in the file everything

Lesson 2his week our legal emphasis is on Immigration and Labor Law.
You must read Chapter 22 (Immigration and Labor Law) in The Legal Environment of Business (10th
Ed.)
When discussing the Mandatory Assignments 22-3 and 22-7 in the Business Case Problems at the
end of the chapter, note the question asked at the end of the fact pattern. This is this issue you must
answer.
State the issue at the beginning of your discussion. Then discuss the facts. Apply the law from the
chapter to the facts to reach your opinion on the answer to the question. Keep in mind this is the law
portion of the course. Your discussion should not include ethical issues.
You can then discuss whether in your opinion government, through legislation and regulations has
responded appropriately to the issue discussed in the Business Case Problem questions. If you
believe there has been an appropriate response, how might it be improved? If not, should society’s
representatives respond with new laws or regulations and what, in brief, should they say?
The Immigration Control and Reform Act of 1986 (IRCA) makes it illegal to hire, recruit, or refer for a
fee someone not authorized to work in the U.S. Chapter 22 includes material on employer
verification of the status of a candidate for employment under IRCA using Form I-9. The chapter also
discuss I-551 Alien Registration Receipts; the H-1B Visa Program; Form ETA 9035 and H-2,O, L
and E Visas.
Section 22-2 Federal Labor Laws discusses the National Labor Relations Act of 1935 establishing
the right of employees to engage in collective bargaining and the right to strike.
Lesson 2 Objectives
The objective of Lesson 5 is to have you become acutely aware of the prohibitions imposed by
Federal law on hiring practices involving immigrants. Similarly, managers need to know the basic
parameters established by law for collective bargaining, even if their current employer is not
unionized.
•
Read Chapter 22 (Immigration and Labor Law) in The Legal Environment of Business, 10th Ed.
Discussion Topic
MANDATORY ASSIGNMENT — Answer the questions in 22.3 “Spotlight on VerizonCollective Bargaining” (p.490) and 22-7 “A Question of Ethics: Immigration Work Status”
(p.490) based on you reading. Post your answers on the Discussion.
used the template format
WGB 614-AO
USE THIS FOMAT FOR THE MANDATORY ASSIGNMENTS AT THE END OF EACH
CHAPTER – EXCEPT THE SANLU CASE IN LESSON 3
NAME:
LESSON (insert Lesson number) MANDATORY ASSIGNMENT: (insert mandatory
assignment(s) e.g. 21-2 Wrongful Discharge)
FACTS:
ISSUE: (THE QUESTION OR QUESTIONS PRESENTED FOR YOU TO ANSWER IN EACH OF THE
MANDATORY ASSIGNMENTS
DISCUSSION: (APPLY LAW TO FACTS)
CONCLUSION: (YOUR ANSWER TO THE QUESTION OR QUESTUONS PRESENTED AT THE END OF
EACH MANDATORY ASSIGNMENT)
SHOULD THE LAW BE AMENDED TO IMPROVE IT?
IF YES, HOW?
IS THE LAW SATISFACTORY?
IF YES, BRIEFLY EXPLAIN WHY YOU THINK IT IS SATISFACTORY
CHAPTER 18
Corporations
413
Reviewing: Corporations
David Brock was on the board of directors of Firm Body Fitness, Inc., which owned a string of fitness clubs in New
Mexico. Brock owned 15 percent of the Firm Body stock and was also employed as a tanning technician at one of the
fitness clubs. After the January financial report showed that Firm Body’s tanning division was operating at a substantial
net loss, the board of directors, led by Marty Levinson, discussed terminating the tanning operations. Brock successfully convinced a majority of the board that the tanning division was necessary to market the clubs’ overall fitness
package. By April, the tanning division’s financial losses had risen. The board hired a business analyst, who conducted
surveys and determined that the tanning operations did not significantly increase membership.
A shareholder, Diego Peñada, discovered that Brock owned stock in Sunglow, Inc., the company from which Firm
Body purchased its tanning equipment. Peñada notified Levinson, who privately reprimanded Brock. Shortly thereafter, Brock and Mandy Vail, who owned 37 percent of the Firm Body stock and also held shares of Sunglow, voted
to replace Levinson on the board of directors. Using the information presented in the chapter, answer the following
questions.
1. What duties did Brock, as a director, owe to Firm Body?
2. Does the fact that Brock owned shares in Sunglow establish a conflict of interest? Why or why not?
3. Suppose that Firm Body brought an action against Brock claiming that he had breached the duty of loyalty by not
disclosing his interest in Sunglow to the other directors. What theory might Brock use in his defense?
4. Now suppose that Firm Body did not bring an action against Brock. What type of lawsuit might Peñada be able to
bring based on these facts?
Debate This . . .
The sole shareholder of an S corporation should not be able to avoid liability for the torts of her or his
employees.
Terms and Concepts
alien corporation 389
articles of incorporation 394
benefit corporation 394
bond 396
business judgment rule 403
bylaws 395
close corporation 392
commingle 399
common stock 396
crowdfunding 397
dividends 389
domestic corporation 389
foreign corporation 389
holding company 389
inside director 401
outside director 401
pierce the corporate veil 399
preemptive rights 408
preferred stock 396
private equity capital 397
proxy 406
public corporation 391
publicly held corporation 391
quorum 401
retained earnings 389
S corporation 393
securities 396
shareholder agreement 393
shareholder’s derivative suit 410
stock 396
stock certificate 408
stock warrant 408
ultra vires 398
venture capital 397
voting trust 407
watered stock 410
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
414
U N I T F OU R
The Business and Employment Environment
Issue Spotters
1. Northwest Brands, Inc., is a small business incorpo-
rated in Minnesota. Its one class of stock is owned by
twelve members of a single family. Ordinarily, corporate
income is taxed at the corporate and shareholder levels. Is there a way for Northwest Brands to avoid this
double taxation? Explain your answer. (See Nature and
Classification.)
2. Nico is Omega Corporation’s majority shareholder. He
owns enough stock in Omega that if he were to sell it,
the sale would be a transfer of control of the firm. Discuss whether Nico owes a duty to Omega or the minority
shareholders in selling his shares. (See Shareholders.)
• Check your answers to the Issue Spotters against the
answers provided in Appendix D at the end of this text.
Business Scenarios
18–1. Preincorporation. Cummings, Okawa, and Taft are
recent college graduates who want to form a corporation to
manufacture and sell digital tablets. Peterson tells them he will
set in motion the formation of their corporation. First, Peterson makes a contract with Owens for the purchase of a piece
of land for $20,000. Owens does not know of the prospective
corporate formation at the time the contract is signed. Second,
Peterson makes a contract with Babcock to build a small plant
on the property being purchased. Babcock’s contract is conditional on the corporation’s formation. Peterson secures all
necessary subscription agreements and capitalization, and he
files the articles of incorporation. (See Formation and Powers.)
(a) Discuss whether the newly formed corporation, Peterson, or
both are liable on the contracts with Owens and Babcock.
(b) Discuss whether the corporation is automatically liable to
Babcock on formation.
18–2. Conflicts of Interest. Oxy Corp. is negotiating
with Wick Construction Co. for the renovation of Oxy’s corporate headquarters. Wick, the owner of Wick Construction
Co., is also one of the five members of Oxy’s board of directors. The contract terms are standard for this type of contract.
Wick has previously informed two of the other directors of his
interest in the construction company. Oxy’s board approves
the contract by a three-to-two vote, with Wick voting with
the majority. Discuss whether this contract is binding on the
corporation. (See Directors and Officers.)
Business Case Problems
18–3. Spotlight on Smart Inventions—Piercing the
Corporate Veil. Thomas Persson and Jon Nokes founded
Smart Inventions, Inc., to market household consumer products. The success of their first product,
the Smart Mop, continued with later products,
which were sold through infomercials and other
means. Persson and Nokes were the firm’s officers and equal
shareholders. Persson was responsible for product development, and Nokes was in charge of day-to-day operations. In
time, they became dissatisfied with each other’s efforts. Nokes
represented the firm as financially “dying,” “in a grim state,
. . . worse than ever,” and offered to buy all of Persson’s shares
for $1.6 million. Persson accepted.
On the day that they signed the agreement to transfer the
shares, Smart Inventions began marketing a new product—
the Tap Light. It was an instant success, generating millions
of dollars in revenues. In negotiating with Persson, Nokes
had intentionally kept the Tap Light a secret. Persson sued
Smart Inventions, asserting fraud and other claims. Under
what principle might Smart Inventions be liable for Nokes’s
fraud? Is Smart Inventions liable in this case? Explain. [Persson v. Smart Inventions, Inc., 125 Cal.App.4th 1141, 23 Cal.
Rptr.3d 335 (2 Dist. 2005)] (See Piercing the Corporate Veil.)
18–4. Duty of Loyalty. Kids International Corp. produced
children’s wear for Walmart and other retailers. Gila Dweck
was a Kids director and its chief executive officer. Because she
felt that she was not paid enough, she started Success Apparel
to compete with Kids. Success operated out of Kids’ premises,
used its employees, borrowed on its credit, took advantage
of its business opportunities, and capitalized on its customer
relationships. As an “administrative fee,” Dweck paid Kids
1 percent of Success’s total sales. Did Dweck breach any fiduciary duties? Explain. [Dweck v. Nasser, 2012 WL 3194069
(Del.Ch. 2012)] (See Directors and Off
Officers.)
18–5. Business Case Problem with Sample Answer—
Piercing the Corporate Veil. Scott Snapp contracted with
Castlebrook Builders, Inc., which was owned by
Stephen Kappeler, to remodel a house. Kappeler
estimated that the remodeling would cost around
$500,000. Eventually, however, Snapp paid Kappeler more than $1.3 million. Snapp filed a suit in an Ohio
state court against Castlebrook, alleging breach of contract
and fraud, among other things. During the trial, it was
revealed that Castlebrook had issued no shares of stock and
that personal and corporate funds had been commingled. The
minutes of the corporate meetings all looked exactly the same.
In addition, Kappeler could not provide an accounting for the
Snapp project. In particular, he could not explain evidence of
double and triple billing nor demonstrate that the amount
Snapp paid had actually been spent on the remodeling project.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CHAPTER 18
Are these sufficient grounds to pierce the corporate veil?
