Who is able to complete this assignment?

Course Text: Langvardt, A. W., Barnes, A. J., Prenkert, J. D., McCrory, M. A., & Perry, J. E. (2019).  Business law: The ethical, global, and e-commerce environment (17th ed.). Retrieved from https://www.vitalsource.com 

Chapter 36

CHAPTER 36

THIRD-PARTY RELATIONS OF THE PRINCIPAL AND THE AGENT

You are vice president of acquisitions for a medium-sized consumer food products company, Bon Vivant Foods Inc. The company’s board of directors has given you authority to negotiate acquisitions of consumer food brands on behalf of Bon Vivant. The board has told you in written and oral instructions that you have the power to acquire any consumer products brand if the acquisition price is not greater than $30,000,000, which is the authority typically held by most vice presidents of acquisitions for businesses like yours. The board’s written instructions also indicate, however, that you have no authority to purchase or negotiate the purchase of a cola drink brand. Others in your position in the consumer food industry typically have authority to purchase a cola drink brand for their companies. The board also tells you that the company wants to buy the Eddie’s ice cream brand from its owner, Eddie Ghahraman, at a price not greater than $28,000,000. The board is fearful, however, that if Eddie knows the company wants to buy the Eddie’s ice cream brand, he will demand a higher price. The board tells you, therefore, not to disclose to Eddie that you are buying for Bon Vivant, and instead to make it appear that you are buying for your own company. It suggests you make up a name for this fictitious company. You decide to use the name LHIW Inc.

Assess the risks to you and Bon Vivant. Consider the following questions:

· If you make a contract in the name of Bon Vivant to buy a snack-cracker brand for $15,000,000, will Bon Vivant be bound on that contract?

· If you make a contract in the name of Bon Vivant to buy a cola brand for $13,500,000, will Bon Vivant be bound on that contract?

· If you make a contract in the name of Bon Vivant to buy an organic canned soup brand for $40,000,000, will Bon Vivant be bound on that contract? Will Bon Vivant be bound on that contract if you present the contract to the board, the board decides to accept the contract, and then the board later rejects the contract as too costly?

· Suppose you make a contract for Bon Vivant to purchase the Eddie’s ice cream brand for $26,200,000. The contract is signed by Eddie. You sign LHIW’s name and also your own name as agent for LHIW. Who is liable on that contract?

 LEARNING OBJECTIVES

After studying this chapter, you should be able to:

36-1  Know when an agent has authority to bind a principal to a contract.

36-2  Understand when an agent may be liable on contracts she makes for the principal.

36-3  Recognize when an agent is able to make a principal liable for torts committed by the agent.

1012

BY LETTING PRINCIPALS CONTRACT through their agents and thereby multiply their dealings, agency law stimulates business activity. For this process to succeed, there must be rules for determining when the principal and the agent are liable on the agent’s contracts. Principals need to predict and control their liability on agreements their agents make. Also, third parties need assurance that such agreements actually bind the principal. Furthermore, both agents and third parties have an interest in knowing when an agent is bound on these contracts. The first half of this chapter discusses the principal’s and the agent’s contract liability.

While acting on the principal’s behalf, agents sometimes harm third parties. Normally, this makes the agent liable to the injured party in tort. Sometimes, moreover, a principal is liable for his agent’s torts. Because tort judgments can be expensive, the rules for determining the principal’s and the agent’s tort liability are of great concern to principals, their agents, and third parties. Thus, we examine these subjects in this chapter’s second half.

The law in this chapter, as in Chapter 35, reflects the rules of the Restatement (Third) of Agency. The Restatement (Third) was adopted by the American Law Institute in 2006.

Contract Liability of the Principal

Know when an agent has authority to bind a principal to a contract.

A principal normally is liable on a contract made by his agent if the agent had  actual  or  apparent authority  to make the contract. Yet even when the agent lacks any authority to contract, a principal may bind herself by later  ratifying  a contract made by an unauthorized agent.

Actual Authority An agent has  actual authority  to take an action “designated” or “implied” in the principal’s  manifestations  to the agent and  acts necessary or incidental  to achieving the principal’s objectives of the agency. The agent’s reasonable understanding of the principal’s manifestations and objectives determines the agent’s actual authority. Actual authority, therefore, is the authority the principal wants the agent to possess. It is based on communications or manifestations from the principal to the agent.

Courts separate an agent’s authority in two parts: express and implied.  Express authority  is actual authority that the principal has specified in very specific or detailed language. For example, suppose that Microsoft instructs its agent Gates to contract to sell a Windows 8.1 software license for $400 or more. If Gates contracts to sell the software license to Dell for $425, Microsoft is liable to Dell on the basis of Gates’s express authority. However, Gates would not have express authority to sell the software license for $375 or to sell a different software license.

An agent generally has  implied authority  to do whatever it is reasonable to assume that his principal wanted him to do, in light of the principal’s manifestations to the agent and the principal’s objectives of the agency. Relevant factors include the principal’s express statements, the nature of the agency, the acts reasonably necessary to carry on the agency business, the acts customarily done when conducting that business, and the relations between principal and agent.

Implied authority usually derives from a grant of express authority by the principal. On occasion, however, implied authority may exist even though there is no relevant grant of express authority. Courts generally derive implied authority from the nature of the agency business, the relations between principal and agent, customs in the trade, and other facts and circumstances. There may be implied authority to make a certain contract if the agent has made similar past contracts with the principal’s knowledge and without his objection or if the agent’s position usually gives an agent the power to make a certain contract.

No matter what its source, an agent’s implied authority cannot contradict the principal’s express statements. Thus, there is no implied authority to contract when a principal has limited her agent’s authority by express statement or clear implication and the contract would conflict with that limitation. But as we will see, apparent authority may still exist in such cases.

Examples of Implied Authority Courts have created general rules or presumptions for determining the implied authority of certain agents in certain situations. For example:

1.  An agent hired to manage a business normally has implied authority to make contracts that are reasonably necessary for conducting the business or that are customary in the business. These include contracts for obtaining equipment and supplies, making repairs, employing employees, and selling goods or services. However, a manager ordinarily has no power to borrow money or issue negotiable instruments in the principal’s name unless the principal is a banking or financial concern regularly performing such activities.

1013

2.  An agent given full control over real property has implied authority to contract for repairs and insurance and may rent the property if this is customary. But such an agent may not sell the property or allow any third-party liens or other interests to be taken on it.

3.  Agents appointed to sell the principal’s goods may have implied authority to make customary warranties on those goods. In states that still recognize the distinction, a general agent described in Chapter 35 is more likely to have such authority than a special agent.

Apparent Authority  Apparent authority  arises when the principal’s manifestations cause a third party to form a reasonable belief that the agent is authorized to act in a certain way. In other words, apparent authority is based on (1) manifestations by the principal to the third party (2) that cause the third party to believe reasonably that the agent has such authority. Background factors such as trade customs and established business practices often determine whether it is reasonable for the third party to believe that the agent has authority. In other words, apparent authority exists because under the circumstances it reasonably appears that the agent may act for the principal, based upon the principal’s words or conduct (action or inaction).

Principals can give their agents apparent authority through the statements they make, or tell their agents to make, to third parties and through the actions they knowingly allow their agents to take with third parties. Thus, a principal might create apparent authority by telling a third party that the agent has certain authority or by directing the agent to do the same. A principal might also create apparent authority by appointing his agent to a position that customarily involves the authority to make certain contracts. For instance, if Exxon makes Alba its gasoline sales agent, and if that position customarily involves the power to sell gasoline, Alba would have apparent authority to sell gasoline. Here, Exxon’s behavior in appointing Alba to the position of gasoline sales agent, as reasonably interpreted in light of business customs, gives Alba apparent authority. However, because agents cannot give themselves apparent authority, there would be no such authority if, without Exxon’s knowledge or permission, Alba falsely told third parties that he was Exxon’s gasoline sales agent.

