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CHAPTER 18 Agency Law

New York City Cabs

Taxis are often owned by one party, and another party—the taxi driver—is hired to drive the taxi. This arrangement creates a principal–agent relationship. The owner is the principal, and the taxi driver is the agent. The owner of the taxicab is liable for the negligent conduct of the driver while the driver is acting within the scope of employment.

Learning Objectives

After studying this chapter, you should be able to:

1. Define agency and the parties to an agency.

2. Describe how express, implied, and apparent agencies are created.

3. Identify and define a principal–independent contractor relationship.

4. Describe the principal’s and agent’s tort and contract liability.

5. Describe how agencies are terminated.

Chapter Outline

1. Introduction to Agency Law

2. Employment and Agency Relationships

3. Formation of an Agency

   1. CONTEMPORARY ENVIRONMENT • Power of Attorney

   2. CASE 18.1 • Eco-Clean, Inc. v Brown

4. Principal’s Duties

5. Agent’s Duties

   1. ETHICS • Agent’s Duty of Loyalty

6. Tort Liability of Principals and Agents

   1. CASE 18.2 • Matthews v. Food Lion, LLC

7. Liability for Intentional Torts

   1. CASE 18.3 • Burlarley v. Wal-Mart Stores, Inc.

8. Contract Liability of Principals and Agents

9. Independent Contractor

   1. CASE 18.4 • Glenn v. Gibbs

10. Termination of an Agency

“Let every eye negotiate for itself, and trust no agent.”

—William Shakespeare Much Ado About Nothing (1598)

The crowning fortune of a man is to be born to some pursuit which finds him employment and happiness, whether it be to make baskets, or broad swords, or canals, or statues, or songs.

Ralph Waldo Emerson (1803–1882)

Introduction to Agency Law

If businesspeople had to conduct all their business personally, the scope of their activities could be severely curtailed. Partnerships would not be able to operate, corporations could not act through managers and employees, and sole proprietorships would not be able to hire employees. The use of agents (or agency), which allows one person to act on behalf of another, solves this problem.

Examples

Examples of agency relationships include a salesperson who sells goods for a store, an executive who works for a corporation, and a partner who acts on behalf of a partnership.

Some agents are independent contractors. That is, they are outside contractors who are employed by a principal to conducted limited activities for the principal.

Examples

Examples of independent contractors would be an attorney who is hired to represent a client and a real estate broker who is employed by an owner to sell the owner’s house.

Agency is governed by a large body of common law known as agency law . The formation of agencies, the duties of principals and agents, contract and tort liability of principals and agents, and termination of agencies are discussed in this chapter.

agency law

The large body of common law that governs agency; a mixture of contract law and tort law.

Employment and Agency Relationships

Agency relationships are formed by the mutual consent of a principal and an agent. Section 1(1) of the Restatement (Second) of Agency defines agency as a fiduciary relationship “which results from the manifestation of consent by one person to another that the other shall act in his behalf and subject to his control, and consent by the other so to act.” The Restatement (Second) of Agency is the reference source for the rules of agency law in this chapter.

agency

The principal–agent relationship.

A party who employs another person to act on his or her behalf is called a principal . A party who agrees to act on behalf of another is called an agent . The principal–agent relationship is commonly referred to as an agency. This relationship is depicted in Exhibit 18.1.

principal

A party who employs another person to act on his or her behalf.

agent

A party who agrees to act on behalf of another.

principal–agent relationship

A relationship formed when an employer hires an employee and gives that employee authority to act and enter into contracts on his or her behalf.

Exhibit 18.1 Principal–Agent Relationship

Principal–Agent Relationship

A principal–agent relationship is formed when an employer hires an employee and gives that employee authority to act and enter into contracts on his or her behalf. The extent of this authority is governed by any express agreement between the parties and implied from the circumstances of the agency.

Examples

The president of a corporation usually has the authority to enter into major contracts on the corporation’s behalf, and a supervisor on the corporation’s assembly line may have the authority only to purchase the supplies necessary to keep the line running.

Employer–Employee Relationship

An employer–employee relationship exists when an employer hires an employee to perform some form of physical service but does not give that person agency authority to enter into contracts.

employer–employee relationship

A relationship that results when an employer hires an employee to perform some task or service but the employee has not been authorized to enter into contracts on behalf of his employer.

Example

A welder on General Motors Corporation’s automobile assembly line is employed to perform a physical task but is not given authority to enter into contracts.

Although the employee in an employer–employee relationship may not have contracting authority, the principal is still liable for tortious conduct of its employees committed while acting within the scope of their employment.

Principal–Independent Contractor Relationship

Principals often employ outsiders—that is, persons and businesses that are not employees—to perform certain tasks on their behalf. These persons and businesses are called independent contractors. Independent contractors operate their own business or profession. The arrangement creates a principal–independent contractor relationship .

principal–independent contractor relationship

The relationship between a principal and an independent contractor who is not an employee of the principal but that has been employed by the principal to perform a certain task on behalf of the principal.

Examples

Doctors, dentists, consultants, stockbrokers, architects, certified public accountants, real estate brokers, and plumbers are examples of those in professions and trades who commonly act as independent contractors.

A principal can authorize an independent contractor to enter into contracts. Principals are bound by the authorized contracts of their independent contractors. For example, if a client authorizes an attorney to settle a case within a certain dollar amount and the attorney does so, the settlement agreement is binding.

Insurance Agent

Individuals and businesses often purchase automobile, homeowner’s, life and health, and other forms of insurance from insurance agents. The insurance agent represents an insurance company or companies. This is the author’s twin brother’s insurance agency.

Formation of an Agency

An agency and the resulting authority of an agent can arise in any of the following four ways: express agency, implied agency, apparent agency, and agency by ratification. These types of agencies are discussed in the paragraphs that follow.

Express Agency

Express agency is the most common form of agency. In an express agency, the agent has the authority to contract or otherwise act on the principal’s behalf, as expressly stated in the agency agreement. Express agency occurs when a principal and an agent expressly agree to enter into an agency agreement with each other. Express agency contracts can be either oral or written unless the Statute of Frauds stipulates that they must be written.

express agency

An agency that occurs when a principal and an agent expressly agree to enter into an agency agreement with each other.

