ACCT 352

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Chapter 33

Agency Liability and Termination

Acct352 Sections 012, 015, 017

SPRING 2021 Clarkson/Miller, Business Law: Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Clarkson/Miller, Business Law: Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§1: LEARNING OBJECTIVES

• Describe how agency relationship is terminated

• Describe the duty of loyalty agents owe to principals

• Describe the principal’s liability to third parties for tortious conduct of agent and independent contractors

• Describe the agent’s liability to third parties stemming from breach of contract

• Describe how independent contractor status is created

• Describe the principal’s liability for the tortious conduct of an independent contractor

• Describe the principal’s liability for the contracts created by an independent contractor

§2: Liability of Agent to Principal

Agents owe to their principals a duty of loyalty. This is a fiduciary duty to not act adversely to the interests of the principal

• An agent acts adversely to the interests of her principal when she does any of the following • Self-dealing • Usurps an opportunity of the principal • Competes with the principal • Misuses the principal’s confidential information • Dual agency

• A breach of the duty of loyalty results in the agent’s liability to the principal for any resulting damages

§2: Liability of Agent to Principal – Agent's Breach of Duty of Loyalty

Self-dealing - Action taken by the agent that is done for the benefit of the agent instead of the benefit of the principal

• No breach of duty of loyalty if self-interest is disclosed

• In cases involving self-dealing the principal can elect to rescind or ratify the agent’s action • Example: Mary is an agent for real estate deals for her principal Jane, a land

developer. Mary and her husband own property in Dover, Delaware that Mary sells to Jane without disclosing Mary’s ownership = self-dealing? • Bottom Line: Agent is not supposed to personally benefit from a transaction done on

behalf of the principal. Agent, of course, is paid by the principal for the agent’s efforts on behalf of the principal, but the agent should not directly profit from the transaction, unless principal approves

§2: Liability of Agent to Principal – Agent's Breach of Duty of Loyalty

Usurping an opportunity - taking a business opportunity intended for the principal • No breach if the agent takes the business opportunity after the principal rejects it after the

agent’s full disclosure of the opportunity to the principal • Example: Mary is an agent who searches nationwide for real estate deals for her principal

Jane, a land developer. Mary learns of property available at a site where a mall will soon be built. Mary purchases the land for Mary and her husband Jim without informing Jane = usurping an opportunity?

• What if Mary tells Jane about the property but not the mall and Jane refuses to buy property and Mary buys it?

Competing with principal - Agent acts as an agent for someone engaged in, or agent personally does business in, a line of work that competes with the principal’s

• Example: Mary is an agent for real estate deals for her principal Jane, a land developer. Mary is also an agent for Sally, another land developer. And, Mary and her husband Jim are also land developers = competing with principal?

§2: Liability of Agent to Principal – Agent's Breach of Duty of Loyalty

Misuse of confidential information - Agent discloses to third-party, or uses for her own benefit, information about the principal’s business (such as trade secrets, customer lists, business plans)

• No breach if agent uses skills and knowledge acquired independently by agent • Example: Mary discloses to third party Jane’s plan to buy vacant property near a soon

to be built mall = misuse of information?

Dual agency - Agent acts as an agent for two unrelated principals in the same transaction • Not a breach of duty of loyalty if dual agency is disclosed and everyone involved in the

transaction agrees to it • Example: Mary is an agent purchasing land for Jane, a land developer. In the same

transaction Mary is selling agent for the owner of the property = dual agency?

§3: Contract Liability of Principals and Agents to Third Parties

Liability of Principals on Contracts Entered Into by Agents

• If principal authorizes agent to enter into a contract with third party, the principal is always ultimately liable to the third party on the contract because the agent had actual (expressed or implied) authority.

• So if an agent is sued by a third party for a breach of a contract that the agent entered into with the third party on behalf of the principal, the agent might be required to pay the third party, but the agent will receive reimbursement from the principal because the principal is ultimately liable for the contracts the principal authorizes the agent to enter into

• Example: Principal refuses to pay for the house that principal authorized agent to purchase. If seller sues agent and wins, agent can obtain reimbursement from principal because the principal is always ultimately liable on an authorized contract

§3: Contract Liability of Principals and Agents to Third Parties

Liability of Principals on Contracts Entered Into by Agents

• If principal does not authorize agent to enter into a contract with third party, only the agent is liable to the third party

• The principal is not liable. Only the agent is liable • Example: Principal refuses to pay for the house that principal did not authorize agent

to purchase. If seller sues principal seller will lose because only the agent is ultimately liable when the contract is unauthorized

• If principal does not authorize agent to enter into a contract with third party, the principal (and agent) would be liable to third party if agent had apparent authority, but principal can receive indemnification from agent (reimbursement for any payments principal is required to make to third party)

• Example: If seller sues principal and wins because the court determines the agent acted under apparent authority, the principal can obtain reimbursement from agent because only agent is ultimately liable on an unauthorized contract

§3: Liability of Agents Contracts That are Authorized by Principal

If a principal authorizes an agent to enter into a contract with a third party on behalf of principal:

• Agent is not liable when the agency is FULLY DISCLOSED.