Apparent authority protects third parties who reasonably rely on the principal’s manifestations that the agent has authority. It assumes special importance in cases where the principal has told the agent not to make certain contracts that the agent ordinarily would have actual authority to make, but the third party knows nothing about this limitation and has no reason to know about it. Suppose that Prince employs Arthur as general sales agent for its tennis racquet manufacturing business. Certain warranties customarily accompany the racquets Prince sells, and

The Global Business Environment

Electronic Agents

In the Internet Age, evolving business practices show an increasing use of software programs known as electronic agents in e-commerce transactions. A common definition of an electronic agent is a computer program or an electronic or other automated means used to initiate an action or to respond to electronic messages without review by an individual.

In the legal context, an electronic agent can be an automated means for making or performing contracts. In automated transactions, an individual does not deal with another individual, but one or both parties are represented by electronic agents. You have probably dealt with an electronic agent if you have ordered books, CDs, airline tickets, and other goods and services from an Internet site like Amazon.com.

The legal relationship between the principal and the automated agent is not fully equivalent to common law agency but takes into account that the electronic agent is not a human actor. Nonetheless, parties who employ or deal with electronic agents are ordinarily bound by the results of their operations.

Most modern countries have laws that indicate when a person can be bound by the action of its electronic agent. In the United States, the Uniform Computer Information Transactions Act (2002) recognizes the ability of electronic agents to bind their principals, even if no individual is aware of or reviews the agent’s operation or the results of the operation. Under the Philippines’ Electronic Commerce Act, a contract may not be denied legal validity solely because it was created using an electronic agent, provided the electronic agent is under the control of or its actions attributable to the person sought to be bound. India’s Electronic Commerce Act states that a contract may be formed between an individual and an electronic agent if the individual has reason to know she is dealing with an electronic agent. In Canada, the Uniform Electronic Commerce Act permits contracts to be formed by electronic agents, but if an individual deals with an electronic agent and makes an error, the individual will not be bound on the contract if the electronic agent provided no opportunity to correct the error and the individual immediately notifies the other party of the error.

agents like Arthur ordinarily are empowered to give these warranties. But Prince tells Arthur not to make any such warranties to buyers, thus cutting off Arthur’s express and implied authority. Despite Prince’s orders, however, Arthur makes the usual warranties in a sale to Modell, who is familiar with customs in the trade. If Modell did not know about the limitation on Arthur’s authority, Prince is bound by Arthur’s warranties.

Agent’s Notification and Knowledge Sometimes, the general agency rules regarding notification and knowledge affect a principal’s contract liability. If a third party gives proper notification to an agent with actual or apparent authority to receive it, the principal is bound as if the notification had been given directly to him. Similarly, notification to a third party by an agent with the necessary authority is considered notification by the principal.

In certain circumstances, an agent’s knowledge of facts is imputed to the principal. This means that the principal’s rights and liabilities are what they would have been if the principal had known what the agent knew. Generally, an agent’s knowledge of facts or reason to know facts is imputed to a principal when it is material to the agent’s duties to the principal. No imputation occurs, however, if the agent acts adversely to the principal with an intent to act solely for the agent’s own purposes or those of another person. Suppose that Ames, acting on behalf of Sony, contracts with Target. Ames knows that Target is completely mistaken about a matter material to the contract to purchase TVs. Even though Sony knew nothing about Target’s unilateral mistake, Target probably can avoid its contract with Sony.

Ratification Ratification is a process whereby a principal binds himself to an unauthorized act done by an agent, or by a person purporting to act as an agent. Usually, the act in question is a contract. Ratification relates back to the time when the contract was made. It binds the principal as if the agent had possessed authority at that time.

Conduct Amounting to Ratification Ratification can be express or implied. An express ratification occurs when the principal manifests assent that his legal relations be affected, such as stating orally that he wishes to be bound by a contract that has already been made. Implied ratification arises when the principal’s conduct justifies a reasonable assumption that he consents to the agent’s act. Examples include the principal’s part performance of a contract made by an agent or the principal’s acceptance of benefits under such a contract. Sometimes, even a principal’s silence, acquiescence, or failure to repudiate the transaction may constitute ratification. This can occur when the principal would be expected to object if he did not consent to the contract, the principal’s silence leads the third party to believe that he does consent, and the principal is aware of all relevant facts.

Additional Requirements Even if a principal’s words or conduct indicate an intent to ratify, other requirements must be met before ratification occurs. These requirements have been variously stated; the following list is typical.

1.  The act ratified must be one that was valid at the time it was performed. For example, an agent’s illegal contract cannot be made binding by the principal’s subsequent ratification. However, a contract that was voidable when made due to the principal’s incapacity may be ratified by a principal who has later attained or regained capacity.

2.  The principal must have been in existence at the time the agent acted. However, as discussed in  Chapter 42 , corporations may bind themselves to their promoters’ preincorporation contracts by adopting such contracts.

3.  When the contract or other act occurred, the agent must have indicated to the third party that she was acting for a principal and not for herself. The agent need not, however, have disclosed the principal’s identity.

4.  The principal must have legal capacity at the time of ratification. For instance, an insane principal cannot ratify.

5.  The principal must have knowledge of all material facts regarding the prior act or contract at the time it is ratified. Here, an agent’s knowledge is not imputed to the principal.

6.  The principal must ratify the entire act or contract. He cannot ratify the beneficial parts of a contract and reject those that are detrimental.

7.  In ratifying, the principal must use the same formalities required to give the agent authority to execute the transaction. As  Chapter 35  stated, few formalities normally are needed to give an agent authority. But when the original agency contract requires a writing, ratification likewise must be written.

Note that a principal’s ratification is binding even if not communicated to the third party. Also, once a principal has ratified a contract, the principal is estopped from denying its ratification if the other party has been induced to make a detrimental change in position.

1015

Intervening Events Certain events occurring after an agent’s contract but before the principal’s ratification may cut off the principal’s power to ratify. These include (1) the third party’s withdrawal from the contract, (2) the third party’s death or loss of capacity, (3) the principal’s failure to ratify within a reasonable time (assuming that the principal’s silence did not already work a ratification), and (4) where it would be inequitable to bind the third party.

Estoppel Closely connected to but different from apparent authority and ratification is the concept of estoppel, that a person may be liable for an actor’s transaction with a third party who justifiably is induced to make a detrimental change in position because he believed the actor had authority to act for the person. The liable person must either Estoppel liability is based on the same concepts as promissory estoppel, which is covered in contract law in  Chapter 9 .

1. Intentionally or carelessly cause the third party’s belief, or

2. Having notice that such belief might cause a third party to change his position, fail to take reasonable steps to notify the third person of the facts.

Estoppel is different from apparent authority because it does not require that the purported principal has made any manifestation that the purported agent can act for her. For example, liability for estoppel can arise when a principal is informed that his agent is representing to a third person that she has authority to act for the principal, when in fact she has no such actual or apparent authority. Because the agent has made the manifestation—not the principal—no actual or apparent authority exists. If, however, the third party justifiably changes his position in reliance on the agent’s representation, the principal may be estopped from denying the agent’s authority. It is not clear from the Restatement (Third) when such third party reliance may be reasonable.

In the following Frontier Leasing case, the Iowa Supreme Court considered whether a golf course professional had authority to lease a beverage cart on behalf of the golf course and whether the golf course had ratified the lease or was estopped to deny the authority of the golf pro to make the lease.

Frontier Leasing Corp. v. Links Engineering, LLC 781 N.W.2d 772 (Iowa Sup. Ct. 2010)

In January 2004, Royal Links USA solicited Dave Fleming, golf professional and director of golf for Links Engineering, doing business as Bluff Creek Golf Course, to purchase a nonmotorized beverage cart. Royal Links told Fleming that advertising revenue from the beverage cart would cover Bluff Creek’s monthly lease expenses for the cart. On January 21, Fleming, on behalf of Bluff Creek, applied for financing for the beverage cart and signed a Royal Links USA credit application. Royal Links sent Bluff Creek’s credit application to C&J Leasing Corp., which approved Bluff Creek for credit. In February 2004, Fleming and C&J Leasing signed a lease agreement for the beverage cart.