Example

In most states, a real estate broker’s contract to sell real estate must be in writing.

If a principal and an agent enter into an exclusive agency contract, the principal cannot employ any agent other than the exclusive agent. If the principal does so, the exclusive agent can recover damages from the principal. If an agency is not an exclusive agency, the principal can employ more than one agent to try to accomplish a stated purpose.

The following feature describes the creation of a special form of express agency.

Contemporary Environment Power of Attorney

A power of attorney is one of the most formal types of express agency agreements. It is often used by a principal to give an agent the power to sign legal documents on behalf of the principal. The agent is called an attorney-in-fact even though he or she does not have to be a lawyer. Powers of attorney must be written. Usually, they must also be notarized. There are two kinds of powers of attorney:

power of attorney

An express agency agreement that is often used to give an agent the power to sign legal documents on behalf of the principal.

general power of attorney

A power of attorney where a principal confers broad powers on the agent to act in any matters on the principal’s behalf.

special power of attorney

A power of attorney where a principal confers powers on an agent to act in specified matters on the principal’s behalf.

1. General power of attorney. A general power of attorney confers broad powers on the agent to act in any matters on the principal’s behalf.

Example

A person who is going on a long trip gives a general power of attorney to his brother to make all decisions on his behalf while he is gone. This general power of attorney includes the power to purchase or sell stocks or real estate, pursue or defend lawsuits, and to make all other relevant decisions.

1. Special power of attorney. A special power of attorney confers limited powers on an agent to act on behalf of a principal. The agent is restricted to perform those powers enumerated by the agreement.

Example

A person who has her house listed for sale but who is going on a trip gives her sister a special power of attorney to make decisions regarding the selling of her house while she is gone, including accepting offers to sell the house and signing documents and deeds necessary to sell the house.

A principal can make a power of attorney a durable power of attorney, which remains effective even though the principal is incapacitated.

Implied Agency

In many situations, a principal and an agent do not expressly create an agency. Instead, the agency is implied from the conduct of the parties. This type of agency is referred to as an implied agency . The extent of the agent’s authority is determined from the facts and circumstances of the particular situation.

Example

A homeowner employs a real estate broker to sell his house. A water pipe breaks and begins to leak water into the house. If the homeowner cannot be contacted, the real estate broker has implied authority to hire a plumber to repair the pipe to stop the water leak. The homeowner is responsible for paying for the repairs.

Agency by Ratification

Agency by ratification occurs when (1) a person misrepresents him- or herself as another’s agent when in fact he or she is not and (2) the purported principal ratifies (accepts) the unauthorized act. In such cases, the principal is bound to perform, and the agent is relieved of any liability for misrepresentation.

implied agency

An agency that occurs when a principal and an agent do not expressly create an agency, but it is inferred from the conduct of the parties.

agency by ratification

An agency that occurs when (1) a person misrepresents him- or herself as another’s agent when in fact he or she is not and (2) the purported principal ratifies the unauthorized act.

Example

Bill Levine sees a house for sale and thinks his friend Sherry Maxwell would want to buy it. Bill enters into a contract to purchase the house from the seller and signs the contract “Bill Levine, agent for Sherry Maxwell.” Because Bill is not Sherry Maxwell’s agent, she is not bound to the contract. If Sherry agrees to purchase the house, however, there is an agency by ratification. On ratification of the contract, Sherry Maxwell is obligated to purchase the house.

In the following case, the court had to decide if an agency had been created.

CASE 18.1 STATE COURT CASE Agency Eco-Clean, Inc. v. Brown

749 S.E.2d 4, 2013 Ga. App. Lexis 913 (2013) Court of Appeals of Georgia

“The board of regents argues that it should not be held responsible for ‘bad decisions made by its students.’ ”

—Barnes, Presiding Judge

Facts

Nicholas Brown was a student at Georgia Tech University and a member of the Ramblin’ Reck spirit club. The board of regents of the University System of Georgia (University) owns a Model A automobile called the Ramblin’ Reck which is the mascot of Georgia Tech University. Members of the club are responsible for driving the car at athletic games, parades and campus-sponsored events and throughout campus to raise school spirit. During its use, several club members drive and sit in the car, while two other members stand on the running boards of the vehicle. When the vehicle needed some repairs, Eco-Clean, Inc. installed new handles on the vehicle’s doors using wood screws one-half to three-quarters of an inch long.

One day when the club members drove the Model T from a fraternity house, Brown stood on the passenger side running board, grasping an interior handle with one hand and the exterior handle with the other. After the car had gone one block, the driver turned left onto Ferst Avenue. When the driver took the turn, the handle Brown was holding onto snapped off, and he fell from the running board. Brown struck his head on the road and blacked out. Eyewitnesses testified that the car accelerated through a red light and that the car was turning at an unusually high rate of speed at the time of the accident. Brown fractured his right temporal bone and was hospitalized for four days. Brown permanently lost his sense of taste and smell, as well as his hearing in one ear.

Brown sued the university and Eco-Clean to recover damages for negligence. Brown asserted that the university negligently promoted the unsafe use of the car by students on public roads and that the university is vicariously liable for the negligence of its agents, including the driver who was driving the Ramblin’ Reck on the university’s behalf at the time of the accident. The jury found that Eco-Clean was negligent for installing the door handles with short wood screws rather than stronger bolts. The jury also found that the student driver was an agent of the university and that the university was vicariously liable for the driver’s negligence. The jury awarded Brown $680,000 against each defendant. The university appealed the decision, alleging that the driver of the Model T was not its agent.

Issue

Was the driver of the car an agent of Georgia Tech University?

Language of the Court

The board of regents argues that it should not be held responsible for “bad decisions made by its students.” The parties deposed an eyewitness to the incident who testified that the driver of the Georgia Tech car sped up and ran a red light before making the turn where Brown fell off. Because some evidence introduced at trial authorized the jury to determine that the board of regents was liable under an agency theory for the negligence of the driver, the trial court did not err in denying the board of regents’ motion for a directed verdict of liability.

Decision

The court of appeals held that the student driver was an agent of Georgia Tech University and upheld the trial court’s award of damages to Brown.

