CHAPTER 35
THE AGENCY RELATIONSHIP
I. OBJECTIVES
This chapter acquaints students with the formation of the agency relation, some basic agency concepts, the agent's duties to the principal, the principal's duties to the agent, and termination of the agency relation (including termination's effect on the principal's authority). Chapter 36 mainly discusses the principal's and the agent's relations with third parties.
A Restatement (Third) of Agency is somewhere in the preliminary draft stage. We see no evidence that it is yet having any effect on the courts, and don't expect to see any effect for some time.
II. ANSWER TO INTRODUCTORY PROBLEM
Rita has breached several fiduciary duties. She has competed with her principal by providing consulting advice to her own clients and by stealing IPQ’s clients. Whether she serves the clients at night or during the day, she nonetheless competes with IPQ and breaches her duty. She also breaches a duty of confidentiality by using IPQ’s database to find clients for her own consulting business. Finally, she breaches her duties to account by working on her own business while in IPQ’s offices and using its phones and other facilities.
IPQ is legally able to enjoin Rita from taking its clients while she is an employee of IPQ. After she terminates her employment with IPQ, she is able to compete with IPQ and take its clients, unless she uses IPQ’s confidential client list or has agreed not to solicit clients in a non-compete agreement.
III. SUGGESTIONS FOR LECTURE PREPARATION
A. Introduction
1. You might introduce the subject the way the chapter does: by asking, in effect, just why all kinds of business actors are often bound by the actions of their employees or representatives. The answer, of course, is agency law.
2. Then, define agency and give some examples of typical agency relationships. Students should be able to suggest additional examples.
3. Emphasize the functions served by agency law and its importance in facilitating commercial activity.
B. Creation of the Agency Relation and Related Matters
1. Note that, while agency is based on consent and many agencies are contractual, no contract is needed to create an agency. Thus consideration is unnecessary and a writing is ordinarily not required. Stress, however, that it is usually desirable to commit the agency agreement to a writing.
2. Note also that the general test for the creation of an agency is objective, and that the existence of an agency can be inferred from the parties' behavior, in light of all the surrounding facts and circumstances. Point out that a written agency contract obviously qualifies as such a manifestation of intent to create an agency.
3. Note further that there can be an agency even where the parties agree that the relation will not exist or state that they intend to create some other relationship instead. On the other hand, the fact that the parties call their relationship an agency does not necessarily mean that the courts will so regard it.
4. Finally, emphasize that the principal's actual control or right to control the agent's activities is a crucial element of an agency. Here, the degree of control is sometimes critical.
5. Note that the text's discussion of the principal's or the agent's incapacity is limited to incapacity at the time the agency relation is created and its effect on the relation. Other implications of incapacity are discussed later in this chapter and in Chapter 36.
6. Note that there are certain nondelegable obligations that cannot be performed by an agent. For example, one hired to paint a portrait usually cannot delegate the job to an art student.
7. Example: Problem Case #1.
C. Agency Concepts, Definitions, and Types
1. This section attempts to lay out certain basic agency types and concepts early on. In certain cases (e.g., authority and the employee/independent contractor distinction), this creates some redundancy because these subjects find their most important applications in Chapter 36. Nonetheless, we include them here because: (1) these concepts and types occasionally are discussed in this chapter, (2) doing so enables us to point out these concepts' nonagency applications (which would be hard to do in Chapter 36), and (3) doing so enables us to discuss termination's effect on an agent's authority where it probably belongs, right after termination itself. One way to handle the redundancy problem is to assign this introductory material as reading, and to lecture on the individual concepts where they assume importance.
2. Authority
a. Distinguish actual authority and apparent authority, noting that, in theory at least, actual authority is based on what the principal communicates to the agent, and apparent authority on what the principal communicates to the third party. Note also that there are two kinds of actual authority: express authority and implied authority.
b. Note that the scope of true express authority may be very limited. Restatement (Second) of Agency section 7, comment c, for example, states: “It is possible for a principal to specify minutely what the agent is to do. To the extent that he does this, the agent may be said to have express authority. But most authority is created by implication. Thus, in the authorization to ‘sell my automobile,’ the only fully expressed power is to transfer title in exchange for money or a promise to give money. In fact, under some circumstances, ‘sell’ may not mean ‘convey,’ and there may or may not be power to take or give possession of the automobile or to extend credit or to accept something in partial exchange. These powers are all implied or inferred from the words used, from customs and from the relations of the parties. They are described as ‘implied authority.’”
c. The language just quoted is an obvious transition to implied authority and the need for it to exist. Stress that the general test for the scope of an agent's implied authority is what the agent could reasonably have expected that the principal wanted him to do in light of all the factors known to the agent. The principal's express words are probably the most important of these factors.
