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Contract law is a component of civil law that concerns the legalprinciples governing the exchange of goods or services between
individuals or businesses. At its heart, contract law involves how legally
enforceable promises are formed and executed.
A promise is a declaration by a legal person (called the promisor) to
perform or forbear from performing specified act(s). The recipient of
the promise (called the promisee), upon a promise being made, has
rights to expect (and often to demand) that the promise be performed.
Whether these rights to expect and demand performance are moral or
legal rights depends on whether the promise was made in the context
of a valid and enforceable contract. Only if the legal requirements of a
contract are satisfied, or if other legal remedies are available, will a
promise be enforceable in a court of law.
The law of contracts provides a means of distinguishing between
types of promises that create moral obligation (e.g., a promise to meet
a friend for coffee) and those that also create legal obligation (e.g., a
promise to your bank to pay the mortgage acquired on your home).
Within the United States, there are two major sources of domestic
contract law: the Uniform Commercial Code (UCC) and the common
law. Depending on the subject matter of the contract, such as if the
contract involves the purchase of tangible personal property (“goods”)
or the hiring of an individual for employment (“services”), one will look
to specific sources of law to determine whether the legal promise is
enforceable.
Contracts for the sale of goods are governed by Article 2 of the UCC.
Most contracts that are not for the sale of goods—such as contracts for
employment, real property, insurance, and so forth—are governed by
the common law, which is generally summarized in the Restatement of
Contracts (Restatement).
Once one identifies the applicable source of the contract law—that is,
whether the contract is governed by the common law or by the UCC—
then, one can determine if the particular promise is valid and
enforceable under the applicable rules contained in that source of law.
Although the UCC and the common law do overlap, there are many key
differences between the two sources of law as regards many areas of
contract law, including the formation and performance of a contract,
the requirements for breach of a contract, the enforceability of a
contract, and the remedies available for the victim of a breach.
The legal enforceability of a particular promise thus hinges on the rules
contained in the relevant source of law that are applicable to the
subject matter of that particular promise. The promise is, in many ways,
the cornerstone of societal order. As stated by distinguished jurist
Roscoe Pound, the “social order rests upon the stability and
predictability of conduct, of which keeping promises is a large item”
(Pound, 1959). Contract law provides the mechanism for determining
when a promise is valid and enforceable in a court of law.
Transcript
References
Pound, R. (1959). Jurisprudence (Vol. 3). Saint Paul, MN: West Publishing
Co.
Contract Remedies
Print
The US legal system is a common-law system, a type of system that
originated in England after the Norman conquest of 1066 CE. The
rulers of England, including William the Conqueror and his progeny,
took measures to unify the country. One of the measures they took
was to establish king’s courts, which sparked the beginning of a body
of common law, or generally applicable rules of law, throughout
England and, eventually, its colonies. Over time, the common law was
brought to America through English colonization, and the system of
common law was adopted by the Founding Fathers of the United
States.
In medieval English times, one could seek different remedies in
different courts. Remedies, broadly construed, are the legal method
by which rights are enforced or wrongs redressed. In medieval English
times, king’s courts resolved disputes by issuing an award of
compensation to injured parties, often in the form of land, valuable
property, or money. The king’s courts eventually became known
as courts of law, and the awards of compensation, remedies at law.
Remedies at law, today, are mostly issued in the form of monetary
amounts called damages, and are awarded through court orders.
It became apparent during the medieval period that there was
sometimes no adequate remedy at law available to resolve a dispute,
and so, over time, chancery courts, also known as courts of equity,
were established. The remedies available in the courts of equity (called
remedies in equity or equitable remedies) were non-monetary
remedies, including specific performance, rescission, reformation, and
injunction.
During the medieval period and still today, equitable remedies are
typically available to the injured party only when remedies at law (e.g.,
monetary damages) are inadequate for resolving a dispute. Over time,
and particularly during the nineteenth century, most states in United
States adopted rules to combine the traditional courts of law and
courts of equity, streamlining the process by making injured parties
capable of seeking both monetary and equitable remedies in the same
court.
Remedies are available for victims of breach of contract. When one
party to a contract does not fulfill his or her legal obligations under
the contract (“breaching the contract”), the other party may seek a
remedy, or some combination of remedies, to make the injured party
whole. Today, in the United States, the remedies available for breach
of contract include both remedies at law (damages), and equitable
remedies, and in most states, these remedies may be sought
simultaneously in the same court. When there is a valid and
enforceable contract, monetary and equitable remedies may be
available.
Even when there is not a valid and enforceable contract, in some cases,
remedies may be sought under other common-law theories, such as
promissory estoppel, or pursuant to theories of quasi-contract. The
following decision tree explains how contract remedies work in
tandem with noncontract remedies.
Contract Remedy Decision Tree
As the decision tree shows, when there is a valid and enforceable
contract, then monetary and equitable remedies may be sought. If
there is not a valid and enforceable contract, then one should ask if a
promise has been made in order to determine the appropriate theory
to use. If a promise has been made, then one may seek a remedy
under the theory of promissory estoppel. If a promise has not been
made, then one may seek a remedy under the theory of quasicontract. If there might be a contract, but this is not certain, then one
may seek relief in the alternative (by requesting the court to determine
if there is a contract and, if so, to issue contract remedies; or, if not, to
issue noncontract remedies).
Thus, even if no valid and enforceable contract exists, there is still the
potential, depending on the circumstances, for the injured party to
seek remedies.
Transcript
Resources
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Breach of Contract
Learning Resource
Print
Breach of Contract
A party who is not relieved from her duty of performance and fails to
perform her obligations under a contract is said to breach the contract.
Breach entails a failure to perform material duties in accordance with
the agreement. This can include a complete lack of performance, partial
performance of the material duties, or performance that fails to meet
the demanded standard. A breach by one party relieves the other
party’s duty of performance.
Ask Yourself
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Should different types of breach be treated differently? Why or
why not?
Joseph enters into a contract with Eric to build a deck on Eric’s
house. Joseph builds a deck that is weak, flimsy, and drastically
varies from the design plans. Under what grounds might Joseph
allege breach of contract against Eric?
Remedies
A breach of contract action may result in any number of damages.
Compensatory Damages
Compensatory damages are court-awarded damages to put the
plaintiff in the same position as if the contract had been performed. It
includes lost profits on the contract and the cost of substitute
performance. A party’s lost profits from the other party’s breach of
contract are the expected gains from performance of the contract. This
would generally mean the value received minus the costs incurred in
performing. This calculation is known as the “expectation damages.”
For example, you sign a contract to sell me supplies for my business.
You back out of the contract and I have to purchase my supplier from
another vendor. The cost to me to purchase the supplies from a new
vendor is 15 percent higher than pursuant to our agreement. I have
suffered damages of 15 percent of the contract value. Alternatively, if I
backed out of the contract and my duties to purchase your supplies,
you would have suffered expectation damages equal to the price of the
goods minus your cost of supplying them to me.
Consequential Damages
Consequential damages are court-awarded damages arising from
unusual losses which the parties knew would result from breach of the
contract.
For example, I order cement from you to complete a large contract. I
express to you that I intend to use the cement for the large
construction contract and that time of deliver and quality of the goods
is of utmost importance. You fail to deliver the cement and I am forced
to purchase from another vendor. The cement arrives late and causes
delays. I incur substantial penalties under the larger contract. Your
breach of contract may have cost me compensatory damages equal to
the price difference between our contract and the replacement vendor.
The consequential damages, however, are the penalties incurred and
any lost business as a result of your breach.
