Unit VI: Agency/Chapter 36. Unit VI: Agency. Chapter 36: Agency

Transcription

1 330 Unit VI: Agency Chapter 36: Agency In business as well as in our personal lives, it is often necessary to have others act on our behalf in order to carry out routine tasks that we may not have the time or expertise to perform ourselves. An entrepreneur might go into business for herself and initially perform all of the required tasks personally while the enterprise is in its early stages. But if the business is successful and the owner wants to expand her operations, it will be impossible for her to do so without hiring additional help to take on some of the responsibilities of the expanding venture. As new employees are hired, they become agents of the owner and are empowered by her to carry out certain tasks in her place. To put it another way, the owner of a business delegates some of her responsibilities to agents whom we normally call employees and empowers these agents to act on her behalf in accordance with the terms of employment. Thus, a used car salesman hired by the owner of a used car lot is empowered to sell cars on the owner's behalf, and can bind the owner to sales contracts he enters into with third parties (used car buyers). Similarly, an individual can authorize another to act as his agent for the purpose of carrying out any legal task by executing a valid power of attorney. In both of these instances, if the agent acts on behalf of the principal (the person on whose behalf the agent acts) with the principal's authority, the acts of the agent bind the principal exactly as if the principal had acted herself. This simple principle forms the basis of agency law, and is of critical importance to the formation of the business organizations we will discuss in the next unit (partnerships, limited partnerships, corporations and limited liability companies). 330

2 331 Chapter 36: Agency In this chapter, we will explore the basic principles of the law of agency and discuss its application in employment relationships. Agency is a consensual relationship that comes into existence when one person authorizes another to act on his behalf to conduct some lawful business. An agent acts as a stand-in for the person she represents (called the principal) and is empowered to conduct most any legal business on the principal's behalf. When a duly authorized agent acts on behalf of a principal, it is as if the principal had acted herself. Creation of an Agency Agency is a consensual relationship. As such, it requires the principal to have the mental capacity to enter into a contract with the agent. Incompetents and minors, therefore, can disaffirm agency agreements, and judicially declared incompetents cannot enter into agency agreements at all (the same rules apply as to contractual capacity). Interestingly, there is no requirement that the agent be competent. In most states, any person may be an agent, including incompetents and children. Principals are free to choose whomever they wish to act on their behalf, and this includes persons lacking full mental capacity. Generally speaking, no formalities are necessary for the creation of a valid agency. Oral instructions as well as written ones can lead to the creation of an agency. The only exception is when the agent is empowered to take some action on the principal's behalf that will require a written, signed contract to be executed by the agent under the requirements of the statute of frauds. In such instances, the agency agreement must also be represented by a signed writing if it is to be enforceable. This requirement is referred to as the equal dignities rule. Simply stated, the equal dignities rule requires that an agency agreement conform to the same formalities as any agreement that the agent will subsequently enter into on the principal's behalf. Thus, if a principal hires an agent to purchase real estate, the agency 331

3 332 agreement must be evidenced by a signed writing, since a contract for the purchase of realty requires a signed writing. Perhaps the most common means of creating an agency relationship is by the execution of a power of attorney, whereby the principal authorizes the holder of the power of attorney (called the attorney-in-fact) to act as his agent with respect to matters specified in the power of attorney. (See Figure 35.1 for an example of a power of attorney.) Agent's Authority Agents may act on behalf of their principals in accordance with theirunder the aegis of actual or apparent authority will bind their principals to contracts entered into on their behalf. An agent acts with actual authority if he acts pursuant to the express or implied instructions of his principal. Actual express actual or apparent authority. Agents who act authority can be found in any oral or written instructions given the agent by his principal, while implied actual authority includes any reasonable steps that an agent takes in order to carry out the express authority granted by the principal. For example, if Peter Principal instructs Angela Agent to purchase a used Japanese-built automobile with less than 70,000 miles for a price not to exceed $5,000, Angela would have the express authority to purchase any vehicle in her discretion that meets the conditions expressed by the principal. In addition, Angela would have the implied authority to take any steps reasonably necessary to carry out her instructions. Under this example, Angela could purchase a 2003 Toyota Corolla with 50,000 miles for $5,000, since doing so would clearly come within her actual express authority. She could also pay the required taxes and registration fee for such a vehicle and arrange its transportation at a commercially reasonable cost; her authority to perform these tasks would be implied from her express authority, since it is commercially reasonable (necessary, in fact) to pay sales taxes and registration fees and to transport an automobile after its purchase. In determining an agent's implied authority, one must look to the actual express authority granted by the principal. Any steps that are reasonably required for the agent to carry out the actual express authority granted by the principal will generally be deemed to have been implicitly authorized by the principal. For example, the express authority by the principal who hires an agent to act as general manager of her business enterprise would include the implied authority to hire, train, supervise and fire employees, as well as to contract for necessary services--all of which are implicitly necessary for the agent to carry out the expressly granted authority to manage the business. 332