Explain. [Snapp v. Castlebrook Builders, Inc., 2014 -Ohio- 163,
7 N.E.3d 574 (2014)] (See Formation and Powers.)
• For a sample answer to Problem 18–5, go to Appendix E at
the end of this text.
18–6. Business Judgment Rule. Country Contractors,
Inc., contracted to provide excavation services for A Westside Storage of Indianapolis, Inc., but did not complete the
job and later filed for bankruptcy. Stephen Songer and Jahn
Songer were Country’s sole shareholders. The Songers had
not misused the corporate form to engage in fraud. The firm
had not been undercapitalized, personal and corporate funds
had not been commingled, and Country had kept accounting records and minutes of its annual board meetings. Are the
Songers personally liable for Country’s failure to complete its
contract? Explain. [Country Contractors, Inc. v. A Westside Storage of Indianapolis, Inc., 4 N.E.3d 677 (Ind.App. 2014)] (See
Directors and Off
Officers.)
18–7. Torts. Jennifer Hoffman took her cell phone to a store
owned by R&K Trading, Inc., for repairs. Later, Hoffman filed
a suit in a New York state court against R&K, Verizon Wireless, Inc., and others. Hoffman sought to recover damages for
a variety of torts, including infliction of emotional distress and
negligent hiring and supervision. She alleged that an R&K
employee, Keith Press, had examined her phone in a back
room, accessed private photos of her stored on her phone, and
disseminated the photos to the public. Hoffman testified that
“after the incident, she learned from another R&K employee
that personal information and pictures had been removed
from the phones of other customers.” Can R&K be held liable
for the torts of its employees? Explain. [Hoffman v. Verizon
Wireless, Inc., 5 N.Y.S.3d 123, 125 A.D.3d 806 (2015)] (See
Nature and Classification.)
18–8. Rights of Shareholders. FCR Realty, LLC, and
Clifford B. Green & Sons, Inc., were co-owned by three
brothers—Frederick, Clifford Jr., and Richard Green. Each
brother was a shareholder of the corporation. Frederick was
Corporations
415
a controlling shareholder, as well as president. Each brother
owned a one-third interest in the LLC. Clifford believed that
Frederick had misused LLC and corporate funds to pay nonexistent debts and liabilities and had diverted LLC assets to
the corporation. He also contended that Frederick had disbursed about $1.8 million in corporate funds to Frederick’s
own separate business. Clifford hired an attorney and filed
an action on behalf of the two companies against Frederick
for breach of fiduciary duty. Frederick argued that Clifford
lacked the knowledge necessary to adequately represent the
companies’ interest because he did not understand financial
statements. Can Clifford maintain the action against Frederick? If so, and if the suit is successful, who recovers the damages? Explain. [FCR Realty, LLC v. Green, __ Conn.Supp. __,
__ Conn.L.Rptr. __, 2016 WL 571449 (Super. 2016)] (See
Shareholders.)
18–9. A Question of Ethics—Piercing the Corporate
Veil. In New York City, 2406-12 Amsterdam Associates LLC
brought an action in a New York state court against
Alianza Dominicana and Alianza LLC to recover
unpaid rent. The plaintiff asserted cause to pierce
the corporate veil, alleging that Alianza Dominicana had made promises to pay its rent while discreetly forming
Alianza LLC to avoid liability for it. According to 2406-12,
Alianza LLC was 90 percent owned by Alianza Dominicana,
had no employees, and had no function but to hold Alianza
Dominicana’s assets away from its creditors. The defendants
filed a motion to dismiss the plaintiff’s claim. [2406-12
[
Amsterdam Associates, LLC v. Alianza, LLC, 136 A.D.3d
512, 25 N.Y.S.2d 167 (1 Dept. 2016)] (See Piercing the Corporate Veil
Veil.)
(a) Assuming that 2406-12’s allegations are true, are there
sufficient grounds to pierce Alianza LLC’s corporate veil?
Discuss.
(b) Suppose that the parties to this dispute were small, close
corporations. How might that circumstance affect the
result in this case?
Legal Reasoning Group Activity
18–10. Corporate versus LLC Form of Business. The
limited liability company (LLC) may be the best organizational form for most businesses. For a significant number of firms, however, the corporate form or some other
form of organization may be better. (See Nature and
Classification.)
(a) The first group will outline several reasons why a firm
might be better off as a corporation than as an LLC.
(b) The second group will discuss the differences between
corporations and LLCs in terms of their management
structures.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
C H A P T E R 19
Agency Relationships
O
ne of the most common, important, and pervasive legal relationships is that of agency. In
an agency relationship involving two
parties, one of the parties, called the
agent, agrees to represent or act for
the other, called the principal. The
principal has the right to control the
agent’s conduct in matters entrusted
to the agent.
Agency relationships are crucial in
the business world. By using agents,
a principal can conduct multiple
business operations at the same time
in different locations. Indeed, the only
way that certain business entities can
function is through their agents. For
instance, a corporate officer is an
agent who serves in a representative
capacity for the corporation. The officer has the authority to bind the corporation to a contract. Only through
its officers can corporations enter into
contracts.
Most employees are also considered to be agents of their employers.
19–1 Agency Law
Section 1(1) of the Restatement (Third) of Agency1 defines
agency as “the fiduciary relation [that] results from the
manifestation of consent by one person to another that
the other shall act in his [or her] behalf and subject to his
[or her] control, and consent by the other so to act.” In
other words, in a principal-agent relationship, the parties
have agreed that the agent will act on behalf and instead
of the principal in negotiating and transacting business
with third parties.
The term fiduciary is at the heart of agency law.
When this term is used as a noun, it refers to a person
having a duty created by his or her undertaking to act
primarily for another’s benefit in matters connected with
the undertaking. When used as an adjective, as in the
phrase fiduciary relationship, it means that the relationship involves trust and confidence.
Agency relationships commonly exist between employers and employees. Agency relationships may sometimes
1. The Restatement (Third) of Agency is an authoritative summary of the
law of agency and is often referred to by judges in their decisions and
opinions.
416
Today, however, the United States is
experiencing a trend toward a socalled gig economy, which centers
on short-term, independent workers
who are not employees. Companies
like Uber and Lyft (discussed in this
chapter’s feature) provide evidence
of this trend. This type of on-demand
employment raises questions related
to agency, making agency an increasingly important topic for students of
business law and the legal environment to understand.
also exist between employers and independent contractors who are hired to perform special tasks or services.
19–1a Employer-Employee Relationships
Normally, all employees who deal with third parties are
deemed to be agents. A salesperson in a department store,
for instance, is an agent of the store’s owner (the principal) and acts on the owner’s behalf. Any sale of goods
made by the salesperson to a customer is binding on the
principal. Similarly, most representations of fact made by
the salesperson with respect to the goods sold are binding
on the principal.
Because employees who deal with third parties generally are deemed to be agents of their employers, agency
law and employment law overlap considerably. Agency
relationships, however, can exist outside an employeremployee relationship, so agency law has a broader reach
than employment law. Additionally, agency law is based
on the common law, whereas much employment law is
statutory law.
Employment laws (state and federal) apply only to
the employer-employee relationship. Statutes governing
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CHAPTER 19
Social Security, withholding taxes, workers’ compensation, unemployment compensation, workplace safety,
and employment discrimination apply only if an
employer-employee relationship exists. These laws do not
apply to independent contractors.
19–1b Employer–Independent
Contractor Relationships
Independent contractors are not employees because, by
definition, those who hire them have no control over
the details of their work performance. Section 2 of the
Restatement (Third) of Agency defines an independent
contractor as follows:
[An independent contractor is] a person who contracts
with another to do something for him [or her] but who
is not controlled by the other nor subject to the other’s
right to control with respect to his [or her] physical conduct in the performance of the undertaking. He [or she]
may or may not be an agent.
Building contractors and subcontractors are independent contractors. A property owner who hires a contractor and subcontractors to complete a project does not
control the details of the way they perform their work.
Truck drivers who own their vehicles and hire out on a
per-job basis are independent contractors, but truck drivers who drive company trucks on a regular basis usually
are employees. See this chapter’s Ethics Today feature for a
discussion of disputes involving the classification of drivers working for Uber and Lyft.
The relationship between a principal and an independent contractor may or may not involve an agency
relationship. To illustrate: A homeowner who hires a real
estate broker to sell her house has contracted with an
independent contractor (the broker). The homeowner
has also established an agency relationship with the broker
for the specific purpose of selling the property. Another
example is an insurance agent, who is both an independent contractor and an agent of the insurance company
for which he sells policies. (Note that an insurance broker,
in contrast, normally is an agent of the person obtaining
insurance and not of the insurance company.)
19–1c Determination of Employee Status
The courts are frequently asked to determine whether
a particular worker is an employee or an independent
contractor. How a court decides this issue can have a significant effect on the rights and liabilities of the parties.
Agency Relationships
417
Employers are required to pay certain taxes, such as Social
Security and unemployment taxes, for employees but not
for independent contractors. Therefore, workers may benefit from obtaining employee status in some situations.
Criteria Used by the Courts In deciding whether a
worker is categorized as an employee or an independent
contractor, courts often consider the following questions:
1. How much control does the employer exercise over the
2.
3.
4.
5.
6.
7.
details of the work? If the employer exercises considerable control over the details of the work and the
day-to-day activities of the worker, this indicates
employee status. This is perhaps the most important factor weighed by the courts in determining
employee status.
Is the worker engaged in an occupation or business distinct from that of the employer? If so, this points to
independent-contractor, not employee, status.
Is the work usually done under the employer’s direction
or by a specialist without supervision? If the work is
usually done under the employer’s direction, this
indicates employee status.
Does the employer supply the tools at the place of work?
If so, this indicates employee status.
For how long is the person employed? If the person is
employed for a long period of time, this indicates
employee status.
What is the method of payment—by time period or at
the completion of the job? Payment by time period,
such as once every two weeks or once a month, indicates employee status.
What degree of skill is required of the worker? If a great
degree of skill is required, this may indicate that the
person is an independent contractor hired for a specialized job and not an employee.