Liquidated Damages
Liquidated damages are damages specified in the contract in the event
of non-performance by either party. Liquidated damages are
appropriate where real damages for breach of contract are likely to be
uncertain. In such a case, the parties decide to specify in the contract
the damages in the event of breach. Courts will enforce these
liquidated damage clauses unless they seem to penalize the defendant
instead of merely compensating the plaintiff for uncertain losses.
For example, I sign an agreement to provide you with consulting
services. It is difficult to estimate the damage to your business if I fail to
adequately perform. In the agreement we indicate that my failure to
perform will result in damages of $1,000 to you. This liquidated
damages clause is likely enforceable.
Nominal Damages
Nominal damages include a small amount awarded by the court to the
plaintiff for a breach of contract, which causes no financial injury to the
plaintiff. In a tort action, a court may only award punitive damages if
there is some finding of liability of the defendant. The court may not be
able to find liability based upon tort theory in the absence of
identifiable harm suffered by the plaintiff. If, however, the tort action is
accompanied by a contract cause of action for the same conduct, the
award of nominal damages for breach of contract may support a
finding of punitive damages in the related tort action.
For example, I enter into a contract to provide you with consulting
services. I fail to perform and you hire someone else. In this situation, it
is difficult to determine if your business incurred any damages. If you
sue me, a court may award nominal damages against me indicating
that I was legally wrong in failing to perform my contractual duties. A
common nominal damages amount is between $1 and $100.
Specific Performance
Specific performance is a court-ordered, equitable remedy available
when the subject matter of the contract is unique. A court order for
specific performance directs a party to perform her duties under the
contract. The court will only apply this remedy when the subject matter
of the agreement is truly unique and irreplaceable. Specific
performance is not available for service obligations.
For example, you agree to sell me a Picasso painting that you inherited.
At the last minute, you back out of the contract. I sue you to force you
to sell me the painting. A court may order specific performance of the
contract by ordering you to sell me the painting.
Recission
Rescission means to undo a contract and return the parties to the
position they were in prior to entering the contract. This generally
means returning property sold in the condition it was transferred and a
return of the purchase price. This remedy is not available for executed
services contracts.
Efficient Breach
Efficient breach occurs when a party makes a conscious decision to
breach a contract after balancing the costs of complying against
fulfilling the contractual obligation. This normally arises in situations
where a party will incur fewer losses or make more money by breaching
the contract than the party would suffer in compensatory or
consequential damages if sued.
Licenses and Attributions
Business Law: An Introduction, by TheBusinessProfessor.com, Jason M.
Gordon & Colleagues has been adapted with permission from Jason M.
Gordon. © Business Professor, LLC.
The video Damages in a Breach of Contract Action has been adapted
with permission from Jason M. Gordon. © 2016, Business Professor, Inc.
Ethical Business Decision Making
Print
It is reasonable that everyone who asks justice should do justice.
Thomas Jefferson
What Is Ethics?
Ethics has been a topic of discussion and debate starting with the Greek philosophers about 2,500
years ago. We can define ethics simply, but resolving ethical issues is rarely simple. Ethics is the
study of good and of how people apply good principles in their behavior. Behavior includes how
we treat people we know and, perhaps more importantly, how we treat people we do not know.
Our biases and fears can complicate ethical decision making. Our own interests in achieving
specific ends can also interfere with our choice of an ethical course of action; the ethical choice
may not be the most profitable or socially acceptable.
It might be helpful to discuss what ethics is not. Ethics is not religion, although religion can
guide ethical thinking. Ethics is not defined by what is possible (e.g., through scientific discovery
or technology), although, as new machines are created, what is possible changes, giving rise to
new ethical quandaries. Nor is ethics simply what is commonly practiced. Any one of us could
cite a historically common practice that is unethical. In addition, what is common practice today
in one place will conflict with what is common practice today in other places.
Ethics is not just how we feel: our instincts may tell us to act one way or another, but this feeling
may not lead us to the best behavior. If making a public speech against a new piece of legislature
were the only way to behave ethically following the passage of that legislature, would we take
this action? Many people, for example, have a gut reaction against public speaking. The law is
not an adequate guide either. Looking back at history, we can certainly name unethical laws.
An important outcome of ethical decision making is a standard for behavior. Standards can be
informal, as in our behavior on the street, in a store, or with our neighbors. If you see someone
drop a $20 bill, what should you do? Standards can also be formal, usually at the institutional
level (e.g., at a university, trade organization, or business) or the societal level (city, county,
state, national, international). At the societal level, for example, methods and forms of taxation
must be determined. What means of taxation are ethical? Are there some that are unethical?
What Is Business Ethics?
Business ethics is ethics concerning behaviors occurring within a business context. The breadth
of ethical considerations should be considered when one is formulating a standard of behavior in
a business setting. We cannot look only to the law, only to common or prior practice, to religion,
or to instinct. We must carefully consider multiple competing factors and, using logic and
rational thought, create business standards of behavior that are ethical.
How Does a Business Provide Ethical Standards?
Businesses attempt to provide ethical standards in several ways:
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relying on each individual to make ethical decisions
stopping at compliance with the law
simply telling employees and officers to act ethically
And some businesses achieve results by taking a managing values approach—a systematic
approach to maintaining the organization’s values that doesn’t depend on individual interpretation
of those values or how to safeguard them.
The first three options are not helpful even when an employee wishes to act ethically; the
employee may not understand how to judge what is ethical behavior. Thus, determining if your
company is using a managing values approach is the first step. Places to look to make this
determination include your organization’s mission statement, core values, and ethics code.
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Operational Ethics in a Business Setting
But what if these don’t help, or worse, they raise ethical issues themselves? Fortunately, there is a
set of standard ethics tests that you can apply yourself.
Ethics Tests You Can Apply
The first ethics test you can apply is called the front page test, or viral news test. This is a fairly
new test, and it is simple: How would your business feel if the issue were on the front page of a
newspaper? Or went viral on the internet?
More traditionally, there are five theoretical tests with which you can judge a business action
(Markkula Center for Applied Ethics, n.d.):
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rights—What duty do the actors have to respect the human rights of those
affected?
justice or fairness—Are all parties treated equally or proportionally? If
differently, is the basis for treating them differently rational?
virtues—The good human being is fair, is honest, shows integrity, and
shows compassion. Does the action uphold these virtues?
common good—This test has become more common recently. How does
the action benefit everyone in society? Whom does it not benefit? Whom
might it harm?
utilitarianism—Utilitarianism is also called the greatest good principle.
Does the overall good outweigh any bad? Sometimes, this conflicts with
other tests.
In order to answer the questions above, we must have a clear sense of what is a good? What is a
harm? What are legitimate rights? What is the standard of fairness? What is the canon of virtues?
What is the common good? These questions have been much debated.
A Method of Determining Ethical Responsibility
There are five questions you can ask to determine whether or not you should act on a given
decision:
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What is the severity of the harm?
What is the certainty of the harm?
What is the degree of involvement?
What is the cost of acting?
What is the certainty of the solution?
Process of Ethical Analysis
Think of ethical analysis as a process that builds on itself. Follow the steps below, knowing that
you might circle back and reevaluate your interpretation of the situation as you complete each
step.
1. Identify the stakeholders and determine whether some are more important
than others.
2. Determine whether all stakeholders have been consulted on the business
decision at hand.
3. Describe the possible actions of the stakeholders following the business
decision
4. Evaluate each of the possible business decisions in light of the ethical
tests.
5. Identify the best possible decision and justify your choice, with reference
to the ethical approach on which you have based it.
References
Markkula Center for Applied Ethics. (n.d.). Ethical decision making. Santa Clara University.
Retrieved from https://www.scu.edu/ethics/ethics-resources/ethical-decision-making/
Business Ethics in a Nutshell: What is
Ethics?
