law than its predecessor the undisclosed principal. In this case, the third party that signs the contract with the agent is fully aware the agent represents a principal, but the principal’s identity is unknown to the third party. Agent is liable to the third party for a breach of contract. If the principal is later identi�ed, then the principal shall be liable to the third party as well. Both the agent and the principal can sue the third party for a breach of contract.   In instances where the agent represents the unidenti�ed principal, the agent should seek an indemnity from both the principal and third party in the contracts to protect herself in the event that the unidenti�ed principal elects to breach the contract.   The second issue in breach of contract cases involving principal and agents is whether or not the agent has exercised her proper authority or had the proper type of authority in negotiating and executing the contract. In the event that agent does not have the authority to enter into the contract, then the principal will not be liable for the contract. The court will examine the facts to determine if the agent had any of the types of authority that would demand that the principal honor the contract or be liable for a breach of contract.   Actual Authority is the authority the principal actually grants to the agent, and actual authority is broken down into speci�c categories. For example, a principal may grant an agent express authority prior to the agent’s action to perform a speci�c task like “buy that car at auction.” This type of authority can usually be verbally given but in some instances, like transactions involving real estate, must be in writing. In cases where express authority is granted by the principal to the agent, the agent is usually not liable

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for a negative result so long as the agent only exercises the express authority granted.

  Incidental Authority is not as speci�c as express authority and many of the agent’s tasks to achieve the stated goal may not be literally de�ned. For example, the principal may tell the agent to “build me a house.” To build a house requires a lot of steps including, for example, hiring an architect to design the house. So in this instance, the agent would have incidental authority to hire an architect even though the agent’s authority is to speci�cally “build me a house” not “hire an architect.”   An agent may also have implied authority. Implied authority is often based on the agent’s position such as a Vice President of Purchasing whose job title implies that the agent has the authority to purchase goods and services for her principal. This is fairly common in master servant relationships. Even so, the agent should sign every contract with the job title so as to assure herself of removing personal liability from the transaction.   Apparent Authority happens when a principal acts in such a way that it seems like an agent exists when the agent may not exist. If a principal recklessly or intentionally leads a third party to reasonably believe that an agency relationship exist with a person, and then the third party relies on the principal’s actions to her detriment, then the principal will be liable for actions of the person. So when an employer says “this is my go to guy” to a third party, then the employer may be giving apparent authority to the employee, even though it might be a junior associate with no authority at all.   This may also happen when an employer or principal �res and employee or agent and does not notify third parties of the termination. If the former employee/agent communicates with third parties acting as an employee/agent for the employer/principal, then the principal could be liable to the third party for the actions of the terminated agent. Thus, it is always important to

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give notice to third parties when an employee/agents has been terminated to avoid such a complication.   Agency by Estoppel or Estoppel Agency occurs when an individual acts like an agent for a principal with principal’s knowledge. But, the principal does nothing to stop the person from acting like an agent for principal. If the agent does something to harm a third party, then the principal may not (estopped) claim that the person was not her agent. The principal is liable.   Principals may after the fact accept the agent’s actions and be bound by such actions even though the agent lacked the authority to act on behalf of the principal. In this instance, the principal rati�es the agent’s actions and thus the agent has rati�cation authority.   Emergency Authority occurs in (1) an emergency situation and (2) the agent does not have the time or cannot reach the principal for a response or advice. If the action by the agent is reasonable, then the principal will be liable for the agent’s actions. This generally only occurs in master servant relationships.   And as an aside, if a breach of contract occurs, then the principal will be deemed to know everything the agent knew, even if the principal did not in fact know. This is called imputing knowledge to the principal, so principal beware.   So when an agent enters into contracts with third parties —employee with a customer, for example, the court would ask the following questions to determine who is liable for the contract with the third party:

Is there a principal agent relationship, mainly was the agent acting on behalf of the principal? Did the agent sign a contract on behalf of principal or make any promises that might be enforceable against the principal? Did the agent act based on the authority granted by principal?

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What type of authority did the agent actually have? Based on the above, is the agent liable for the contract or the principal?