Whether a worker is an employee or an independent contractor can affect the employer’s liability for the
worker’s actions. An employer normally is not responsible for the actions of an independent contractor. ■ CASE
IN POINT 19.1 Terence Pershad was a tow truck driver
for Five Star Auto Service. Five Star had contracted to
perform towing and auto repair services for AAA North
Jersey, Inc. After one of its customers was involved in a
car accident, AAA called Five Star for assistance, and Five
Star sent a truck driven by Pershad. Pershad got into a
fight with Nicholas Coker, a passenger in the car, and
assaulted Coker with a knife.
Coker filed a suit in a New Jersey state court against
Pershad, Five Star, and AAA. The court determined that
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
418
U N I T F OUR
ETHICS
TODAY
The Business and Employment Environment
Is It Fair to Classify Uber and
Lyft Drivers as Independent Contractors?
The transportation-for-hire world has changed
dramatically since Uber, Lyft, and other
transportation-sharing companies came onto
the scene. Uber started in San Francisco in
2009. Today, its services are available in one
form or another in about 60 countries and
more than 300 cities worldwide. Its main
competitor, Lyft, was launched in 2012 and
operates in more than 200 U.S. cities. The growth in
transportation sharing has not been without its setbacks, though. Most of them involve laws that have
prohibited Uber and Lyft from operating in certain
cities, as well as lawsuits by drivers claiming that they
were misclassified.
Classification of Workers
Workers in the United States generally fall into two
categories: employees and independent contractors.
Employment laws, including minimum wage and antidiscrimination statutes, cover employees. Such laws
do not cover most independent contractors. Enter
the digital age of on-demand workers who obtain job
assignments via apps.
Workers for Lyft, Uber, and similar companies
choose when and where they will perform their duties.
They do not choose how much they will be paid,
however. For them, employment is a take-it-or-leave-it
proposition. They electronically accept the platform
terms of the apps, or they obtain no work assignments.
Some critics of this contractual system argue that
there should be a new category of workers with
“dependent-contractor” status who receive some of the
protections traditionally given only to employees. Certain aspects of current labor law would be attached to
the relationships between dependent contractors and
their employers.
Worker Misclassification Lawsuits
A number of former or current Uber and Lyft drivers have pursued legal remedies to change their
job classification and to obtain better benefits. In
California, for instance, two federal court judges
allowed separate lawsuits to go before juries on the
Pershad was Five Star’s employee and that Five Star was an
independent contractor, not AAA’s employee. Therefore,
AAA was not liable (and Five Star was, so it entered into
a settlement agreement with Coker). Coker appealed,
but a state intermediate appellate court affirmed. AAA
could not be held liable for the actions of Five Star, its
question of whether on-demand drivers
should be considered employees rather than
independent contractors.a
In a similar case, rather than go to court,
Lyft settled a worker misclassification lawsuit
for $12.25 million. The suit, which was settled
in 2016, had been brought in 2013. The
settlement did not achieve a reclassification
of Lyft drivers as employees. Basically, Lyft agreed to
change its terms of service to conform to California’s
independent contractor status regulations. For instance,
the company can no longer deactivate drivers’
accounts without reason and without warning the drivers. Drivers have to be given a fair hearing first. Even
though the lawsuit and the agreement were California
based, the new terms of service will apply to all Lyft’s
drivers nationwide.
Competitors Sue Uber
In many cities, competitors, especially taxi drivers,
have sued Uber. These lawsuits have involved claims of
unfair competition, lack of minimum wages, and unsafe
vehicles. A taxi driver sued Uber in northern California,
for instance, but a federal district court ruled in favor of
Uber’s request for summary judgment.b
Another suit was brought in Pennsylvania. In this
one, Checker Cab of Philadelphia claimed that Uber
was violating Pennsylvania’s unfair competition law.
Checker Cab sought a preliminary injunction to prevent Uber from taking away its customers. The federal
district court refused to grant an injunction, however,
because Checker Cab failed to show irreparable harm.
That decision was upheld on appeal.c
Critical Thinking What choices do disgruntled Uber and
Lyft drivers have?
a. Cotter v. Lyft, Inc., 60 F.Supp.3d 1067 (N.D.Cal. 2015); O’Connor v.
Uber Technologies, Inc., et al., Case No. C-13-3826 EMC (N.D.Cal.
2015).
b. Rosen v. Uber Technologies, Inc., __ F.Supp.3d __, 2016 WL 704078
(N.D.Cal. 2016).
c. Checker Cab of Philadelphia v. Uber Technologies, Inc., __ Fed.Appx.
__, 2016 WL 929310 (3d Cir. 2016).
independent contractor, because “AAA did not control
the manner and means of Five Star’s work.”2 ■
Criteria Used by the IRS The Internal Revenue Service (IRS) has established its own criteria for determining
2. Coker v. Pershad
Pershad, 2013 WL 1296271 (N.J.Sup.Ct. 2013).
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CHAPTER 19
whether a worker is an independent contractor or an
employee. The most important factor is the degree of
control the business exercises over the worker.
The IRS tends to closely scrutinize a firm’s classification of its workers because, as mentioned, employers can
avoid certain tax liabilities by hiring independent contractors instead of employees. Even when a firm has classified a
worker as an independent contractor, the IRS may decide
that the worker is actually an employee. If the IRS decides
that an employee is misclassified, the employer will be
responsible for paying any applicable Social Security, withholding, and unemployment taxes due for that employee.
Employee Status and “Works for Hire” Ordinarily, a person who creates a copyrighted work is the owner
of it—unless it is a “work for hire.” Under the Copyright
Act, any copyrighted work created by an employee within
the scope of her or his employment at the request of the
employer is a “work for hire.” The employer owns the
copyright to the work.
In contrast, when an employer hires an independent
contractor—such as a freelance artist, writer, or computer programmer—the independent contractor normally owns the copyright. An exception is made if the
parties agree in writing that the work is a “work for hire”
and the work falls into one of nine specific categories.
The nine categories include audiovisual works, collective
works (such as magazines), motion pictures, textbooks,
tests, and translations.
■ CASE IN POINT 19.2 As a freelance contractor, Brian
Cooley created two sculptures of dinosaur eggs for the
National Geographic Society for use in connection with
an article in its magazine, National Geographic. Cooley
spent hundreds of hours researching, designing, and
constructing the sculptures. National Geographic hired
Louis Psihoyos to photograph Cooley’s sculptures for
the article. Cooley and Psihoyos had separate contracts
with National Geographic in which each transferred the
copyrights in their works to National Geographic for a
limited time.
The rights to the works were returned to the artists
at different times after publication. Psihoyos then began
licensing his photographs of Cooley’s sculptures to third
parties in return for royalties. He digitized the photographs and licensed them to various online stock photography companies, and they appeared in several books
published by Penguin Group. Cooley sued Psihoyos for
copyright infringement.
Psihoyos argued that he owned the photos and could
license them however he saw fit, but a federal district
court disagreed. The court found that Psihoyos did not
have an unrestricted right to use and license the photos.
Agency Relationships
419
When Psihoyos reproduced an image of a Cooley sculpture, he reproduced the sculpture, which infringed on
Cooley’s copyright. Therefore, the court granted a summary judgment to Cooley.3 ■
19–2 Formation of the
Agency Relationship
Agency relationships normally are consensual. They come
about by voluntary consent and agreement between the
parties. Normally, the agreement need not be in writing,
and consideration is not required.
A person must have contractual capacity to be a principal.4 The idea is that those who cannot legally enter
into contracts directly should not be allowed to do so
indirectly through an agent. Any person can be an agent,
however, regardless of whether he or she has the capacity
to contract (including minors).
An agency relationship can be created for any legal
purpose. An agency relationship created for a purpose
that is illegal or contrary to public policy is unenforceunenforce
able. ■ EXAMPLE 19.3 Archer (as principal) contracts
with Burke (as agent) to sell illegal narcotics. The agency
relationship is unenforceable because selling illegal narcotics is a felony and is contrary to public policy. If Burke
sells the narcotics and keeps the profits, Archer cannot
sue to enforce the agency agreement. ■
An agency relationship can arise in four ways: by
agreement of the parties, by ratification, by estoppel, and
by operation of law.
19–2a Agency by Agreement
Most agency relationships are based on an express or
implied agreement that the agent will act for the principal
and that the principal agrees to have the agent so act. An
agency agreement can take the form of an express written
contract or be created by an oral agreement. ■ EXAMPLE
19.4 Reese asks Grace, a gardener, to contract with others
for the care of his lawn on a regular basis. If Grace agrees,
an agency relationship exists between Reese and Grace
for the lawn care. ■
An agency agreement can also be implied by concon
duct. ■ CASE IN POINT 19.5 Gilbert Bishop was admitted to a nursing home, Laurel Creek Health Care Center,
suffering from various physical ailments. He was not able
to use his hands well enough to write but was otherwise
3. Cooley v. Penguin Group (USA), Inc., 31 F.Supp.3d 599 (S.D.N.Y. 2014).
4. Note that some states allow a minor to be a principal. When a minor is
permitted to be a principal, any resulting contracts will be voidable by
the minor principal but not by the adult third party.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
420
U N I T F OUR
The Business and Employment Environment
mentally competent. Bishop’s sister offered to sign the
admission papers for him, but it was Laurel Creek’s
policy to have the patient’s spouse sign the forms if the
patient could not.
Bishop’s sister then brought his wife, Anna, to the hospital to sign the paperwork, which included a mandatory
arbitration clause. Later, when the family filed a lawsuit
against Laurel Creek, the nursing home sought to enforce
the arbitration clause. Ultimately, a Kentucky appellate
court held that Bishop was bound by the contract and
the arbitration clause his wife had signed. Bishop’s conduct had indicated that he was giving his wife authority
to act as his agent in signing the admission papers.5 ■
19–2b Agency by Ratification
On occasion, a person who is in fact not an agent (or
who is an agent acting outside the scope of her or his
authority) makes a contract on behalf of another (a principal). If the principal approves or affirms that contract
by word or by action, an agency relationship is created
by ratification. Ratification involves a question of intent,
and intent can be expressed by either words or conduct.
