Chapter 33 Agency Formation and Duties Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGrawHill Education Overview • LO33-1: What is agency law? • LO33-2: How is an agency relationship created? • LO33-3: What are the different types of agency? • LO33-4: What are the different types of agency relationships? • LO33-5: What are the duties of the agent and principal? • LO33-6: What are the rights and remedies of the agent and principal? 33-2 Chapter 33 Hypothetical Case • Brian Puryear is an employee of Wellborn Industrial Systems, Inc ("Wellborn"), located in Little Rock, Arkansas Times are tough at Wellborn— the company's rank and file workers have not had a raise in four years Despite the federal government's assertions that inflation is under control, Puryear knows that prices for goods and services keep rising, and he desperately needs to make up for the difference Puryear has been searching the Internet for part-time jobs in Little Rock He notices that a security guard position is available at a local manufacturing plant The security job is Monday through Friday from 8:00 p.m until 2:00 a.m His job at Wellborn is Monday through Friday from 8:00 a.m until 5:00 p.m • Would Brian Puryear violate his duty of loyalty to Wellborn Industrial Systems, Inc if he accepted the part-time security position? From an ethical perspective, should Brian notify Wellborn of his intentions and secure Wellborn's approval before accepting the security guard position? 33-3 Chapter 33 Hypothetical Case • Robert Newman, attorney-at-law, just attended a pretrial conference for a trial scheduled to begin next week The case, Effingham v Atwater, involves his client, Jessica Effingham On September 8, 2009, Effingham sustained serious injuries in an automobile accident when a car driven by Harvey Atwater (the defendant) struck her car from behind Effingham sustained permanent partial disability as a result of the accident, and Newman believes the case is worth $250,000 for his client's permanent partial disability, pain and suffering, medical expenses, and other compensatory/consequential damages During the pretrial conference, Atwater's defense counsel, Gunner Vader, offered the plaintiff $20,000 in full and final settlement of the Effingham v Atwater litigation Vader proclaimed that $20,000 was all of the settlement authority he had, and his client would not pay a penny more to settle the case Judge Clarence Ginsburg strongly recommended that the plaintiff take the $20,000 settlement offer, but Newman considered the lowball offer to be a personal insult as well as an affront to his client, and he immediately rejected the offer • In rejecting the offer, did Robert Newman violate his professional duty as his client's agent? 33-4 Agency Law • Agency: Relationship between principal and agent • Agent: One authorized to act for/on behalf of principal • Principal: One who hires agent to represent him/her • Fiduciary: One with duty to act primarily for another person's benefit 33-5 Creation of Agency Relationship • Expressed agency: Agency formed by making written/oral agreement • Power of attorney: Document giving agent authority to sign legal documents on behalf of principal • Durable power of attorney: Power of attorney intended to continue to be effective/take effect after principal incapacitated • Agency by implied authority: Agency formed by implication, through conduct of parties • Agency by estoppel: Agency formed when principal leads third party to believe that another individual serves as his/her agent (although principal had actually made no agreement with purported agent) • Agency by ratification: Agency that exists when individual misrepresents himself/herself as agent for another party, and principal accepts/ratifies unauthorized act 33-6 Agency By Ratification Requirements • Individual must misrepresent himself/herself as agent for another party • Principal accepts/ratifies unauthorized act • Principal has complete knowledge of all material facts regarding contract • Principal must ratify entirety of agent's act 33-7 Agency Relationships • Agency relationship: Fiduciary relationship (relationship of trust) in which agent acts on behalf of principal • Principal-agent relationship: Employer hires employee to enter into contracts on behalf of employer; parties have agreed that agent will have power to bind principal in contract • Employer-employee relationship: Employer hires employee to perform certain tasks; employer has right to control conduct of employees • Employer-independent contractor relationship: Employer hires persons (other than employee) to conduct some sort of task; employer has no control over details of conduct of independent contractor 33-8 Independent Contractor or Employee? • Does