Ethics is the branch of philosophy concerned with the meaning of all
aspects of human behavior. Theoretical ethics, sometimes called
normative ethics, is about discovering and delineating right from
wrong; it is the consideration of how we develop the rules and
principles (norms) by which to judge and guide meaningful decision
making. Theoretical ethics is supremely intellectual in character, and
being a branch of philosophy, is also rational in nature. Theoretical
ethics is the rational reflection on what is right, what is wrong, what is
just, what is unjust, what is good and what is bad in terms of human
behavior.
Business ethics is not chiefly theoretical in character. Though reflective
and rational in part, this is only a prelude to the essential task behind
business ethics. It is best understood as a branch of ethics called
applied ethics: the discipline of applying value to human behavior,
relationships and constructs, and the resulting meaning. Business ethics
is simply the practice of this discipline within the context of the
enterprise of creating wealth (the fundamental role of business).
There are three parts to the discipline of business ethics: personal,
professional, and corporate. All three are intricately related, and it is
helpful to distinguish between them because each rests on slightly
different assumptions and requires a slightly different focus in order to
be understood. We are looking at business ethics through a trifocal
lens: close up and personal, intermediate and professional, and on the
grand scale (using both farsighted and peripheral vision) of the
corporation.
In spite of some recent bad press, business executives are first and
foremost human beings. Like all persons, they seek meaning for their
lives through relationships and enterprise, and they want their lives to
amount to something. Since ethics is chiefly the discipline of meaning,
the business executive, like all other human beings, is engaged in this
discipline all the time, whether cognizant of it or not. Therefore, we
should begin by looking at how humans have historically approached
the process of making meaningful decisions. Here are four ethical
approaches that have stood the test of time.
Personal Ethics: Four Ethical Approaches
From the earliest moments of recorded human consciousness, the
ethical discipline has entailed four fundamental approaches, often
called ethical decision-making frameworks: utilitarian ethics (outcome
based), deontological ethics (duty based), virtue ethics (virtue based),
and communitarian ethics (community based). Each has a distinctive
point of departure as well as distinctive ways of doing the fundamental
ethical task of raising and answering questions of value. It is also
important to understand that all four approaches have overlaps as well
as common elements, such as the following:
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impartiality—weighting interests equally
rationality—backed by reasons a rational person would accept
consistency—standards applied similarly to similar cases
reversibility—standards that apply no matter who makes the
rules
These are in a sense the rules of the ethics game, no matter which
school or approach to ethics one identifies with most.
Utilitarian Ethics
The utilitarian approach is perhaps the most familiar and easiest to
understand of all approaches to ethics. Most of us are using utilitarian
ethics much of the time, especially those of us in business. The
utilitarian asks a very important question: “How will my actions affect
others?” They then attempt to quantify the impact of their actions
based on some least common denominator, such as happiness,
pleasure, or wealth. Therefore, utilitarians are also called
consequentialists, because they look to the consequences of their
actions to determine whether any particular act is justified.
“The greatest good for the greatest number” is the motto of the
utilitarian approach. Of course, defining “good” has been no easy task
because what some people think of as good, others think of as
worthless. When a businessperson does a cost benefit analysis, he or
she is practicing utilitarian ethics. In this case, the least common
denominator is usually money. Everything from the cost of steel to the
worth of a human life must be given a dollar value, and then one just
does the math. The Ford Pinto automobile was a product of just such
reasoning. Thirty years ago, executives at the Ford Motor Company
reasoned the cost of fixing the gas tank problem with their Pinto would
cost more than the benefit of saving a few human lives. Several tanks
did explode, people died, and the company lost lawsuits when judges
and juries refused to accept these executives’ moral reasoning.
One of the most familiar uses of outcome-based reasoning is in
legislative committees in representative democracies. How many
constituents will benefit from a tax credit and how many will be
diminished is the question before the revenue committee at tax
rectification time. Representative democracies make most decisions
based on the utilitarian principle of the greatest good for the greatest
number.
Democratic governments are naturally majoritarian, though in
constitutional democracies there are some things that cannot be
decided by doing the math (adding up the votes). Some questions
should never be voted on. The founders of our nation expressed this
fundamental concept with three words: certain unalienable rights.
Deontological Ethics
Enter the deontological ethicists. Immanuel Kant is the quintessential
deontological (duty-based) ethical theorist. Kant, who lived in
eighteenth-century Prussia, was one of the most amazing intellects of
all time, writing books on astronomy, philosophy, politics, and ethics.
He once said, “Two things fill the mind with ever new and increasing
admiration and awe …the starry heavens above and the moral law
within” (Kant, 1788). For Kant there were some ethical verities as eternal
as the stars.
Deontological simply means the study (or science) of duty. Kant did not
believe that humans could predict future consequences with any
substantial degree of certainty. Ethical theory based on a guess about
future consequences appalled him. What he did believe was that if we
use our facility of reason, we can determine with certainty our ethical
duty. As to whether or not doing our duty would make things better or
worse (and for whom), Kant was agnostic.
Duty-based ethics is enormously important for (though consistently
ignored by) at least two kinds of folks: politicians and business people.
It is also the key to a better understanding of our responsibilities as
members of teams. Teams (like work groups or political campaign
committees) are narrowly focused on achieving very clearly defined
goals: winning the election, successfully introducing a new product, or
winning a sailboat race. Sometimes a coach or a boss will say, “Look,
just do whatever it takes.” Ethically, “whatever it takes” implies the ends
justify the means. This was Kant’s fundamental criticism of the
utilitarians.
For Kant, there were some values (duties) that could never be sacrificed
to the greater good. He wrote: “So act as to treat humanity, whether in
thy own person or in that of any other, in every case as an end withal,
never as a means only” (Kant, 1998). Fellow team members, employees,
campaign staffs, customers, and partners are always to some extent
means to our various goals (ends), but they are also people. And
people, Kant believed, cannot be just used, they must also be respected
in their own right, whether or not the goal is achieved. He called this
absolute respect for persons a categorical imperative.
In any team situation the goal is critical, but treating team members
with respect is imperative. Teams fall apart when a team member feels
used or abused (treated as less important than the overall goal itself).
Great leaders carry the double burden of achieving a worthwhile end
without causing those who sacrifice to achieve the goal being treated
as merely expendable means. People are never merely a means to an
end. We owe that understanding to Immanuel Kant.
It is one thing to understand that there are duties that do not depend
on consequences; it is quite another to develop the character to act on
those duties. This is where Aristotle (384-322 B.C.) comes in. Aristotle
wrote the first systematic treatment of ethics in Western civilization:
Nicomachean Ethics.
Virtue Ethics
Today we call his approach to ethics virtue ethics. For Aristotle and
other Greek thinkers, virtue meant the excellence of a thing. The virtue
of a knife is to cut; the virtue of a physician is to heal; the virtue of a
lawyer is to seek justice. In this sense, ethics becomes the discipline of
discovering and practicing virtue. Aristotle begins his thinking about
ethics by asking, “What do people desire?” He discovers the usual—
wealth, honor, physical and psychological security—but he realizes that
these are not ends in themselves; they are means to ends.
The ultimate end for a person, Aristotle taught, must be an end that is
self-sufficient, “that which is always desirable in itself and never for the
sake of something else” (Arisotle, 1999). This end of ends Aristotle
designates with the Greek word eudemonia, usually translated by the
English word “happiness.” But happiness does not do Aristotle or his
ethics justice. Yes, eudemonia means “happiness,” but really it means so
much more. The problem is not with Aristotle’s Greek word eudemonia,
the problem is in our English word “happiness.”