In 2005, Bluff Creek defaulted on the lease payments. C&J Leasing sent a default letter to Bluff Creek stating that Bluff Creek could correct the default by paying $1,322. Otherwise, C&J Leasing would require payment of the entire balance of $14,636, and Bluff Creek would have to return the equipment.

Upon receiving this letter, the managing owner of Bluff Creek, Lance Clute, called C&J Leasing and learned of the lease agreement signed by Fleming. Clute requested a copy of the lease, and upon its receipt, he stopped all payments on the cart. Clute communicated to C&J Leasing that he wanted the beverage cart removed from his property. Clute submitted an affidavit stating Fleming did not have authorization to enter into financing agreements. Nonetheless, Bluff Creek had made some payments on the cart lease to C&J Leasing prior to Clute learning about the lease.

Bluff Creek was sued for breach of contract. The district court issued a summary judgment that Fleming had authority to bind Bluff Creek on the contract and that Bluff Creek was liable to the lessor, Frontier Leasing Corporation, which had acquired from C&J Leasing the rights to collect on the lease. The Iowa Court of Appeals reversed, and Frontier Leasing appealed to the Iowa Supreme Court.

Ternus, Chief Justice

An agency relationship can be established through the agent’s actual or apparent authority to act on behalf of the principal.

Actual authority to act is created when a principal intentionally confers authority on the agent either by writing or through other conduct which, reasonably interpreted, allows the agent to believe that he has the power to act. Actual authority includes both express and implied authority. Express authority is derived from specific instructions by the principal in setting out duties, while implied authority is actual authority circumstantially proved. Thus, actual authority examines the principal’s communications to the agent. Restatement (Third) of Agency§ 2.01 (2006).

1016

Apparent authority is authority the principal has knowingly permitted or held the agent out as possessing. Apparent authority focuses on the principal’s communications to the third party. Restatement (Third) of Agency §§ 2.03, 3.03. In other words, apparent authority must be determined by what the principal does, rather than by any acts of the agent.

A principal may also be liable under the doctrines of estoppel and ratification. Under the doctrine of estoppel, the principal is liable if he (1) causes a third party to believe an agent has the authority to act, or (2) has notice that a third party believes an agent has the authority and does not take steps to notify the third party of the lack of authority. Restatement (Third) of Agency § 2.05. Moreover, based on principles of ratification, a principal may be liable when he knowingly accepts the benefits of a transaction entered into by one of his agents.

The district court based its ruling that Fleming had actual and apparent authority to enter into the lease on behalf of Bluff Creek on an affidavit submitted by the director and owner of Bluff Creek, Lance Clute. Clute stated in his affidavit that Fleming was in charge of the day-to-day operations of the golf course, Clute was aware of the existence of the beverage cart and did not disavow the transaction, and Bluff Creek made payments on the cart from August 2004 through March 2005. The district court noted that Bluff Creek did not provide an affidavit from Fleming confirming the testimony of Clute. While these facts do support a finding of an agency relationship, an examination of Clute’s entire affidavit could also cause one to conclude that Fleming did not have actual or apparent authority to enter into the lease and that Clute did not ratify the transaction or act in any way that would estop Bluff Creek from rejecting the transaction.

In particular, Clute’s affidavit refutes the existence of actual authority with Clute’s statement that Fleming was not authorized to enter into any financing agreements or transactions for the purchase, lease, or financing of capital assets like the beverage cart, especially given the lease’s hefty amount of $19,000. Clute’s affidavit refutes the existence of apparent authority with the statement that it is customary in the golf industry to hire a PGA golf professional to manage the day-to-day operations of a golf course, and vendors are aware that such professionals do not have authority to enter into the type of transaction at issue here. Clute’s affidavit also refutes that Bluff Creek is estopped from rejecting the transaction and that Bluff Creek ratified the lease. It does so with Clute’s explanation that, when he saw the cart, he thought it was an “even trade for advertisement” such as Bluff Creek[s]’ practice with scorecard advertising. Clute stated that with scorecard advertisements, Bluff Creek is given the scorecards for free in exchange for the advertisements on the cards. Clute’s affidavit also refutes the doctrines of estoppel and ratification with its statements that he first learned of the lease through a collection letter that was received when Fleming was no longer employed with Bluff Creek, that he immediately requested a copy of the lease when it could not be found in Bluff Creek’s records, that he made the cart available for repossession after determining that the lease was a “scam,” and that the cart “to this day . . . sits idle in [Bluff Creek’s] garage taking up space.” Finally, while Bluff Creek does not submit an affidavit from Fleming supporting Clute’s affidavit testimony, a jury nevertheless could believe Clute, finding in Bluff Creek’s favor. The absence of testimony from Fleming simply goes to the weight of Bluff Creek’s evidence, which is something for the jury to decide, not a court on summary judgment.

Because reasonable minds could draw different inferences from the record as to whether Fleming had authority to bind Bluff Creek to the equipment lease, we reverse the district court’s grant of summary judgment.

Judgment for Bluff Creek affirmed. Remanded to the trial court.

Contracts Made by Subagents The rules governing a principal’s liability for her agent’s contracts generally apply to contracts made by her subagents. If an agent has authorized his subagent to make a certain contract and this authorization is within the authority granted the agent by his principal, the principal is bound to the subagent’s contract.

Also, a subagent contracting within the authority conferred by her principal (the agent) binds the agent in an appropriate case. In addition, both the principal and the agent probably can ratify the contracts of subagents.

http://www.unidroit.org/english/conventions/1983agency/agency-convention1983.pdf

https://www.law.kuleuven.be/personal/mstorme/PECL2en.html

European Union Agency Law

Go to the first link, and you will find the “Unidroit Convention on Agency in the International Sale of Goods (1983).” The second link has “The Principles of European Contract Law.”  Chapter 3  covers agent’s authority. Contract Liability of the Agent

Understand when an agent may be liable on contracts she makes for the principal.

When are agents liable on contracts they make on their principals’ behalf? For the most part, this question depends on a different set of variables than those determining the principal’s liability. The most important of these variables is the nature of the principal. Thus, this section first examines the liability of agents who contract for several different kinds of principals. Then it discusses two ways that an agent can be bound after contracting for any type of principal.

The Nature of the Principal

Disclosed Principal A principal is  disclosed  if a third party knows or has reason to know (1) that the agent is acting for a principal and (2) the principal’s identity. Unless he agrees otherwise, an agent who represents a disclosed principal is not liable on authorized contracts made for such a principal. Suppose that Adkins, a sales agent for Google, calls on Toyota and presents a business card clearly identifying her as Google’s agent. If Adkins contracts to sell Google’s advertising space to Toyota with authority to do so, Adkins is not bound because Google is a disclosed principal. This rule usually is consistent with the third party’s intention to contract only with the principal.

Unidentified Principal  A principal is unidentified if the third party (1) knows or has reason to know that the agent is acting for a principal but (2) lacks knowledge or reason to know the principal’s identity. This can occur when an agent simply neglects to disclose his principal’s identity. Also, a principal may tell her agent to keep her identity secret to preserve her bargaining position, such as when a national retailer tries to buy land on which to build a large store.

Among the factors affecting anyone’s decision to contract are the integrity, reliability, and creditworthiness of the other party to the contract. When the principal is unidentified, the third party ordinarily cannot judge these matters. As a result, he usually depends on the agent’s reliability to some degree. For this reason, and to give the third party additional protection, an agent is liable on contracts made for an unidentified principal unless the agent and the third party agree otherwise.

Undisclosed Principal  A principal is undisclosed when the third party lacks knowledge or reason to know both the principal’s existence and the principal’s identity. This can occur when a principal judges that he will get a better deal if his existence and identity remain secret or when the agent neglects to make adequate disclosure.

A third party who deals with an agent for an undisclosed principal obviously cannot assess the principal’s reliability, integrity, and creditworthiness. Indeed, here the third party reasonably believes that the agent is the other party to the contract. Thus, the third party may hold an agent liable on contracts made for an undisclosed principal.