4 333 Power of Attorney STATE OF NEW YORK COUNTY OF NASSAU KNOW ALL PERSONS BY THESE PRESENTS: Pamela Principal, hereinafter referred to as PRINCI- PAL, does appoint Arnold Agent her true and lawful attorney. In principal's name, and for principal's use and benefit, said attorney is authorized hereby: (1) To demand, sue for, collect, and receive all money, debts, accounts, legacies, bequests, interest, dividends, annuities, and demands as are now or shall hereafter become due, payable, or belonging to principal, and take all lawful means, for the recovery thereof and to compromise the same and give discharges for the same; (2) To buy and sell land, make contracts of every kind relative to land, any interest therein or the possession thereof, and to take possession and exercise control over the use thereof; (3) To buy, sell, mortgage, assign, transfer, and in any manner deal with goods, wares and merchandise, choses in action, certificates or shares of capital stock, and other property in possession or in action, and to make, do, and transact all and every kind of business of whatever nature; (4) To execute, acknowledge, and deliver contracts of sale, escrow instructions, deeds, leases including leases for minerals and hydrocarbon substances and assignments of leases, covenants, agreements and assignments of agreements, mortgages and assignments of mortgages, conveyances in trust, to secure indebtedness or other obligations, and assign the beneficial interest thereunder, subordinations of liens or encumbrances, bills of lading, receipts, evidences of debt, releases, bonds, notes, bills, requests to reconvey deeds of trust, partial or full judgments, satisfactions of mortgages, and other debts, and other written instruments of whatever kind and nature, all upon such terms and conditions as said attorney shall approve. Giving and granting to said attorney full power and authority to do all and every act and thing whatsoever requisite and necessary to be done relative to any of the foregoing as fully to all intents and purposes as principal might or could do if personally present. All that said attorney shall lawfully do or cause to be done under the authority of this power of attorney is expressly approved. Signed before me this 3 rd day of April, 2009: Pamela Principal (L.S.) Notary s Signature: Nathan Notary Notary Public State of New York Commission Expires April 1, 2010 Figure 36.1: Sample Power of Attorney 333

5 334 Agent's Apparent Authority Like implied authority, and agent has apparent authority that flows directly from an express grant of actual authority by the principal. Apparent authority can be defined as the authority that an agent seems (or appears) to have to a reasonable person under the circumstances based upon the nature of the agency. Such authority generally flows from the customs and practices of an industry or the general assumptions about a person's position that a reasonably prudent person might make. For example, since it is generally true that the director of human resources has the power to hire new employees, an interviewee who is offered a job by a company's director of human resources can accept such an offer and bind the principal to honor it even if the specific HR director was not authorized by management to make employment offers. The same is true of contracts entered into by employees who have been fired on behalf of their previous employers unbeknownst to innocent third parties with whom they deal. If, for instance, the purchasing manager for XYZ Company enters into a milliondollar equipment purchase contract the day after he is fired by XYZ, the company would be bound by the contract unless the supplier with whom the ex-purchasing manager contracted was aware of the employee's lack of actual authority. After an agency terminates, ex-agents have apparent authority to bind their principals until the principal lets third parties who have dealt with the agent in the normal course of business know that the agency has terminated. With regard to third parties who have dealt with the agent in the past, the principal must provide actual notification of the agency s termination, and such notification is generally effective when it is received by the third party. Therefore, if Peter Principal fires Angela Agent, Angela s implied authority continues until every person with who she has dealt as Peter s agent is given actual notice that the agency has terminated or learns of that fact by independent means, such as by actually reading a legal notice in the newspaper that states Angela is no longer Peter s agent. Persons who may have been aware of the agency but who did not deal with Angela directly can be given constructive notice of the termination of the agency by publication of a legal notice in a newspaper of general circulation in the geographic area or areas in which Angela acted as Peter s agent. Constructive notice will effectively destroy an agent s implied authority to bind her principal with respect to third parties who have never dealt with the agent, but not with regard to third parties with whom the agent has dealt as an agent for her principal. The termination of an agency by operation of law (covered below) automatically terminates all authority by the agent, including apparent authority. Agency by Estoppel There are instances in which a principal who has not actually empowered an agent to act on his behalf can be bound by acts of the agent under an estoppel theory. If the principal misleads a third party into believing that a person who is not an agent is in fact the principal's 334