Happiness in English comes from the ancient word hap,
meaning chance, as in happenstance. For Aristotle happiness was not
something one acquired by chance. Happiness was the grand work of
living; the very practice of being all that you can
be. Fulfillment and flourishing are far better words to translate the
concept contained in the Greek word eudemonia. For Aristotle, this
state of virtue is achieved not by accident but through intent, reason,
and practice.
Aristotle thought that one discovers virtue by using the unique gift of
human reasoning, that is, through rational contemplation. “The
unexamined life is not worth living,” said Socrates almost 100 years
before Aristotle. Like Aristotle and Aristotle’s teacher Plato, Socrates
knew that we humans need to engage our brains before we open our
mouths or spring into some decisive action. For Aristotle, the focus of
that brain work was chiefly about how to balance between the fears
and excesses in which the human condition always abounds. Between
our fears (deficits) and exuberances (excesses), lies a sweet spot, the
golden mean, called virtue.
At times of physical peril—say in a big storm on a small sailboat—a
crew member may be immobilized by fear and unable to function, thus
putting the lives of everyone on the sailboat in danger. Or the opposite
could happen. A devil-may-care attitude in the face of real danger can
as easily lead to disaster. Courage is the virtue located at the mean
between cowardliness and rashness. Yet, identifying such a virtue and
making that virtue part of one’s character are two quite different
things. Aristotle thus distinguishes between intellectual virtue and
practical virtue. Practical virtues are those developed by practice and
are a part of a person’s character, while intellectual virtue is simply the
identification and understanding of a virtue.
Practice is how one learns to deal with fear; practice is how one learns
to tell the truth; practice is how one learns to face both personal and
professional conflicts. Practice is the genius of Aristotle’s contribution
to the development of ethics. He showed that virtues do not become a
part of our moral muscle fiber because we believe in them, or advocate
them. Instead, virtues become characteristics of ourselves by our
exercising them. How does one learn to be brave in a storm at sea?
“Just do it.”
The ultimate goal behind developing characteristics of virtue is
eudemonia, a full flourishing of our self, true happiness. Practitioners of
the Judeo-Christian tradition tend to think of ethics (or morality) as the
business of figuring out how to be good rather than bad. That is not
the true end of ethics so far as Aristotle was concerned. The end is a
state of fulfillment; the ultimate goal is becoming who you truly are
and realizing the potential you were born with—being at your best in
every sense.
Just as the virtue of the knife is to cut and the virtue of the boat is to
sail, the virtue of the self is to become the best of who it can be. This is
eudemonia. Just as the well-trained athlete seeks to be in the zone (the
state of perfect performance achieved by practice), Aristotle wrote
about the truly virtuous life and the pursuit of eudemonia. Just as a
perfectly trimmed sailboat glides through the water, effortlessly in sync
with the waves and the wind, the man or woman in a state of
eudemonia has achieved the state of earthly fulfillment.
Communitarian Ethics
All three approaches to ethics described above are principally focused
on the individual: the singular conscience, rationally reflecting on the
meaning of duty or responsibility, and in the case of virtue ethics, the
ethical athlete practicing and inculcating the capacity to achieve the
state of eudemonia. Communitarian ethics has quite a different point
of departure: the community (or team, or group, or company, or
culture) within which the individual engages himself or herself is the
critical context for ethical decision making.
The communitarian asks the important question, “What are the
demands (duties) that the community or communities of which I am a
part make on me?” The Scottish ethicists W. D. Ross (himself a student
of Aristotle) focused his own ethical reflections on the question of,
“Where do ethical duties come from?” His answer was that they come
from relationships. We know our duties toward fellow human beings by
the nature and quality of our relationships with them. The duties we
owe a colleague in the workplace is different from the duties we owe a
spouse; those duties are different from the duties we owe our country.
The communitarian asks us to look outward and to face up to the
duties of being social creatures. We define ourselves and our
responsibilities by the company we keep.
Communitarians are quite critical today of the attitude of so many in
our society who, while adamant about their individual rights, are
negligent of their social duties. The “me generation” has created a
need for a new breed of ethicists who insist that, from family and
neighborhood to nation and global ecosystem, the communities in
which we live require us to accept substantial responsibilities.
Environmentalists, neighborhood activists, feminists, and globalists are
some of the groups loosely identified today with the communitarian
movement.
Amitai Etzioni, in Spirit of Community: Rights, Responsibilities and the
Communitarian Agenda described the principles of this somewhat
disorganized movement. Etizioni’s thesis is that we must pay more
attention to common duties as opposed to individual rights. Our
neighborhoods, he believes, can again be safe from crime without
turning our country into a police state. Our families can once again
flourish without forcing women to stay home and not enter the
workforce. Our schools can provide, “essential moral education”
without indoctrinating young people or violating the First
Amendment’s prohibition of establishing religion.
The key to this social transformation is the communitarian belief in
balancing rights and responsibilities: “Strong rights presume strong
responsibilities.” Etzioni (1993) states the communitarian agenda:
“Correcting the current imbalance between rights and responsibilities
requires a four-point agenda: a moratorium on the minting of most, if
not all, new rights; reestablishing the link between rights and
responsibilities; recognizing that some responsibilities do not entail
rights; and, most carefully, adjusting some rights to the changed
circumstances.”
Here, if nothing else, is a frontal attack on the libertarian mindset of
our age.
Communitarianism is not new, at least if one defines it as an approach
to ethics and value referencing significant communities of meaning.
Most of the world’s great religions are in this sense communitarian. It is
from a community of faith that the faithful develop a sense of self and
responsibility (or in Confucian thought, the extended family which
nurtures this development). Ethics cannot be separated from the ethos
of the religious or familial community. The modern communitarian
movement may or may not be religiously inclined, yet it is clearly a part
of a tradition of ethical approach as old as human association.
In the context of teams, the communitarian approach to ethics has
much to commend itself. How much of one’s personal agenda is one
willing to sacrifice for the overall goal of winning a sailboat race? Under
what conditions is one willing to let the values or culture of the team
alter one’s own ethical inclinations? To what extent do the relationships
one has with team members give rise to duties that one is willing to
honor? How willing is one to share the credit when the team succeeds?
How willing is one to accept blame when the team loses? Under what
conditions would one break with the team? If Ross is correct that duties
come from relationships, paying attention to such questions about the
company we keep may be more than a social obligation; perhaps, our
ethical duty.
Other Ethical Approaches
There are two pervasive ethical approaches not treated here: ethical
egoism and the divine imperative. Each has a broad and dedicated
following and each is deeply problematic to the ethical maturing of any
society. Briefly, and with pejorative intent, here is what these extreme,
yet interestingly similar approaches assert.
The ethical egoists say that ethics is a matter of doing what feels right
to the individual conscience. If one asks, “Why did you do that?” The
answer is, “Because I felt like it.” The approach is often dressed up with
statements about being true to yourself: “let your conscience be your
guide”, or “do the right thing.” But how does one know what is true for
the self? How does one develop a conscience? How is one to know that
doing what is right (what feels right to you) is the right thing to do?
If nothing else, ethical egoism is a conversation stopper! How does one
communicate to colleagues, friends, children or any other human being
when the reference point of behavior or ethical judgment is just about
how one feels inside? How does a civil society emerge if we civilians
cannot deliberate in common, understandable language about our
motives, intents, values, or duties? In essence, ethical egoism is the
ethics of teenagers rebelling against being answerable to outside
authority. To teenagers, to enter the ethical dialogue is to take the
radical risk of having one’s values and actions challenged.
Apparently, there are many of us who are just not grown up enough to
risk that! Better to repeat the mantra: “I did what my conscience
dictated.”