The undisclosed principal is also a party to the contract. However, an undisclosed principal becomes a party to the contract only when the agent acts on the principal’s behalf in making the contract. An undisclosed principal is not a party to the contract when the agent does not intend to act for the principal.

The third party may not usually refuse to perform the contract merely because the principal was undisclosed, unless the contract excluded the possibility of an undisclosed principal.

Nonexistent Principal Unless there is an agreement to the contrary, an agent who purports to act for a  legally nonexistent  principal, such as an unincorporated association, is personally liable when the agent knows or has reason to know the principal does not exist. Likewise, the agent is liable when she knows or has reason to know a principal has no capacity. This is true even when the third party knows that the principal is nonexistent or lacks capacity. See Chapter 42 for a more detailed discussion of the liability of those who transact on behalf of nonexistent corporations.

In the Treadwell case that follows, the court found that an agent acted for an unidentified principal when he disclosed he was transacting for a corporation, but gave the wrong corporate name to the third party with whom he transacted.

Treadwell v. J.D. Construction Co. 938 A.2d 794 (Me. Sup. Jud. Ct. 2007)

In the early 1990s, Jesse Derr created a corporation, JCDER Inc., to operate his construction business. At some point, Derr began referring to the corporation as J.D. Construction Co. Inc., but no corporation by that name was ever created. JCDER Inc. remained the official name for purposes of organization and filing with Maine’s Secretary of State. Derr never filed with the Secretary of State a statement of intention to do business under the assumed name J.D. Construction Co. Inc.

1018

In 2003, when Leah and William Treadwell decided to build a home, they were referred to Derr. The Treadwells brought their home plans to Derr’s office to get a quote and left the plans with an employee, Jane Veinot. They did not meet with Derr but received a quote from him in the mail. Soon after, the Treadwells signed a contract with J.D. Construction, with work to start in May 2003. Derr signed the contract, and his signature appeared on the contract as follows:

J.D. Construction Co. Inc.

By: Jesse Derr

The name JCDER Inc. was nowhere in the contract, and the Treadwells were unaware of the existence of JCDER Inc. when they signed the agreement. None of the documents the Treadwells received from J.D. Construction indicated that the company’s real name was JCDER Inc.

Mr. Treadwell testified that he spoke with Derr twice at the worksite, just as they were breaking ground. The Treadwells, who visited the site almost daily, never saw Derr again, even though they tried many times to contact him. They spoke to Veinot often, but she would tell them that Derr was at another construction site. Derr had hired subcontractors to do the work on the Treadwells’ property. Around Thanksgiving 2003, the Treadwells visited the site and found that Derr had abandoned the job with the house unfinished because the company was not making any money on the job. The Treadwells had paid Derr approximately $91,000 before construction halted.

The Treadwells found many problems with the structure, including twisted studs and other lumber that had to be replaced. The Treadwells hired new contractors to fix and finish the project, for which they paid a significant sum.

To recover the additional costs, the Treadwells sued J.D. Construction Co., JCDER, and Derr for breach of contract and other grounds. The trial court awarded the Treadwells damages against J.D. Construction Co. and JCDER but found that Derr was not personally liable for the damages. The Treadwells appealed to the Supreme Judicial Court of Maine, asking that Derr also be held liable.

Alexander, Judge

The Treadwells argue that the trial court should have awarded damages against Derr individually since he signed the contract for a non-existent corporation. In the alternative, they contend that the trial court should have pierced the corporate veil and held Derr responsible because he failed to disclose the existence of JCDER, Inc.

The question presented to us is whether, as a matter of law, an individual who signs a contract, purporting to act on behalf of a corporate entity that he knows does not exist, becomes personally liable for damages arising from failure to properly perform under that contract.

An agent who makes a contract for an undisclosed principal or a partially disclosed principal will be liable as a party to the contract. In order for an agent to avoid personal liability on a contract negotiated in his principal’s behalf, he must disclose not only that he is an agent but also the identity of the principal. The term “partially disclosed” principal is synonymous with “unidentified” principal. Restatement (Third) of Agency, § 1.04 comment b (2006). “A principal is unidentified if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal but does not have notice of the principal’s identity.” Restatement (Third) of Agency, § 1.04(2)(c) (2006). To avoid liability for the agent, the third party must have actual knowledge of the identity of the principal, and does not have a duty to investigate.

In Maine Farmers Exch. v. McGillicuddy, 697 A.2d 1266 (Me. 1996), the son of a potato seller signed a contract with a distributor for a certain grade potato. The father/seller furnished the potatoes, which turned out to be the wrong grade. In an action by the distributor against the father and son, the trial court found them to be jointly and severally liable. They appealed the finding of joint and several liability, arguing that the distributor should have been aware that the son was acting as an agent for his father. We affirmed that finding because the son did not disclose that he was an agent for his father, and the distributor believed he was buying potatoes from the son.

In the present case, Derr organized a corporation called JCDER, Inc., which he used to operate his construction business. Both Derr and JCDER, Inc., acted under the assumed name J.D. Construction Co., Inc., Derr signed the contract on behalf of J.D. Construction, hired the subcontractors, and was purported to be the contact-person for the project, although he was not available to the Treadwells. Derr’s use of an assumed trade name was not sufficient to disclose his agency relationship with JCDER, Inc. JCDER, Inc., was therefore an unidentified or partially disclosed principal. As a matter of law, Derr is personally liable for performance of contracts entered into as agent for the non-existent J.D. Construction, Co., Inc., or the undisclosed principal JCDER, Inc.

Judgment reversed in favor of the Treadwells.

1019

Liability of Agent by Agreement An agent may bind herself to contracts she makes for a principal by expressly agreeing to be liable. This is true regardless of the principal’s nature. An agent may expressly bind herself by (1) making the contract in her own name rather than in the principal’s name, (2) joining the principal as an obligor on the contract, or (3) acting as surety or guarantor for the principal.

Problems of contract interpretation can arise when it is claimed that an agent has expressly promised to be bound. The two most important factors affecting the agent’s liability are the wording of the contract and the way the agent has signed it. An agent who wishes to avoid liability should make no express promises in her own name and should try to ensure that the agreement obligates only the principal. In addition, the agent should use a signature form that clearly identifies the principal and indicates the agent’s representative capacity—for example, “Parker, by Adkins,” or “Adkins, for Parker.” Simply adding the word “agent” when signing her name (“Adkins, Agent”) or signing without any indication of her status (“Adkins”) could subject the agent to liability. Sometimes, the body of the contract suggests one result and the signature form another. In such contexts, oral evidence or other extrinsic evidence of the parties’ understanding may help resolve the uncertainty.

Implied Warranty of Authority An agent also may be liable to a third party if he contracts for a legally existing and competent principal while lacking authority to do so. Here, the principal is not bound on the contract. Yet it is arguably unfair to leave the third party without any recovery. Thus, an agent normally is bound on the theory that he made an implied warranty of his authority to contract. This liability exists regardless of whether the agent is otherwise bound to the third party.

To illustrate, suppose that Allen is a salesman for Prine, a seller of furs. Allen has actual authority to receive offers for the sale of Prine’s furs but not to make sale contracts, which must be approved by Prine himself. Prine has long followed this practice, and it is customary in the markets where his agents work. Representing himself as Prine’s agent but saying nothing about his authority, Allen contracts to sell Prine’s furs to Thatcher on Prine’s behalf. Thatcher, who should have known better, honestly believes that Allen has authority to contract to sell Prine’s furs. Prine is not liable on Allen’s contract because Allen lacked actual or apparent authority to bind him. But Allen is liable to Thatcher for breaching his implied warranty of authority.

However, an agent is not liable for making an unauthorized contract if any of the following applies:

1.  The third party actually knows that the agent lacks authority. Note from the previous example, however, that the agent still is liable where the third party merely had reason to know that authority was lacking.

2.  The principal subsequently ratifies the contract. Here, the principal is bound, and there is no reason to bind the agent.

