Creating an agency relationship
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Creating an Agency Relationship. Agency is a relationship in which the agent agrees to perform a task for, and under the control of, the principal. To create an agency, there must be: A principal, An agent, Who mutually consent that the agent will act on behalf of the principal, and

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Creating an Agency Relationship

  • Agency is a relationship in which the agent agrees to perform a task for, and under the control of, the principal.

  • To create an agency, there must be:

    • A principal,

    • An agent,

    • Who mutually consent that the agent will act on behalf of the principal, and

    • Be subject to the principal’s control,

    • Thereby creating a fiduciary relationship.


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Requirements for Agency

  • Consent, control and a fiduciary relationship are required.

  • Elements not required for an agency relationship include:

    • A written agreement (unless the business of the agent requires a written contract).

    • A formal agreement (acting like agent and principal is enough to establish agency).

    • Consideration (an agent does not have to be paid).


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TAVERN EXAMPLE

  • Customer gets drunk in tavern; attempts to drive home; kills another driver in car accident.

  • Parents of dead man sue brewer and distributor of the beer customer drank, arguing tavern and bartender acted (negligently) as the agent of the brewer/distributor.

  • They had a contractual relationship with the tavern? Did they have an agency relationship?


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Fiduciary Relationship

  • What is a fiduciary relationship? How is it different from other relationships, like run-of-the-mill contractual relationships?

  • Fiduciary’s primary duty is to another person—i.e., to act for the benefit of another, even against own interests at times.

  • “Fiduciary” is not always an “agent,” but an agent does always owe fiduciary duty.


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  • Burns, a very wealthy man, hires Smithers as his assistant, authorizing Smithers to research and invest in lucrative new businesses using Burns’ investment account (totalling $100 million).

  • Burns, who owns a biotechnology company, tells Smithers that there is about to be a huge technological breakthrough in “gene therapy” and that Smithers should be on the lookout for companies developing software to assist in developing gene therapies.

  • During the course of his work Smithers identifies one such company that is selling $50 million worth of stock.

  • Smithers buys $40 million in stock using Burns money, $9.9 million using the money of another rich investor for whom is working (unbeknownst to Burns), and $100,000 of his own money.

  • To increase the value of his investment, Smithers shared with the company’s management Burns warning about the impending breakthrough in gene therapy.


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Duties of Agent to Principal authorizing Smithers to research and invest in lucrative new businesses using Burns’ investment account (totalling $100 million).

  • Insurance Co. of North America v. Miller

  • Did Smithers violate the duty of loyalty? If so, how?


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Duties of Agent to Principal authorizing Smithers to research and invest in lucrative new businesses using Burns’ investment account (totalling $100 million).

  • Duty of Loyalty-- The agent:

    • must act for the benefit of the principal.

    • may not receive outside benefits without approval of the principal.

    • can neither disclose nor use for her own benefit any confidential information.

    • is not allowed to compete with his principal within the scope of the agency business.

    • may not act for two principals whose interests conflict.

    • may not become a party to a transaction without the principal’s permission.

    • may not engage in inappropriate behavior that reflects badly on the principal.


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Other Duties of an Agent authorizing Smithers to research and invest in lucrative new businesses using Burns’ investment account (totalling $100 million).

  • An agent must obey her principal’s instructions, unless illegal or unethical.

  • Agent must act with reasonable care.

    • An agent with special skills is held to a higher standard because she is expected to use those skills.

  • Agent must give accurate information.

    • An agent has a duty to provide the principal with all information in her possession that she has reason to believe the principal wants to know.


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  • Who are agents? authorizing Smithers to research and invest in lucrative new businesses using Burns’ investment account (totalling $100 million).

    • Employees are agents of employer

    • Partners are agents of other partners in partnerships

    • Directors and officers are agents of shareholders

    • Sometimes one party to a contract acts as agent of another

  • Duties can extend beyond the life of the agency relationship

    • Professionals generally


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Principal’s Remedies When the Agent Breaches a Duty authorizing Smithers to research and invest in lucrative new businesses using Burns’ investment account (totalling $100 million).

  • The principal can recover damages caused by the agent’s breach.