Just as there is no possible meaningful ethical dialogue with the ethical
egoist, nor is there much hope of creative engagement with divine
imperialists. For this growing community, ethics is the simple business
of doing what God tells one to do. There is therefore no reason or need
for discussion. The issue is conversion, not conversation. In a
constitutional democracy like ours with a fundamental commitment to
“the non-establishment of religion”, the divine imperialist is stuck with
a difficult dilemma: either to
make all ethical inquiry personal (that is, no social or political value
deliberation), or bring no state into conformity with the revealed will of
God. Divine Imperialists do not deliberate. They dictate, simply because
there is nothing to deliberate about. God has spoken. It is in the book.
The flaw in the divine imperialists’ approach that if God is good, then
He must reveal only good laws and rules. This creates two alternatives.
The first is that there is a reference for “good” apart from the divine
itself. The only other, that God is undependable; that God is arbitrary;
surely this is unacceptable. God is not only good, but God wills the
good. God’s will, then, becomes a reality discoverable even apart from
belief in a particular represented manifestation of God. Religion, at its
best, should understand that faith confers no special status of ethical
insight. Believers, agnostics, and nonbelievers can, and do, contribute
to the culture’s continuing struggle to understand what is good, what is
just, what is true. That is why democracies (as opposed to states
founded upon some divine right of kings) survive.
Narrative Ethics
Among the professions, particularly medicine, law, and counseling,
narrative has become a powerful tool in developing ethical insights and
perspective. To tell a story is to invite participation from the hearer, and
it is to also a means of communicating the richness and complexity of
human dilemmas. Narrative ethics is simply diagnosis through story. Its
benefit over the four traditional ethical approaches is that story invites
both ethical engagement and ethical creativity. In business, as in law, a
great deal of teaching is done through the use of cases. This is nothing
more or less than using the pedagogy of narrative ethics. The narrative
invites the hearer into the complexity of issues involved in personal,
professional and organizational dilemmas, and provides a road through
the complexity to the simplicity on the other side.
Oliver Wendell Holmes, an American jurist who wrote stunningly
comprehensible decisions, even in some of the most complex cases
imaginable, has a famous quote: “I would not give a fig for simplicity
this side of complexity, but I would give my life for the simplicity that
lies on the other side of complexity.” It is the role of narrative to lead
us through the thickets of overwhelming complexity, to the clarity of
enriched simplicity.
At all stages of the ethical decision-making process, narrative is a
useful tool of analysis for exposing the facts, conflicts, feelings, and
values that are the stuff of the human predicament.
References
Aristotle. (1999). Nicomachean ethics. (T. Irwin, trans.). Indianapolis, IN:
Hackett Publishing Company.
Etzioni, A. (1993). The spirit of community: Rights, responsibilities, and
the communitarian agenda. New York: Crown Publishers.
Kant, I. (1998). Groundwork of the metaphysics of morals (M. Gregor and
J. Timmermann, eds.). Cambridge, UK: Cambridge University Press.
Kant, I. (2002). Critique of practical reason (W. S. Pluhar, trans.).
Indianapolis, IN: Hackett Publishing Company.
Licenses and Attributions
Business Ethics in a Nutshell: What is Ethics? by Global Text Project
from OpenStax CNX is available under a Creative Commons Attribution
3.0 Unported license. © Oct 6, 2010, Global Text Project. UMGC has
modified this work and it is available under the original license.
Download for free at http://cnx.org/contents/201f18c7-3578-4b1ab7f9-fe5a74833b05@4.
Legal Responsibilities of Agents and
Employees
Print
Agency law is a component of civil law and deals with the legal
relationship by which one person acts on behalf of another.
The agent is the person who acts on behalf of the principal to do
something the principal has delegated the agent to do, which the
principal him or herself is legally permitted to do.
The creation of an agency relationship gives rise to both rights and
duties of the agent and the principal, as well as the potential for
liability to each other and to third parties. Principals may be held liable
by third parties for the acts of their agents under certain, but not all,
circumstances. The potential liabilities a principal has to third parties
for the agent’s acts often depend on whether the agent is an employee
or an independent contractor. Principals face potentially more liabilities
to third parties for the acts of their employees than they do for the acts
of their independent contractors.
Agency and Liability
Agency law concerns the legal relationship by which one person acts
on behalf of another. This resource will examine the agency
relationship and the legal duties owed by principal and agent. It will
focus on the scope of the agency relationship—particularly in the
context of the employer-employee relationship. It will introduce the
concept of vicarious liability and provide the elements necessary for a
principal to be held liable for the actions of the agent. This topic will
include liability for contracts entered into by the agent and torts
committed by the agent.
What Is an Agency?
An agency relationship is one in which a party acts on behalf of and
with the authority of another party. The principal appoints or
authorizes the agent to act on her behalf. Thus, she is responsible for
the actions of the agent taken in furtherance of her duties or per the
instructions of the principal. The agent will interact with third parties on
behalf of the principal. The agency relationship requires an
understanding of the relationship between principal and agent, agent
and third parties, and the principal and third parties’ roles,
responsibilities, and rights.
For example, I hire Betty to negotiate a business deal on my behalf. I
am the principal and Betty is my agent for this purpose. Betty will act as
my representative in dealing with the third parties to this business deal.
Transcript
Types of Agents
The principal will lay out the scope of the agency, including the
responsibilities and limitations of the agent. Agents generally fall into
three categories:
•
•
limited agent—A limited agent has a special purpose and limited
authority to act on behalf of the principal. Unless specifically
limited by the principal, actions done in furtherance of that
purpose are within the scope of the agent’s authority. For
example, I hire a real estate agent to represent me in the
purchase of a business. She is my limited agent for that purpose.
Her authority to act on my behalf is limited to this situation.
general agent—A general agent has broad authority to act on
behalf of the principal. The scope of the agency is not limited to a
special purpose. For example, Arthur is my employee. He serves
as operations manager. As such, he is my general agent with
regard to all aspects of operations falling under his responsibility.
•
His authority to act as my agent is not limited to a specific task;
rather, it is pursuant to his responsibilities in his position.
independent contractor—Agency law considers an independent
contractor to be a special form of agent of the principal. The
independent contractor is hired to perform a service for the
principal but is generally not under the direct control or
supervision of the principal. In this way, the agent has very limited
ability to represent or act on behalf of the principal outside of the
context of the services contract.
Numerous subcategories of agent exist within these broader
categories. For instance, an agent coupled with an interest is a type of
special agent who earns compensation through performing her agency
duties (rather than receiving compensation directly from the principal).
A sales agent who receives a commission on sales may be an agent
coupled with an interest. This type of agency is subject to contract rules
and cannot be terminated without violating the legal rights of the
agent or principal.
Other common categorizations of agents include co-agents and
subagents. Co-agents are multiple agents who serve a single principal
for the same purpose. Subagents are authorized agents of an agent.
Employee vs. Independent Contractor
An employer hires an employee to work on behalf of the employer as
part of or in support of the business’s core functions. The employee
generally works exclusively for the business in the functions for which
she is hired. The employer exercises extensive control over the nature,
time, and manner of work carried out by the employee. As such, the
employee is a general agent of the business to the extent of her
authority in the position.
An individual working on behalf of an employer does not have to be
paid to be considered an employee. An unpaid person may be a
“gratuitous employee.” This may be the case when individuals are
volunteering for nonprofit ventures or working as part of an internship.
For example, ABC Corp hires me as an internal accountant. I report to
ABC Corp from 8 a.m. to 6 p.m. five days per week. I work on any and
all accounting functions assigned to me by my supervisor.