3.  The agent adequately notifies the third party that he does not warrant his authority to contract.

In the following DePetris & Bachrack case, the court found the president of a dissolved corporation liable for breaching the agent’s implied warranty of authority.

DePetris & Backrach, LLP v. Srour 71 A.D.3d 460 (N.Y. App. Div. 1st Dep’t 2010)

Plaintiff law firm sued, among others, defendant attorneys, seeking to collect for fees allegedly due to the law firm for representation of defendant client. The attorneys referred the client to the law firm. The complaint alleged that the attorneys represented to the law firm that they had authority from a third party to promise payment of $75,000 of the client’s fees when, in fact, they lacked such authority. Defendants-respondents moved to dismiss the complaint against them.

The Supreme Court, New York County (New York), granted the attorneys’ motion to dismiss the complaint as against them and denied the law firm’s cross motion for leave to serve a supplemental complaint. The law firm appealed.

Feinman, Judge

Under the doctrine of implied warranty of authority, a person who purports to make a contract, representation, or conveyance to or with a third party on behalf of another person, lacking power to bind that person, gives an implied warranty of authority to the third party and is subject to liability to the third party for damages for loss caused by breach of that warranty, including loss of the benefit expected from performance by the principal. See Restatement (Third) of Agency § 6.10 (2006). In this case, the Court finds that the doctrine of apparent authority is irrelevant because the causes of action alleged are not seeking to hold the principals liable on the ground that defendants-respondents had apparent authority to make promises of payment. Rather, these causes of actions are seeking to hold the agents, defendants-respondents, liable for contracts or representations they purported to make on behalf of the principal while acting without authority from the principal. The trial court thus erred in relying on the principle of apparent authority.

Judgment modified in part and affirmed in part.

Liability of Principal and Agent: The Major Possibilities

	Agent’s Authority
Principal	Actual	Apparent	None
Disclosed	P liable on the contract. A not liable on the contract unless agrees to be liable.	P liable on the contract. A not liable on the contract unless agrees to be liable.	P not liable on the contract. A usually liable for breach of the implied warranty of authority.
Unidentified	P liable on the contract. A liable on the contract.	P liable on the contract. A liable on the contract.	P not liable on the contract. A liable on the contract or for breach of the implied warranty of authority.
Undisclosed	P liable on the contract. A liable on the contract.	Impossible.	P not liable on the contract. A liable on the contract.

Tort Liability of the Principal

Recognize when an agent is able to make a principal liable for torts committed by the agent.

Besides contracting on the principal’s behalf, an agent may also commit torts while acting for the principal. A principal’s liability for an agent’s torts may be found on either of two bases:

1. Vicarious liability, including respondeat superior.

2. Direct liability.

Direct liability requires that the principal be at fault; a principal’s vicarious liability requires only that the agent be at fault. For some torts, a principal may have both direct and vicarious liability.

Respondeat Superior Liability The more important type of vicarious liability is based on the doctrine of  respondeat superior  (let the master answer). Under this doctrine, a principal who is an  employer  is liable for torts committed by agents (1) who are  employees  and (2) who commit the tort while acting within the  scope of their employment . Respondeat superior makes the principal liable both for an employee’s negligence and for her intentional torts.  Chapter 35  outlined the main factors courts consider when determining whether an agent is an employee. The most important of these factors is a principal’s right to control the manner and means of an agent’s performance of work. The court in the CBS v. FCC case in  Chapter 35  found that Janet Jackson and Justin Timberlake were not employees of CBS during their halftime performance at the Super Bowl, and therefore, CBS was not responsible for their actions under respondeat superior.

Respondeat superior is a rule of imputed or vicarious liability because it bases an employer’s liability on her relationship with the employee rather than her own fault. This imputation of liability reflects the following beliefs: (1) that the economic burdens of employee torts can best be borne by employers; (2) that employers often can protect themselves against such burdens by self-insuring or purchasing insurance; and (3) that the resulting costs frequently can be passed on to consumers, thus “socializing” the economic risk posed by employee torts. Respondeat superior also motivates employers to ensure that their employees avoid tortious behavior. Because they typically control the physical details of the work, employers are fairly well positioned to do so.

1021

Scope of Employment Respondeat superior’s scope-of-employment requirement has been stated in many ways and is notoriously ambiguous. Some courts considering this question asked whether the employee was on a “frolic” of his own or merely made a “detour” from his assigned activity. According to the Restatement, an employee acts within the scope of employment when performing work assigned by the employer or when engaging in a course of conduct subject to the employer’s control. An employee’s act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer. Most courts find that an employee’s conduct is within the scope of his employment if it meets each of the following four tests:

1.  It was of the kind that the employee was employed to perform. To meet this test, an employee’s conduct need only be of the same general nature as work expressly authorized or be incidental to its performance.

2.  It occurred substantially within the authorized time period. This is simply the employee’s assigned time of work. Beyond this, there is an extra period of time during which the employment may continue. For instance, a security guard whose regular quitting time is 5:00 probably meets the time test if he unjustifiably injures an intruder at 5:15. Doing the same thing three hours later, however, would probably put the guard outside the scope of employment.

3.  It occurred substantially within the location authorized by the employer. This includes locations not unreasonably distant from the authorized location. For example, a salesperson told to limit her activities to New York City probably would satisfy the location requirement while pursuing the employer’s business in New Rochelle just north of the city limits but not while pursuing the same business in Philadelphia. Generally, the smaller the authorized area of activity, the smaller the departure from that area needed to put the employee outside the scope of employment. For example, consider the different physical distance limitations that should apply to a factory worker assigned to a single building and a traveling salesperson assigned to a five-state territory.

Moreover, in today’s connected economy, many employers allow some of their employees to work at the employees’ homes. The scope of employment for such an employee would encompass the employee’s home.

4.  It was motivated at least in part by the purpose of serving the employer. This test is met when the employee’s conduct was motivated to any appreciable extent by the desire to serve the employer. Thus, an employee’s tort may be within the scope of employment even if the motives for committing it were partly personal. For example, suppose that a delivery employee is behind schedule and for that reason has an accident while speeding to make a delivery in his employer’s truck. The employee would be within the scope of employment even if another reason for his speeding was to finish work quickly so he could watch his daughter’s soccer game.

Ethics in Action

 Principal’s Liability for Agent’s Torts

We have covered the reasons the law makes employers liable for the torts of employees under respondeat superior, including the ability of employers to bear the burden or to socialize the cost of paying for damages caused by an employee’s tort.

· Do you think those are good reasons to make someone liable for the actions of another person? What kind of behavior is the rule of respondeat superior likely to foster? Does the rule encourage employers to train and supervise their employees better?

· Do you think respondeat superior makes employers liable for too many acts of their employees? Does the rule discourage some businesses from using employees? Does any discouragement affect both prospective employers and prospective employees?

· Do you think the law should make employers liable for all the torts of their employees?

· Do you think it is right for an employer to pay for all damages caused to others by the tort of an employee? When forming your answers, consider the ethical theories we covered in  Chapter 4 .

1022

Direct Liability A principal’s  direct liability  for an agent’s torts differs considerably from respondeat superior liability. Here, the principal himself is at fault, and there is no need to impute liability to him. Also, no scope-of-employment requirement exists in direct liability cases, and the agent need not be an employee. Of course, a principal might incur both direct liability and respondeat superior liability in cases where due to the principal’s fault, an employee commits a tort within the scope of her employment.

A principal is directly liable for an agent’s tortious conduct if the agent acts within her actual authority or the principal ratifies the agent’s conduct. Usually, this means the principal directs the agent’s conduct and intends that it occur. In such cases, the agent’s behavior might be intentional, reckless, or negligent. For instance if Lawn Mower Company directs its agent Agnew to sell defective lawn mowers to Landscape Company, Lawn Mower Company is directly liable to Landscape Company. Likewise, Procenture Consulting Company would be liable for harm to clients caused by its ordering its consulting employees to complete an engagement in an unreasonable, substandard manner.

http://csi.toolkit.tst.cch.com/BOToC.asp

The CCH Business Owners Toolkit is a fount of information on managing the liability of employers for the acts of employees.