d. For apparent authority, stress: 1) that it is theoretically based on whatever the principal communicates to the third party; 2) that this "communication" can take a variety of forms (including acquiescence in the agent's behavior); 3) that agents cannot give themselves apparent authority by claiming authority or acting as if they have it without the principal's acquiescence; and 4) that whatever the principal "communicates" to the third party must cause the agent to form a reasonable belief that the agent has authority. At some point, you should probably add that the seeming reason for apparent authority is to protect third parties who rely on a reasonable appearance of authority. The rule that such authority must be based on the principal's communications can be seen as an attempt to protect the principal from any assertion of authority that the agent might happen to make. Finally, suggest that despite seeming statements to the contrary, whatever gives rise to apparent authority can't be completely based on what the principal communicates to the third party. As discussed in Chapter 36, for example, business customs can clearly play a role in determining the reasonableness of the agent's belief.
e. Note that actual and apparent authority can both exist at the same time and often are equal to each other. Suppose that P appoints A to a position such as general sales manager that customarily carries with it certain kinds of authority.
f. Euclid Plaza Associates, LLC v. African American Law Firm, LLC (p. 786): This case addresses the issues of creation of an agency and the existence of an agent’s authority.
Points for Discussion: Why did the court find there was no agency relationship and no express, implied, or apparent authority of Del-Mar to make a contract binding Euclid? There was no evidence that Euclid gave any powers to Del-Mar, that Euclid controlled Del-Mar’s actions, or that Del-Mar acted as a fiduciary on Euclid’s behalf. This disproved not only the existence of an agency, but also the existence of express or implied authority.
Additional Point for Discussion: The court continued to determine if there was any evidence of apparent authority of Del-Mar to bind Euclid to the lease. The court found no apparent authority, because nothing that was communicated to Tenants indicated anything other than that Del-Mar was the landlord. Tenants did not even know that Euclid had bought the building. They could hardly argue that they relied on any communication by Euclid that would create apparent authority for Del-Mar to act for Euclid.
g. Additional examples: Problem Cases ##2 and 4.
3. Go over the muddy distinction between general and special agents. Probably the most important factor distinguishing these two kinds of agents is the continuity (uninterruptedness) of the agent's service. In Chapter 36, the distinction assumes importance with respect to the agent's implied and apparent authority to make warranties binding the principal.
However, it's questionable whether modern courts pay much attention to the distinction between general and special agents. Nonetheless, the Restatement, the Seavey treatise, and the Reuschlein-Gregory treatise play up the distinction, so we continue to include it. But it's probably dispensable if you want to ignore it.
4. Note that the possibility of a gratuitous agency has something to do with the fact that consideration is not needed to form an agency. Point out that the existence of a gratuitous agency may change the various principal-agent duties discussed later in the chapter.
5. Subagents
a. Define the term and emphasize that the agent must have the authority to make the subagent his agent in the conduct of business that the principal has entrusted to the agent.
b. Distinguish the situation where the agent appoints another agent for the principal. State why this is important: except where the appointing agent is directly liable, he is not legally responsible for the other agent's actions. An agent who appoints a true subagent, on the other hand, is a principal with respect to that agent.
c. The ABKCO case on page 789 involves a subagency.
6. The employee-independent contractor distinction
a. Point out that the distinction is most important for determining the principal's liability for the agent's torts, as discussed in Chapter 36. And the distinction obviously is important outside agency law and is especially important in making corporations liable for the torts of their employees.
b. Stress that the most important of the factors used to make the distinction is the principal's right to control the physical details of the work.
c. Reich v. Circle C Investments (p. 788) shows how the employee-independent contractor distinction matters outside the respondeat superior context. Here, it matters in determining the application of the Fair Labor Standards Act.
Points for Discussion: What could you argue on Circle C's behalf on the "control" issue? That Circle C can't do much to control a dancer's dance routine, which is significant in determining her success and which almost has to be fairly personal. What general factor is the court apparently too decorous to mention? That a dancer's success depends to some degree on something only she can bring to the table: her physical attractiveness. Why isn't the ability to develop and maintain rapport with customers a relevant type of "initiative?" We don't know. Legal arguments aside, what else is probably motivating the court here? Could it be a desire to extend FLSA protections to women in a marginal occupation?
d. The Restatement lists several factors for resolving the employee-independent contractor question. They are:
(1) the extent of control which, by the agreement, the master may exercise over the details of the work;
(2) whether or not the one employed is engaged in a distinct occupation or business;
(3) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
(4) the skill required in the particular occupation;
(5) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
(6) the length of time for which the person is employed;
(7) the method of payment, whether by the time or by the job;
(8) whether or not the work is part of the regular business of the employer;
(9) whether or not the parties believe that they are creating the relationship of master and servant; and
(10) whether the principal is or is not in business.
e. Example: Problem Case #3.
D. Agent's Duties to the Principal
1. Begin by stating that, if the agency is created by contract, the contract establishes one set of duties for the agent, and that the various fiduciary duties supplement those set by contract. The parties' ability to eliminate or modify these duties by agreement (or by the principal's consent) is a subject about which few generalizations can be made. Some examples appear in the text's discussion of the specific duties.
2. With respect to the agent's duty of loyalty:
a. Loyalty is the fiduciary duty an agent owes to a principal. It can be argued that all the other fiduciary duties are encompassed within this duty. If the agent is loyally working for the principal's benefit, he will obey the principal's instructions, act with care and skill, notify the principal when necessary, and properly account for the principal's money or property. By making this point, you are able to preview all the agent's duties.