19–2c Agency by Estoppel
Sometimes, a principal causes a third person to believe
that another person is the principal’s agent, and the third
person acts to his or her detriment in reasonable reliance on that belief. When this occurs, the principal is
“estopped to deny” (prevented from denying) the agency
relationship. The principal’s actions have created the
appearance of an agency that does not in fact exist, creating an agency by estoppel.
The Third Party’s Reliance Must Be Reasonable
The third person must prove that he or she reasonably
believed that an agency relationship existed.6 Facts and
circumstances must show that an ordinary, prudent person familiar with business practice and custom would
have been justified in concluding that the agent had
authority.
Created by the Principal’s Conduct Note that
the acts or declarations of a purported agent in and of
themselves do not create an agency by estoppel. Rather,
it is the deeds or statements of the principal that create an
agency by estoppel. ■ CASE IN POINT 19.6 Francis Azur
was president and chief executive officer of ATM Corporation of America. Michelle Vanek was Azur’s personal
assistant. Among other duties, she reviewed his creditcard statements. For seven years, Vanek took unauthorized cash advances from Azur’s credit-card account with
Chase Bank. The charges appeared on at least sixty-five
monthly statements.
When Azur discovered Vanek’s fraud, he fired her and
closed the account. He filed a suit against Chase, arguing that the bank should not have allowed Vanek to take
cash advances. The court concluded that Azur (the principal) had given the bank reason to believe that Vanek
(the agent) had authority. Therefore, Azur was estopped
(prevented) from denying Vanek’s authority.7 ■
19–2d Agency by Operation of Law
The courts may find an agency relationship in the
absence of a formal agreement in other situations as well.
This may occur in family relationships, such as when one
spouse purchases certain basic necessaries and charges
them to the other spouse’s account. The courts often
rule that a spouse is liable for payment for the necessaries
because of either a social policy or a legal duty to supply
necessaries to family members.
Agency by operation of law may also occur in emergency situations. If an agent cannot contact the principal
and failure to act would cause the principal substantial
loss, the agent may take steps beyond the scope of her or
his authority. For instance, a railroad engineer may contract on behalf of his or her employer for medical care for
an injured motorist hit by the train.
19–3 Duties of Agents
and Principals
Once the principal-agent relationship has been created,
both parties have duties that govern their conduct. As
discussed previously, the principal-agent relationship is
fiduciary—based on trust. In a fiduciary relationship, each
fiduciary
party owes the other the duty to act with the utmost good
faith.
5. Laurel Creek Health Care Center v. Bishop, 2010 WL 985299 (Ky.App.
2010).
6. These concepts also apply when a person who is, in fact, an agent under-
takes an action that is beyond the scope of her or his authority.
7. Azur v. Chase Bank, USA, N.A., 601 F.3d 212 (3d Cir. 2010).
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CHAPTER 19
19–3a Agent’s Duties to the Principal
Generally, the agent owes the principal five duties—performance, notification, loyalty, obedience, and accounting (see Exhibit 19–1).
Performance An implied condition in every agency
contract is the agent’s agreement to use reasonable diligence and skill in performing the work. When an agent
fails to perform his or her duties, liability for breach of
contract may result.
Standard of Care. The degree of skill or care required of
an agent is usually that expected of a reasonable person
under similar circumstances. Generally, this is interpreted
to mean ordinary care. If an agent has represented herself
or himself as possessing special skills, however, the agent is
expected to exercise the degree of skill claimed. Failure to
do so constitutes a breach of the agent’s duty.
Gratuitous Agents. Not all agency relationships are
based on contract. In some situations, an agent acts gratuitously—that is, without payment. A gratuitous agent
cannot be liable for breach of contract because there is no
contract. He or she is subject only to tort liability. Once
a gratuitous agent has begun to act in an agency capacity, he or she has the duty to continue to perform in that
capacity. A gratuitous agent must perform in an acceptable manner and is subject to the same standards of care
and duty to perform as other agents.
■ EXAMPLE 19.7 Bower’s friend Alcott is a real estate
broker. Alcott offers to sell Bower’s vacation home at no
Agency Relationships
421
charge. If Alcott never attempts to sell the home, Bower
has no legal cause of action to force her to do so. If Alcott
does attempt to sell the home to Friedman, but then performs so negligently that the sale falls through, Bower
can sue Alcott for negligence. ■
Notification An agent is required to notify the principal of all matters that come to her or his attention concerning the subject matter of the agency. This is the duty
of notification, or the duty to inform.
■ EXAMPLE 19.8 Perez, an artist, is about to negotiate a contract to sell a series of paintings to Barber’s Art
Gallery for $25,000. Perez’s agent learns that Barber is
insolvent and will be unable to pay for the paintings. The
agent has a duty to inform Perez of Barber’s insolvency
because it is relevant to the subject matter of the agency,
which is the sale of Perez’s paintings. ■
Generally, the law assumes that the principal is aware of
any information acquired by the agent that is relevant to
the agency—regardless of whether the agent actually passes
on this information to the principal. It is a basic tenet of
agency law that notice to the agent is notice to the principal.
Loyalty Loyalty is one of the most fundamental duties
in a fiduciary relationship. Basically, the agent has the
duty to act solely for the benefit of his or her principal
and not in the interest of the agent or a third party. For
instance, an agent cannot represent two principals in the
same transaction unless both know of the dual capacity
and consent to it.
EXHIBIT 19–1 Duties of the Agent
DUTIES OF THE AGENT
Performance
Notification
Loyalty
Obedience
Accounting
Agent must use
reasonable diligence
and skill when
performing duties.
Agent is required to
notify the principal
of all matters that
concern the subject
of the agency.
Agent has a duty to
act solely for the
principal’s benefit.
Agent must follow
all lawful and stated
instructions from
the principal.
Agent must provide
records of all property
and funds received
or paid out on the
principal’s behalf.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
422
UNIT FOUR
The Business and Employment Environment
The duty of loyalty also means that any information
or knowledge acquired through the agency relationship
is confidential. It is a breach of loyalty to disclose such
information either during the agency relationship or after
its termination. Typical examples of confidential information are trade secrets and customer lists compiled by
the principal.
The agent’s loyalty must be undivided. The agent’s
actions must be strictly for the benefit of the principal
and must not result in any secret profit for the agent.
In the following case, an employer alleged that a former employee had breached his duty of loyalty by planning a competing business while still working for the
employer.
Spotlight on Taser International
Case 19.1 Taser International, Inc.
nc. v. Ward
Court of Appeals of Arizona, Division 1, 224 Ariz. 389, 231 P.3d 921 (2010).
Background and Facts Taser International, Inc., develops and makes electronic control devices,
commonly called stun guns, as well as accessories for electronic control devices, including a personal
video and audio recording device called the TASER CAM.
Steve W
Ward was Taser’s vice president of marketing when he began to explore the possibility of
developing and marketing devices of his own design, including a clip-on camera. Ward talked to
patent attorneys and a product development company and completed most of a business plan.
After he resigned from Taser, he formed Vievu, LLC, to market his clip-on camera.
Ten months after Ward resigned, Taser announced the AXON, a product that provides an audioT
video record of an incident from the visual perspective of the person involved. Taser then filed a suit
in an Arizona state court against Ward, alleging that he had breached his duty of loyalty to Taser.
The court granted Taser’s motion for a summary judgment in the employer’s favor. Ward appealed.
In the Language of the Court
PORTLEY, Judge.
****
* * * An agent is under the duty to act with entire good faith and loyalty for the furtherance of the
interests of his principal in all matters concerning or affecting the subject of his agency.
One aspect of this broad principle is that an employee is precluded from actively competing with
his or her employer during the period of employment.
Although an employee may not compete prior to termination, the employee may take action during
employment, not otherwise wrongful, to prepare for competition following termination of the agency relationship. Preparation cannot take the form of acts in direct competition with the employer’s business. [Emphasis
added.]
****
It is undisputed that, prior to his resignation, Ward did not solicit or recruit any Taser employees, distributors, customers, or vendors; he did not buy, sell, or incorporate any business; he did not
acquire office space or other general business services; he did not contact or enter into any agreements
with suppliers or manufacturers for his proposed clip-on camera; and he did not sell any products.
However, Ward did begin developing a business plan, counseled with several attorneys, explored and
abandoned the concept of an eyeglass-mounted camera device, and engaged, to some extent, in the
exploration and development of a clip-on camera device.
Ward argues that his pre-termination activities did not constitute active competition but were
merely lawful preparation for a future business venture. Taser contends, however, that “this case is * * *
about developing a rival design during employment, knowing full well TASER has sold such a device
and continues to develop a second-generation product.”
****
* * * Assuming Taser was engaged in the research and development of a recording device during
Ward’s employment, assuming Ward knew or should have known of those efforts, and assuming Taser’s
device would compete with Ward’s concept, substantial design and development efforts by Ward
during
hisLearning.
employment
would
constitute
direct
competition
with the in
business
of 02-200-203
Taser and
Copyright 2018
Cengage
All Rights
Reserved.
May not be
copied,
scanned, or duplicated,
whole or activities
in part. WCN
CHAPTER 19
Case 19.1 Continued
Agency Relationships
423
would violate his duty of loyalty. In the context of a business which engages in research, design, development, manufacture, and marketing of products, we cannot limit “competition” to just actual sales of competing products.
Decision and Remedy A state intermediate appellate court agreed with Taser that an employee may
not actively compete with his employer before his employment is terminated. But the parties disputed the
extent of Ward’s pre-termination efforts, creating a genuine issue of material fact that could not be resolved
on a motion for summary judgment. The appellate court thus reversed the lower court’s decision in Taser’s
favor and remanded the case for further proceedings.
Critical Thinking
• Legal Environment Did Ward breach any duties owed to his employer in addition to his alleged breach
of the duty of loyalty? Discuss.
• What If the Facts Were Different? Suppose that Ward’s pre-termination activities focused on a prod
product that was not designed to compete with Taser’s products. Would these efforts have breached the duty of
loyalty? Why or why not?
Obedience When acting on behalf of the principal, an
agent has a duty to follow all lawful and clearly stated
instructions of the principal. Any deviation from such
instructions is a violation of this duty.
During emergency situations, however, when the
principal cannot be consulted, the agent may deviate
from the instructions without violating this duty. Whenever instructions are not clearly stated, the agent can fulfill the duty of obedience by acting in good faith and in a
manner reasonable under the circumstances.