  • The agent must refund any profits made from the agency, if he breaches his duty of loyalty.

  • The principal may rescind a transaction with an disloyal agent.


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Principals can be liable for acts performed by agents, even if agent acted contrary to principal’s wishes.


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Principal’s Liability for Contracts if agent acted contrary to principal’s wishes.

  • The principal is bound by the acts of an agent if:

    • the agent has authority (express, implied or apparent), or

    • the principal, for reasons of fairness, is estopped from denying that the agent had authority, or

    • the principal ratifies the acts of the agent.


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Authority if agent acted contrary to principal’s wishes.

  • A principal is bound by the acts of an agent if the agent has authority.

  • There are three types of authority: express, implied, and apparent.

    • Only express and implied are actual authority, because the agent is truly authorized to act.

    • In apparent authority, the agent seems to be authorized, but is actually not. The principal is still bound by the agent’s actions.


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Actual Authority if agent acted contrary to principal’s wishes.

  • Express Authority

    • Granted by words or conduct that, reasonably interpreted, cause the agent to believe the principal desires her to act.

    • In ambiguity about the principal’s intent, the courts look at the principal’s objective manifestation not his subjective intent.

  • Implied Authority

    • Unless otherwise agreed, authority to conduct a transaction includes authority to do acts that are reasonably necessary to accomplish it.


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  • Burns authorizes Smithers to invest in software companies. if agent acted contrary to principal’s wishes.

  • Smithers invests in Microsoft Genetics, a subsidiary of Microsoft whose software products assist in the development of gene therapies.

  • Burns disavows the contract to buy the stock, saying he never intended to authorize Smithers to invest in Microsoft, given the current antitrust suit against the company.

    EXPRESS AUTHORITY

  • Before investing, Smithers paid $50 for a financial analysis of the company.

  • Burns seeks reimbursement of the $50, saying he never authorized the payment.

    IMPLIED AUTHORITY


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Apparent Authority if agent acted contrary to principal’s wishes.

  • A principal can be liable for the acts of an agent who is not, in fact, acting with authority if the principal’s conduct causes a third party reasonably to believe that the agent is authorized.

  • An agent with actual authority may perform an act beyond the scope of that authority. If the action appears to the third party to be within the scope of the authority, the principal will be bound.

  • Cartinez v. Reliable Amusement Co., Inc


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Principal’s Liability for Torts if agent acted contrary to principal’s wishes.

  • A principal may be liable for the torts of a servant but generally is not liable for the torts of an independent contractor.

    • Santiago v. Phoenix Newspapers, Inc.

    • A master (principal) is liable for physical harm caused by the negligent conduct of servants (agent) within the scope of employment (respondeat superior).

    • The principal is liable for the physical torts of an independent contractor only if the principal has been negligent in hiring or supervising.


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Classifying Agents: if agent acted contrary to principal’s wishes.Servant vs. Independent Contractor

  • Employees are always servants. To distinguish servants from independent contractors, look to:

    • Ability of principal to control details of the work

    • Who supplies materials for work?

    • How agent is paid?

    • Is work part of principal’s business?

    • Parties’ expectations


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Scope of Employment if agent acted contrary to principal’s wishes.

  • Authorization

    • An act is within the scope of employment, even if expressly forbidden, if it is of the same general nature as that authorized or if it is incidental to the conduct authorized.

  • Abandonment

    • The master is liable for the actions of the servant that occur while the servant is at work, but not for actions that occur after the servant has abandoned the master’s business.

    • Doctrine of “detour” and “frolic”


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Misrepresentation if agent acted contrary to principal’s wishes.

  • A principal is liable if:

    • The agent makes misrepresentation,

    • The agent has express, implied, or apparent authority,

    • The third party relies on the misrepresentation; and

    • The third party suffers harm.


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Defamation if agent acted contrary to principal’s wishes.

  • A principal is liable if:

    • The agent makes a defamatory statement;

    • The agent has express, implied, or apparent authority; and

    • The third party is harmed by the statement.


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Agent’s Liability For Torts if agent acted contrary to principal’s wishes.

  • Agents are always liable for their own torts, even if the principal is also liable.

