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  • Introduction to Agency Law
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  • Introduction to Agency Law

    While you may not be familiar yet with the idea of agency law, you've dealt with it all your life. The basic principle is that of authority. In an agency relationship, one party (known as an agent) agrees to represent or act for another party (the principal). The principal exerts authority or control over the actions of the agent, and the agent agrees to act for the benefit of the principal, and the principal only. Agency is also defined as a fiduciary relationship. This is a relationship that is based on trust and confidence.

    Perhaps an example may help. Let's imagine that you graduate from BYU-Idaho and need a car for your first job because it will require a lengthy commute. So you enter the car dealership and work with the salesperson below. Is the salesperson an agent of the dealership?

    In other words, does the salesperson have the ability to represent the dealership in your negotiations? If you believe that the answer is yes, you are correct. If the salesperson makes or accepts an offer, the dealership is bound by that decision. Of course, we'll muddy up the waters as you read further on, but your intuition is correct that in general, any employees that interact with third parties are considered agents of the employer. This rule is even true when it comes to Lin-Manuel Miranda working at McDonalds.

    Clearly, there are some limitations here. If the 15 year-old Lin-Manuel offers to sell you the recipe for McD's secret sauce, you would rightly assume that he has no authority to do so, and McDonald's would not be bound by his agreement...but we'll get to that in greater detail down the road. At this point, it is sufficient to understand that employees typically act as agents for their employer.

    Creation of the Agency Relationship

    Most agency relationships are consensual. They are created when the parties voluntarily consent to the relationship either verbally or through a formal agreement, express or implied. Because it is based on contract law, an agency arrangement created for an illegal purpose is void. Similarly, someone that lacks capacity to enter a contract cannot engage an agent to act for him or her. 

    Agency by Agreement (Expressed Agency)

    Most agency relationships are based on express or implied agreements wherein one party, the agent, will act on behalf of the other party, the principal. In such agreements, the principal agrees to allow the agent to act on behalf of the principal. This agreement, known as an expressed agency, is the most common type of agency. 

    A power of attorney is a document that establishes agency relationships. This is a document that gives an agent the authority to sign legal documents on behalf of the principal. For example, before my in-laws left to serve a mission, they granted my wife a power of attorney to act on their behalf while they were out-of-state. With this power of attorney, my wife can rent out her parents' home, access their bank accounts, and do anything she deems necessary to protect her parents' property while they are out of the state. This is called a general power of attorney. On the other hand, a principal may limit the authority of the agent by granting only a specific power of attorney which grants the agent authority to act in the specific areas outlined in the agreement (i.e., banking, healthcare decisions, etc.).

    One day, they may wish to give my wife a durable power of attorney to make healthcare decisions for them in the event of incapacity. A durable power of attorney is a document that specifies that an agent's authority is intended to continue beyond the principal's incapacitation. Therefore, if one or both of my in-laws becomes incapacitated due to dementia or other health impairments, my wife will be able to give the physician instructions on how to provide (or withhold) health services.

    Agency by Implied Authority

    If the agency is not created by express language, but rather by the acts of the parties, you have an implied agency. Look at the circumstances to determine the extent of the agency relationship. 

    Agency by Estoppel

    Let's say that you come to my law office looking for an attorney. As you walk in, I'm on my way out heading to campus to teach this class. As I walk away, I say, "Talk to Jason inside; he's my paralegal and runs the firm for me anyway." In reality, Jason is my friend and just hangs out in my office to eat all the candy I keep stored there. If Jason agrees to take your case (acting as my agent...even though he is not), can I claim that Jason is not my agent and therefore nullify the agreement that Jason entered into on my behalf? The answer is no. Because I told you that Jason is my agent, I am...you guessed it...estopped from saying that he's not my agent.

    The rule here is that when the principal causes a third party to believe that another person is his or her agent and the third party engages with the supposed agent, the principal cannot later claim that no agency exists. To prevail, the third party must prove that it was reasonable to believe that an agency relationship existed. Ask yourself if an ordinary, reasonable person would have believed that the supposed agent had the authority.

    Agency by Ratification

    Let's say that you are walking back to your apartment one night after a long day of studying business law. As you walk by the stadium, you see a Tesla Model S for sale in the parking lot. You walk over and meet the owner of the Tesla and say, "my business law professor is obsessed with this car and would love to buy it." The owner asks if you are authorized to buy the car on behalf of your instructor to which you say, "OF COURSE!" You then sign a purchase agreement and sign it as "Awesome Student, Agent of Michael Hales." 

    Obviously, I'm not obligated to buy the Tesla because you are not my agent. Suppose, however, that you come to class the next day and bring the signed contract up to my podium. I look it over, a little skeptical at first because the price looks too good to be true. I meet with the owner, take the car for a spin (to make sure it can really hit 0-60 in 2.9 seconds), and decide to buy it pursuant the terms of the agreement you entered. In such a situation, I ratified the agreement and you as my agent...but only for this transaction. We're still going to have a chat about your behavior...