Accounting Unless the agent and principal agree otherwise, the agent must keep and make available to the
principal an account of all property and funds received
and paid out on the principal’s behalf. This includes gifts
from third parties in connection with the agency.
The agent has a duty to maintain a separate account
for the principal’s funds and must not intermingle these
funds with the agent’s personal funds. If a licensed professional (such as an attorney) violates this duty, he or
she may be subject to disciplinary action by the licensing
authority (such as the state bar association). Of course,
the professional will also be liable to his or her client (the
principal) for failure to account.
19–3b Principal’s Duties to the Agent
The principal also has certain duties to the agent (as shown
in Exhibit 19–2). These duties relate to compensation,
EXHIBIT 19–2 Duties of the Principal
DUTIES OF THE PRINCIPAL
Compensation
Reimbursement and
Indemnification
Cooperation
Safe Working
Conditions
Principal must pay the
agreed-on (or reasonable)
value for the agent’s
services.
Principal must reimburse
the agent for any funds
paid out at the principal’s
request, as well as for
necessary expenses.
Principal must cooperate
with and assist an agent
in performing his or
her duties.
Principal must provide a
safe working environment
for agents and employees.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
424
U N I T F OUR
The Business and Employment Environment
reimbursement and indemnification, cooperation, and
safe working conditions.
Compensation In general, when a principal requests
certain services from an agent, the agent reasonably
expects payment. For instance, when an accountant or
an attorney is asked to act as an agent, an agreement to
compensate the agent for this service is implied. The
principal therefore has a duty to pay the agent for services rendered.
Unless the agency relationship is gratuitous and the
agent does not act in exchange for payment, the principal
must pay the agreed-on value for the agent’s services. If
no amount has been expressly agreed on, then the principal owes the agent the customary compensation for such
services. The principal also has a duty to pay that compensation in a timely manner.
■ CASE IN POINT 19.9 Keith Miller worked as a sales
representative for Paul M. Wolff Company, a subcontractor specializing in concrete-finishing services. Sales representatives at Wolff are paid a 15 percent commission
on projects that meet a 35 percent gross profit threshold. The commission is paid after the projects are completed. When Miller resigned, he asked for commissions
on fourteen projects for which he had secured contracts
but which had not yet been completed. Wolff refused, so
Miller sued.
The court found that “an agent is entitled to receive
commissions on sales that result from the agent’s efforts,”
even after the employment or agency relationship ends.
Miller had met the gross profit threshold on ten of the
unfinished projects, and therefore, he was entitled to
more than $21,000 in commissions.8 ■
Reimbursement and Indemnification Whenever an agent disburses funds at the request of the principal, the principal has a duty to reimburse the agent.
The principal must also reimburse the agent (even a
gratuitous agent) for any necessary expenses incurred
in the course of the reasonable performance of her or
his agency duties. Agents cannot recover for expenses
incurred as a result of their own misconduct or negligence, though.
8. Miller v. Paul M. Wolff Co., 178 Wash.App. 957, 316 P.3d 1113 (2014).
Subject to the terms of the agency agreement, the
principal has the duty to indemnify (compensate) an
agent for liabilities incurred because of authorized and
lawful acts and transactions. For instance, if the agent, on
the principal’s behalf, forms a contract with a third party,
and the principal fails to perform the contract, the third
party may sue the agent for damages. In this situation,
the principal is obligated to compensate the agent for any
costs incurred by the agent as a result of the principal’s
failure to perform the contract.
Additionally, the principal must indemnify the agent
for the value of benefits that the agent confers on the
principal. The amount of indemnification usually is
specified in the agency contract. If it is not, the courts
will look to the nature of the business and the type of loss
to determine the amount. Note that this rule applies to
acts by gratuitous agents as well.
Cooperation A principal has a duty to cooperate with
the agent and to assist the agent in performing his or her
duties. The principal must do nothing to prevent that
performance.
For instance, when a principal grants an agent an
exclusive territory, the principal creates an exclusive
agency, in which the principal cannot compete with
the agent or appoint or allow another agent to compete.
If the principal does so, he or she violates the exclusive
agency and is exposed to liability for the agent’s lost
profits.
■ EXAMPLE 19.10 Penny (the principal) creates
an exclusive agency by granting Andrew (the agent) a
territory within which only Andrew may sell Penny’s
organic skin care products. If Penny starts to sell the
products herself within Andrew’s territory—or permits
another agent to do so—Penny has failed to cooperate
with the agent. Because she has violated the exclusive
agency, Penny can be held liable for Andrew’s lost sales
or profits. ■
In the following case, a pair of potential homebuyers
entered into an agreement with a realtor to act as the
buyers’ exclusive agent in locating and purchasing property. Later, the buyers executed an exclusive agency agreement with a different realtor. Neither agent knew about
the other until the buyers found a home that they liked
and bought it.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CHAPTER 19
Agency Relationships
425
Case Analysis 19.2
NRT New England, LLC v. Jones
Appellate Court of Connecticut, 162 Conn.App. 840, 134 A.3d 632 (2016).
In the Language of the Court
HARPER, J. [Judge]
****
The defendant [Christopher Jones]
met Andrea Woolston, a licensed realtor
working as an independent contractor
[for NRT New England, LLC, doing
business as Coldwell Banker Residential Brokerage], in October 2010. The
defendant expressed to Woolston a
desire to purchase a home for himself
and his then fiancée, Katherine Wiltshire. One of the first things Woolston
asked the defendant was whether he
was represented by another agent. The
defendant responded that he was not.
After a number of conversations about
the defendant’s needs and wishes, the
parties executed an exclusive right to
represent buyer agreement (agreement),
which established, among other things,
that Woolston was the defendant’s
exclusive agent for finding, negotiating, and purchasing property. Over the
next several months, Woolston devoted
a substantial amount of time searching
for properties for the defendant to purchase. Specifically, Woolston researched
available properties at six town halls in
the communities in which the defendant was interested. She showcased a
number of properties personally to the
defendant and Wiltshire and introduced
many more to them through e-mail.
Woolston and the defendant had at
least twenty appointments where they
viewed multiple properties. Additionally,
Woolston visited many properties alone
to determine if they were suitable for the
defendant. Altogether, Woolston spent
hundreds of hours seeking a suitable
home for the defendant.
The agreement was in effect from
January 11, 2011 until July 11, 2011,
and set forth the geographical area that
the defendant was interested in and the
rate of compensation for the plaintiff ’s
services. With respect to geographical
area, the parties agreed that Woolston
would seek properties in Killingworth,
Guilford, Essex, Old Saybrook, Deep
River, Lyme, and Old Lyme [Connecticut]. With respect to compensation, the
defendant agreed to pay the plaintiff a
commission equal to 2.5 percent of the
purchase price of the property “if the
[buyer] or any person or entity acting on
the [buyer’s] behalf purchases, options,
exchanges, leases or trades any property,
through the efforts of anyone, including
the [buyer].” The agreement imposed the
following duties on the defendant: “The
[buyer] will not deal directly with any
other broker, agent or licensee during the
term of this agreement. The [buyer] will
notify other brokers, agents or licensees
at first contact that the [buyer] is being
exclusively represented by [NRT]. The
[buyer] will disclose to [NRT] any past
and/or current contacts for any real property or with any other real estate broker
or agent.”
On May 10, 2011, the defendant
informed Woolston via e-mail that he
and Wiltshire purchased property at
300 Vineyard Point Road in Guilford
for $1,375,000. The defendant learned
of this property on May 4, 2011, from
Mary Jane Burt, a realtor with H. Pearce
Real Estate (H. Pearce), who previously
had represented Wiltshire with the sale
of her house in Hamden [Connecticut].
Woolston subsequently confronted the
defendant and eventually learned that he
and Wiltshire previously had executed
an exclusive right to
represent buyer agreement with Burt and
H. Pearce. This agreement was in effect
from August 1, 2010, until August 1,
2011, and contained a provision designating Burt as the exclusive agent for the
defendant and Wiltshire. Thus, at the
time the defendant purchased the property in Guilford, he was under contract
for exclusive agency with both Woolston
and Burt. The defendant never told
Woolston or Burt that he had two
agreements in effect at the same time.
Woolston notified her superiors of what
had transpired.
* * * [NRT] filed a * * * complaint
[in a Connecticut state court] against the
defendant [for] breach of contract * * * .
After a trial * * * , the court * * * found
that the plaintiff had proven * * * breach
of contract * * * and damages. * * * The
court awarded the plaintiff $34,375 in
damages [which represented 2.5 percent
of the purchase price for the Vineyard
Point property] plus attorney’s fees and
costs. This appeal followed.
****
The defendant * * * claims that the
agreement was unenforceable. Specifically, he argues that the court improperly
* * * found that it was inequitable to
deny the plaintiff recovery.
****
There is ample evidence in the record
to support the court’s conclusion that
denying the plaintiff relief would be
inequitable. Woolston testified, and the
defendant himself conceded, that she
rendered a significant amount of services
to the defendant over several months.
Case 19.2 Continues
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
426
U N I T F OUR
The Business and Employment Environment
Case 19.2 Continued
Specifically, Woolston researched properties at town halls for availability and
encumbrances, contacted property owners, arranged personal visits, prepared
and presented literature to the defendant
on available properties, and attended
appointments with the defendant and
Wiltshire. Woolston spent hundreds of
hours working for the defendant in total.
The defendant, on the other hand,
accepted Woolston’s services while under
contract with another agent in violation
of the agreement. Indeed, the defendant
acknowledged that he was untruthful
with Woolston at the beginning of their
relationship when he told her that he
was not represented by another agent.
In fact, he was scheduling appointments and viewing properties with both
Woolston and Burt at approximately the
same time in May 2011. For example,
the defendant e-mailed Woolston on
May 2, 2011, thanking her for showing him a property. Approximately
one week later, the defendant e-mailed
Woolston to inform her that he viewed
300 Vineyard Point Road with Burt and
had “put in an all cash bid that has been
accepted.”