The typical direct liability case, however, involves harm caused by the principal’s negligence regarding the agent. Examples of direct liability for negligence include (1) giving the agent improper or unclear instructions; (2) failing to make and enforce appropriate regulations to govern the agent’s conduct; (3) hiring an unsuitable agent; (4) failing to discharge an unsuitable agent; (5) furnishing an agent with improper tools, instruments, or materials; and (6) failing to properly supervise an agent. Today, suits for negligent hiring are common.

The next case, Green, covers both direct liability and respondeat superior.

Green v. Cosby 138 F. Supp. 3d 114 (D. Mass. 2015)

On December 10, 2014, Tamara Green filed a complaint alleging that after having been sexually assaulted by an entertainer, William H. Cosby, Jr. (Defendant), he publicly defamed her in statements made by individuals operating at his discretion and/or within the scope of their employment. The complaint was later amended to include similar claims by two additional plaintiffs, Therese Serignese and Linda Traitz (collectively, the three are referred to as Plaintiffs).

Defendant then filed motions to dismiss Plaintiffs’ amended complaint in its entirety, which Plaintiffs opposed. In response, Plaintiffs then sought leave to file a second amended complaint and the court granted Plaintiffs’ request. Plaintiffs’ second amended complaint (SAC) supplemented factual allegations with respect to an allegedly defamatory statement directed at Green.

Mastroianni, Judge

The two legal theories for establishing fault in this case are: respondeat superior liability and direct liability. Respondeat superior is a “doctrine holding an employer or principal liable for the employee’s or agent’s wrongful acts committed within the scope of the employment or agency.” Under the direct liability theory, Defendant would be held liable on the basis of his own fault for his conduct and involvement regarding the statements.

Respondeat Superior Liability

Under the legal theory of respondeat superior, Defendant asserts the SAC does not sufficiently allege his agents possessed the requisite degree of fault necessary to hold Defendant liable for defamation on the basis of respondeat superior. When a third party is harmed by an agent’s conduct, the principal is subject to respondeat superior liability, a form of vicarious liability, if the agent was acting within the scope of work performed for the principal and the principal controlled or had a right to control the manner of the agent’s work. Restatement (Third) of Agency §§ 7.03, 7.07 (2006). In order to proceed on their theory of respondeat superior liability, Plaintiffs’ SAC must include sufficient allegations supporting a finding of fault on the part of those speaking for Defendant—Phillips, Brokaw, and Singer.

The SAC states directly and by inference that the individuals who issued the statements were professionals, employed by Defendant for purposes including speaking to the media on his behalf. Given Defendant’s prominence in the entertainment field, the Court infers he surrounded himself with people accomplished in media relations and legal matters. The Court also infers those making Defendant’s public statements had an open line of communication with him as well as some historical perspective on his public relations matters. Based on the facts and inferences, the Court finds it plausible at this point to conclude (1) those agents would have had, at a minimum, some sense of Defendant’s alleged conduct, such that their duty of care would have required them to take steps to determine the truth or falsity of the statements, and (2) the content of their responsive statements demonstrates such reasonable care was not taken.

The Court thus accepts all of the Plaintiffs’ well-pled averments as true and finds respondeat superior liability is sufficiently pled.

Defendant asserts that Plaintiff’s do not identify direct liability as a legal theory upon which the defamation claims can be proven. However, the SAC does state Defendant acted “by and through” each of the people who actually gave each statement alleged to be defamatory. The SAC also states that Defendant’s agents gave the statements “at the direction of Defendant.” Additionally, the SAC states Defendant knew the claimed defamatory statements were false at the time they were published. If a principal purposefully directs an agent to perform an action, and that agent performs the action, then the principal is directly responsible for the consequences of the action. See Restatement (Third) of Agency § 7.03.

The court is not persuaded by Defendant’s argument that Plaintiffs did not adequately plead direct liability as a named legal theory. Form examination of all the facts in the SAC, it does not take a speculative leap for the court to conclude Defendant would be personally involved in reviewing these types of accusations against him, crafting or approving the responsive statements, and directing the dissemination. The SAC alleges Defendant was an “internationally known” entertainment figure and the people making public statements for him were acting either as attorney or publicist and/or authorized representative or employee. At this stage of the litigation, it would be unreasonable for the Court to view these particular circumstances, responding to very serious accusations of the nature involved here, as not having the direct involvement of Defendant.

The Court thus finds direct liability is sufficiently pled and Defendant’s motions to dismiss are denied in their entirety.

Liability for Torts of Nonemployee Agents A principal ordinarily is not liable for torts committed by nonemployee agents (independent contractors). As compared with employees, nonemployee agents are more likely to have the size and resources to insure against tort liability and to pass on the resulting costs themselves. Sometimes, therefore, the risk still can be socialized if only the nonemployee agent is held responsible. Because the principal does not control the manner in which a nonemployee agent’s work is performed, he has less ability to prevent the nonemployee agent’s torts than an employer has to prevent an employee’s torts. Thus, imposing liability on principals for the torts of nonemployee agents may do little to eliminate the nonemployee agent’s torts. However, the rule that principals are not liable for torts committed by nonemployee agents has exceptions. For example:

1.  A principal can be directly liable for tortious behavior connected with the retention of a nonemployee agent. One example is the hiring of a dangerously incompetent nonemployee agent.

2.  A principal is liable for harm resulting from the nonemployee agent’s failure to perform a duty of care, which duty the principal owes to other persons but has delegated to the agent. A duty of care is a duty whose proper performance is so important that a principal cannot avoid liability by delegating it to an agent. This is often termed a nondelegable duty. Examples include a carrier’s duty to transport its passengers safely, a municipality’s duty to keep its streets in repair, a railroad’s duty to maintain safe crossings, and a landlord’s duties to make repairs and to use care in doing so. Thus, a landlord who retains a nonemployee agent to repair the stairs in an apartment building is liable for injuries caused by the agent’s failure to repair the stairs properly.

This basis of liability also encompasses a principal’s liability for a nonemployee agent’s negligent failure to take the special precautions needed to conduct certain highly dangerous or inherently dangerous activities. Examples of such activities include excavations in publicly traveled areas, the clearing of land by fire, the construction of a dam, and the demolition of a building. For example, a nonemployee agent engaged in demolishing a building presumably has duties to warn pedestrians and to keep them at a safe distance. If injury results from the nonemployee agent’s failure to meet these duties, the principal is liable.

Liability for Agent’s Misrepresentations Special rules apply when a third party sues a principal for  misrepresentations  made by her agent. In most cases where the principal is liable under these rules, the third party can elect to recover in tort, or to rescind the transaction.

A principal is directly liable for misrepresentations made by her agent during authorized transactions if she

1024

An Outline of the Principal’s Tort Liability

Respondeat Superior	1. Agent must be an employee, and 2. Employee must act within scope of employment while committing the tort.
Direct Liability	1. Principal intends and directs agent’s intentional tort, recklessness, or negligence, or 2. Principal is negligent regarding hiring or training of agent.
Torts of Nonemployee Agents	1. Principal generally is not liable 2. Exceptions exist for direct liability and nondelegable duties.
Misrepresentation	1. Direct liability 2. Vicarious liability when agent has authority to make true statements on the subject of the misrepresentation. 3. An exculpatory clause may eliminate the principal’s tort liability, but the third party still can rescind the contract.

intended that the agent make the misrepresentations. In some states, a principal also may be directly liable if she negligently allows the agent to make misrepresentations. Even where a principal is not directly at fault, she may be liable for an agent’s misrepresentations if the agent had actual or apparent authority to make true statements on the subject. Suppose that an agent authorized to sell farmland falsely states that a stream on the land has never flooded the property when in fact it does so almost every year and that this statement induces a third party to buy the land. The principal is directly liable if she intended that the agent make this false statement. Even if the principal is personally blameless, she is liable if the agent had actual or apparent authority to make true statements about the stream.