6 335 agent, then the principal will be unable to disavow acts of the purported agent. For instance, if a sole proprietor leads an innocent third party to believe that a specific person is his agent when no actual agency exists, any contracts entered into by the third party with the purported agent in reliance on the principal's misrepresentations will bind that principal as if the purported agent were in fact a duly authorized agent. Note, though, that a purported agent s misrepresentations will not bind the principal unless they are made in the presence of the principal who does not disavow them. The following examples will illustrate. Arnold misrepresents himself to be Paula s new purchasing agent to Tom, an innocent third party, in the presence of Paula who does not correct Arnold s misstatement. Arnold subsequently sends Tom, a wholesaler, a written order for $100,000 worth of electronics equipment for resale in Paula s business. If Paula rejects the shipment when it arrives, Tom is entitled to sue her for damages, including his lost profits and shipping and insurance costs, as Tom had apparent authority to order the goods as Paula s purported agent. Archibald, an unemployed charlatan, tells Tina that he is a new partner in the accounting firm of Adam, Bloom and Chang, P.C., a prestigious small firm in Tina s city. Tina, believing his assertions, pays him a sizable retainer for his purported firm to handle her company s payroll and maintain her books. If Archibald cashes the check and skips town, Tina has no recourse against Adam, Bloom and Chang, P.C., as the firm did not mislead her. She did not verify Archibald s statements with the firm and the firm is not responsible for allowing her to be misled by the false statement. Termination of an Agency An agency can be terminated in one of three ways: by the consent of the parties, by the completion of the agency purpose or expiration of the agency period, or by operation of law. Termination by Consent of the Parties: generally speaking, an agency can be terminated at any time by the mutual consent of the principal and agent, or by the unilateral wish of either party. This is generally true even in cases where a contract exists between the parties that prevents an agency from being dissolved or states that the agency will run for a specified period of time. If an agency is wrongfully terminated by one of the parties unilaterally, damages may be available to the aggrieved party for breach of contract. Thus, if an agent agrees to serve as agent for a principal for a period of five years and quits at the end of the first year, the principal may be able to recover compensatory damages which would include the difference between what he would have paid the agent under their agreement and what he must pay a replacement agent for the remaining period in the breached agency agreement along with incidental and consequential damages, such as the cost of conducting an employment 335

