Chapter 31Agency Formation

and Duties

Chapter 31Agency Formation

and Duties

IntroductionIntroduction

Agency=Principal and Agent.

Agency is the most common and most important legal relationship.

Understanding agency is crucial to understanding the legal environment of business.

Introduction [2]Introduction [2]

Principals use agents to be able to conduct multiple business operations simultaneously in various locations.

The principal has the right to control the agent in matters entrusted to the agent.

Agency is a “fiduciary” relationship based on trust and confidence. Distinguish Employee vs. Independent Contractor Relationships.

§ 1: Agency Relationships§ 1: Agency Relationships

Employer

EmployeeIndependentContractor

Employee vs. Independent Contractor Relationship

Employee vs. Independent Contractor Relationship

Factors Courts Consider: E’ee I.C.

Does the Employer exercise a great degree of control over the details of the work?

Yes No

Is the worker engaged in an occupation or business distinct from Employer?

No Yes

Is the work usually done under Employer’s supervision? Yes No

Does Employer provide the tools? Yes No

Has the worker been employed a long time? Yes No

Is the worker paid at the end of the job? No Yes

Is there a great degree of skill required? No Yes

Employer LiabilityEmployer LiabilityDetermining whether the worker is an employee or an independent contract affects liability of Principal/Employer.Tax Liability: Employer liable if employee.Contract Liability: Employer not necessarily

liable.Tort Liability: Employer liable for torts of

employee within scope of employment.

§2: Formation of the Agency Relationship

§2: Formation of the Agency Relationship

Consensual Agreement.

No consideration required.

Principal needs contractual capacity, Agent does not.

For any legal purpose.

Types of AgenciesTypes of Agencies

Agency by Agreement.

Agency by Ratification.

Agency by Estoppel.

Agency by Operation of Law.Necessaries for family.Emergency.

Agency By AgreementAgency By Agreement

Formed through express consent (oral or written) or implied by conduct.

Agency by RatificationAgency by Ratification

Principal either by act or by agreement ratifies conduct of a person who is not in fact an agent.

Agency by EstoppelAgency by Estoppel

Principal causes a third person to believe that another person is the Principal’s Agent, and the third person acts to her detriment in reasonable reliance on that belief.

Agency by Operation of LawAgency by Operation of Law

Agency based on social duty is formed in certain situations when the Agent is unable to contact the Principal.Necessaries.Emergencies.

§ 3: Duties of Agents and Principals

§ 3: Duties of Agents and Principals

Agent’s Duties to Principal:Performance: reasonable diligence and skill

(special skills).Notification to P.Loyalty (no conflict of interest). Obedience. Accounting.

Principal’s Duties to AgentPrincipal’s Duties to Agent

Compensation (Express or Implied).

Reimbursement and Indemnification.

Cooperation.

Provide safe working conditions.

§ 4: Remedies and Rights of Agents and Principals

§ 4: Remedies and Rights of Agents and Principals

Agent’s Rights:Right to compensation, reimbursement,

indemnification and cooperation.Agent can withhold performance and demand

an accounting.Agent can recover damages for past services

and future damages.

Principal’s Rights &Remedies Against Agent

Principal’s Rights &Remedies Against Agent

Contract remedies for breach of fiduciary duty and performance.Can sue in tort: libel, slander, trespass, deceit, fraud. Constructive Trust – money/ property agent steals from Principal.Avoidance of contract if agent does not do as told. Indemnification

Case 31.1: Graham v. James(Employment Status)

Case 31.1: Graham v. James(Employment Status)

FACTS:Graham sold CD‑ROM disks containing compilations

of shareware, freeware, and public domain software.Graham asked James to create a file‑retrieval

program for the disks. James agreed to do so in exchange for credit on the final product and built into the program a notice attributing authorship and copyright to himself.

Later, Graham removed the notice, claiming that the program was a work for hire and the copyright was his. Graham used the program on other releases, and James sold the program to another pub lisher.

Graham sued alleging copyright infringement.

HELD: FOR JAMES. The court ruled that James was an independent

contractor and that he owned the copyright. James “is a skilled computer programmer, he

was paid no benefits, no payroll taxes were withheld, and his engagement by Graham was project‑by‑project.”

The only factor in Graham’s favor was his general control over the work, but his actual participation was “minimal” and his instructions were “general.”

Case 31.1: Graham v. James(Employment Status)

Case 31.1: Graham v. James(Employment Status)

Case 31.2: Williams v. Inverness(Agency by Estoppel)

Case 31.2: Williams v. Inverness(Agency by Estoppel)

FACTS:Inverness markets the Inverness Ear Piercing

System, which includes a training course, an “eye-catching assortment of selling aids,” and release forms.

Barrera, the owner of a jewelry cart in a mall, bought the system, took the course, and set up the displays.

Williams paid Barrera to pierce Williams’s ear. The ear became infected, which led to complications.

Williams sued Inverness and Barrera, claiming in part that Inverness was liable on a theory of agency by estoppel.

HELD: FOR WILLIAMS. An agency by estoppel was created and Inverness was liable. “[A] jury reasonably could infer that Inverness

knew, or should have known, that Barrera distributed Inverness’s release forms *  *  * , that Barrera was using the Inverness Ear Piercing System, that she displayed Inverness’s ‘eye-catching assortment of selling aids,’ and that she used Inverness’s training program.”

Also, “Angela believed that Barrera was Inverness’s agent” and “relied on Inverness’s manifestations of agency,” and this reliance was “justifiable.”

Case 31.2: Williams v. Inverness(Agency by Estoppel)

Case 31.2: Williams v. Inverness(Agency by Estoppel)

Case 31.3: American Express v. Topel(Agent’s Duties to Principal)

Case 31.3: American Express v. Topel(Agent’s Duties to Principal)

FACTS:Topel was a financial planner for American

Express (AMEX), when he decided to resign and go to work for Multi-Financial Securities Corporation, an AMEX competitor.

Before resigning, Topel encouraged his customers to sell their AMEX products and invest in Multi-Financial funds. He sent a letter to all of his clients in which he wrote that he was ending his relationship with AMEX and that their accounts would be assigned to another AMEX advisor.

AMEX sued Topel alleging breach of fiduciary duty.

HELD: FOR AMEX.Topel breached his fiduciary duty of loyalty by soliciting

AMEX customers for his new competing business while working for AMEX.

An agent has a duty to act solely for the benefit of the principal in all matters connected with an agency. “While an agent is entitled to make some preparations to compete with his principal after the termination of their relationship, an agent violates his duty of loyalty if he engages in pre‑termination solicitation of customers for a new competing business.”

Case 31.3: American Express v. Topel(Agent’s Duties to Principal)

Case 31.3: American Express v. Topel(Agent’s Duties to Principal)