After contemplating their potential liability under the rules just discussed, both honest and dishonest principals may try to escape liability for an agent’s misrepresentations by including an exculpatory clause in contracts the agent makes with third parties. Such clauses typically state that the agent has authority only to make the representations contained in the contract and that only those representations bind the principal. Exculpatory clauses do not protect a principal who intends or expects that an agent will make false statements. Otherwise, though, they insulate the principal from tort liability if the agent misrepresents a material fact. But the third party still may rescind the transaction because it would be unjust to let the principal benefit from the transaction while disclaiming responsibility for it.

Tort Liability of the Agent

Agents are usually liable for their own torts. Normally, they are not absolved from tort liability just because they acted at the principal’s command. However, there are exceptions to this generalization.

1.  An agent can escape liability if she is exercising a privilege of the principal. Suppose that Tingle grants Parkham a right-of-way to transport his farm products over a private road crossing Tingle’s land. Parkham’s agent Adams would not be liable in trespass for driving across Tingle’s land to transport farm products if she did so at Parkham’s command. However, an agent must not exceed the scope of the privilege and must act for the purpose for which the privilege was given. Thus, Adams would not be protected if she took her Jeep on a midnight joyride across Tingle’s land. Also, the privilege given the agent must be delegable in the first place. If Tingle had given the easement to Parkham exclusively, Adams would not be privileged to drive across Tingle’s land.

2.  A principal who is privileged to take certain actions in defense of his person or property may often authorize an agent to do the same. In such cases, the agent escapes liability if the principal could have done so. For example, a Walmart warehouse guard may use force to protect the property in Walmart’s warehouse.

3.  An agent who makes misrepresentations while conducting the principal’s business is not liable in tort unless he either knew or had reason to know their falsity. Suppose Parker authorizes Arnold to sell his house, falsely telling Arnold that the house is fully insulated. Arnold does not know that the statement is false and could not discover its falsity through a reasonable inspection. If Arnold tells Thomas that the house is fully insulated and Thomas relies on this statement in purchasing the house, Parker is directly liable to Thomas, but Arnold is not liable.

1025

4.  An agent is not liable for injuries to third persons caused by defective tools or instrumentalities furnished by the principal unless the agent had actual knowledge or reason to know of the defect.

Tort Suits against Principal and Agent

Sometimes, both principal and agent are liable for an agent’s torts. Here, the parties are jointly and severally liable. This means that a third party may join the principal and the agent in one suit and get a judgment against each, or may sue either or both individually and get a judgment against either or both. However, once a third party actually collects in full from either the principal or the agent, no further recovery is possible.

In some cases, therefore, either the principal or the agent has to satisfy the judgment alone despite the other party’s liability. Here, the other party sometimes is required to indemnify the party who has satisfied the judgment. As discussed in Chapter 35, for example, sometimes a principal is required to indemnify an agent for tort liability the agent incurs. On the other hand, some torts committed by agents may involve a breach of duty to their principal, and the principal may be able to recover from an agent on this basis.

uniformlaws.org

Agents and College Athletes

The National Conference of Commissioners on Uniform State Laws has adopted the Uniform Athlete Agent Act (2000), which is designed to regulate contacts between agents and college athletes and, thereby, to help college athletes maintain their eligibility to play college sports. Note that section 14 lists several prohibited actions, backed by section 15, which imposes criminal penalties on an agent who violates section 14.

Problems and Problem Cases

1. Jonas Bravario hires Suzanne Hermano, a securities broker, to manage his $700,000 portfolio of securities. When Bravario managed his own investments, his investment strategy was to own a large number of different companies, with no one company representing more than 5 percent of his total investments. Bravario also purchased all his investments for cash and did not borrow money to finance the purchase of any investment. Hermano is aware of Bravario’s historical investment strategy, which Bravario informed Hermano that he wanted to continue in the future. Nonetheless, Hermano opts to purchase 1 million shares of Enron Corporation for $70,000. To finance the purchase, Hermano sells $40,000 of Bravario’s current investments and borrows $30,000 from Wells Fargo Bank in the name of Bravario. The interest rate on the loan is 10 percent. When Bravario discovers the purchase and the loan, he attempts to repudiate both contracts. Is Bravario liable on the Enron purchase and loan contracts?

2. Shelley Opp lived in California with her husband, Richard Opp, until they sought a divorce. Ten months later, Shelley contacted Soraghan Moving and Storage to move her personal property from California to Illinois. Shelley told Soraghan she wanted to insure her property for its full value of $10,000. Soraghan faxed to Shelley an “Estimate/Order for Service” form which stated that Shelley intended to declare that the value of the goods shipped was $10,000. Shelley signed the form. According to Soraghan, it explained to Shelley that she or her representative must advise the mover at the time the shipment was picked up whether Shelley would like full replacement coverage of $10,000. According to Shelley, she was never informed that the person releasing her property in California would have to sign anything, declare any value for her property, or do anything other than give the movers access to her belongings. The estimate form also provided a location where Shelley could designate someone as her “true and lawful representative,” but she made no such designation. On the day of the move, the movers in California called Shelley in Illinois to tell her they would be late arriving at the California home due to a flat tire. Shelley then phoned Richard at his office and asked him to go to the house, open the door, and let the movers in. Shelley also told Soraghan that “someone” would be at the California home to give the movers access to her property. Richard met the movers at the house, and he signed the bill of lading on a line that indicated that he was Shelley’s authorized agent, and he allegedly agreed to limit the carriers’ liability for her property at 60 cents per pound. Richard also signed an inventory of the property that indicated that he was its “owner or authorized agent.” The truck carrying Shelley’s belongings was struck by a train, damaging most of her property. Shelley inspected her damaged property and estimated its full replacement value to be over $10,000. Soraghan claimed that its liability was limited by the bill of lading to $2,625 because Richard had the actual and apparent authority to sign the bill of lading as Shelley’s agent. What did the court rule?

3. The Work Connection (Connection) was a temporary employment agency that provided workers to customers for a fee. Doyle Olson, a sales representative for Connection, contacted Universal Forest Products (Universal). Olson spoke with Ken Von Bank, Universal’s production manager, who had direct supervisory authority over temporary workers. Universal hired some of Connection’s employees, including Wayne DeLage, to construct fence panels at its Shakopee plant. Olson gave to Universal work verification forms that were used as employee timecards. Universal filled out and signed the forms, which contained the worker’s name, date, and hours worked. Submission of a completed, signed form was required for an employee to be paid, and Connection processed the forms through its payroll department. The work verification forms contained the following language:

CUSTOMER AGREES TO THE TERMS AND CONDITIONS SET FORTH ON THE REVERSE SIDE HEREOF AND CERTIFIES THAT THE LISTED EMPLOYEES HAVE SATISFACTORILY PERFORMED SERVICES FOR THE HOURS SHOWN ABOVE.

The back of the verification form stated the following:

CONDITIONS OF UNDERTAKING: CUSTOMER agrees to indemnify, hold harmless and defend THE WORK CONNECTION against claims, damages, or penalties from any claims for bodily injury (including death), or loss of, and loss of use of, or damage to, property arising out of the use of or operation of CUSTOMER’S owned, nonowned, or leased vehicles, machinery or equipment by THE WORK CONNECTION employees.

The parties never discussed the language on the back of the work verification form. The parties’ oral agreement did not include a term that required Universal to provide workers’ compensation insurance for Connection’s employees. Nonetheless, Von Bank signed the verification forms for Universal from March 1995 through July 1995, when the office manager, Yvonne Kohout, took over signing duties. At some point, Universal ran out of original work verification forms. Kohout simply photocopied the front side of the form and, thereafter, submitted forms that were blank on the back.

In August 1995, DeLage severed three of his fingers while operating a radial arm saw. DeLage received $75,000 in workers’ compensation benefits from Connection. Connection then asked Universal to indemnify it pursuant to the language on the back of the verification form. Was Universal found liable to Connection?