Ethics Questions

1. Did Georgia Tech University act ethically in denying liability? To view the Ramblin’ Reck vehicle, go to www.reckclub.org.

Apparent Agency

Apparent agency (or agency by estoppel) arises when a principal creates the appearance of an agency that in actuality does not exist. Where an apparent agency is established, the principal is estopped (stopped) from denying the agency relationship and is bound to contracts entered into by the apparent agent while acting within the scope of the apparent agency. Note that the principal’s actions—not the agent’s—create an apparent agency.

apparent agency (agency by estoppel)

Agency that arises when a principal creates the appearance of an agency that in actuality does not exist.

Example

Georgia Pacific, Inc., interviews Albert Iorio for a sales representative position. Iorio, accompanied by Jane Franklin, the national sales manager, visits retail stores located in the open sales territory. While visiting one store, Franklin tells the store manager, “I wish I had more sales reps like Albert.” Nevertheless, Iorio is not hired. If Iorio later enters into contracts with the store on behalf of Georgia Pacific and Franklin has not controverted the impression of Iorio that she left with the store manager, the company will be bound to the contract.

CONCEPT SUMMARY Formation of Agency Relationships

Principal’s Duties

The principal owes certain duties to an agent and independent contractor. These duties include the following:

duty to compensate

A duty that a principal owes to pay an agreed-upon amount to the agent either upon the completion of the agency or at some other mutually agreeable time.

• Duty to compensate. A principal owes a duty to compensate an agent for services provided. Usually, the agency contract (whether written or oral) specifies the compensation to be paid. The principal must pay this amount either on the completion of the agency or at some other mutually agreeable time. If there is no agreement abouat the amount of compensation, the law implies a promise that a principal will pay the agent the customary fee paid in the industry. If the compensation cannot be established by custom, the principal owes a duty to pay the reasonable value of the agent’s services.

• Duty to reimburse. In carrying out an agency, an agent may spend his or her own money on the principal’s behalf. Unless otherwise agreed, the principal owes a duty to reimburse the agent for all such expenses if they were (1) authorized by the principal, (2) within the scope of the agency, and (3) necessary to discharge the agent’s duties in carrying out the agency.

Example

A principal must reimburse an agent for authorized business trips taken on the principal’s behalf.

• Duty to indemnify. A principal also owes a duty to indemnify the agent for any losses the agent suffers because of the principal’s conduct. This duty usually arises when an agent is held liable for the principal’s misconduct.

Example

An agent enters into an authorized contract with a third party on the principal’s behalf, the principal fails to perform on the contract, and the third party recovers a judgment against the agent. The agent can recover indemnification of this amount from the principal.

• Duty to cooperate. Unless otherwise agreed, the principal owes a duty to cooperate with and assist the agent in the performance of the agent’s duties and the accomplishment of the agency.

Example

Unless otherwise agreed, a principal who employs a real estate agent to sell his or her house owes a duty to allow the agent to show the house to prospective purchasers during reasonable hours.

duty to reimburse

Unless otherwise agreed, the principal owes a duty to reimburse the agent for expenses incurred by the agent on behalf of the principal.

duty to indemnify

A principal owes a duty to indemnify the agent for any losses the agent suffers because of the principal’s conduct.

duty to cooperate

Unless otherwise agreed, the principal owes a duty to cooperate with and assist the agent in the performance of the agent’s duties and the accomplishment of the agency.

Contingency Fee

Certain types of agents traditionally perform their services on a contingency-fee basis. Under this type of arrangement, the principal owes a duty to pay the agent an agreed-on contingency fee only if the agency is completed. Real estate brokers, finders, lawyers, and salespersons often work on a contingency-fee basis.

Example

Sarah, who is driving her automobile, is injured when another driver negligently causes an automobile accident. Sarah hires a lawyer to represent her on a 35 percent contingency-fee basis. If the lawyer wins the case for Sarah or settles the case with Sarah’s approval, he will earn 35 percent of whatever is collected from the defendant. If the lawyer does not win or settle the lawsuit, he gets paid nothing.

Agent’s Duties

The agent owes certain duties to a principal. These duties are discussed in the following paragraphs.

Duty to Perform

An agent who enters into a contract with a principal has two distinct obligations: (1) to perform the lawful duties expressed in the contract and (2) to meet the standards of reasonable care, skill, and diligence implicit in all contracts. Collectively, these duties are referred to as the agent’s duty to perform . Normally, an agent is required to render the same standard of care, skill, and diligence that a fictitious reasonable agent in the same occupation would render in the same locality and under the same circumstances.

duty to perform

An agent’s duty to a principal that includes (1) performing the lawful duties expressed in the contract and (2) meeting the standards of reasonable care, skill, and diligence implicit in all contracts.

Examples

A general medical practitioner in a rural area would be held to the standard of a reasonable general practitioner in rural areas. A brain surgeon would be held to the standard of a reasonable brain surgeon.

An agent who does not perform his or her express duties or fails to use the standard degree of care, skill, or diligence is liable to the principal for damages.

Duty to Notify

In the course of an agency, the agent usually learns information that is important to the principal. This information may come from third parties or other sources. An agent owes a duty to notify the principal of important information he or she learns concerning the agency. The agent’s duty to notify the principal of such information is called the duty to notify . The agent is liable to the principal for any injuries resulting from a breach of this duty.

duty to notify

An agent owes a duty to notify the principal of important information concerning the agency.

Information learned by an agent in the course of an agency is imputed to the principal. The legal rule of imputed knowledge means that the principal is assumed to know what the agent knows. This is so even if the agent does not tell the principal certain relevant information.

imputed knowledge

Information that is learned by an agent that is attributed to the principal.

Example

Sonia, who owns a piece of vacant real estate, hires Matthew, a licensed real estate broker, to list the property for sale. Leonard, an adjacent property owner to Sonia’s property, tells Matthew that a chemical plant has polluted his property and probably Sonia’s property. Sonia does not know this fact, and Matthew does not tell Sonia this information. Sonia sells the property to Macy. It is later discovered that the property Macy bought from Sonia is polluted. In this example, the information that Matthew was told about the possible pollution of the property is imputed to Sonia. Sonia will be held liable to Macy.