    • Agents and principals are jointly and severally liable, which means that the injured party may sue either one or both, as she chooses.

    • The injured party may not recover twice, but may recover partially from both parties.

    • The principal can sue the agent, if the injured party recovers from the principal.


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Employer-Employee Relationship if agent acted contrary to principal’s wishes.

Hiring/Firing and Promotion

Contract law rules

employment at will

wrongful discharge

Statutory and regulatory rules

employment discrimination


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  • In pre-industrial society, most people followed their parents’ occupations.

  • Employers knew their workers and expectations were understood.

  • With the industrial revolution came changes in employment law too, and a trend toward employment contracts.

    • Without a contract specifying otherwise, a worker was an employee at will.

    • An employee at will can be fired for a good reason, a bad reason or no reason at all.


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  • Common law claim of parents’ occupations. “wrongful discharge” prohibits an employer from firing a worker for a bad reason, but this is a narrow exception to the “employment at will” doctrine.

  • The public policy rule prohibits an employer from firing a worker for a reason that violates basic social rights, duties, or responsibilities, such as:

    • Refusing to Violate the Law

    • Exercising a Legal Right

    • Performing a Legal Duty (like jury duty)


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  • Truth in Hiring parents’ occupations.

    • Oral promises made during the hiring process can be enforceable (promissory estoppel).

    • Employers may be liable for promises that they cannot keep.

  • Statutory limits on freedom to hire/fire/promote who you want.

    • Most relate to protection of groups who have been discriminated against historically for non-job-related reasons.


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  • WHISTLEBLOWERS: parents’ occupations.Employees who disclose illegal behavior of their employers are protected in these situations:

    • Wrongdoing by government contractors

    • Government employees speaking out on a matter of public concern

    • Federal employees reporting illegal federal activity

    • Reporting illegal activity for which the whistleblower himself could be in trouble

    • Reporting a co-worker’s illegal activities


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  • Under the parents’ occupations.Equal Pay Act, an employee may not be paid a lesser rate (for equal work) than opposite sex employees.

  • Title VIIof the Civil Rights Act of 1964

    • Prohibits employers from discriminating on the basis of sex, race, color, religion, or national origin.

    • Employers must make reasonable accommodation for a worker’s religious beliefs unless the request would cause undue hardship for the business.

    • Affirmative action is not required by Title VII, nor is it prohibited.


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Title VII parents’ occupations.

  • Disparate treatment: focus on employer’s action

  • Disparate impact: focus on effect of employer’s action

  • Process

    • Plaintiff shows disparate treatment/impact

    • Defendant shows job practice was job-related

    • Plaintiff must show that ostensibly valid reason is merely a pretext for what is an underlying invalid reason


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Title VII parents’ occupations.

  • Possible defenses for a charge of discrimination:

    • Merit

    • Seniority

    • Bona Fide Occupational Qualification

      • E.g., firefighter’s qualifying written exam

      • E.g., firefighter’s physical test


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Sexual Harassment parents’ occupations.

  • Involves unwelcome sexual advances, requests for sexual favors, and verbal or physical conduct of a sexual nature.

    • Quid pro quo

    • Hostile Work Environment

      • A claim of sexual harassment might be valid if sexual innuendo is so pervasive that it interferes with an employee’s ability to do her (or his!) job.

    • Pregnancy

      • An employer may not fire or refuse to hire a woman just because she is pregnant.

      • FMLA: guarantees leave and right to return to the job

    • Company vs. personal liability: Faragher v. City of Boca Raton


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Age Discrimination parents’ occupations.

  • The Age Discrimination in Employment Act (ADEA) of 1967 prohibits age discrimination against employees or job applicants who are at least 40 years old.

  • Gaworski v. ITT Commercial Finance


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Americans with Disabilities Act parents’ occupations.

  • A disabled person is someone with a physical or mental impairment that substantially limits a major life activity, or someone who is regarded as having such an impairment.

  • An employer may not disqualify a job applicant or employee because of disability as long as she can, with reasonable accommodation (would not create undue hardship) perform the essential functions of the job.

  • Sutton v. United Air Lines, Inc.


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