4. Adventure Quest, a nonprofit school, was founded and operated by Peter Drutchal, its executive director and only full-time employee. From 1994 to 1996, Adventure Quest had liability coverage with Virginia Surety Company. The insurance policy included a “sexual abuse endorsement” that provided coverage for sexual abuse claims but excluded from coverage any person or entity that personally participated in committing any sexual abuse. When Drutchal completed Adventure Quest’s application for the insurance policy, he answered “no” in response to the question, “Have you ever had an incident which resulted in an allegation of sexual abuse?” In fact, Drutchal had previously sexually abused Adventure Quest’s students, and additional abuse occurred during the coverage periods of the insurance policy. He kept the abuse secret from others until 2001. Drutchal’s sexual abuse occurred in the course of school activities, while Drutchal was acting in his capacity as coach and chaperone. Drutchal’s acts of sexual abuse were for his own purposes. The abuse was not done within the scope of his duties or authority as executive director and was not done in the best interests of Adventure Quest. Virginia Surety refused to pay for Adventure Quest’s liability for Drutchal’s abuse, arguing that Drutchal’s knowledge of his own previous abuse was imputable to Adventure Quest, thereby excluding it from the policy’s coverage. Was Virginia Surety right?

5. Richard Daynard, a Northeastern University law professor, contracted to provide tobacco litigation assistance to the Ness law firm in South Carolina. The Ness firm and the Scruggs law firm of Mississippi were plaintiffs’ attorneys for tobacco litigation in Mississippi. Over a period of months, Daynard met in South Carolina and Boston, spoke over the phone, and communicated by fax with members of the Ness firm. He also communicated by phone and fax with members of the Scruggs firm. Based on their actions, Daynard believed that the Ness firm and Scruggs firm were agents of each other in directing the Mississippi tobacco litigation. In addition, both firms retained the benefits of his legal advice, which was provided in accordance with a contract he made with the Ness law firm and called for compensation equal to 5 percent of their legal fees. When the firms refused to pay Daynard, he sued in a federal district court in Massachusetts. The court had personal jurisdiction over the Ness firm because of its contacts with Massachusetts, but the Scruggs firm asserted that it had no contacts with Massachusetts. May the contacts of the Ness firm be imputed to the Scruggs firm, giving the court jurisdiction over the Scruggs firm?

1027

6. Lee Cain was an officer and director of Timber Creek Oil Co., the operator of oil wells that it failed to plug after the Texas Railroad Commission ordered it to do so. The Commission authorized the expenditure of State of Texas funds to pay the expense of plugging the wells.

Four months later, Timber Creek failed to file its franchise-tax report. Two months later, its corporate charter was forfeited by the State of Texas, causing Timber Creek to cease to exist; the charter was never revived. Beginning one month after the charter forfeiture and continuing for six months, the Commission paid $50,000 to plug the Timber Creek wells. The state sued Cain to recover the $50,000 on a theory that he was personally liable for the Timber Creek debt. Was Cain liable for the debt?

7. Mark Bradshaw, an agent for National Foundation Life Insurance Co. (NFLIC), tried to sell a health insurance policy to Bobby Reed. Bradshaw told Reed that his health insurance coverage would begin upon signing some forms and paying the first premium. On January 7, Reed signed but did not read the forms, which included language stating that Reed understood that Bradshaw could not change any NFLIC policy or make any policy effective, that the policy would not be effective until actually issued by NFLIC, and that it could take up to two weeks for Reed’s application to be processed and the policy issued. NFLIC received Reed’s application, including his payment for the first premium, on January 12. On January 19, NFLIC called Reed’s home and was informed he had a heart attack on January 15. NFLIC declined to issue the policy to Reed. On what grounds did Reed sue Bradshaw? Was Reed’s suit against Bradshaw successful?

8. Maria Millan opened two brokerage accounts at Dean Witter Reynolds. The broker for both accounts was her son Miguel, an employee of Dean Witter. Over the course of the next three years, Miguel systematically looted his mother’s account, ultimately stealing from her more than $287,000. He stole checks from his mother’s bathroom drawer, wrote checks on his mother’s account, deposited his mother’s checks into his own account, forged his mother’s signature on numerous occasions, stole statements from her mailbox, created and sent bogus statements to his mother, and opened a post office box so he could receive his mother’s actual statements. Dean Witter did not verify Millan’s signature, as policy required. A Dean Witter supervisor also did not verify a check in the amount of $35,000, which was against Dean Witter written policy. Millan sues her son and Dean Witter for unauthorized transactions, negligence, and gross negligence. Under a theory of direct liability, who is a jury likely to find for? Under the doctrine of respondeat superior, is Dean Witter vicariously liable for the actions of Miguel? (Hint: Think about whether Miguel’s actions were within his general scope of authority as a broker.)

9. LaVar Johnson was a retail representative for the Wheaton Company, a processor of consumer packaged goods like cereals and canned goods. Johnson’s job was to visit grocery stores in his territory to ensure that each store gave adequate shelf space to all Wheaton products sold by the store. Wheaton told Johnson that maintaining good relations with the general manager and assistant manager of each store was essential. It was important, Wheaton told him, to accommodate the managers to ensure that Wheaton got the shelf space it wanted in each store.

While visiting a store in Springfield, Illinois, Johnson chatted for a few minutes with the manager, who got a phone call that his wife was in an auto accident while on her way to pick up the manager at the store. While the wife was not seriously injured, Johnson offered to take the manager to the scene of the accident, and the manager accepted. On the way to the accident scene, Johnson negligently ran a red light, resulting in his car being struck by another car. The grocery store manager received a broken leg, arm, and pelvis. Is Wheaton liable for the manager’s injuries under the doctrine of respondeat superior?

1028

10. Gary McCoy ordered a pizza from a Papa John’s restaurant. The restaurant was owned by RWT, a franchisee of Papa John’s International. RWT did business as Papa John’s Pizza. Wendell Burke, an employee of RWT, delivered the pizza and obtained payment from McCoy at his place of business. Burke lingered for almost two hours after being paid, asking McCoy for a job and viewing a hunting videotape. When Burke returned to the Papa John’s restaurant, to avoid criticism for being late he concocted the story that McCoy held him against his will. The police arrested McCoy for false imprisonment, which charges were eventually dropped. McCoy sued Burke, RWT, and Papa John’s International for malicious prosecution based on Burke’s false statements. Does the doctrine of respondeat superior impose liability on the franchisor, Papa John’s International, in this case?

11. Tammy Bauer hires consulting firm Accent Pointe to find a buyer for the formula and trade name of her pest repellent, NO BUGGZ. Bauer tells Accent Pointe to tell prospective buyers that NO BUGGZ is organic and has no health risks to humans. Bauer knows that NO BUGGZ has serious negative health effects on humans even when used as directed. Consequently, Accent Pointe tells Scotts Company that NO BUGGZ has no serious negative health risks to humans when used as directed. The written purchase contract that Scotts signs with Bauer does not represent that NO BUGGZ has no health risks to humans; the contract contains an exculpatory clause stating that Bauer is not bound by Accent Pointe’s representations, unless they also appear in the written contract. Two years after Scotts buys NO BUGGZ, Scotts is subjected to consumer lawsuits claiming that NO BUGGZ is causing health problems for its users. Is Bauer liable to Scotts for misrepresentation?

12. Thule Drilling sued Jacob Schimberg based on business transactions between Thule and QGM Group, a corporation for which Schimberg was the CEO. Thule’s contract with QGM required QGM to do repair and construction work on three of Thule’s mobile drilling rigs. Thule agreed to loan QGM funds so that QGM’s work on the rigs could be completed. Thule alleged that QGM breached the contracts with Thule and that Thule was entitled to take possession of the rigs. Thule also argued that Schimberg, as the corporate agent of QGM, was personally liable to Thule because he directly denied Thule access to its rigs, committing the tort of conversion. Schimberg argued that he acted only at the behest of his QGM superiors and that he was never a party to any of the contracts between Thule and QGM. Are both QGM and Schimberg liable to Thule?