• Fully Disclosed Agency means the third party knows, through the principal, agent, or some other source:

• That agent is acting for a principal • Actual identity of the principal • Agent is liable only if she guarantees that the principal will perform the contract.

• But agent can obtain reimbursement (indemnification) from principal • To clearly establish agency, agent should sign the contract in a way that conveys

agent/principal relationship (e.g., “Mary agent for Jane”)

§3: Liability of Agents Contracts That are Authorized by Principal (Cont.)

If a principal authorizes an agent to enter into a contract with a third party on behalf of principal • Agent (and principal) are liable to the third party for principal’s breach of the

contract if agency is Partially Disclosed or Undisclosed • Partially Disclosed means the third party:

• Knows that agent is acting for a principal • But does not know the identity of the principal

• Undisclosed Agency means third party is unaware of: • Existence of an agency • Identity of principal

• Example: Principal refuses to pay for the house that principal authorized partially disclosed or undisclosed agent to purchase. If home seller sues agent, seller will win. Agent can obtain reimbursement from principal

§4: Liability of Agents Contracts That are NOT Authorized by Principal

As noted previously, the agent is ultimately liable when the agent enters into an unauthorized contract. • Beach of Implied warranty of authority - The legal theory under which a third party would sue

an agent who enters into an unauthorized contract • An agent who enters into a contract on behalf of another party warrants to third party that

she has the authority to do so. An agent breaches that implied warranty of authority if she enters into a contract that is not authorized by the principal

• This is a breach of the implied warranty of authority NOT breach of contract • Agent, alone, is liable for breaching the implied warranty of authority

• The principal is liable only if she ratifies the contract. That is, the principal accepts the agent’s unauthorized contract • Example: Mary is authorized by Jane to find land deals in the US. Mary travels to Australia because she

learns of a potentially very lucrative opportunity for Jane. She travels without obtaining Jane’s approval to seek business in foreign countries. Mary fully discloses her agency to an Australian land owner and thereafter signs a contract to purchase land located in Australia from that person. Does Jane have to perform this contract?

§5: Tort Liability of Principals and Agents to Third Parties

Principal and agent are each individually and personally liable for their own tortious conduct

• When is Principal liable to Third Parties for Tortious acts of Agent? • Principal is liable for tortious conduct of agent when agent is acting

within the scope of authority (scope of employment)

• When is Agent liable to third parties for Tortious acts of Principal? • Agent is liable for tortious conduct of principal only if agent directly or

indirectly, aids and abets the principal’s conduct

§5: Principal's Liability for Agent's Tort (Cont.)

Why is the Principal Liable for Tortious Conduct of Agent: Respondeat Superior

• Respondeat Superior: Principals are liable for negligent conduct of agents acting within the scope of the agent’s employment

• Respondeat superior (“let the master answer"), is based on the theory of vicarious liability which states that liability should run to any person (master) who had the ability and duty to control the actions of the servant (agent)

• So respondeat superior is a form of strict liability because it is akin to liability without fault. That is, the principal did not do anything wrong, the agent did, but the principal is liable by virtue of the principal’s control of the agent through their contractual (agent/principal) relationship.

• Rationale: Principal controls the agent's behavior and should assume responsibility for the agent's actions. Moreover, if the principal benefits through the agent, the principal should be liable through, and bear the cost of, agent’s negligence

§5: Principal's Liability for Agent's Tort (Cont.)

What Work is Within an Agent’s Scope of Employment (or scope of authority)? - any work that is expressly authorized by the principal or that can be implied because it is customarily connected with or reasonably necessary for the performance of the authorized work and is done for the benefit of the principal

• In other words, any work within the agent’s express or implied authority • Example #1: Mary crashes into another car while driving to meet the owner of land

the principal is interested in purchasing = Who is liable to the injured person? • Example #2: Mary is authorized by Jane to locate land for development in the US.

Mary travels to Australia because she learns of a potentially very lucrative opportunity for Jane. She travels without obtaining Jane’s approval to seek business in foreign countries. Mary injures a person while driving her rental car in Australia = Who is liable to injured party?

§5: Principal's Liability for Agent's Tort (Cont.)