    Agency Relationships

    In the business setting, agency is important because it helps define when a business may be bound by agreements made by others. In this situation, we are primarily concerned with two types of relationships: employees and independent contractors. 

    Employer-Employee Relationship

    An employer-employee relationship is created when an employer hires an employee to perform a service. The employee is bound to follow the instructions of the employer and in so doing, is considered an agent of the employer. Normally, all employees are considered agents of the employer, even if the employee is not authorized to enter agreements on behalf of the employer. 

    Employer-Independent Contractor Relationship

    Employers often hire independent contractors. These are people that are not employees but rather hired to perform certain tasks. Independent contracts are not employees because the employer does not have control over the details of their work. Construction contractors or subcontractors are independent contractors. If I am building a house or having my kitchen remodeled, the person I engage to help is not my employee. I tell the contractor what I want, and I let him or her get to it; I don't manage every detail of the job. 

    Determining Employee Status

    Determining whether a worker is an employee or an independent contractor is an important decision because it affects payroll taxes, liability, and unemployment qualifications. An employee is protected by discrimination protections, workplace safety requirements, and unemployment benefits. An independent contractor, on the other hand, does not have these benefits and must pay taxes independently without the employer withholding taxes through payroll. Most importantly, employers are generally liable for the actions of their employees, but not of independent contractors. Because of these considerations, some employers seek to classify (and at times mis-classify) workers as independent contractors rather than employees. 

    Courts are asked to determine whether a worker should be classified as an employee or an independent contractor. In so doing, they primarily look at the amount of control that the employer exercised over the worker. The more control, the more likely that the court will decide that the worker was an employee. However, there are a number of considerations that the courts analyze:

    CRITERIA

    EMPLOYEE

    INDEPENDENT CONTRACTOR

    The amount of control the employer exercises of the details of the work

    Considerable control

    Less control

    Whether the worker engages in a distinct occupation/business from the employer

    No, they are the same

    Yes, they are different

    Whether the employer supervises the work

    Yes

    No, there is minimal supervision

    Does the employer supply the tools for the work?

    Yes

    No

    What skill is required of the worker?

    No specialized skill

    Great degree of skill

    How long is the person employed?

    A long time

    Varies

    How is the worker paid?

    Regular payments

    At the completion of the job

    Duty of an Agent to the Principal

    An agency relationship is more involved than a typical contractual relationship. If I hire you to paint my fence, your duty is to paint my fence. However, if I hire you as my agent, you have additional duties in that you owe me a fiduciary duty. As a fiduciary, you stand in a position of trust and must act not in your own self-interest, but in mine.

    Duty of Loyalty

    At the foundation of any fiduciary relationship is the duty of loyalty. Because an agent is in a position of trust, the agent has an obligation of loyalty to the principal. An agent may not engage in activities that will enrich the agent at the expense of the principal. Doing so is known as self-dealing and is a breach of the duty of loyalty to the principal. The duty of loyalty is broad and includes the requirement that agents avoid conflicts of interest and protect the principal's confidential information.

    Duty of Performance/Duty Not to Be Negligent

    The agent must use reasonable diligence and skill in performing his or her responsibilities. The standard here is that of a reasonable person under similar circumstances. However, if an agent has claimed to have specialized skills (such as an accountant or attorney), then the agent must use reasonable skill in that profession. 

    Duty of Notification

    The agent must notify the principal of the agent's actions on behalf of the principal. Moreover, the agent must notify the principal of any information that the principal would find important. This is important because the law presumes that the principal is aware of all information revealed or disclosed to the agent. 

    Duty of Obedience

    The agent must follow the lawful instructions and directions of the principal. However, this extends only to reasonable instructions. For example, attorneys are considered agents of their clients. Yet an attorney is not required to comply when a client tries to dictate courtroom tactics. The attorney must allow the client to make major decisions about the representation (i.e., how to plead, whether to settle, etc.), but the attorney is given leeway in how best to execute those decisions. 

    Duty of Accounting

    The agent must keep accurate financial records, take receipts, and comply with generally accepted business practices.

    Duty of a Principal to the Agent

    When a principal agrees to let another act on his or her behalf, the principal owes certain duties to that agent. If the principal fails to comply with these duties, the agent can bring suit against the principal on contract or tort theories. Moreover, the agent can refuse to continue to represent the principal if the principal has breached the duties mentioned below.

    Duty of Compensation

    Because the agent is performing services on behalf of the principal, the agent is entitled to compensation for those services. The contract that created the agency will usually specify how payment is to be made. If there is no agreement, courts will hold that the principal must pay a customary and reasonable fee. 