Duty to Account

Unless otherwise agreed, an agent owes a duty to maintain an accurate accounting of all transactions undertaken on the principal’s behalf. This duty to account (sometimes called the duty of accountability) includes keeping records of all property and money received and expended during the course of the agency. A principal has a right to demand an accounting from the agent at any time, and the agent owes a legal duty to make the accounting. This duty also requires the agent to (1) maintain a separate account for the principal and (2) use the principal’s property in an authorized manner.

duty to account (duty of accountability)

A duty that an agent owes to maintain an accurate accounting of all transactions undertaken on the principal’s behalf.

Any property, money, or other benefit received by the agent in the course of an agency belongs to the principal. If an agent breaches the agency contract, the principal can sue the agent to recover damages caused by breach.

The following ethics feature discusses the duty of loyalty that an agent owes a principal.

Ethics Agent’s Duty of Loyalty

Because the agency relationship is based on trust and confidence, an agent owes the principal a duty of loyalty in all agency-related matters. Thus, an agent owes a fiduciary duty not to act adversely to the interests of the principal. If this duty is breached, the agent is liable to the principal. The most common types of breaches of loyalty by an agent are the following:

duty of loyalty

A fiduciary duty owed by an agent not to act adversely to the interests of the principal.

• Self-dealing. Agents are generally prohibited from undisclosed self-dealing with the principal.

Example

A real estate agent who is employed to purchase real estate for a principal cannot secretly sell his or her own property to the principal. However, the deal is lawful if the principal agrees to buy the property after the agent discloses his or her ownership of the property.

• Usurping an opportunity. An agent cannot personally usurp an opportunity that belongs to the principal.

Example

An agent works for a principal that is in the business of real estate development. A landowner who wants to sell his vacant land tells the agent of the property’s availability. The agent, without informing the principal, purchases the land for her own use. This is a violation of the agent’s duty of loyalty.

• Competing with the principal. Agents are prohibited from competing with the principalduring the course of an agency unless the principal agrees.

Example

An agent works as a salesperson for a principal who owns an automotive parts business. While doing so, the agent also works as a salesperson for a competing seller of automotive parts. This example demonstrates a conflict of interest, and the agent has violated his duty of loyalty.

• Misuse of confidential information. In the course of an agency, the agent often acquires confidential information about the principal’s affairs (e.g., business plans, technological innovations, customer lists, trade secrets). The agent is under a legal duty not to disclose or misuse confidential information either during or after the course of the agency.

• Dual agency. An agent cannot meet a duty of loyalty to two parties with conflicting interests. Dual agency occurs when an agent acts for two or more different principals in the same transaction. This practice is generally prohibited unless all the parties involved in the transaction agree to it.

Where an agent has breached her or his duty of loyalty, the principal may recover damages from the agent, obtain an injunction against the agent from using confidential information, and obtain other remedies.

Ethics Questions

1. Why is a duty of loyalty imposed on agents? Do you think many agents breach this duty?

Tort Liability of Principals and Agents

A principal and an agent are each personally liable for their own tortious conduct. The principal is liable for the tortious conduct of an agent who is acting within the scope of his or her authority. The agent, however, is liable for the tortious conduct of the principal only if he or she directly or indirectly participates in or aids and abets the principal’s conduct.

If we are industrious, we shall never starve; for, at the workingman’s house hunger looks in, but dares not enter. Nor will the bailiff or the constable enter, for industry pays debts, while despair increaseth them.

Benjamin Franklin (1706–1790)

respondeat superior

A rule stating that an employer is liable for the tortious conduct of its employees or agents while they are acting within the scope of the employer’s authority.

vicarious liability

Liability without fault. Vicarious liability occurs where a principal is liable for an agent’s tortious conduct because of the employment contract between the principal and agent, not because the principal was personally at fault.

The courts have applied a broad and flexible standard in interpreting scope of authority in the context of employment. Although other factors may also be considered, the courts rely on the following factors to determine whether an agent’s conduct occurred within the scope of his or her employment:

• Was the act specifically requested or authorized by the principal?

• Was it the kind of act that the agent was employed to perform?

• Did the act occur substantially within the time period of employment authorized by the principal?

• Did the act occur substantially within the location of employment authorized by the employer?

• Was the agent advancing the principal’s purpose when the act occurred?

Where liability is found, tort remedies are available to the injured party. These remedies include recovery for medical expenses; lost wages; pain and suffering; emotional distress; and, in some cases, punitive damages. As discussed in the following paragraphs, the three main sources of tort liability for principals and agents are negligence, intentional torts, and misrepresentation.

Negligence

Principals are liable for the negligent conduct of agents acting within the scope of their employment. This liability is based on the common law doctrine of respondeat superior (“let the master answer”), which in turn is based on the legal theory of vicarious liability (liability without fault). In other words, the principal is liable because of his or her employment contract with the negligent agent, not because the principal was personally at fault.

The doctrine of negligence rests on the principle that, if someone (i.e., the principal) expects to derive certain benefits from acting through others (i.e., an agent), that person should also bear the liability for injuries caused to third persons by the negligent conduct of an agent who is acting within his or her scope of employment.

Example

Business Unlimited Corporation employs Harriet as its marketing manager. Harriet is driving her automobile to attend a meeting with a client on behalf of her employer. On her way to the meeting, Harriet is involved in an automobile accident that is caused by her negligence. Several people are seriously injured because of Harriet’s negligence. In this example, Harriet is personally liable to the injured parties. In addition, Business Unlimited Corporation is liable as the principal because Harriet was acting within the scope of her employment when she caused the accident.

An employee’s scope of employment was at issue in the following case.

CASE 18.2 STATE COURT CASE Scope of Employment Matthews v. Food Lion, LLC

695 S.E.2d 828, 2010 N.C. App. Lexis 1151 (2010) North Carolina Court of Appeals

“In the event that an employee is engaged in some private matter of his own or outside the legitimate scope of his employment the employer is no longer responsible for the negligence of the employee.”