7 336 search to replace the agent. But the agency itself will be effectively terminated upon the wish of either the principal or the agent. Termination by Completion of Agency Purpose or Expiration of Agency Period: an agency automatically terminates upon the completion of its stated purpose when the agency is entered into in order to complete a single purpose. For example, an agency that is created for the purpose of the agent purchasing a specific piece of real estate for the principal automatically expires when the agent completes his assigned task. Likewise, an agency that is set up to expire after a set period of time or upon the happening of a given event automatically terminates when the specified time period expires or the specified event happens. Termination by Operation of Law: an agency automatically terminates by operation of law upon the death, incompetence or bankruptcy of the principal, or upon the death of the agent. (Note that the incompetence or bankruptcy of the agent do not necessarily terminate an agency.) Subsequent illegality and impossibility of performance also cause an agency to be terminated by operation of law, since the purpose of the agency cannot be fulfilled. If the impossibility of performance or illegality are only temporary, then the agency resumes as soon as the impediment to the completion of the agency purpose if fulfilled. For example, if XYZ Corp. hires Adam Agent to purchase electronics goods from a specific country for resale in the U.S. during the next five years at a set salary and Congress places an embargo on that country for alleged civil rights abuses a year after the contract was entered into, the agency terminates by operation of law. But if Congress removes the sanctions a year later because of an improvement in that country's civil rights record, then the agency would resume for the remaining three-year period called for in the original agreement. Principal's Duties in an Agency Agreement A principal owes certain duties to the agent in every agency. These include the duty to compensate the agent for her services (unless compensation is waived by the agent), the duty to indemnify the agent for any reasonable costs incurred or losses suffered as a result of the agency, and the duty to cooperate with the agent in carrying out the purposes of the agency. In addition to these duties that arise by operation of law in every agency, the principal can have other duties specified in the agency agreement. A principal who breaches any duty owed his agent will be liable to the agent for damages. Duty to Compensate Agent: unless it is clear that a gratuitous agency was intended, the agent is entitled to be compensated for her service to the principal. If compensation is not discussed, the agent is entitled to compensation for the reasonable value of the services rendered. Duty of Reimbursement and Indemnification: an agent will often need to spend money on behalf of the principal in order to carry out the duties of the agency. If these expenditures are reasonable and necessary to further the interests of the principal, the agent is entitled to reimbursement from the principal for these expenses upon giving an accounting of them. In addition, agents can sometimes suffer personal losses while engaged in the business of the 336

8 337 agency. As long as these losses were reasonably foreseeable by the principal at the time of entering into the agency and were not caused by the willful acts of the agent, the agent is entitled to indemnification for such losses. For example, if an agent is injured through the fault of a third party or though his own negligence while conducting agency business, the principal must indemnify the agent for all medical expenses and related losses flowing from the injury. Likewise, an agent whose personal property is damaged or destroyed while carrying out agency business is generally entitled to indemnification by the principal for such losses. Duty of Cooperation: a principal must render any reasonable assistance necessary to allow the agent to carry out the responsibilities of the agency. This duty extends to providing the agent with any necessary information or resources needed to perform the assigned agency duties, and also includes a duty of the principal not to interfere with the agent while the agent attempts to carry out the duties of the agency. Agent's Duties in an Agency Agreement Like the principal, the agent has certain obligations that flow from the agency agreement by operation of law and by the express terms of the agency agreement. The agent's duties arising by operation of law include the duty of loyalty, the duty of obedience, the duty to inform the principal of relevant facts relating to the agency learned by the agent, the duty to exercise due care in carrying out the responsibilities of the agency and the duty to render an accurate accounting of expenses or income received by the agent in conducting the principal's business. Duty of Loyalty: the duty of loyalty requires that the agent place the interests of the principal above his own, and requires the agent to deal honestly and in good faith in carrying out his duties as assigned by the principal. Agency is a fiduciary relationship (a relationship based on trust in which the agent must exercise absolute good faith in his dealings on behalf of the principal). An agent can breach the duty of loyalty in a number of ways, including through the obvious means of stealing or misappropriating funds from the principal, and the much more subtle means of competing with the principal or using information learned by means of the agency relationship to further his own interests rather than those of the principal. An agent cannot even keep gifts (or illicit bribes, for that matter) received by him in the normal course of conducting agency business on the principal's behalf; such gains are considered the rightful property of the principal and must be turned over to the principal by the agent who receives them. Duty of Obedience: the agent's duty of obedience to her principal requires her to follow the reasonable instructions of the principal relating to the agency. Failure to do so will subject the agent to liability for any resulting loss suffered by the principal. 337