An independent contractor is not an employee; rather, she or it is a
separate business that is hired to perform services for or on behalf of
another person or business. One way of thinking of an independent
contractor is that she has her own business that services the employer
as a client or customer. The employer does not directly control the
manner and method by which an independent contractor carries out
her duties. Also, an independent contractor generally has more than
one customer or client. As such, the independent contract is only a
limited or special agent of the principal employer.
For example, I have my own professional accounting practice. I prepare
the tax returns for any business or individual who pays me to do so. I
do not have any employees. ABC Corp hires me to prepare its annual
tax return. I promise to have the return completed within 1 month. I will
invoice ABC Corp for my services. I am not an employee of ABC Corp. I
am an independent contractor who is hired to perform a specific
function for a limited amount of time. While I have a projected
deadline, ABC Corp does not control the nature, time, and manner of
the services I perform.
This distinction is important for determining a principal’s liability for
the agent’s actions. Generally, absent specific instructions to do a task
leading to liability, an employer is not liable for the actions of an
independent contractor taken on behalf of the principal.
There are exceptions where an independent contractor may subject an
employer to liability for her actions. This is the case when the work
performed is inherently dangerous in nature; the tasks performed for
the employer are illegal; the work is nondelegable; or the employer
ratifies the contractor’s actions. A separate cause of action may exist if
the employer was negligent in selecting a contractor to perform the
duties. That is, she failed to exercise reasonable care in selecting a
particular contractor. This may be the case where past performance
demonstrated the contractor was unsuitable for the task.
Types of Principals
Principals are categorized based upon whether their identity is
disclosed to third parties with whom the agent interacts on their behalf:
•
•
•
disclosed principal—A disclosed principal’s identity is known to
third parties dealing with the agent.
partially disclosed principal—A partially disclosed principal is
known by third-parties to exist, but her exact identity is unknown.
This type of relationship exists when there is some benefit to the
principal to remain anonymous to third parties interacting with
the agent.
undisclosed principal—The existence of an undisclosed principal
is unknown to a third party. The third party believes that she is
interacting only with the agent.
These categorizations of principal are important in determining the
rights and duties of the principal, agent, and third party.
Principal-Agent Relationship Requirements
An agency relationship is created in the following manners:
•
express agreement—A principal and agent may expressly agree
to form an agency relationship. The agreement can be oral or in
writing. The principal must simply confer the authority upon the
agent to act on her behalf. The subject matter of the agency
•
•
•
relationship must be legal. The agency has the express authority
granted in the agency agreement and the implied authority to
undertake tasks incidental to that objective. If the duties of the
agent include executing a contract subject to the statute of
frauds, the agency relationship may need to be in writing to be
enforceable. An express agency relationship is often created
pursuant to a legal document known as a power of attorney. The
power of attorney may create a general or special agency
relationship.
implied agency—An agency may be implied from the facts or
circumstances surrounding an individual’s actions on behalf of
another. If the principal acts in a way that demonstrates an intent
for an individual to act on her behalf, this may imply an agency
relationship. The parties to an agency relationship do not need to
understand the law of agency or understand what it means to be
a principal or agent.
ratification—Ratification is a contract principle. If an individual
undertakes actions on behalf of another, these actions may be
outside of any express or implied authority. If, however, the
principal acknowledges and accepts the agent’s actions, this is
known as “ratification” of the agency relationship. The principal
ratifies the agent’s actions, after the fact. Agency by ratification is
only possible when the principal is fully disclosed.
by estoppel—If a third-party reasonably relies on an agent’s
representation that she has authority to act on behalf of the
principal, the principal may be bound by the actions of the agent.
Generally, the principal must act or fail to act in a manner that
causes a third party to reasonably believe that an agency
relationship exists, when in fact there is no agency. Agency by
estoppel is based upon principles of fairness. It would be unfair to
detriment a third party who reasonably believed that the agent
had authority to act on behalf of the principle, and the principal
was the source or cause of that belief. Agency by estoppel is only
•
possible with fully-disclosed principals. For example, Bill is James’
agent. James terminates the agency relationship. Nonetheless,
unbeknownst to James, Bill continues to transact with third
parties on James’ behalf. James fails to notify third parties of Bill’s
termination. James may be bound to any agreement entered into
by Bill.
by necessity—Agency by necessity arises when one party makes
a decision on behalf of another person who is unable to do so.
The decision must be essential in nature and it must be in the
interest of the principal in making that decision. As such, the law
will impute a de facto agency relationship where no actual agency
exists. For example, Bill is hired to deliver Tom’s goods. He drops
the goods off at the fulfillment center. The center says that there
is no contract in place and intends to reject the goods. Tom is out
of country and cannot be reached. The goods will spoil if not
accepted. Bill signs the warehousing agreement on Tom’s behalf.
Duties of a Principal?
Generally, a principal owes the following duties to the agent:
•
•
•
duty to compensate—An agency relationship may be paid or
gratuitous. The terms of an agency may be laid out in the agency
agreement. If the agency agreement does not indicate the terms
of compensation, the principal is obligated to provide the agent
with reasonable compensation. For example, default rules in a
relationship with a sales agent dictate that the agent will earn a
reasonable commission on sales induced or completed.
duty to reimburse—The principal must reimburse the agent for a
reasonable amount expended in carrying out her duties.
Reasonable reimbursement includes the cost of travel, meals,
lodging, incidental expenses, etc.
duty to indemnify—Generally, a principal must indemnify an
agent for liability incurred in the performance of her duties. This
generally arises when the instructions of the principal subject the
agent to liability to a third party. If an agent exceeds or acts
outside of the scope of her authority, the principal may be
relieved from the duty to indemnify. If the principal later ratifies
the actions of the agent, she will incur the obligation to indemnify
the agent against liability.
Duties of an Agent
Agents generally have the following duties to the principal:
•
loyalty—An agent has the duty of loyalty to act for the principal’s
advantage and not to act to benefit herself at the principal’s
expense. An agent is expected to refrain from undertaking actions
personally that would conflict with the purpose of the agency. An
employee has a lower duty of loyalty with regard to opportunities
that are outside of the employee’s duties or responsibilities to the
employer. Generally, this means that an agent may not
simultaneously represent the principal and another party to a
transaction.
Employees are agents of the employer. If an employee does not have
permission, she violates a duty of loyalty by undertaking activities for a
third party that are similar to the duties of the employee in the agency
relationship. This is seen as competing with the employer. If, however,
she performs services unrelated to or not the type of services the
employer would seek to provide to the client, she does not a breach a
duty by providing those services. This is true even if the employee
provides those services to a client of the employer.
For example, I work for ABC Corp as a professional service provider. A
potential client comes in to seek the services of ABC Corp. I cannot
compete with ABC Corp by trying to convince the client to pay me to
serve them personally rather than hire ABC Corp. I also have a side job
selling supplies to construction contractors. This is a completely
different line of business from ABC Corp. If it does not conflict with
ABC Corp’s services, I can offer my supplies for sale to the client
without violating my duty of loyalty.
•
•
•
•
duty of care—An agent has a duty to exercise due care and
diligence when carrying out the responsibilities of the agency.
This is often referred to as a duty to not act negligently in
carrying out the principal’s affairs. For example, I work for ABC
Corp as an accountant. I represent ABC Corp in every action I
undertake as part of my employment, such as preparing client
taxes. I have a duty to ABC Corp and the client to exercise
reasonable care in carrying out my job duties.
information and disclosure—The agent has a duty to protect all
confidential information of the principal, such as trade secrets.
Further, the agent has a duty to keep the principal fully informed
of all material information acquired as a result of the agency
relationship. For example, I am a sale agent for ABC Corp. I
receive an offer from a customer to undertake a joint venture with
ABC Corp. I have a duty to transmit this information to ABC Corp.