—Beasley, Judge

Facts

Brigitte Hall was a part-time cashier at a grocery store owned and operated by Food Lion, LLC. When Hall’s shift was over, she punched the time clock to end her work shift and headed toward the bathroom before leaving the premises. Hall entered the bathroom at a brisk pace and, on opening the door, the door struck Diamond Matthews, knocking Matthews to the floor. Employees at Food Lion called 911. Rescue assistants accompanied Matthews to the hospital. Matthews sued Hall and Food Lion to recover damages for negligence and respondeat superior. Food Lion filed a motion for summary judgment, alleging that Hall was not acting within the scope of her employment at the time of the incident. The trial court granted summary judgment in favor of Food Lion. Matthews appealed.

Issue

Was Hall acting within the scope of her employment at the time of the accident?

Language of the Court

The evidence establishes that Food Lion has no control over the actions of its employees once they have “clocked out” of work. Hall was not acting within the scope of her employment at the time of the incident and Hall had completely departed from the course of business of her employer. Therefore, Hall was acting outside the scope of her employment at the time she entered the bathroom and Food Lion is not liable under the theory of respondeat superior.

Decision

The court of appeals held that Hall was not acting within the scope of her employment at the time of the accident. The court of appeals affirmed the trial courts’ grant of summary judgment for Food Lion.

Ethics Questions

1. Should Food Lion have denied liability in this case? Was this a close case to decide? Did any party act unethically in this case?

Frolic and Detour

Agents sometimes act during the course of their employment to further their own interests rather than the principal’s interests. An agent might take a detour to run a personal errand while on assignment for the principal. This is commonly referred to as frolic and detour . Negligence actions stemming from frolic and detour are examined on a case-by-case basis. Agents are always personally liable for their tortious conduct in such situations. Principals are generally relieved of liability if the agent’s frolic and detour is substantial. If the deviation is minor, however, the principal is liable for the injuries caused by the agent’s tortious conduct.

Critical Legal Thinking

1. What is the doctrine of respondeat superior? What is the doctrine of vicarious liability? Why does the law recognize these doctrines?

frolic and detour

A situation in which an agent does something during the course of his or her employment to further his or her own interests rather than the principal’s.

Examples

A salesperson stops at home for lunch while on an assignment for his principal. After lunch and while leaving his home in his car, the agent hits and injures a pedestrian with his automobile. The principal would be liable if the agent’s home were not too far out of the way from the agent’s assignment. The principal would not be liable, however, if an agent who is on an assignment for his employer in Cleveland, Ohio, deviates from his assignment and drives to a nearby city to meet a friend and is involved in an accident. The facts and circumstances of each case determine its outcome.

Coming and Going Rule

Under the common law, a principal is generally not liable for injuries caused by its agents and employees while they are on their way to or from work. This so-called coming and going rule , which is sometimes referred to as the going and coming rule, applies even if the principal supplies the agent’s automobile or other transportation or pays for gasoline, repairs, and other automobile operating expenses. This rule is quite logical: Because principals do not control where their agents and employees live, they should not be held liable for tortious conduct of agents on their way to and from work.

coming and going rule (going and coming rule)

A rule stating that a principal is generally not liable for injuries caused by its agents and employees while they are on their way to or from work.

Example

Sarah works as a professor at a university. Her home is 20 miles from the campus. Sarah leaves her home one morning and is driving to work when her negligence causes an automobile accident in which several pedestrians are injured. In this example, Sarah is personally liable for her negligence, but the university is not liable because of the coming and going rule.

Dual-Purpose Mission

Sometimes principals request that agents run errands or conduct other acts on their behalf while the agent or employee is on personal business. In this case, the agent is on a dual-purpose mission . That is, he or she is acting partly for him- or herself and partly for the principal. Most jurisdictions hold both the principal and the agent liable if the agent injures someone while on such a mission.

dual-purpose mission

A situation that occurs when a principal requests an employee or agent to run an errand or do another act for the principal while the agent is on his or her own personal business.

Example

Suppose a principal asks an employee to drop off a package at a client’s office on the employee’s way home. If the employee negligently injures a pedestrian while on this dual-purpose mission, the principal is liable to the pedestrian.

Liability for Intentional Torts

Intentional torts include acts such as assault, battery, false imprisonment, and other intentional conduct that causes injury to another person. A principal is not liable for the intentional torts of agents and employees that are committed outside the principal’s scope of business.

Example

If an employee attends a sporting event after working hours and gets into a fight with another spectator at the event, the employer is not liable. This is because the fight was a personal affair and outside the employee’s business responsibilities.

However, a principal is liable under the doctrine of vicarious liability for intentional torts of agents and employees committed within the agent’s scope of employment. The courts generally apply one of the two following tests in determining whether an agent’s intentional torts were committed within the agent’s scope of employment:

motivation test

A test that determines whether an agent’s motivation in committing an intentional tort is to promote the principal’s business; if so, the principal is liable for any injury caused by the tort.

work-related test

A test that determines whether an agent committed an intentional tort within a work-related time or space; if so, the principal is liable for any injury caused by the agent’s intentional tort.

1. Motivation test. Under the motivation test , if the agent’s motivation for committing an intentional tort is to promote the principal’s business, the principal is liable for any injury caused by the tort. If an agent’s motivation for committing the intentional tort is personal, however, the principal is not liable, even if the tort takes place during business hours or on business premises.

Example

Under the motivation test, an employer—the principal—is not liable if his employee, who is motivated by jealousy, injures someone on the job who dated her boyfriend. In this example, the motivation of the employee was personal and not work-related.

1. Work-related test. Some jurisdictions have rejected the motivation test as being too narrow. These jurisdictions apply the work-related test instead. Under this test, if an agent commits an intentional tort within a work-related time or space—for example, during working hours or on the principal’s premises—the principal is liable for any injuries caused by the agent’s intentional torts. Under this test, the agent’s motivation is immaterial.

Example

Under the work-related test, an employer—the principal—is liable if his employee, who was motivated by jealousy, injures someone on the work premises and during work hours who dated her boyfriend. In this example, the motivation of the employee is not relevant. What is relevant is that the intentional tort was committed on work premises and during the employee’s work hours.

In the following case, the court faced the issue of whether an employer was liable for an employee’s intentional tort.