9 338 Duty to Communicate to the Principal Relevant Information Learned About the Agency: a principal is deemed to have constructive knowledge of any relevant information that the agent learns during the course of performing her duties under the agency. Because relevant information learned by the agent is presumed as a matter of law to be known by the principal, agents must communicate any relevant information they learn relating to the agency to their principals immediately. If they fail to do so, they can be held personally responsible for any losses suffered by the principal as a result of their failure to disclose the relevant information. Duty to Exercise Due Care in Conducting Agency Business: agents must exercise the duties of their agency with reasonable care. Failure to do so can result in tort liability for negligence. Agents who have special skills, such as attorneys, physicians or architects, must exercise a level of professionalism and expertise that is acceptable in their profession; failure to do so can result in liability for malpractice. Duty to Render an Accounting: agents must keep accurate records of expenses incurred on behalf of their principals for which they are entitled to reimbursement or indemnification, as well as of any income or other benefit derived from the agency to which the principal is entitled. Agents must render a formal accounting to their principals from time to time, whenever an accounting is reasonably requested by the principal or as otherwise provided by the agency agreement. Liability of Principal for Agent's Torts Principals are liable for the torts committed by their agents during the scope of their agency. The agent, of course, is also liable for his own torts with regard to third parties whom the agent injures while engaged in agency business. In order for the principal to be held liable for the agent's torts, two tests must be met: 1. there must be a master-servant relationship, wherein the agent is under the direct control of the principal (e.g., the agent must be an employee of the principal); and 2. the tort must have been committed by the agent while engaged in conducting agency business. If, for example, an innocent person is injured by the driver of a delivery truck while making a delivery, the injured person can hold the driver's employer liable for the injuries suffered. But not so if the driver injures someone while driving his own car on the way to work, since he would not at that time have engaged in conducting agency business. Independent contractors are not deemed agents of their employers, but rather are deemed to be self employed and solely responsible for their own torts. In determining whether a given person is an employee or an independent contractor, courts weigh a number of factors, including the level of control exerted by the principal over the details of the work performed by the person, the number of hours worked by the person on the principal's behalf every week, whether the person has other clients, and whether the person exerts independent judgment in carrying out her duties. Thus, a gardener who works for the Jones family two hours per week and has 20 other clients in the area is not an employee, but rather an inde- 338

10 339 pendent contractor, but a gardener who works exclusively for the Jones family for 20 hours per week and has no other clients probably is an employee; the difference can be crucial if the gardener injures himself or someone else during the course of his employment, for the Jones family would not be responsible for such injuries in the former case but would be liable for them in the latter. Liability of Agents for Contracts Entered into on the Principal's Behalf Agents are not generally personally liable for contracts they enter into on behalf of their principals within the scope of their authority. When an authorized agent enters into a contract on behalf of a principal, it is as if the principal had entered into the contract personally. The agent is merely a facilitator and not a party to the contract. A problem arises, however, when agents enter into unauthorized contracts and when agents act on behalf of principals who wish to keep their identities secret from the other contracting parties. In such instances, the agent may be solely liable under the resulting contract, or may be jointly liable with the principal, depending on the circumstances. Agent s Unauthorized Contracts If an agent enters into a contract with a third party on behalf of a principal without having either actual, implied or apparent authority to do so, the principal is not bound under the resulting agreement, and the agent is personally liable under the contract. For example, if Alec Agent is authorized by Pancho Principal to bid up to $100,000 at auction for a piece of unimproved real estate and Alec bids $120,000 on the property, Pancho is not bound by the resulting agreement, since Alec acted without express or implied authority, but Alec is bound by it and is liable to the third party with whom he contracted (e.g., the auctioneer) for breach of contract if he does not purchase the land at the agreed-upon price. Principals are free to honor unauthorized contracts entered into by their agents if they choose, but are under no obligation to do so. If a principal elects to honor an unauthorized contract entered into on his behalf by an agent, he ratifies the agreement and is afterwards bound by it. Ratification involves an affirmance by the principal of a previously unauthorized act by the agent. Once an unauthorized contract is ratified by the principal, the agent is no longer liable under it, since the liability for performing the contract is assumed by the principal upon its ratification. Agent's Authorized Contracts on Behalf of a Fully Disclosed Principal An agent has no liability for authorized contracts entered into on behalf of a fully disclosed principal. A principal is fully disclosed when the party with whom the agent deals on the principal's behalf is aware that the agent is acting as an agent for a particular principal 339

