Agency is a relationship based on an agreement authorizing one person, the agent, to act for another, the principal. For example an agent may negotiate and make contracts with third persons on behalf of the principal. Actions of an agent can obligate the principal to third persons. Actions of an agent may also give a principal rights against third persons.
The term agency is often used in other ways. For example, the term is used sometimes to show that a person has the right to sell certain products. A car dealer might be referred to as having an automobile agency. But the dealer is not an agent in the sense of representing the manufacturer.
Also, sometimes an agency relationship is created even if this term is not used. This question or situation has been the result of numerous Court actions. It is important to be able to distinguish agencies from other relationships that are similar. Control and authority are key factors in distinguishing ordinary employees and independent contractors from agents.
Employees: An ordinary employee is not an agent unless the employee was hired to represent the employer in dealings with third persons. It is possible, though, for the same person to be both an agent and an employee. It depends upon the authority given the employee. An example would be the authority to make contracts on behalf of the employer.
Independent Contractors: An agent or an employee is different from an independent contractor. A principal or employer has control over an agent or employee, but not over an independent contractor. A principal or employer does not have control over the work performance of an independent contractor. A principal or employer is not bound by the actions of an independent contractor.
The separate identity of an independent contractor may be concealed in such a way that the public believes that it is dealing with the principal. When this happens, the principal is liable for the negligence of the independent contractor. In the New Jersey case of Hill v. Newman[1], Hill purchased furniture from Grant Furniture. When Hill complained that the furniture was damaged, she was told by Grant’s that they would send someone to repair the damage. Newman, an independent contractor, was sent to repair the furniture. He identified himself to Hill as “the man from Grant’s.” The lacquer Newman put on the furniture exploded and seriously injured Hill. She sued both Newman and Grant. Grant claimed that Newman was an independent contractor and that Grant’s was not responsible for his conduct. The Court held for Hill stating that when the separate identity of an independent contractor is concealed by a business that makes it appear that the independent contractor is an employee of the business, the business is liable for the negligence of the contractor. Since Grant’s made it appear that Newman was its employee, Grant was liable to the same extent it would be liable if Newman had been Grant’s employee.
PURPOSE OF AGENCY
An agency can be created for the purpose of doing almost any act the principal could do. However, there are some acts that must be done in person and cannot be done by an agent. Examples would be: testifying in court for another individual, making a will, and voting.
WHO MAY BE A PRINCIPAL
Any competent person can be a principal and act through an agent. However, a person appointing an agent must be mentally and legally competent to appoint an agent. Otherwise, the appointment is voidable. Someone who had been declared NCM (i.e., mentally incompetent) by a Court cannot appoint an agent. A minor child cannot legally act through an agent appointed by the minor.
WHO MAY BE AN AGENT
A contract made by an agent is legally the contract of the principal. Therefore, it is irrelevant whether or not the agent had legal capacity to make a contract. A minor technically could act as an agent without hurting the enforceability of the contract. I don’t recommend this though.
CLASSIFICATION OF AGENTS
A general agent is authorized by the principal to transact all the affairs of a particular kind of business. For example, a person appointed as manager of a store is a general agent.
A special agent is authorized by the principal to handle a particular business transaction or perform a specific act. For example, a specific power of attorney appointing an agent (attorney-in-fact) to sell a particular piece of real estate or a certain car would be the appointment of a special agent.
A universal agent is authorized by the principal to do any act that can be delegated to a representative. An example would be giving a person a general power of attorney. A general power of attorney is often given to a family member by someone in the military who is going overseas. This would give the family member authority to handle any business until the person in the military returned home.
AGENCY COUPLED WITH AN INTEREST
An agent has an interest in the authority when consideration has been given or paid for the right to exercise the authority. For example, when a lender in making a loan is given, as security, authority to collect rents due to the borrower and to apply those rents to the payment of the debt, the lender becomes the borrower’s agent with an interest in the authority given to collect the rents.
An agent has interest in the subject matter when, for a consideration, the agent is given an interest in the property with which the agent is dealing. For example, when the agent is authored to sell property of the principal and is given a lien on the property as security for a debt owed to the agent by the principal, the agent has an interest in the subject matter.
CREATING THE AGENCY
An agency can come into being by appointment, conduct, ratification, or operation of law.
AUTHORIZATION BY APPOINTMENT
The usual method of creating an agency is by expressly appointing one person to act for another. This appointment may be oral; you can verbally appoint an agent. Some agency appointments have to be in writing. Most states require that agency appointments be in writing when the agent will be authorized to buy or sell land.
A written authorization of agency is called a power of attorney. The agent is referred to as an attorney-in-fact.