CASE 18.3 STATE COURT CASE Employee’s Intentional Tort Burlarley v. Wal-Mart Stores, Inc.

904 N.Y.S.2d 826, 2010 N.Y. App. Div. Lexis 6278 (2010) Appellate Division of the Supreme Court of New York

“In our view, the court properly concluded that throwing a full bag of heavy items at an unsuspecting customer’s face as a ‘joke’ is not commonly done by a cashier and, indeed, substantially departs from a cashier’s normal methods of performance.”

—Mercure, Judge

Facts

After an hour of shopping at a Walmart store, which is owned by Wal-Mart Stores, Inc. (Walmart), Michael Burlarley and his wife proceeded to the checkout at the store. The cashier, joking with the couple in an effort to make her work shift “go a little faster,” pretended to ring up items for vastly more than their price and threw various items at Michael. Michael, not amused, told her to stop, and the cashier initially complied. When Michael turned away, however, the cashier threw a bag containing a pair of shoes and shampoo at him. Michael was struck in the face. Michael sued Wal-Mart Stores, Inc., to recover damages. Walmart filed a motion for summary judgment, alleging that the cashier’s actions were personally motivated and that Walmart was not liable under the state’s motivation test. The trial court granted summary judgment to Walmart. Michael appealed.

Issue

Is Walmart vicariously liable for the personally motivated acts of its cashier?

Language of the Court

In our view, the court properly concluded that throwing a full bag of heavy items at an unsuspecting customer’s face as a “joke” is not commonly done by a cashier and, indeed, substantially departs from a cashier’s normal methods of performance. Moreover, the cashier’s actions arose not from any work-related motivation, but rather her desire to pass the time and relieve mounting frustration with her job.

Decision

Applying the motivation test, the appellate court held that Walmart was not vicariously liable for the intentional tort of its cashier. The appellate court affirmed the trial court’s grant of summary judgment in favor of Walmart.

Ethics Questions

1. Was it ethical for Walmart to deny liability for its employee’s actions in this case? If the court applied the work-related test, would the outcome of the case be different?

Misrepresentation

Intentional misrepresentations are also known as fraud or deceit. They occur when an agent makes statements that he or she knows are not true. An innocent misrepresentation occurs when an agent negligently makes a misrepresentation to a third party. A principal is liable for the intentional and innocent misrepresentations made by an agent acting within the scope of employment. The third party can either (1) rescind the contract with the principal and recover any consideration paid or (2) affirm the contract and recover damages.

intentional misrepresentation (fraud or deceit)

A deceit in which an agent makes an untrue statement that he or she knows is not true.

Example

Assume that a car salesperson is employed to sell the principal’s car, and the principal tells the agent that the car was repaired after it was involved in a major accident. If the agent intentionally tells the buyer that the car was never involved in an accident, the agent has made an intentional misrepresentation. Both the principal and the agent are liable for this misrepresentation.

CONCEPT SUMMARY Tort Liability of Principals and Agents to Third Parties

Bad laws are the worst sort of tyranny.

Edmund Burke (1729–1797)

Contract Liability of Principals and Agents

Agency law imposes contract liability on principals and agents, depending on the circumstances. A principal who authorizes an agent to enter into a contract with a third party is liable on the contract. Thus, the third party can enforce the contract against the principal and recover damages from the principal if the principal fails to perform it.

The agent can also be held liable on the contract in certain circumstances. Imposition of such liability depends on whether the agency is classified as fully disclosed, partially disclosed, or undisclosed.

Fully Disclosed Agency

A fully disclosed agency results if a third party entering into a contract knows (1) that the agent is acting as an agent for a principal and (2) the actual identity of the principal. The third party has the requisite knowledge if the principal’s identity is disclosed to the third party by either the agent or some other source.

fully disclosed agency

An agency in which a contracting third party knows (1) that the agent is acting for a principal and (2) the identity of the principal.

In a fully disclosed agency, the contract is between the principal and the third party. Thus, the principal, who is called a fully disclosed principal, is liable on the contract. The agent is not liable on the contract, however, because the third party relied on the principal’s credit and reputation when the contract was made.

Example

Poran Kawamara decides to sell her house and hires Mark Robbins, a real estate broker, to list and sell the house for a price of $1 million. They agree that Mark will disclose the existence of the agency and the identity of the principal to interested third parties. Mark shows the house to Heather, a prospective buyer, and discloses to Heather that he is acting as an agent for Poran. Heather agrees to buy the house, and Mark signs the contract on behalf of Poran. Poran, the principal, is liable on the contract but Mark, the agent, is not.

The agent’s signature on a contract entered into on the principal’s behalf is important. It can establish the agent’s status and therefore his or her liability. For instance, in a fully disclosed agency, the agent’s signature must clearly indicate that he or she is acting as an agent for a specifically identified principal.

Examples

Proper agent’s signatures include “Catherine Adams, agent for Juan Perez” and “Juan Perez, by Catherine Adams, agent.”

Partially Disclosed Agency

A partially disclosed agency occurs if an agent discloses his or her agency status but does not reveal the principal’s identity and the third party does not know the principal’s identity from another source. The nondisclosure may be because the principal instructs the agent not to disclose his or her identity to the third party or the agent forgets to tell the third party the principal’s identity. In this kind of agency, the principal is called a partially disclosed principal.

partially disclosed agency

An agency in which a contracting third party knows that the agent is acting for a principal but does not know the identity of the principal.

undisclosed agency

An agency in which a contracting third party does not know of either the existence of the agency or the principal’s identity.

In a partially disclosed agency, both the principal and the agent are liable to the other contracting party. If the agent is made to pay the contract, the agent can sue the principal for indemnification.

Example

A principal, Nigel Jones, and an agent, Marcia McKee, agree that the agent will represent the principal to purchase a business and that the agent will disclose the existence of the agency and identity of the principal to third parties. The agent finds a suitable business and contracts to purchase the business on behalf of the principal, but the agent mistakenly signs the contract “Marcia McKee, agent.” This is a partially disclosed agency that occurs because of mistake. The principal is liable on the contract with the third party, and the agent is also liable.