worker engage in distinct occupation/independently established business? • Is work done under employer's supervision, or does specialist without supervision complete the work? • Does employer supply the tools? • What skill is required for the occupation? • What is the length of time for which worker employed? • Is worker a regular part of the employer's business? • How is worker paid? 33-9 Principal and Agent Duties • Principal's duties to agent: • • • • Compensation Reimbursement and indemnification Cooperation Safe working conditions • Agent's duties to principal: • • • • • Loyalty Notification Performance Obedience Accounting 3310 Principal and Agent Rights and Remedies • Principal's rights and remedies against agent: • Constructive trust • Avoidance • Indemnification • Agent's rights and remedies against principal: • Tort and contract remedies • Demand for an accounting • Specific performance 3311 Chapter 33 Hypothetical Case • Maximillian Snell is having a very bad Monday at his pre-owned car dealership, Maximillian Motors Known countywide for his eye-catching television advertisements (with staged customers proclaiming "Thanks a million, Maximillian!"), Snell is having a difficult time attracting and retaining an effective and reliable sales staff; in fact, not a single salesperson has appeared for work on Monday The only employee who does show up for work that day is his secretary of three years, Daisy Martinez, whose responsibilities include processing tax, title, and tag paperwork Business is slow that day, with only two shoppers appearing on the lot between 8:00 a.m to 2:00 p.m Famished, and eager to try out the new Italian restaurant down the street, Snell instructs Martinez to tell any prospective customers he will return at 3:30 p.m When Snell returns at 3:30, he asks Martinez whether any potential customers visited the lot in his absence Martinez beams with pride and says, "Why yes, Max, there was a young couple who came by right after you left They wanted to buy that red BMW sedan on the front row, and I knew business was slow, so I went ahead and sold it to them The contract is here on my desk Aren't you proud of me?" 3312 Chapter 33 Hypothetical Case (cont'd) • Curious, Snell examines the contract It describes the red BMW sedan and includes the signatures of both purchasers, as well as Martinez's signature (indicating "Daisy Martinez for Maximillian Motors") The contract price is $21,000 Snell's face reddens as he heads for the car inventory purchase price records on his computer Computer records reflect that he purchased the car at auction last Wednesday for $28,000, and that his established retail price for the car was $31,000 When he confronts Martinez with the facts, she bursts into tears saying, "Please don't fire me! I've made a terrible mistake!" Martinez is inconsolable, but that is irrelevant to Snell Through her tears, Martinez indicates that the couple will return at 5:30 p.m to take possession and ownership of the car; they have gone to their bank to obtain the $21,000 • Is Snell legally obligated to sell the car to the couple? From an ethical standpoint, should the couple agree to pay at least Snell's cost for the car ($28,000)? 3313 Chapter 33 Hypothetical Case • Serena Hofstadt is a Massachusetts-based professional freelance editor who has a wide variety of clients, including individuals and businesses One of her clients is a medical association based in Atlanta, Georgia, that publishes a monthly journal; as an independent contractor, Hofstadt edits all of the journal articles, which are complex and require solid knowledge of medical terms and the association's journal style Hofstadt has lately been inundated with work from several different clients As a result of her heavy workload, she decided to subcontract the work on last month's medical journal articles to a less-experienced friend The journal's editor calls Hofstadt one afternoon and reprimands her for the poor work on the previous batch of articles Hofstadt reluctantly divulges that she did not the work herself, and that instead another editor performed the work • Did Hofstadt breach her duties as an agent to the principal in this case? Explain your answer 3314 ...Overview • LO33-1: What is agency law? • LO33-2: How is an agency relationship created? • LO33-3: What are the different types of... accepting the security guard position? 33-3 Chapter 33 Hypothetical Case • Robert Newman, attorney-at -law, just attended a pretrial conference for a trial scheduled to begin next week The case, Effingham... rejecting the offer, did Robert Newman violate his professional duty as his client's agent? 33-4 Agency Law • Agency: Relationship between principal and agent • Agent: One authorized to act for/on behalf