  Proof of Agency—Contract: Many principal agent relationships are evidenced by a written contract, often times in the form of an employee handbook where the employee signs an acknowledgment that she agrees to the terms in the handbook. These types of handbooks or agreements usually include some form of non-compete agreement whereby if the relationship is terminated, then the agent cannot compete against the principal for a period of time in a speci�c geographic region. Many jurisdictions will protect this restraint so long as the period of time is reasonable and the geographic region is reasonable in size. So for most people, a two- to three- year non-compete restriction for a 50- to 100-mile radius would be reasonable and likely enforceable. Any restrictions that go beyond that time and distance would probably be considered an unreasonable restraint, against public policy and therefore void. Every state is di�erent in treatment of non-competes and the factual circumstances largely determine the strength of the non-compete. A non- compete for a high level employee is usually enforceable regardless of time and geographic restrictions because high-level employees will be paid to agree to the non- compete. Also, non-competes against employees that have access to trade secrets are usually upheld too even when the time and geographic restrictions are signi�cant because of the risk to the company.  

Tort Liability Agents operate in the real world on behalf of the principal. Agents that enter into contracts on behalf of the principal are usually planned and controlled by a process. On the other hand, when an agent commits a tort while working on behalf of the principal, a third party will su�er and injury or harm and a �nancial liability will attach to either the agent or principal for that harm su�ered by the third party. This section examines who is liable for damages

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caused by the agent’s action while engaged by the principal.   Vicarious Liability is when the courts will assign responsibility for the damages caused by another person. Employers may be assigned responsibility for the harm or damages caused by their employees under the legal theory of respondeat superior. Under this theory, the employer must pay for the harm caused by its employee during the course and scope of the employee’s job. As a legal student, the de�nition of “course and scope of employee’s job” provides an opportunity to explore the common legal refrain to how to answer a legal question: it depends. Courts and juries alike have di�culty in determining what those words mean.   Please note: in these instances where an employee commits a tort—the employee is also liable for the tort. If the employee commits the tort while in the course and scope of employee’s job, then both the employee and employer are responsible—and this as one may recall is called “joint and several liability” where both parties are responsible for the full amount of damages to the extent that the harmed third party may recover 100% of her damages. And if the employer pays for the damages, then the employer is entitled to repayment from the employee, which is called indemni�cation.   The legal theory justifying respondeat superior where the employer is liable for the employee’s harm to third parties centers on the employer’s control over the employee. Otherwise, respondeat superior would also apply in cases where independent contractor’s harm third parties. But principals are not liable for the torts of independent contractors except when independent contractors are hired to perform ultra-hazardous work like demolitions. Or, if the independent contractor was negligently hired like when a long haul truck driver with a long history of driving under the in�uence is hired to perform contract- based deliveries—and then the driver gets in a work- related accident while drunk.  

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Making the employer liable for the acts of the employee puts the onus on the employer to hire employees who have been properly screened while also ensuring legally su�cient employee supervision and training. Further, the employer is the �nancial bene�ciary of the employee’s actions and thus should bear the cost burden too of those actions. Frankly, the remedy for the employer is to purchase appropriate insurance that would cover and employee harm to third parties.   In order for the employer to be liable for the employee’s acts, however, the third party bears the burden of proving that the injury occurred within the course and scope of the employee’s employment. Case law that provides precedent determining what “course and scope” means provides a laundry list of facts for the jury to consider when making that determination:

Time and place of harm as a result of employee’s actions? Did the harm occur during normal work hours on at the employer’s place of business? Was the harm caused by an act of the employee, which she normally does on the job? Do all such employees with this job perform this act? Was the employee’s action at service to the employer? Does employer expect this type of act out of employee? Was use of force required by employee against the third party and would the employer expect the use of force? Did employee cause harm to third party with a tool or “instrumentality” provided by employer? Was the employee act an intentional tort or even worse a serious crime?

  The employer has defenses to this liability of course, but employer cannot avoid liability simply by telling an employee not to do something and an employer can also be held liable when an employee fails to act, if action is required.