AUTHORIZATION BY CONDUCT
If the owner of a store places another person in charge, third parties (e.g., customers) may assume that the person in charge is the agent of the owner. In this case, person appears to outsiders to be authorized as an agent. The agent has apparent authority. The term apparent authority is used when:
- There is only the appearance of authority, but no actual authority; and
- The appearance of authority was created by the principal.
The test for the existence of apparent authority is whether or not the principal’s words or conduct would lead a third person to reasonably believe that the “agent” has authority. If the principal has restricted the “agent’s” authority, but a third person does not know of the restrictions, the principal can still be bound by the apparent agent’s actions toward the third person. The third person must reasonably believe that the agent has authority, or there is no apparent authority. If the basis for the third person’s belief in the authority is not reasonable, there is no apparent authority.
Edwards came to Sue’s house and showed her order blanks with the name Elco Corporation. Edwards told Sue that he was the agent for the Elco Corporation, and he then solicited orders from Sue for merchandise manufactured by Elco. He also accepted a cash deposit from Sue for her order. Edwards was not an agent of Elco, and the forms he had shown Sue were counterfeit. Sue sued Elco on the grounds that Edwards appeared to be the agent of Elco and therefore had apparent authority to bind Elco. Was Sue correct? No. Elco Shoe Mfgrs. v. Sisk, 260 N.Y. 100, 183 N.E. 191 (1932). Apparent authority arises only when the conduct of the alleged principal is responsible for causing the appearance of authority. Elco did not cause the appearance of authority in this instance.[2]
In a Washington case, Walker v. Pacific Mobile Homes[3] Walker owned a trailer that he wanted to sell. He took it to Pacific Mobile Homes. A fellow named Stewart introduced himself as a salesman for Pacific. Stewart was the only person on the premises, and this had been the case several other times Walker had been at Pacific. Stewart said that he would take possession of Walker’s trailer and try to sell it. Stewart filled out some forms of Pacific and later wrote Walker some letters that were on Pacific stationery. Stewart sold the trailer and skipped with the money. Walker sued Pacific. Pacific argued that Stewart had no authority to enter into a sales contract on behalf of Pacific. Also, Pacific argued that its salesmen were forbidden to sell used trailers for their owners. The Court held against Pacific and in favor of Walker. The fact that Stewart was apparently in charge whenever Walker went to Pacific gave Stewart the appearance of being able to sell trailers. Pacific should have watched over its sales lot more closely and kicked any trespassers like Stewart off. It was reasonable for Walker to believe that Stewart was not a trespasser. It was also reasonable for Walker to believe that Stewart had authority to sell trailers for Pacific.
AGENCY BY RATIFICATION
Suppose an agent tries to do an act for his principal that he is not authorized so to do; or suppose a person who is not the agent of another attempts to act as an agent anyway. Generally, the principal has the choice of ignoring the transaction or ratifying it. Generally, any unauthorized act may be ratified.
Intention to Ratify: Initially, ratification is a question of intention. It is a question of whether or not the principal intended to approve or ratify the action of the unauthorized agent. This intention may be expressed verbally or it may be demonstrated by the conduct of the principal. Examples of ratification:
- Paying for goods ordered by the agent.
- Performing the contract the agent made and accepting payment for performance of the contract.
A transaction by an agent may be ratified by the principal when the principal accepts the benefits of the unauthorized transaction. However, the principal must know what has happened.
Conditions for Ratification: The principal must have full knowledge of all material facts. If the agent conceals a material fact, any alleged ratification by the principal is not valid unless the principal knows of these facts. There can be no ratification when the principal does not know that his agent has made a contract. For example, a building owner’s agent and a contractor make unauthorized changes to an installation contract. If this is done without the owner’s knowledge, there is no ratification by the owner. (There might be an apparent agency problem though). However, it is not always necessary to show that the principal had actual knowledge. Knowledge will be imputed if a principal knows of facts which would cause a prudent person to inquire as to what is going on. The court may rule that the principal should have known what was going on and therefore will be held to have sufficient knowledge to ratify the agent’s acts.
Form of Ratification: A ratification may be oral. However, if a contract cannot be enforced unless it is in writing, it is generally held that the ratification of the contract must also be in writing. For example, if an agent makes a contract for the sale of land without authority, ratification must be in writing because of the statute of frauds.
Effect of Ratification: When an unauthorized action is ratified, the effect is the same as though the act had been originally authorized. The principal and the person the agent dealt with are bound by the contract made by the agent.
PROVING THE AGENCY RELATIONSHIP
The burden of proving the existence of an agency relationship is on the person trying to benefit from the possible agency. The person who is trying to bind the principal because of the actions of an alleged agent has to prove:
- The alleged agent was in fact the authorized agent of the principal; and
- The agent had authority to do the act in question.