I acquired this information as a result of the agency relationship,
and it is obviously outside of my unilateral decision-making
authority.
obedience—The agent has a duty to obey the reasonable
instructions from the principal. For example, I work for ABC Corp
selling insurance. ABC provides me detailed training and
instructions on what types of policies to write and the client area
that I can serve. I have a duty to obey these instructions as agent
of my employer.
accounting—The agent has a duty to account to the principal for
monies handled. Further, the agent may have a duty to account to
third parties for whom money is handled. This includes situations
where an agent collects too much money from a third party and
is still in possession of those funds or when an agent intentionally
collects funds that belong to the third party and the principal is
undisclosed. For example, I am a financial advisor for ABC Corp. I
am responsible for reporting and keeping accurate records
regarding all money or value transferred or received in carrying
out my job duties. Note that the principal-agent relationship is a
fiduciary or trust-based relationship. The agent may have any
other duties as established in the agency agreement.
Contractual Obligations
A principal is generally bound to third parties pursuant to the contracts
entered into by the agent on behalf of the principal. This means that
the principal is responsible for any obligations incurred by the agent
that are within her authority. An agent has varying sources of authority
when dealing with third parties.
•
•
actual authority—Actual authority is the express authority from
the principal allowing the agent to enter into obligations
(contracts) on her behalf. It can be specific instructions to do so
or generally included in her job duties. The principal is bound to
third parties if disclosed, partially disclosed, or undisclosed. For
example, Arnold is an employee of ABC Corp. He signs an
employee agreement indicating that he will sell products
manufactured by ABC Corp directly to retailers. He has express
authority to enter into any contracts with retailers for the sale of
ABC-manufactured goods.
implied authority—Implied authority concerns the authority to
enter into obligations that a reasonable person would imply from
the agent’s position, title, or past course of dealings. If an
employee has the title of vice president, it implies a great deal of
authority to act on behalf of the business. Further, if an employee
entered into a previous contract on behalf of the principal, it may
imply that she can enter into similar contracts in the future. This
principle can only apply to disclosed and partially disclosed
•
principals. There can never be implied authority to act on behalf
of an undisclosed principal. For example, Beth is hired by ABC
Corp with the title of Senior Sales Manager. 123 Corp seeks to
purchase a shipment of supplies manufactured by ABC Corp. Even
if Beth is expressly prohibited in her employment agreement from
entering into direct sales agreements, it is reasonable for a
retailer to believe that a person with her title has that authority. If
a retailer is unaware of Beth’s limitations and Beth signs a sales
contract on behalf of ABC Corp, ABC Corp will be bound by the
contract. Beth may be liable to ABC Corp, but her title implies this
authority to transact with third parties in this manner.
apparent authority—Apparent authority arises from the
reasonable representations of the agent to third parties. That is,
when the agent represents that she has authority to enter into a
contract on behalf of the principal, her actions will bind the
principal if a reasonable person would believe those
representations. The 3rd party’s belief must generally result from
some action or inaction by the principal. This principle applies to
disclosed and partially disclosed principals. There can be no
apparent authority if the principal is not disclosed to the third
party. For example, Gina works for ABC Corp. She has a generic
title of manager. She is limited in her ability to sign purchase
agreements on behalf of ABC Corp. She does, however, routinely
negotiate the terms of purchase agreements with vendors. She
then transmits the purchase agreements to her boss who signs
them. The vendor never deals with anyone other than Gina. If
Gina decides to start by personally signing the purchase
agreement, ABC Corp will likely be bound by the contracts. By
signing the agreements, she is representing to vendors that she
has authority to do so. It is likely reasonable for vendors to
believe that she has this authority, as Gina is the primary point of
contact for negotiating the agreements.
•
ratification—While an agent may bind the principal to the extent
of her authority, the principal is also bound if she ratifies the
conduct of the agent that is beyond her express, implied, or
apparent authority. That is, if the principal accepts or takes
advantage of the agent’s actions, she impliedly ratifies those
actions as taken on her behalf. In such a situation, this expands
the implied and apparent authority of the agent when
undertaking future actions. Ratification can only take place if the
principal is disclosed or partially disclosed.
In each of the above situations, a disclosed principal is liable to third
parties dealing with the agent. If the agent exceeds her express
authority, the third party may still have the ability to back out of the
contract. The third party is generally bound by the contract if the
principal ratifies the agent’s conduct before the third-party finds out
about the lack of authority and withdraws
Agents’ Liability
An agent acting within the scope of her authority is not liable to third
parties on obligations entered into on behalf of the principal. Even if
the agent exceeds her express authority, her implied authority may
bind the principal to the agreement and relieve her from any
contractual liability to the third party. The important point is that the
agent must act on behalf of the principal and disclose that relationship
to the third party. If the agent is acting on behalf of a principal, but fails
to disclose her agency status, it may subject her to liability to the third
party. In some cases, it may also serve to bind the principal once the
agency relationship is determined.
If the agent goes beyond her express authority, she may be liable to
the principal for any obligations binding the principal to third parties.
That is, the principal may be able to recover damages suffered because
of the agent exceeding her authority.
For example, I work for ABC Corp. I enter into an agreement with 123
Corp on behalf of ABC Corp. I am not personally obligated to perform
the contract. If I fail to tell 123 Corp that I work for ABC Corp (123 Corp
believes that I have my own business), I am liable to 123 Corp if ABC
Corp does not perform the contract. ABC Corp is obligated to perform
the contract if my entering the contract was in my express, implied, or
apparent authority. If I did not have express or implied authority, but
123 Corp realized I was acting on behalf of an agent, ABC Corp may be
liable if I had apparent authority. In such a situation, ABC Corp may be
able to sue me for any losses suffered.
Principals’ Liability
An individual is always liable for her own conduct. Whenever an
individual is held liable for the actions of another, this is known as
vicarious liability. In the context of agency, the agent is acting
vicariously for the principal. A principal is responsible for the tortious
acts of an agent pursuant to a doctrine known as respondeat superior.
More specifically, an agent may create legal liability for the principal for
actions taken by the agent “within the scope of the agency.” In such
cases, the principal and agent are “jointly and severally” liable for the
harm caused by the agent’s conduct. An act is within the scope of the
agency if the purpose behind the action taken is to advance the
interests of the principal. As such, if any act taken by an employee in an
effort to advance the employer’s interest is a tort, the employer may be
liable for that conduct.
Generally, intentional torts are generally not considered to be within
the scope of an employee’s duties or employment. As such, a principal
will not be liable for the intentional torts committed by an employee
unless the principal ordered or condoned the tortious conduct. Even if
a tort is within the scope of employment, it will not relieve the agent
from personal liability for her actions.
For example, I am an employee of a corporation. While carrying out my
duties, I act negligently and harm a third party. The third party sues the
corporation and me. The corporation will be liable for my negligent act
because I was acting within the scope of my job responsibilities when I
committed the tort.
Frolic and Detour
A “frolic and detour” is a general defense to vicarious tort liability. It
states that the principal should not be liable for the tortious acts of the
agent when the agent is acting outside the scope of her employment
and for the benefit of someone other than the employer. Plainly stated,
an employee who is on a frolic or detour is no longer acting for the
employer.
A frolic is when an employee abandons the employer’s business
objectives and pursues personal interests. A detour occurs when an
employee substantially deviates from an employer’s instructions or
rules. Generally, both a frolic and detour must be present to relieve an
employer from liability for the agent’s actions.
For example, an employee providing services for her employer at the
location of a client is an agent acting within the scope of her
employment. If, however, the employee takes the company vehicle and
goes on a personal errand that is not authorized, the employee is likely
outside the scope of her employment. Suppose while running these
errands she gets into an automobile accident that is her fault. The
employer would be able to argue that the deviation from her duties as
employee was a frolic and detour and relieved her of liability for the
employee’s tort.