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  Employers will generally not be held liable under respondeat superior for intentional torts committed by their employees but are more likely to be held liable for the negligent acts of their employees. An employer is never liable under respondeat superior for the criminal acts of their employees.   Direct Liability occurs when employers are held directly liable for the actions of employees as opposed to vicariously liable under respondeat superior. Direct liability usually occurs under the following circumstances. (1) The employer instructs the employee to commit the act, (2) the employer does not properly supervise the employee, and (3) the employer negligently hired the employee.   For example, if the employer instructs the employee to act and that act is criminal, then the employer may be liable for that crime directly or as a coconspirator. Further, if an employee is drinking on the job and harms a coworker due to drunkenness, then the employer will be liable for failure to properly supervise the employee during work for letting her drink on the job. Also, if an employer is negligent in hiring an employee, then the employer will be held directly liable for the employee’s acts. So, if an employee with a violent criminal record is hired and that employee physically assaults someone while at work, then the employer will be liable because he should not have hired an employee prone to violence because this outcome could be foreseen and avoided.   To determine liability for the impact of employee’s actions and whether liability be imposed on the employer, the following questions should be considered: (1) Was the employee acting as an employee for employer, (2) Did the employee actually commit a tort, (3) Was the employee within the course and scope of the job, and (4) Who is entitled to indemni�cation the employee or employer from the other?  

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The employer does have several defenses to vicarious and direct liability created by an employee’s actions, mainly that the employee’s acts did not occur during the course and scope of employment. In extreme cases, the employer may argue that employee’s actions were so outside the range of normal behavior that the

behavior was not foreseeable.8 When an act is not foreseeable, then negligence cannot attach to the employer as foreseeability is an element of negligence. And lastly, if an employee is on what the industry deems a “frolic,” essentially abandoning the course and scope of work, then the employer should not be liable because the employer was not in control of the employee at the time the harm occurred.   On the job injuries to the employee or his coworkers by employee actions are the last area of concern for the employer. The employer is responsible for providing a safe workplace including proper equipment and equipment maintenance where required. In the case where work conditions are not safe, then the employer has the responsibility to warn her employees of any danger. Many states have enacted worker safety rules through OSHA. Employers have used common law in some states to defend against worker injury such as employee negligence (driving too fast in a storm), and these defenses rely on the general theories of assumption of the risk, contributory negligence, or comparative negligence.   In the case of an employee injuring another employee— most states hold that the employer is not liable for such injury but it depends on the state and the speci�c facts surrounding the injury.  

CHAPTER SUMMARY Agency involves the work relationship between two parties and how that work relationship may impact third parties. An agency may be an employer and employee relationship, which in legal terms is called the master servant relationship. Or, the principal and agent

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relationship may be one where the agent is an independent contractor working on a speci�c project for a speci�c period of time. In either instance, the principal has di�erent obligations to the employee or independent contractor and may be liable for the actions of either the employee or independent contract depending on the circumstances and the state where the work is being performed.  

Footnotes

1.  . . . within the scope of employment. 2. She was essentially an hourly cashier which included

ringing up merchandise, renting videos, and making small appliance sells . . . But did not include driving to get cookies.

3. The court held that the accident—tort—occurred outside of the scope of employment. The employee was thus acting in an individual capacity and not as an agent for the company. Accordingly the company was held not liable.

4. The relationship between a principal and agent is �duciary in nature, and as such imposes a duty of loyalty, good faith, and fair and honest dealing on the agent. Anderson v. Gri�th, 501 S.W. 2d 695, 700 (Tex. Civ. App. 1973).

5. A �duciary relationship arises not only from a formal principal–agent relationship, but also from informal relationships of trust Adickes v. Andreoli, 600 S.W. 2d 939, 945-46 (Tex. Civ. App. 1980).

6. An agent’s duty of loyalty requires that he not have a personal stake that con�icts with the principal’s interest in a transaction in which he represents his principal. As stated in Burleson v. Earnest, 153 S.W. 2d 869 (Tex. Civ. App. 1941): (The) principal is entitled to the best e�orts and unbiased judgment of his agent . . .  (cannot be both buyer and seller at the same time nor connect his own interests with property involved in his dealings as an agent for another).

7. Where an agent has an interest adverse to that of his principal in a transaction in which he purports to

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act on behalf of his principal, the transaction is voidable by the principal unless the agent disclosed all material facts within the agent’s knowledge that might a�ect the principal’s judgment. Burleson v. Earnest, 153 S.W. 2d at 874-75.

8. Byrd v. Faber, 57 Ohio St. 3d 56, 565 N.E.2d 584, 1991 Ohio LEXIS 32, 5 A.L.R.5th 1115 (Jan. 16, 1991) held that a church may be held liable under the doctrine of respondeat superior for nonconsensual sexual conduct between a pastor and a parishioner only if the injured party alleges facts indicating that the employee had a past history of criminal or tortious conduct about which the employer knew or should have known.