The defendant nevertheless argues
that it would not be inequitable to
deny recovery to the plaintiff because
Woolston performed no services in
connection with his purchase of 300
Vineyard Point Road. We are not persuaded. The defendant agreed to pay a
commission “equal to 2.5% of the purchase
price if the [buyer] or any person or entity
acting on the [buyer’s] behalf purchases * * *
any property, through the efforts of anyone,
including the [buyer], where an agreement
to purchase the property was entered into
during the term of this agreement.” However unjust this result may seem to the
defendant in hindsight, we cannot say it
is inequitable because it is precisely what
he agreed to. [Emphasis added.]
****
The judgment is affirmed.
Legal Reasoning Questions
1. What is the advantage to a principal of an exclusive agency agreement? What was the advantage to Jones of his agreement with
Woolston? Discuss.
2. Why, in addition to damages, was the plaintiff awarded attorneys’ fees and costs?
3. Jones’s agreement with Woolston provided that on the purchase of the property, NRT “will, whenever feasible, seek compensation from the seller or the seller’s agent.” The court determined that it was not feasible. Why would it not be reasonable in this
situation to ask the seller of the property to pay part of Woolston’s commission?
Safe Working Conditions The common law
requires the principal to provide safe working premises, equipment, and conditions for all agents and
employees. The principal has a duty to inspect working areas and to warn agents and employees about any
unsafe situations. When the agent is an employee, the
employer’s liability is frequently covered by state workers’ compensation insurance. In addition, federal and
state statutes often require the employer to meet certain
safety standards.
environment. An agent also has the right to perform
agency duties without interference by the principal. In
addition, an agent can withhold further performance and
demand that the principal give an accounting.
A principal has contract remedies for an agent’s breach
of fiduciary duties. The principal has tort remedies if the
agent engages in misrepresentation, negligence, deceit,
libel, slander, or trespass. In addition, any breach of a
fiduciary duty by an agent may justify the principal’s termination of the agency.
19–3c Rights and Remedies
of Agents and Principals
In general, for every duty of the principal, the agent has
a corresponding right, and vice versa. When one party
to the agency relationship violates his or her duty to the
other party, the remedies available to the nonbreaching
party arise out of contract and tort law. These remedies
include monetary damages, termination of the agency
relationship, an injunction, and required accountings.
The agent has the right to be compensated, to be
reimbursed and indemnified, and to have a safe working
19–4 Agent’s Authority
The liability of a principal to third parties with whom
an agent contracts depends on whether the agent had
the authority to enter into legally binding contracts on
the principal’s behalf. An agent’s authority can be either
actual (express or implied) or apparent. If an agent contracts outside the scope of his or her authority, the principal may still become liable by ratifying the contract.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CHAPTER 19
19–4a Express Authority
Express authority is authority declared in clear, direct,
and definite terms. Express authority can be given orally
or in writing.
The Equal Dignity Rule In most states, the equal
dignity rule requires that if the contract being executed is
or must be in writing, then the agent’s authority must also
be in writing. (Recall that a writing includes an electronic
record.) Failure to comply with the equal dignity rule can
make a contract voidable at the option of the principal. The
law regards the contract at that point as a mere offer. If the
principal decides to accept the offer, the acceptance must
be ratified, or affirmed, in writing.
■ EXAMPLE 19.11 Paloma (the principal) orally asks
Austin (the agent) to sell a ranch that Paloma owns. Austin finds a buyer and signs a sales contract on behalf of
Paloma to sell the ranch. Because a contract for an interest in realty must be in writing, the equal dignity rule
applies. The buyer cannot enforce the contract unless
Paloma subsequently ratifies Austin’s agency status in a
writing. Once the sales contract is ratified, either party
can enforce rights under the contract. ■
Modern business practice allows several exceptions to
the equal dignity rule:
1. An executive officer of a corporation normally can
conduct ordinary business transactions without
obtaining written authority from the corporation.
2. When the agent acts in the presence of the principal,
the rule does not apply.
3. When the agent’s act of signing is merely a formality, then the agent does not need written authority to
sign. ■ EXAMPLE 19.12 Sandra Healy (the principal)
negotiates a contract but is called out of town the day
it is to be signed. If Healy orally authorizes Derek
Santini to sign, the oral authorization is sufficient. ■
Power of Attorney Giving an agent a power of
attorney confers express authority.9 The power of attorney is a written document and is usually notarized. (A
document is notarized when a notary public
public—a person
authorized to attest to the authenticity of signatures—
signs, dates, and imprints the document with her or his
seal of authority.) Most states have statutory provisions for
creating a power of attorney.
A power of attorney can be special (permitting the
agent to perform specified acts only), or it can be general (permitting the agent to transact all business for the
9. An agent who holds a power of attorney is called an attorney-in-fact for
the principal. The holder does not have to be an attorney-at-law (and
often is not).
Agency Relationships
427
principal). Because a general power of attorney grants
extensive authority to the agent, it should be used with
great caution and usually only in exceptional circumstances. Ordinarily, a power of attorney terminates on
the incapacity or death of the person giving the power.10
19–4b Implied Authority
An agent has the implied authority to do what is reasonably necessary to carry out express authority and
accomplish the objectives of the agency. Authority can
also be implied by custom or inferred from the position
the agent occupies.
■ EXAMPLE 19.13 Archer is employed by Packard
Grocery to manage one of its stores. Packard has not
expressly stated that Archer has authority to contract
with third persons. Nevertheless, authority to manage a business implies authority to do what is reasonably required (as is customary or can be inferred from a
manager’s position) to operate the business. This includes
forming contracts to hire employees, buying merchandise and equipment, and advertising the products sold
in the store. ■
Note, however, that an agent’s implied authority cannot contradict his or her express authority. Thus, if a
principal has limited an agent’s express authority, then
the fact that the agent customarily would have such
authority is irrelevant.
19–4c Apparent Authority
Actual authority (express or implied) arises from what
the principal makes clear to the agent. Apparent authority,
in contrast, arises from what the principal causes a third
party to believe. An agent has apparent authority when
the principal, by either word or action, causes a third party
reasonably to believe that the agent has authority to act,
even though the agent has no express or implied authority.
Apparent authority usually comes into existence
through a principal’s pattern of conduct over time. ■ CASE
IN POINT 19.14 Gilbert Church owned Church Farm,
Inc., a horse-breeding farm in Illinois, which was managed by Herb Bagley. Church Farm’s advertisements for
the breeding rights to one of its stallions, Imperial Guard,
directed all inquiries to “Herb Bagley, Manager.” Vern
and Gail Lundberg contacted Bagley and executed a preprinted contract giving them breeding rights to Imperial
10. A durable power of attorney, however, continues to be effective despite
the principal’s incapacity or death. An elderly person, for instance,
might grant a durable power of attorney to provide for the handling of
property and investments or specific health-care needs should he or she
become incompetent.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
428
U N I T F OUR
The Business and Employment Environment
Guard “at Imperial Guard’s location.” Bagley handwrote
a statement on the contract that guaranteed the Lundbergs “six live foals in the first two years.” He then signed
it “Gilbert G. Church by H. Bagley.”
The Lundbergs bred four mares, which resulted in
one live foal. Church then moved Imperial Guard from
Illinois to Oklahoma. The Lundbergs sued Church for
breaching the contract by moving the horse. Church
claimed that Bagley was not authorized to sign contracts
for Church or to change or add terms but only to present
preprinted contracts to potential buyers. The jury found
in favor of the Lundbergs and awarded $147,000 in
damages. Church appealed, but the state appellate court
affirmed the judgment. The court found that “an agent
may bind his principal by acts which the principal has
not given him actual authority to perform, but which
he appears authorized to perform.” Because Church
allowed circumstances to lead the Lundbergs to believe
Bagley had the authority, Church was bound by Bagley’s
actions.11 ■
the third party’s agreement is an unaccepted offer, the
third party can revoke it at any time, without liability,
before the principal ratifies the contract. The agent, however, may be liable to the third party for misrepresenting
her or his authority.
The requirements for ratification can be summarized
as follows:
1. The agent must have acted on behalf of an identified
principal who subsequently ratifies the action.
2. The principal must know all of the material facts
3.
4.
5.
19–4d Emergency Powers
When an unforeseen emergency demands action by the
agent to protect or preserve the property and rights of the
principal, but the agent is unable to communicate with the
principal, the agent has emergency power. ■ EXAMPLE
19.15 Rob Fulsom is an engineer for Pacific Drilling
Company. While Fulsom is acting within the scope of
his employment, he is severely injured in an accident on
an oil rig many miles from home. Acosta, the rig supervisor, directs Thompson, a physician, to give medical aid
to Fulsom and to charge Pacific for the medical services.
Acosta, an agent, has no express or implied authority
to bind the principal, Pacific Drilling, for Thompson’s
medical services. Because of the emergency situation,
however, the law recognizes Acosta as having authority to
act appropriately under the circumstances. ■
19–4e Ratification
Ratification occurs when the principal affirms, or accepts
responsibility for, an agent’s unauthorized act. When ratification occurs, the principal is bound to the agent’s act,
and the act is treated as if it had been authorized by the
principal from the outset. Ratification can be either express
or implied.
If the principal does not ratify the contract, the principal is not bound, and the third party’s agreement with the
agent is viewed as merely an unaccepted offer. Because
11. Lundberg v. Church Farm, Inc., 502 N.E.2d 806, 151 Ill.App.3d (1986).
6.
involved in the transaction. If a principal ratifies a
contract without knowing all of the facts, the principal can rescind (cancel) the contract.
The principal must affirm the agent’s act in its
entirety.
The principal must have the legal capacity to authorize the transaction at the time the agent engages in
the act and at the time the principal ratifies. The third
party must also have the legal capacity to engage in
the transaction.
The principal’s affirmation (ratification) must occur
before the third party withdraws from the transaction.
The principal must observe the same formalities
when ratifying the act as would have been required
to authorize it initially.
19–5 Liability in
Agency Relationships
Frequently, a question arises as to which party, the principal or the agent, should be held liable for contracts
formed by the agent or for torts and crimes committed
by the agent.
19–5a Liability for Contracts
Liability for contracts formed by an agent depends on
how the principal is classified and on whether the actions
of the agent were authorized or unauthorized. Principals are classified as disclosed, partially disclosed, or
undisclosed.12
1. A disclosed principal is a principal whose identity is
known by the third party at the time the contract is
made by the agent.