Undisclosed Agency

An undisclosed agency occurs when a third party is unaware of the existence of an agency. The principal is called an undisclosed principal. Undisclosed agencies are lawful. In an undisclosed agency, both the principal and the agent are liable on the contract with the third party because the agent, by not divulging that he or she is acting as an agent, becomes a principal to the contract. If the principal fails to perform the contract, the third party can recover against the principal or the agent. If the agent is made to pay the contract, he or she can recover indemnification from the principal.

Example

The Walt Disney Company wants to open a new theme park in Chicago but first needs to acquire land for the park. Disney employs Saul Green as an agent to work on its behalf to acquire the needed property, with an express agreement that the agent will not disclose the existence of the agency to a third-party seller. If a seller agrees to sell the needed land and the agent signs his name “Saul Green,” it is an undisclosed agency. Disney is liable on the contract with the third-party seller, and so is the agent.

CONCEPT SUMMARY Contract Liability of Principals and Agents to Third Parties

Independent Contractor

Principals often employ outsiders—that is, persons and businesses that are not employees—to perform certain tasks on their behalf. These persons and businesses are called independent contractors . For example, lawyers, doctors, dentists, consultants, stockbrokers, architects, certified public accountants, real estate brokers, and plumbers are examples of people who commonly act as independent contractors. The party that employs an independent contractor is called a principal.

independent contractor

“A person who contracts with another to do something for him who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking” [Restatement (Second) of Agency].

Example

Jamie is a lawyer who has her own law firm and specializes in real estate law. Raymond, a real estate developer, hires Jamie to represent him in the purchase of land. Raymond is the principal, and Jamie is the independent contractor.

A principal–independent contractor relationship is depicted in Exhibit 18.2.

Exhibit 18.2 Principal–Independent Contractor Relationship

Factors for Determining Independent Contractor Status

Section 2 of the Restatement (Second) of Agency defines independent contractor as “a person who contracts with another to do something for him who is not controlled by the other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking.” Independent contractors usually work for a number of clients, have their own offices, hire employees, and control the performance of their work.

The way to wealth is as plain as the way to market. It depends chiefly on two words, industry and frugality: that is, waste neither time nor money, but make the best use of both. Without industry and frugality nothing will do, and with them everything.

Benjamin Franklin (1706–1790)

The crucial factor in determining whether someone is an independent contractor or an employee is the degree of control that the principal has over that party. Critical factors in determining independent contractor status include:

Critical Legal Thinking

1. Is it difficult to apply the factors for determining whether a person is an independent contractor or an employee? A plaintiff injured by that person usually wants which to be found?

• Whether the worker is engaged in a distinct occupation or an independently established business

• The length of time the agent has been employed by the principal

• The amount of time that the agent works for the principal

• Whether the principal supplies the tools and equipment used in the work

• The method of payment, whether by time or by the job

• The degree of skill necessary to complete the task

• Whether the worker hires employees to assist him or her

• Whether the employer has the right to control the manner and means of accomplishing the desired result

If an examination of these factors shows that the principal asserts little control, the person is an independent contractor. Substantial control indicates an employer–employee relationship. Labeling someone an independent contractor is only one factor in determining whether independent contractor status exists.

Most are engaged in business the greater part of their lives, because the soul abhors a vacuum and they have not discovered any continuous employment for man’s nobler faculties.

Henry David Thoreau (1817–1862)

Liability for an Independent Contractor’s Torts

Generally, a principal is not liable for the torts of its independent contractors. Independent contractors are personally liable for their own torts. The rationale behind this rule is that principals do not control the means by which the results are accomplished.

Example

Qixia hires Harold, a lawyer and an independent contractor, to represent her in a court case. While driving to the courthouse to represent Qixia at trial, Harold negligently causes an automobile accident in which Mildred is severely injured. Harold is liable to Mildred because he caused the accident. Qixia is not liable to Mildred because Harold was an independent contractor when he caused the accident.

Principals cannot avoid liability for inherently dangerous activities that they assign to independent contractors. For example, the use of explosives, clearing of land by fire, crop dusting, and other inherently dangerous activities involve special risks. In these cases, a principal is liable for the negligence of the independent contractor the principal hired to perform the dangerous task.

In the following case, the court had to decide if a party was an independent contractor.

CASE 18.4 STATE COURT CASE Independent Contractor Glenn v. Gibbsm

746 S.E.2d 658, 2013 Ga. App. Lexis 639 (2013) Court of Appeals of Georgia

“The evidence showed that Glenn decided the manner, method, and means of trimming the limbs.”

—Phipps, Chief Judge

Facts

Frankie and Trena Gibbs and Joel and Madeira Glenn were members of the Creek Baptist Church, which both couples attended. The church held a fundraiser whereby members would help other members with projects, and the member for whom the work was done would make a donation to the church’s youth ministry. As part of the fund-raiser, Frankie Gibbs, who had no experience using a chainsaw, asked Joel Glenn, who was experienced with using a chainsaw, to trim branches on a tree on Gibbs’s property. When Glenn arrived at Gibbs’s property with his own chainsaw and ladder, Gibbs showed Glenn which limbs on the tree he wanted trimmed. Glenn climbed to the very top of an A-type ladder, straddled the ladder—one foot on each side—and began trimming the tree. However, after making a cut on a limb, the limb snapped off and hit the top of the ladder, knocking the ladder backward. Glenn fell forward, head first, and landed on his back. Glenn died from the fall. Madeira Glenn sued the Gibbs to recover damages, alleging that her deceased husband was an agent of the Gibbs and that, as principals, the Gibbs had breached the ordinary duty of care they owed to Glenn as an invitee on their property. Gibbs defended, asserting that Glenn was an independent contractor with a duty of his own to make certain his work area was safe, to take all precautions, and to exercise ordinary care for his own safety. The trial court granted summary judgment to the Gibbs. Madeira Glenn appealed.

Issue

Was Joel Glenn an independent contractor?

Language of the Court

Glenn decided where to place the ladder, and never asked for Gibbs’s assistance in operating the chainsaw. Gibbs had no training or experience in operating a chainsaw and did not direct Glenn in the use of the chainsaw or in positioning the ladder. Gibbs did not tell Glenn how to cut the limbs. Glenn brought his own chainsaw and ladder to trim the limbs. Gibbs merely pointed out to Glenn which limbs he wanted trimmed. The evidence showed that Glenn decided the manner, method, and means of trimming the limbs; there was no evidence that Gibbs retained the right to control these factors. The evidence demanded a finding that Glenn was an independent contractor.