    Duty of Reimbursement

    Subject to the terms of the agency agreement, the principal has the duty to reimburse or indemnify the agent for funds spent in the reasonable performance of the agent's duties. If an agent travels in order to fulfill the responsibilities of the agency agreement, the principal must reimburse the agent for the cost of the trip. 

    Duty of Cooperation

    The principal owes a duty of cooperation with the agent. The principal must assist the agent in the performance of the agent's duties and cannot do anything to interfere with the reasonable conduct of the agent. By way of example, if I hire a real estate agent to sell my house, I have to make my home available to show when the agent lines them up. 

    Contract Liability in Agency Relationships

    Questions frequently arise when we have to determine if the principal and/or agent are liable for breach of contract or for torts. To answer these questions, we must first classify the principal and then decide whether the principal authorized the actions of the agent. 

    Classification of the Principal

    Principals are classified as disclosed, partially disclosed, or undisclosed. A disclosed principal is one whose identity is known by the third party when the agent entered into the contract. A partially disclosed principal exists when the third party knows that there is a principal, but does not know the identity of the principal. Finally, if a third party does not know that an agent is working on behalf of another, the principal is classified as an undisclosed principal. 

    Authorized Acts

    When an agent acts within the scope of authority, the principal will normally be required to perform the contractual obligations entered into by the agent. The classification of the principal, however, may determine whether or not the agent is also liable under the contract.

    A disclosed or partially disclosed principal is liable to third parties for contracts made by an agent acting within the scope of authority. If the principal is disclosed, the agent has no liability to the third party. If the principal is partially disclosed, the agent is treated as a party to the contract and can be held liable for nonperformance by the principal. If the principal is undisclosed, the agent and the principal are held liable for nonperformance. 

    Unauthorized Acts

    If the agent was acting without authority, the principal is never held liable for the contract terms. In general, the agent will be liable. If the principal is disclosed or partially disclosed, the agent is liable to the third party only if the third party relied on the agency status. If the third party knows that the agent does not have authority, the agent is not personally liable (but seriously, when would this happen...if you knew that the agent had no authority, would you really enter the contract?).

    Tort Liability in Agency Relationships

    A key thing to remember here is that everyone is liable for their own tortious conduct. If I slap you in the face, the fact that I'm the agent of your former significant other is of little consequence...you still sue me for battery. But for good measure, the law will also allow you to sue your ex. 

    Liability for Agent's Negligence

    A principal may be liable for the negligent acts of an agent (i.e., an employee) under the theory of respondeat superior, a Latin phrase meaning "let the master respond." This theory is the basis for vicarious liability, allowing an employer to be held liable for acts of employees due to the relationship between the parties. In essence, the law generally holds the employer liable for the acts of the employee within the scope of employment even though the employer did nothing wrong.

    A key in the analysis here is whether or not the agent's/employee's negligent act was committed within the scope of employment. You need to ask yourself whether or not the negligent act was part of their job duties. To help in this analysis, courts look to the following:

    1. Did the employer authorize the employee's actions?
    2. Did the act occur within the time and space limits of the employment?
    3. Was the act performed on behalf of the employer?
    4. Did the employer provide the tools that were used when the act occurred?
    5. Did the employee use force beyond the scope regularly used?
    6. To what extent were the employer's interests (or employee's interests) advanced by the act?
    7. Did the act involve a serious crime?

    Let's bring Lin-Manuel Miranda back into this. Assume that Lin-Manuel is hired by Stan's Donuts to drive to Rexburg and sell donuts to college students.

    If Lin-Manuel negligently hits your roommate while crossing the street over by Cafe Rio, both he and Stan's Donuts are liable for the injuries of your roommate. But what if Lin-Manuel hits my cat (assuming I [shudder] owned a cat) up by the temple because Lin-Manuel wanted to see the temple before selling food downtown as he was instructed to do?

    A key to analyzing this situation involves the concept of "detour" and "frolic." Like so much of our legal system, we owe these phrases to the English judges that bequeathed their legal systems upon us. In essence, a judge in the 1800s said that if the employee was on a mere "detour" from the mandated route, then the employer was liable. If, on the other hand, the employee was on a "frolic of his own" and in no way "on his master's business," the master was not liable. 

    Liability for Independent Contractor's Negligence

    The general rule is that in the absence of an agency relationship, an independent contractor's negligence does not create liability for the business/entity that hired the independent contractor. In other words, the doctrine of respondeat superior and vicarious liability does not apply to independent contractors. One well-known exception to this general rule involves inherently dangerous activity. For example, if BYU-Idaho was to hire a company to use dynamite to blow out lava rock in an effort to build a new non-hideous business building, BYU-Idaho cannot avoid liability by using an independent contractor to perform the work.

    This content is provided to you freely by BYU-I Books.

    Access it online or download it at https://books.byui.edu/BUS_375/introduction_to_agen.