2. A partially disclosed principal is a principal whose
identity is not known by the third party. Nevertheless, the third party knows that the agent is or may
12. Restatement (Third) of Agency, Section 1.04(2).
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CHAPTER 19
be acting for a principal at the time the contract is
made. ■ EXAMPLE 19.16 Eileen has contracted with
a real estate agent to sell certain property. She wishes
to keep her identity a secret, but the agent makes it
clear to potential buyers of the property that he is
acting in an agency capacity. In this situation, Eileen
is a partially disclosed principal. ■
3. An undisclosed principal is a principal whose identity is totally unknown by the third party. In addition, the third party has no knowledge that the agent
is acting in an agency capacity at the time the contract is made.
Authorized Acts If an agent acts within the scope of
her or his authority, normally the principal is obligated
to perform the contract regardless of whether the principal was disclosed, partially disclosed, or undisclosed.
Whether the agent may also be held liable under the contract, however, depends on the disclosed, partially disclosed, or undisclosed status of the principal.
Disclosed or Partially Disclosed Principal. A disclosed
or partially disclosed principal is liable to a third party for
a contract made by the agent. If the principal is disclosed,
the agent has no contractual liability for the nonperformance of the principal or the third party. If the principal is partially disclosed, in most states the agent is also
treated as a party to the contract. Thus, the third party can
hold the agent liable for contractual nonperformance.13
■ CASE IN POINT 19.17 Stonhard, Inc., makes epoxy
and urethane flooring and installs it in industrial and
commercial buildings. Marvin Sussman contracted with
Stonhard to install flooring at a Blue Ridge Farms foodmanufacturing facility in Brooklyn, New York. Sussman
did not disclose that he was acting as an agent for the
facility’s owner, Blue Ridge Foods, LLC, at the time of
the contract.
When Stonhard was not paid for the flooring it
installed, it filed a suit against the facility, its owner, and
Sussman to recover damages for breach of contract. The
lower court dismissed the complaint against Sussman
personally, but on appeal a reviewing court reversed that
decision. The contract had been signed by Sussman “of
Blue Ridge Farms.” That evidence indicated that Sussman was acting as an agent for a partially disclosed principal, in that the agency relationship was known, but not
the principal’s identity. “As an agent for an undisclosed
Agency Relationships
429
[or partially disclosed] principal, Sussman became personally liable under the contract.”14 ■
Undisclosed Principal. When neither the fact of an
agency relationship nor the identity of the principal is disclosed, the undisclosed principal is bound to perform just
as if the principal had been fully disclosed at the time the
contract was made.
When a principal’s identity is undisclosed and the
agent is forced to pay the third party, the agent is entitled
to be indemnified (compensated) by the principal. The
principal had a duty to perform, even though his or her
identity was undisclosed, and failure to do so will make
the principal ultimately liable.
Once the undisclosed principal’s identity is revealed,
the third party generally can elect to hold either the principal or the agent liable on the contract. Conversely, the
undisclosed principal can require the third party to fulfill
the contract, unless one of the following is true:
1. The undisclosed principal was expressly excluded as a
party in the written contract.
2. The contract is a negotiable instrument signed by the
agent with no indication of signing in a representative capacity.15
3. The performance of the agent is personal to the contract, thus allowing the third party to refuse the principal’s performance.
Unauthorized Acts If an agent has no authority but
nevertheless contracts with a third party, the principal
cannot be held liable on the contract. It does not matter
whether the principal was disclosed, partially disclosed, or
undisclosed. The agent is liable.
■ EXAMPLE 19.18 Chu signs a contract for the purpur
chase of a truck, purportedly acting as an agent under
authority granted by Navarro. In fact, Navarro has not
given Chu any such authority. Navarro refuses to pay for
the truck, claiming that Chu had no authority to purchase it. The seller of the truck is entitled to hold Chu
liable for payment. ■
If the principal is disclosed or partially disclosed, and
the agent contracts with a third party without authorization, the agent is liable to the third party. The agent’s
liability here is based on his or her breach of the implied
warranty of authority, not on the breach of the contract
14. Stonhard, Inc. v. Blue Ridge Farms, LLC, 114 A.D.3d 757, 980 N.Y.S.2d
507 (2 Dept. 2014).
15. Under the Uniform Commercial Code (UCC), only the agent is liable
13. Restatement (Third) of Agency, Section 6.02.
if the instrument neither names the principal nor shows that the agent
signed in a representative capacity [UCC 3–402(b)(2)].
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
430
U N I T F OUR
The Business and Employment Environment
itself.16 An agent impliedly warrants that he or she has the
authority to enter a contract on behalf of the principal.
If the third party knows at the time the contract is made
that the agent does not have authority—or if the agent
expresses to the third party uncertainty as to the extent of
her or his authority—the agent is not personally liable.
Actions by E-Agents Although in the past standard
agency principles applied only to human agents, today
these same agency principles also apply to e-agents. An
electronic agent, or e-agent, is a semiautonomous software program that is capable of executing specific tasks,
such as searching through many databases and retrieving
relevant information for the user.
E-agents can enter into binding agreements on behalf
of their principals. Thus, if consumers place an order
over the Internet, and the company (principal) takes the
order via an e-agent, the company cannot later claim that
it did not receive the order.
19–5b Liability for Torts and Crimes
Obviously, any person, including an agent, is liable for his
or her own torts and crimes. Whether a principal can also be
held liable for an agent’s torts and crimes depends on several
factors, which we examine here. In some situations, a principal may be held liable not only for the torts of an agent
but also for torts committed by an independent contractor.
Principal’s Tortious Conduct A principal who acts
through an agent may be liable for harm resulting from
the principal’s own negligence or recklessness. Thus,
a principal may be liable if he or she gives improper
instructions, authorizes the use of improper materials
or tools, or establishes improper rules that result in the
agent’s committing a tort.
■ EXAMPLE 19.19 Parker knows that Audrey’s driver’s license has been suspended but nevertheless tells her
to use the company truck to deliver some equipment to
a customer. If someone is injured as a result, Parker will
be liable for his own negligence in instructing Audrey to
drive without a valid license. ■
Principal’s Authorization of Agent’s Tortious
Conduct Similarly, a principal who authorizes an agent
to commit a tort may be liable to persons or property
injured thereby, because the act is considered to be the
principal’s. ■ EXAMPLE 19.20 Pedro directs his agent,
Andy, to cut the corn on specific acreage, which neither
of them has the right to do. The harvest is therefore a
16. The agent is not liable on the contract because the agent was never
intended personally to be a party to the contract.
trespass (a tort), and Pedro is liable to the owner of the
corn (Andy is also liable even if he did not know that
Pedro lacked the right to harvest the corn). ■
Liability for Agent’s Misrepresentation A principal is exposed to tort liability whenever a third person
sustains a loss due to the agent’s misrepresentation. The
principal’s liability depends on whether the agent was
actually or apparently authorized to make representations
and whether the representations were made within the
scope of the agency.
The principal is always directly responsible for an
agent’s misrepresentation made within the scope of the
agent’s authority. ■ EXAMPLE 19.21 Ainsley is a demonstrator for Pavlovich’s products. Pavlovich sends Ainsley to a home show to demonstrate the products and to
answer questions from consumers. Pavlovich has given
Ainsley authority to make statements about the products.
If Ainsley makes only true representations, all is fine. But
if he makes false claims, Pavlovich will be liable for any
injuries or damages sustained by third parties in reliance
on Ainsley’s false representations. ■
When a principal has placed an agent in a position
of apparent authority, the principal may also be liable
for the agent’s fraudulent acts. For instance, partners
in a partnership generally have the apparent implied
authority to act as agents of the firm. Thus, if one of
the partners commits a tort or a crime, the partnership
itself—and often the other partners personally—can be
held liable for the loss.
Liability for Agent’s Negligence An agent is liable
for his or her own torts. A principal may also be liable for
harm an agent causes to a third party under the doctrine
of respondeat superior,17 a Latin term meaning “let the
master respond.” Under the doctrine of respondeat superior, the principal-employer is liable for any harm caused
to a third party by an agent-employee in the course or
scope of employment. The doctrine imposes vicarious
liability, or indirect liability, because the principalemployer is being held liable for torts committed by an
agent-employee.
When an agent commits a negligent act in such
a situation, both the agent and the principal are liable. ■ EXAMPLE 19.22 Aegis hires SDI to provide landscaping services for its property. An herbicide sprayed
by SDI employee David Hoggatt enters the Aegis building through the air-conditioning system and causes
17. Pronounced ree-spahn-dee-uht
-dee-uht soosoo-peer
peer-ee-your.
peer
-ee-your. The doctrine of respon-
deat superior applies not only to employer-employee relationships but
also to other principal-agent relationships in which the principal has the
right of control over the agent.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CHAPTER 19
Catherine Warner, an Aegis employee, to suffer a heart
attack. If Warner sues, both SDI (principal) and Hoggatt
(agent) can be held liable for negligence. ■
The doctrine of respondeat superior is similar to the
theory of strict liability in that liability is imposed regardless of fault for reasons of public policy. Every person has
a duty to manage his or her affairs so as not to injure
another. This duty applies even when a person acts
through an agent (controls the conduct of another).
Determining the Scope of Employment. The key to
determining whether a principal may be liable for the
torts of an agent under the doctrine of respondeat superior
is whether the torts are committed within the scope of
the agency. Courts may consider the following factors in
determining whether a particular act occurred within the
course and scope of employment:
1. Whether the employee’s act was authorized by the
employer.
Agency Relationships
431
2. The time, place, and purpose of the act.
3. Whether the act was one commonly performed by
employees on behalf of their employers.
4. The extent to which the employer’s interest was
advanced by the act.
5. The extent to which the private interests of the
employee were involved.
6. Whether the employer furnished the means or instru-
mentality (such as a truck or a machine) by which an
injury was inflicted.
7. Whether the employer had reason to know that the
employee would perform the act in question and
whether the employee had done it before.
8. Whether the act involved the commission of a serious crime.
In the following case, the court had to determine
whether or not a dump truck operator was the employee
of a concrete services contractor.
