Chapter 35 – The Agency Relationship

The Agency Relationship

Third-Party Relations of the

Principle and Agent

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

The Agency Relationship

I’ve got an ego and all that, but I know I need help. So I go and hire the very best people.

H. Ross Perot, EDS founder

Inc. magazine (Jan. 1989)

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

v Creation of an agency relationshipv Agency concepts, definitions, and typesv Duties of agent to principalv Duties of principal to agentv Termination of an agency

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v Agency is everywhere! Agency is a two-party relationship in which one party (agent) is authorized to act on behalf of, and under the control of another party (principal)w MDM Group Associates, Inc. v. CX Reinsurance

Company Ltd.: Agent owes a fiduciary duty to principal, but not vice versa

v All employees are agents, but not all agents are employees.

Overview

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v Anybody may be an agent or principal, but the agreement is voidable by minors and the mentally incapacitated

v Certain duties are non-delegable

Creation of Agency

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v An agent can bind his principal only when the agent has authority to do so

v Two forms: actual or apparent authorityv Actual authority is either express or implied

wExpress authority is created by the principal’s actual words (written or oral)wExample: “I want to hire you as my real

estate agent to sell my house.”

Agency Authority

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v Agent has implied authority to do whatever it is reasonable to assume that the principal wanted the agent to do given principal’s statements and surrounding circumstancesw Example: a person hired as general manager in

a restaurant will have broad authority to run the business while a person hired as a waiter will have limited authority

Implied Authority

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v Apparent authority arises when principal’s conduct leads a third party to believe that an agent (who lacks actual authority) is authorized to act a certain way and the third party reasonably relies on the appearance (cloak) of authority

v To protect third parties, agency law allows agents to bind a principal on the basis of apparent authority

Apparent Authority

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v A legal question may depend on whether a person who contracts with a principal is an employee (servant) or independent contractor

v No clear distinction, but the Eisenberg v. Advance Relocation & Storage, Inc. court lists the “Reid” factors to aid in decision making: right to control physical details of the work, skill required, source of tools, location, schedule control, duration of relationship, payment method, benefits, tax treatment of hired party, uniqueness of work…

Employee or Independent Contractor?

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v In Eisenberg v. Advance Relocation & Storage, Inc., the court disregarded Eisenberg’s short tenure and found that she was an employee: w she loaded trucks for a moving company that

supplied all tools and paid her an hourly wage, and the company controlled the way she performed her assigned tasks

v As an employee, Eisenberg had the right to file a sexual harassment lawsuit under Title VII of the Civil Rights Act of 1964

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Employee orIndependent Contractor?

v Since agency is a fiduciary relationship of trust and confidence, an agent has a duty of loyalty to the principal

v Agent must (1) avoid conflicts of interest with the principal, (2) maintain confidentiality of information received from the principalw The duty of confidentiality survives agency

Duties of Agent to Principal

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v Conflicts of interest include self-dealing, competition with the principal, or acting for another partyw These duties end after the period of agency

Duties of Agent to Principal

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ABKCO Music Inc. v. Harrisongs Music, Ltd.

v Facts: w 1971: George Harrison, managed by ABKCO

Music (A.B. Klein), was sued by the copyright holder of hit song, “He’s So Fine” (Bright Tunes), which claimed Harrison’s song, “My Sweet Lord,” infringed on their copyright

w Klein tried unsuccessfully to settle the suit, then his contract with Harrison expired

w At the copyright trial in 1976, Harrison found liable for infringement; damages issue remained

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v Facts: w 1978: After agency termination, Klein (ABKCO)

used Harrison’s information in negotiations to purchase Bright Tunes and all rights to lawsuitw ABKCO became the plaintiff in 1979 trial for damages

w At trial, Harrison counterclaimed for damages from ABKCO’s breach of the duty of loyalty

w Trial court found a breach of duty and reduced ABKCO’s recovery; ABKCO appealed

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v Legal Reasoning and Issue: w An agent has a duty not to use confidential

knowledge acquired in employment to compete with principal and the duty exists after the employment

w However, using information based on general business knowledge is not covered by the rule

w Did Klein use confidential information from his agency to purchase Bright Tunes?