Termination of Agency Relationship
The establishment, duration, and termination of the agency
relationship is generally governed by the agreement between the
principal and agent. In the absence of an express agreement, several
default rules apply regarding the point at which the agency relationship
terminates. Below are common rules for terminating the agency
relationship:
•
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withdrawal by either party—A principal or agent may withdraw
from the relationship at any time. This legal authority is separate
from the contractual right to withdraw. While withdrawal
terminates the agency relationship, it may lead to liability of the
withdrawing party. For example, Daisy hires Jeb as a sales agent
for her new product line. Jeb will earn a commission on sales of
the product. Jeb studies the product lines, develops a sales plan,
and hits the road. Shortly after the relationship begins, Daisy
decides to hire Luke and fire Jeb. Daisy’s withdrawal terminates
the agency relationship with Jeb. Jeb, however, may have the
legal right to seek damages against Daisy for terminating the
relationship.
withdrawal by both parties—The parties can terminate the
agency relationship upon mutual consent.
termination by the principal—Either party may terminate the
agency relationship, even if it violates a contractual agreement
between the parties. A principal will be subject to a breach of
contract action for terminating the agency relationship if the
agent’s status is part of an agreement that is supported by
consideration and terminating the agency relationship will harm
the agent’s rights. This scenario commonly arises in an agency
coupled with an interest. An agency relationship is coupled with
interest when the agent has a specific interest in the subject
matter of the agency, such as a consignment of goods for resale.
For example, I enter into a contract with Ernest to package and
sell his products on the Internet. In exchange for my effort, I will
keep in percentage of the sale value. As such, the agency is
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coupled with an interest and cannot be revoked without
breaching a contract.
renunciation by the agent—The agent can renounce the
business of the principal and terminate her agency status and
authority. This may, however, violate a contractual relationship
between the parties. For example, I enter into a contract to serve
as your agent. I may terminate the agency by renouncing my
duties. Unless I have a justification, my actions will likely violate
my contractual obligations to you.
duties of agent complete—If the purpose of the agency ceases
to exist, the agency relationship terminates. This often arises
when the agent discharges all of her agency obligations. Further,
it could arise when the subject matter of the agency no longer
exists. For example, You higher me to represent you in the sale of
your real estate. The real estate is the subject of an eminent
domain action and is taken by the government. The agency
relationship terminates when the purpose of my agency is gone.
death or incapacity—The agency relationship terminates upon
the death or incapacity of either party.
bankruptcy—The agency relationship terminates upon the
liquidation or reorganization of either party.
The above situations resulting in termination of the agency relationship
are default rules. The parties may reserve any rights or restrictions on
terminating the agency relationship within their agreement.
Licenses and Attributions
Business Law: An Introduction, by TheBusinessProfessor.com, Jason M.
Gordon & Colleagues has been adapted with permission from Jason M.
Gordon. © Business Professor, LLC.
The video What is an Agency Relationship has been adapted with
permission from Jason M. Gordon. © 2016, Business Professor, Inc.
Step 2
Hope you’ve had time to review the case file on The Turnip Plaza Hotel.
In order to formulate a sound response to my questions, you’ll need to
review a number of specific foundational issues involving legal
contracts.
First, find the necessary information about contract formation and
execution. Then, look into possible contract remedies for when a
breach of contract occurs. As you read over this information, be sure to
record your thoughts pertaining to the case, while noting the places in
the readings that prompted your thoughts.
After you have refreshed your understanding of contract law generally,
you should supplement that understanding by doing legal research on
specific laws related to contracts in Michigan. Again, make sure to take
notes as you read. Good notes will help you write your report.
Thinking over this case, put some of your focus on Edward Griffin’s role
in this situation with Mark Piper. More specifically, consider whether
Edward had the authority to make the promise he made (or any
promises) to Mark.
Review the legal responsibilities of agents and employees to help
formulate your answer. You should also review ethical business
decision making, as it pertains to keeping promises in business
situations and the ethical questions I have asked you to consider.
I trust you to perform with the same tenacity as you did with the first
cases.
Step 3: Focus on Your Rationale and
Conclusions: Create Your Outline
You’ve finished your research and reflected on how the facts and the
law come together in this situation. You’ve also analyzed the possible
arguments and determined which seem most reasonable (all things
considered). Now it is time to formulate them, making sure to address
all the concerns that VP Dodger expressed to you when you met.
Outline the report that you will draft for your VP and review your
document to make certain it covers all relevant points and progresses
in a logical order.
After you finish the outline, if you have time, give yourself one night of
sleep before you begin the next step, in which you will write the report.
Fresh eyes might help you see points that need revision.
Step 4: Communicate Your Findings and
Conclusions to the VP: Create Your Report
Use your outline and research notes to prepare your report for the VP.
Be sure to meet the following requirements he has requested:
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Format your report by including APA-formatted in-text citations
and an APA-formatted reference list (do not format the body of
the report using APA style, just the reference list). See references
and citations for details.
Include a specific recommendation of what action, if any, the VP
should take based on your analysis and conclusions.
Support your conclusion with references to legal principles and
laws.
The report should be no more than 10 pages (double spaced, 12point font; the reference list does not count towards page limit).
Mark Piper was employed for several years as a tour guide at the
Turnip Plaza Hotel in Port Austin, Michigan. Turnip Plaza is one of
Colossal Corporation’s luxury hotel holdings, strategically located near
Lake Huron’s famous Turnip Rock. Over the years, Mark developed a
reputation as one of the most skillful tour guides in Michigan. He
would guide tourists through extreme kayaking, hiking, and camping
adventures in and around the Great Lakes. He was often requested by
name by tourists visiting the hotel and was featured on extreme sports
television. His high adventure kayaking tours brought in significant
revenue for the hotel.
One month ago, Mark was approached by Stacey Nguyen, the manager
of the Huron Overnight Inn—a rival company of Turnip Plaza. Stacey
offered Mark a substantial salary increase to leave Turnip Plaza and
come to work for her. Mark agreed to think about this offer and get
back to Stacey in 48 hours. When he returned to Turnip Plaza, he asked
several of his colleagues what they thought about the offer. One of
them immediately went to Turnip Plaza’s manager, Edward Griffin, and
told him the details of Stacey’s offer to Mark.
Upon hearing of the offer, Edward called Mark into his office and said:
“If you stay with Turnip Plaza, I promise that next month you will
receive a promotion with a 50 percent raise and a guaranteed contract
for a two-year term.” This sounded good to Mark, and he turned down
the offer from Stacey to stay with Turnip Plaza. However, last week,
shortly before Mark was to receive his new contract, he was dismissed
from Turnip Plaza because of corporate restructuring due to concerns
about the increased liability risks of managing high adventure tours
through Colossal’s hotels. Although Mark has not taken any formal
action at this point, the vice president is concerned that Mark might try
to hold Turnip Plaza to Edward’s promise.
Your task is to research the legal and ethical issues associated with this
situation and write a report to the vice president answering the
following questions:
1. What legal theories might Mark use to try to legally enforce
Edward’s promise? Explain the elements of these theories and
how they apply to the facts of this scenario.
2. If Mark were to file a lawsuit and win, what sort of damages or
other remedies might he be entitled to? Include your reasoning
and any evidence that led you to your conclusions.
3. Finally, regardless of the legal implications, the vice president
would like your view on the ethical issues. Does Turnip Plaza have
an ethical obligation to fulfill the promise made by Edward to
Mark? Is it right to lay off Mark under these circumstances? What
should Turnip Plaza do from an ethical perspective? Use ethical
theory and principles to analyze these questions.