When is an Agent not Acting Within the Scope of the Agent’s Employment?

• Frolic vs. Detour • Frolic- agent briefly but substantially strays from authorized activities to

engage in fun/entertaining personal activities such that she can be said to be engaged in conduct that is completely unrelated to the authorized work

• Example: Mary, while scouting land deals for Jane in NY, stops at a museum to browse its art collection. She accidentally destroys artwork = Negligence for whom?

• Detour - agent briefly but insubstantially strays from authorized activities to tend to a personal matter

• Agent is always personally liable during frolic and during detour • Principal is liable for detour NOT frolic

• Example: Mary, while scouting land deals for Jane in NY, stops at a museum to use the bathroom and eat lunch in its cafeteria. While there she accidentally destroys causes a fire = Negligence for whom?

§5: Principal's Liability for Agent's Tort (Cont.)

Coming and Going - principal is not liable for tortious acts committed by agent on the way to work from home and from work to home, even if the means of transportation and related expenses are provided for and paid by the principal

• The agent has not "clocked in" or has “clocked out” so such conduct is not within the scope of employment”

• But principal is liable if employee is on a "dual purpose mission." That is, agent is detouring from "home trip" to run an errand for principal • Example #1: Mary on her way home from work negligently injured Tom in a car

accident = liability for whom? • Example #2: Mary on her way home is asked by Jane to stop at Bloomingdale’s

to pick up Jane’s mink coat. Mary negligently injures Tom in a car accident = liability for whom?

§5: Principal's Liability for Agent's Tort (Cont.)

Agent’s conduct Agent liable Principal liable

Frolic Yes No

Detour Yes Yes

Coming and going rule Yes No

Dual-purpose mission Yes Yes

§6: Liability of Principal for Torts of Independent Contractor

Independent contractors - outsiders employed by principals to perform tasks on the principal's behalf and over whom the principal has no control

• Independent contractors are personally liable for their own TORTS

• A principal is not generally liable for the torts of its independent contractors because the principal has no control over the independent contractor. Why? Because there is no master servant relationship (so no control) to create respondeat superior liability

• It is the level of control the principal exerts over the independent contractor that determines the principal’s liability. Even if an independent contractor is referred to as such, if the principal controls the time, manner and method of the independent contractor's work, then the independent contractor might be deemed to be an employee and the principal is liable • Is there a way the person who hired the independent contractor could be found liable even if the IC is not

deemed to be an employee? Answer = no. Principal is never liable for the torts of IC! Because there is no master servant relationship (so no control) to create respondeat superior liability

§7: Liability of Principal for Contracts entered into by Independent Contractors

A principal is not liable on a CONTRACT an independent contractor enters into with a third party UNLESS the principal expressly or impliedly authorizes the independent contractor to enter into the contract

• If the principal does provide such authorization, the rules we have discussed regarding contracts authorized by the principal will apply

§8: Termination of Agency by Act of Parties Agency can be terminated by the following acts

•Mutual agreement of the parties

•If a time stated in the contract has lapsed • Example: Page lists her property for sale with Alex, a real estate agent, for six

months. The agency ends when that six month period ends

•If a specified purpose is achieved • Example: Calvin, a cattle rancher, hires Abe as his agent in the purchase of

fifty breeding stock. The agency ends when the cattle have been purchased

•Occurrence of a stated event • Example: Meredith appoints Allen to handle her business affairs while she is

away on vacation. The agency terminates when Meredith returns

§8: Termination of Agency by Act of Parties – Notice of Termination

Notice of Termination of Agency – Principal must provide

• Direct notice – to persons who have dealt with agent

• Constructive notice – to persons aware of agency but who have not dealt with the agent • Constructive notice is, for example, placement of a notice in a

newspaper of general circulation in the place where agent does business or in a place that is reasonably likely to inform third parties, such as posting the notice in public places or on websites likely to be visited by relevant third parties.

• Example of a Public Notice Section of a Newspaper • Notice is not required if a third party is unaware of the agency

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Slide 1
§1: LEARNING OBJECTIVES
§2: Liability of Agent to Principal
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Slide 5
Slide 6
Slide 7
Slide 8
Slide 9
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Slide 11
§5: Tort Liability of Principals and Agents to Third Parties
§5: Principal's Liability for Agent's Tort (Cont.)
§5: Principal's Liability for Agent's Tort (Cont.)
§5: Principal's Liability for Agent's Tort (Cont.)
§5: Principal's Liability for Agent's Tort (Cont.)
§5: Principal's Liability for Agent's Tort (Cont.)
§6: Liability of Principal for Torts of Independent Contractor
Slide 19
§8: Termination of Agency by Act of Parties
Slide 21