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v Holding: w Evidence showed that Klein gave Bright Tunes

confidential earnings schedules belonging to Harrison and that Klein’s former position aided in his purchase of Bright Tunes pending litigation

w Sufficient evidence exists to state that Klein’s conduct did not meet the standard of a former fiduciary

w Judgment affirmed

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v Agents must obey the principal’s reasonable instructions for agency business, exercise the degree of care and skill standard for the job, promptly communicate to the principal matters reasonably relevant or material to the agency business, and duty to accountw No duty to obey illegal or unethical orders

Other Agent Duties

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v Defendant employer countered employee’s lawsuit with “faithless servant” doctrinew Employee allegedly acting unethically or

operating a side business (moonlighting)

v Faithless servant doctrine applies if worker’s disloyal acts were related to performance of duties and employer suffered damagesw Employer failed to prove either point

Sanders v. Madison Square Garden L.P.

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v A written agency contract normally states the duties the principal owes the agent, but law implies certain duties on the principal:

1. To compensate the agent

2. To reimburse the agent for money spent in the principal’s service

3. To indemnify the agent for losses suffered in conducting the principal’s business

Duties of Principal to Agent

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v Termination by act of the parties includes:w At a time or event stated in the

agreementw When agency was created to

achieve a special purpose and the purpose was achieved

w By mutual agreement of the partiesw At the option of either party

Termination of Agency

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v Termination by operation of law includes:w Serious breach of the agent’s duty of loyaltyw Principal’s permanent loss of capacity or agent’s

loss of capacity to perform agency businessw Change in value of agency property or subject

matter (including loss or destruction)w Changes in the law making the agency illegalw Changed business conditions or outbreak of war


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v Termination by operation of law also includes:w Impossibility of performance by the agent w Death or bankruptcy of principal or agent

v Exception: if agent’s power coupled with an interest, agency doesn’t terminate by the principal’s revocation, loss of capacity by principal or agent, or death of either principal or agent


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v Facts: Insurer sent written offer letter to insured Gaston Trepanier, who directed plaintiff (wife) to write acceptance on letter and send; she sent letter after husband entered a coma but before he died

v Issue: Whether Mrs. Trepanier’s agency terminated when Mr. Trepanier lapsed into a coma

v Holding: An individual in a comatose state is not permanently incapacitated under general agency principles, thus the trial court erred in entering summary judgment for insurer

Trepanier v. Bankers Life & Casualty Co.:

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v After agency terminates, agent’s express and implied authority endsw Caution: ex-agents may retain apparent

authority that could bind a former principal

v Principals should reduce risk of liability for third parties relying on ex-agent’s apparent authority by actual or constructive notice to third parties about agency termination

Effect of Agency Termination

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Test Your Knowledge

v True=A, False = Bw Agency is a contract in which an agent is

authorized to act on behalf of, and under the control of, a principal.

w All employees are agents, and all agents are employees.

w Agents may bind a principal on the basis of apparent authority.

w Agency may be created unintentionally.

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Test Your Knowledge

v True=A, False = Bw All duties are delegable.

wAn agent’s duty of confidentiality continues after the agency ends.

w To be considered actual authority, the authority must be expressed in words orally or in writing.

w Agency is a fiduciary relationship.

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Test Your Knowledge

v Multiple Choicew Principals have the following duties to agent:

(a) Duty to compensate

(b) Duty to reimburse for reasonable expenses for doing agency business

(c) Duty to indemnify the agent for losses suffered due to agency’s business

(d) Both A and B

(e) All of the above

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Test Your Knowledge

v Multiple ChoicewManuel asked his friend Sunil, a good

salesman, to sell his car and Sunil agreed. Does an agency relationship exist?

(a) Yes, Sunil is an agent for Manuel

(b) Yes, but only if there is a written contract describing the agency’s purpose

(c) No, since friends cannot engage in an agency relatioship

(d) No, unless Sunil sells Manuel’s car35 - 28

Thought Questions

v Have you been an agent or a principal?

v Do you think the agency rules of liability are fair?

v What are the ethical issues involved in an agency relationship?

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Education

Chapter 35 – The Agency Relationship