Decision

The court of appeals upheld the trial court’s finding that Glenn was an independent contractor and not an agent of Gibbs, and affirmed the trial court’s judgment in favor of defendant Gibbs.

Ethics Questions

1. Was it ethical for Glenn to sue the Gibbs? Do the Gibbs owe an ethical duty to pay compensation to Mrs. Glenn for Mr. Glenn’s death?

Nature seems to have taken a particular care to disseminate her blessings among the different regions of the world, with an eye to their mutual intercourse and traffic among mankind, that the nations of the several parts of the globe might have a kind of dependence upon one another and be united together by their common interest.

Joseph Addison (1672–1719)

Liability for an Independent Contractor’s Contracts

A principal can authorize an independent contractor to enter into contracts. Principals are bound by the authorized contracts of their independent contractors.

Example

Suppose a client hires a lawyer as an independent contractor to represent her in a civil lawsuit against a defendant to recover monetary damages. If the client authorizes the lawyer to settle a case within a certain dollar amount and the lawyer does so, the settlement agreement is binding.

If an independent contractor enters into a contract with a third party on behalf of the principal without express or implied authority from the principal to do so, the principal is not liable on the contract.

Termination of an Agency

An agency contract can be terminated by an act of the parties, by an unusual change of circumstances, by impossibility of performance, and by operation of law.

Termination of an Agency by an Act of the Parties

An agency contract is similar to other contracts in that it can be terminated by an act of the parties (termination of an agency by an act of the parties ). An agency can be terminated by the following acts:

termination of an agency by an act of the parties

A situation where the parties to an agency contract terminate their contract by mutual agreement or when a previously agreed-on event occurs.

1. The mutual assent of the parties.

Example

A principal hires a lawyer to represent her in a lawsuit until the lawsuit is resolved. If the principal and the lawyer voluntarily agree to terminate the relationship prior to the resolution of the case by trial or settlement, the agency is terminated.

1. If a stated time has lapsed.

Example

If an agency agreement states, “This agency agreement will terminate on August 1, 2025,” the agency terminates when that date arrives.

1. If a specified purpose is achieved.

Example

If a homeowner hires a real estate broker to sell the owner’s house within six months and the house sells after three months, the agency terminates on the sale of the house.

1. The occurrence of a stated event.

Example

If a principal employs an agent to take care of her dog until she returns from a trip, the agency terminates when the principal returns from the trip.

Shortly his fortune shall be lifted higher; True industry doth kindle honour’s fire.

William Shakespeare

The Life and Death of Lord Cromwell (1602)

Notice of Termination

The termination of an agency extinguishes an agent’s actual authority to act on the principal’s behalf. If the principal fails to give the proper notice of termination to a third party, however, the agent still has apparent authority to bind the principal to contracts with these third parties. To avoid this liability, the principal needs to provide the following notices:

• Direct notice of termination to all persons with whom the agent dealt. The notice may be oral or written unless required to be in writing.

• Constructive notice of termination to any third party who has knowledge of the agency but with whom the agent has not dealt.

Example

Notice of the termination of an agency that is printed in a newspaper that serves the vicinity of the parties is constructive notice.

Generally, a principal is not obliged to give notice of termination to strangers who have no knowledge of the agency. Constructive notice is valid against strangers who assert claims of apparent agency.

Termination of an Agency by an Unusual Change in Circumstances

An agency terminates when there is an unusual change in circumstances (termination of an agency by an unusual change in circumstances ) that would lead the agent to believe that the principal’s original instructions should no longer be valid.

termination of an agency by an unusual change in circumstances

A situation where an agency terminates because an unusual change in circumstances has occurred that would lead the agent to believe that the principal’s original instructions should no longer be valid.

Example

An owner of a farm employs a real estate agent to sell the farm for $1 million. The agent thereafter learns that oil has been discovered on the property, a discovery that makes the land worth $5 million. The agency terminates because of this change in circumstances.

Termination of an Agency by Impossibility of Performance

An agency relationship terminates if a situation arises that makes its fulfillment impossible. The following circumstances can lead to termination of an agency by impossibility of performance :

termination of an agency by impossibility of performance

A situation where an agency terminates because a situation arises that makes the fulfillment of the agency impossible.

• The loss or destruction of the subject matter of the agency.

Example

A principal employs an agent to sell his horse, but the horse dies before it is sold. The agency relationship terminates at the moment the horse dies.

• The loss of a required qualification.

Example

A principal employs a licensed real estate agent to sell her house, but the real estate agent’s license is revoked before he can sell the principal’s house. The agency relationship terminates at the moment the real estate agent’s license is revoked.

• A change in the law.

Example

A principal employs an agent to trap alligators. If a law is passed that makes trapping alligators illegal, the agency contract terminates when the law becomes effective.

Termination of an Agency by Operation of Law

Agency contracts can be terminated by operation of law (termination of an agency by operation of law ). An agency contract is terminated by operation of law in the following circumstances:

termination of an agency by operation of law

A situation where an agency terminates because of the occurrence of legally specified events.

1. The death of either the principal or the agent

2. The insanity of either the principal or the agent

3. The bankruptcy of the principal

4. The outbreak of a war between the principal’s country and the agent’s country

If an agency terminates by operation of law, there is no duty to notify third parties about the termination.

Wrongful Termination

The termination of an agency extinguishes the power of the agent to act on behalf of the principal. If the principal’s or agent’s termination of an agency contract breaches the contract, the other party can sue to recover damages for wrongful termination .

wrongful termination

The termination of an agency contract in violation of the terms of the agency contract. The nonbreaching party may recover damages from the breaching party.

Example

A principal employs a licensed real estate agent to sell his house. The agency contract gives the agent an exclusive listing for four months. After one month, the principal unilaterally terminates the agency. The agent can no longer act on behalf of the principal. Because the principal did not have the right to terminate the contract, however, the agent can sue him and recover damages (i.e., lost commission) for wrongful termination.