Case 19.3
Asphalt & Concrete Services, Inc. v. Perry
Court of Special Appeals of Maryland, 221 Md.App. 235, 108 A.3d 558 (2015).
Background and Facts Asphalt & Concrete Services, Inc. (ACS), was working on a play pad at St.
John Regional Catholic School in Frederick, Maryland. ACS project manager Blake Wood contacted
William Johnson at Higher Power Trucking, LLC, to arrange for a dump truck to haul material from a
quarry to the job site. One day, while Johnson was driving the dump truck between the job site and
the quarry, the truck struck and injured Moran Perry, who was crossing an intersection.
To recover for his injuries, Perry filed a lawsuit in a Maryland state court against ACS. Perry alleged
that Johnson’s negligence in operating the dump truck was the proximate cause of his injuries and
that Johnson was ACS’s employee. ACS, however, claimed that Johnson was an independent contractor. A jury agreed with Perry and awarded him $529,500 in damages. The court issued a judgment in
Perry’s favor, and ACS appealed.
In the Language of the Court
GRAEFF, J. [Judge]
****
* * * Pursuant to the doctrine of respondeat superior, an employer may be found liable for torts
committed by its employee while acting in the scope of employment. ACS does not dispute this wellestablished rule, but it argues that the evidence showed that Mr. Johnson was not its employee.
* * * Maryland courts have traditionally considered five criteria in determining whether or not an
employer/employee relationship exists between two parties. These criteria, developed from the common law
standard for determining the master/servant relationship, include (1) the power to select and hire the employee,
(2) the payment of wages, (3) the power to discharge, (4) the power to control the employee’s conduct, and
(5) whether the work is part of the regular business of the employer. [Emphasis added.]
Of the five factors, the factor of control stands out as the most important. * * * Whether the
employer has the right to control and direct the employee in the performance of the work and in the
manner in which the work is to be done is the decisive, or controlling, test.
****
Case 19.3 Continues
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
432
U N I T F OUR
Case 19.3 Continued
The Business and Employment Environment
Here, * * * the evidence indicated as follows: (1) ACS called Mr. Johnson directly to reserve his trucking services; (2) Mr. Wood spoke only to Mr. Johnson when calling Higher Power; (3) ACS directed Mr.
Johnson to go to the * * * quarry to pick up materials for the play pad project and gave him the time to
be there for the pick-up; (4) Mr. Johnson was required to bring the materials directly to the job site after
his truck was loaded, and if Mr. Johnson did not deliver the materials promptly, ACS had the right to
dock his pay or to no longer employ him; (5) ACS paid Mr. Johnson on an hourly basis from the time
he picked up his first load until ACS dismissed him from the job site; (6) after Mr. Johnson delivered his
first load of materials, ACS directed him to return to the quarry to pick up and bring back additional
materials; and (7) at the job site, Mr. Johnson was obligated to follow ACS’s directions in terms of where
to drop the materials, how much material to drop, and how many times he would need to return to the
quarry. Based on that evidence, a jury could find that Mr. Johnson was subject to ACS’s control, and
ACS was liable for Mr. Johnson’s negligence pursuant to the doctrine of respondeat superior.
Decision and Remedy The state intermediate appellate court affirmed the jury’s finding with respect to
Johnson’s status as ACS’s employee. The court disagreed, however, with the lower court’s admission of cer
certain evidence that may have influenced the jury’s finding of proximate cause for Perry’s injuries. As a result,
the court reversed the judgment on this ground and remanded the case for a new trial.
Critical Thinking
• Economic Why did ACS contend that Johnson was not its employee? Discuss.
The Distinction between a “Detour” and a “Frolic.” A
useful insight into the concept of “scope of employment” can be gained from Judge Baron Parke’s classic
distinction between a “detour” and a “frolic” in the case
of Joel v. Morison (1834).18 In this case, the English
court held that if a servant merely took a detour from
his master’s business, the master will be responsible. If,
however, the servant was on a “frolic of his own” and
not in any way “on his master’s business,” the master
will not be liable.
■ EXAMPLE 19.23 While driving his employer’s vehicle to call on a customer, Mandel decides to stop at a
store—which is three blocks off his route—to take care
of a personal matter. As Mandel approaches the store, he
negligently runs into a parked vehicle owned by Chan. In
this situation, because Mandel’s detour from the employer’s business is not substantial, he is still acting within the
scope of employment, and the employer is liable.
But suppose instead that Mandel decides to pick up a
few friends in another city for cocktails and in the process
negligently runs his vehicle into Chan’s. In this situation,
the departure from the employer’s business is substantial—
Mandel is on a “frolic” of his own. Thus, the employer
normally will not be liable to Chan for damages. ■
18. 6 Car. & P. 501, 172 Eng.Rep. 1338 (1834).
An employee going to and from work or to and from
meals usually is considered to be outside the scope of
employment. If travel is part of a person’s position, however, as it is for a traveling salesperson, then travel time
is normally considered within the scope of employment.
Liability for Agent’s Intentional Torts Most
intentional torts that individuals commit have no relation to their employment, and their employers will
not be held liable. Nevertheless, under the doctrine of
respondeat superior, the employer can be liable for intentional torts that an employee commits within the course
and scope of employment. For instance, a department
store owner is liable when a security guard who is a store
employee commits the tort of false imprisonment while
acting within the scope of employment.
In addition, an employer who knows or should know
that an employee has a propensity for committing tortious acts is liable for the employee’s acts even if they
would not ordinarily be considered within the scope of
employment. ■ EXAMPLE 19.24 Chaz, the owner of the
Comedy Club, hires Alec as a bouncer for the club even
though he knows that Alec has a history of arrests for
criminal assault and battery. In this situation, Chaz may
be liable if Alec viciously attacks a customer in the parking lot after hours. ■ An employer can also be liable for
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CHAPTER 19
permitting an employee to engage in reckless actions that
can injure others.
Liability for Independent Contractor’s Torts
Generally, an employer is not liable for physical harm
caused to a third person by the negligent act of an independent contractor in the performance of the contract.
This is because the employer does not have the right
to control the details of an independent contractor’s
performance.
Courts make an exception to this rule when the contract involves unusually hazardous activities, such as
blasting operations, the transportation of highly volatile
chemicals, or the use of poisonous gases. In these situations, strict liability is imposed, and an employer cannot
be shielded from liability merely by using an independent contractor.
Liability for Agent’s Crimes An agent is liable for
his or her own crimes. A principal or employer normally
is not liable for an agent’s crime even if the crime was
committed within the scope of authority or employment.
An exception to this rule is made when the principal or
employer participated in the crime by conspiracy or
other action.
Agency Relationships
433
In addition, in some jurisdictions, a principal may be
liable under specific statutes if an agent, in the course and
scope of employment, violates certain regulations. For
instance, a principal might be liable for an agent’s violation of sanitation rules or regulations governing prices,
weights, or the sale of liquor.
19–6 Termination of an Agency
Agency law is similar to contract law in that both an
agency and a contract may be terminated by an act of
the parties or by operation of law. Once the relationship
between the principal and the agent has ended, the agent
no longer has the right (actual
actual authority) to bind the
principal. For an agent’s apparent authority to be terminated, though, third persons may also need to be notified
that the agency has been terminated.
19–6a Termination by Act of the Parties
An agency may be terminated by certain acts of the parties, which are listed and described in Exhibit 19–3.
When an agency agreement specifies the time period
EXHIBIT 19–3 Termination by Act of the Parties
METHOD
RULES
ILLUSTRATION
1. Lapse of Time.
Agency terminates automatically at
the end of the stated time.
Page lists her property for sale with
Alex, a real estate agent, for six
months. The agency ends in
six months.
2. Purpose Achieved.
Agency terminates automatically on
the completion of the purpose for
which it was formed.
Calvin, a cattle rancher
rancher, hires Abe as
his agent in the purchase of fifty head
of breeding stock. The agency ends
when the cattle have been purchased.
3. Occurrence of a Specific Event.
Agency normally terminates
automatically on the event’s
occurrence.
Meredith appoints Allen to handle her
business affairs while she is away. The
agency terminates when Meredith
returns.
4. Mutual Agreement.
Agency terminates when both parties
Linda and Greg agree that Greg will
consent to end the agency relationship. no longer be her agent in procuring
business equipment.
5. At the Option of One Party
(revocation, if by principal;
renunciation, if by agent).
Either party normally has a right to
terminate the agency relationship.
Wrongful termination can lead
to liability for breach of contract.
When Patrick becomes ill, he informs
Alice that he is revoking her authority
to be his agent.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
434
U N I T F OUR
The Business and Employment Environment
during which the agency relationship will exist, the
agency ends when that time period expires. If no definite
time is stated, then the agency continues for a reasonable
time and can be terminated at will by either party. What
constitutes a reasonable time depends on the circumstances and the nature of the agency relationship.
The parties can, of course, mutually agree to end
their agency relationship. In addition, as a general rule,
either party can terminate the agency relationship without the agreement of the other. The act of termination
is called revocation if done by the principal and renunciation if done by the agent. Note, however, that the
terminating party may face liability if the termination
is wrongful.
Wrongful Termination Although both parties have
the power to terminate the agency, they may not always
possess the right to do so. Wrongful termination can
subject the canceling party to a lawsuit for breach of
contract. ■ EXAMPLE 19.25 Rawlins has a one-year
employment contract with Munro to act as agent in
return for $65,000. Munro has the power to discharge
Rawlins before the contract period expires. But if he does
so, he can be sued for breaching the contract, because he
had no right to terminate the agency. ■
Even in an agency at will—in which either party may
terminate at any time—the principal who wishes to terminate must give the agent reasonable notice. The notice
must be at least sufficient to allow the agent to recoup
his or her expenses and, in some situations, to make a
normal profit.
Notice of Termination When the parties terminate
an agency, it is the principal’s duty to inform any third
parties who know of the existence of the agency that it has
been terminated. No particular form is required for notice
of termination to be effective. The principal can personally notify the third party, or the party can learn of the termination through some other means. Although an agent’s
actual authority ends when the agency is terminated, an
agent’s apparent authority continues until the third party
receives notice (from any source) that such authority has
been terminated.
19–6b Termination by Operation of Law
Certain events terminate agency authority automatically because their occurrence makes it impo…