11 340 and is aware of the principal's identity. As previously noted the agent in such instances is merely a facilitator and does not become a party to the contract. If either the principal or the third party subsequently breaches the contract, they can only sue each other (and not the agent) for the breach. Agent's Authorized Contracts on Behalf of a Partially Disclosed Principal When a partially disclosed principal is involved, the agent discloses to the third party with whom she is contracting that she is acting on behalf of a principal but refuses to disclose the identity of the principal. Such contracts are common in instances where the principal fears that the third party might be unwilling to deal with him, or where the identity of the principal might drive up the price of the contract if it were known. In such contracts, both the principal and the agent have joint liability and both can be sued if the contract is breached. Agent's Authorized Contracts on Behalf of an Undisclosed Principal In contracts involving an undisclosed principal, the third party with whom the agent contracts is unaware that the agent is acting on behalf of a principal. As far as the third party is concerned, the agent acts solely on his own behalf and is thus personally liable for the performance of the contract if the undisclosed principal fails to perform. If the third party later learns of the undisclosed principal's identity, the third party may hold both the agent and the undisclosed principal liable under the contract. QUESTIONS 1. What is agency? 2. What formalities are necessary in order to enter into an agency agreement? 3. How does the equal dignities rule apply? 4. What are the three basic means by which an agency can be terminated? 5. What effect does the death of the agent have on an agency? The death of the principal? 6. What effect does the bankruptcy of the agent have on an agency? What about the bankruptcy of the principal? 7. What are the basic duties owed by a principal to an agent in every agency relationship? 8. What are the basic duties that all agents owe their principals? 340

12 What is the contractual liability of agents who enter into unauthorized contracts on behalf of their principals? 10. What is the agent's contractual liability in contracts entered into with third parties on behalf of disclosed principals? Partially disclosed principals? Undisclosed principals? HYPOTHETICAL CASES 1. Marsha asks Muhammad, a fellow student at State U who is a computer whiz, to purchase a computer for her that in his best judgment would best meet her needs. She tells him that he can spend up to $1,500 on a complete system, including an inexpensive printer. Muhammad, after many hours of research to put together the most cost-effective system at the lowest possible price for Marsha, places an order with Computer World on Marsha's behalf and asks that the complete system be shipped to Marsha. a. Is Muhammad Marsha's agent under the facts given? If so, does he need written authorization before he can purchase the system on Marsha's behalf? b. If Muhammad orders a system for $1,500 from computer World after identifying himself as Marsha s agent, is Muhammad liable on the contract if Marsha refuses the computer system when it is delivered? Explain. c. If Muhammad finds a $4,000 computer system on clearance for $2,000 and orders it for Marsha, who is liable on the contract if Marsha refuses to accept it when the system is delivered, assuming that there is no issue with the statute of frauds? Explain. 2. Assume the same facts as in the last question. a. If payment for Muhammad's services was not discussed when Marsha asked him to purchase the computer system, will Muhammad nevertheless be entitled to be paid for his services? Explain. b. If Muhammad purchases a system that is inappropriate for Marsha's needs, what recourse will she have? 3. Barbara hires Enrique as a consultant to set up and maintain her computer network. Enrique works at Barbara's business site approximately 5-10 hours per week and bills Barbara at a rate of $100 per hour for his work. He does not have an office in Barbara's place of business and is not on the payroll. He works unsupervised and sets his own schedule and hours on an as-needed basis. In addition to working for 341

13 342 Barbara, Enrique does consulting work for several other clients on an ongoing basis. a. Is Enrique an employee or an independent contractor? b. What practical difference does it make whether Enrique is an independent contractor or an employee? c. Would Enrique be considered an employee under the previous facts if he worked 20 hours per week for the past three years for Barbara and had no other clients? 4. Jasmine hires Jemal to run her business as general manager under a three-year contract. After six months, the parties have a falling out and Jemal gives Jasmine notice of his intention to resign from his position and expresses the willingness to stay on for up to 60 days to allow Jasmine to recruit a suitable successor. a. If Jasmine is unwilling to release Jemal from his contractual obligation, can she force him to stay on as her agent for the contractual three-year term? b. If Jasmine cannot convince Jemal to stay on as her general manager, what recourse does she have against him? Explain. c. Assuming that Jasmine can find several suitable replacements for Jemal for a lesser salary than she had agreed to pay him, what recourse will she have against Jemal? 342