For example, a buyer of a computer alleges that a seller’s agent breached an express warranty regarding the computer. The buyer must prove that the agent had actual or apparent authority to make the warranty. If the buyer can’t prove this, the jury must find that there was no agency.
AGENT’S AUTHORITY
A very important aspect of the law of agency deals with determining the scope of the agent’s authority.
SCOPE OF AGENT’S AUTHORITY
The scope of an agent’s authority may be determined from the verbal authorization of the principal to the agent, or it may be implied from things the principal says or does in relation to the agent, or from the customs of the trade or business in which the principal and agent are involved.
Express Authority: If the principal tells the agent to perform a certain act, the agent has express authority to do this act. Express authority can be indicated verbally or in writing. Example: I tell my office manager to purchase a new desk for me.
Incidental Authority: An agent has implied incidental authority to perform any act which is reasonably necessary to carry out the express authority given to the agent. For example, if the principal authorizes the agent to purchase goods and does not furnish the funds for the agent to pay for the goods, the agent has implied incidental authority to purchase the goods on credit. Our office manager has incidental authority to purchase office supplies like typing paper.
Customary Authority: An agent has implied customary authority to do any act that is customary in the business in which the principal and agent operate. For example, an agent who has express authority to receive payments from third persons has the implied authority to issue receipts. A general manager of a business has the power to make any contract that is necessary for the usual and ordinary conduct of the business.
Apparent Authority: A person has apparent authority as an agent when the principal, by his words or conduct, leads a third person to reasonably believe that the person/agent has the authority that the agent appears to have, and the third person relies on this appearance of authority. The question of apparent authority is probably the most litigated question in agency law.
EFFECT OF PROPER EXERCISE OF AUTHORITY
When a duly-authorized agent makes a contract with a third person on behalf of the principal, there is a binding contract between the principal and the third person. The agent is not a party to this contract. In a situation where the owner of goods being sold is the principal, the owner’s agent is not liable to the buyer for a breach of warranty claim with respect to the goods sold by the agent. This is because the owner, and not the agent, was technically the seller in the sales transaction.
Smith was agent for the Acme Sportswear. He contracted on behalf of Acme to provide the City High School football team with 60 “game “jerseys. The jerseys delivered to the school were of such poor quality that they were clearly not fit for the purpose of serving as “game” jerseys. The School Department sued Smith, the person who sold them the jerseys, for breach of warranty. Judgment for Smith. The contract for the jerseys was between Acme and the high school. Even though Marks called on the school and sold the jerseys to school personnel, he was authorized to do so as an agent for Acme. As an agent he is not a party to the contract and is not liable for breach of warranty. The principal, Acme, is liable for breach of warranty since it was the seller in the transaction.
DUTY TO ASCERTAIN EXTENT OF AGENT’S AUTHORITY
A third person who deals with a person claiming to be an agent cannot rely solely upon the statements made by the agent concerning the extent of the agent’s authority. If the agent is not authorized to perform the act in question, or is not even the agent of the principal, the transaction between the alleged agent and the third person will have no legal effect between 0the principal and the third person.
Third persons are under a legal obligation to find out the extent of the agent’s authority. For example, the third person could call the principal to verify the extent of the agent’s authority and then confirm this authority in a letter to the principal. The letter could be later used in evidence if a dispute arises with regard to the agent’s authority.
Agent’s Acts Adverse to Principal: The third person is under an obligation to take notice of any acts that are clearly adverse to the interests of the principal. For example, if the agent is obviously making use of funds of the principal for the agent’s personal benefit, people dealing with the agent should recognize that the agent may be acting without authority.
LIMITATIONS OF AGENT’S AUTHORITY
A person who has knowledge of a limitation of an agent’s authority cannot disregard this limitation.
Obvious Limitations: In some situations, it will be apparent to third persons that they are dealing with an agent whose authority is limited. When third persons know that they are dealing with an officer of a private corporation or a representative of a governmental agency, they should recognize that such a person will ordinarily not have unlimited authority.
Loyalty: An agent must be loyal or faithful to the principal and must not obtain any secret profit or benefit from the agency.
In the Pennsylvania case of Kribbs v. Jackson,[4] Kribbs owned real estate that had been leased through his agent, Jackson, at a monthly rental of $275.00. When this lease terminated, Jackson and a third person, Solomon, made an agreement that if Solomon obtained a new tenant for a rental of $500.00 a month, Jackson would pay Solomon $100.00 a month. Solomon did obtain a new tenant who paid a monthly rental of $550.00. Jackson continued to send Kribbs $275.00 a month, less his usual commission and janitor and utility costs. He paid Solomon $100.00 a month, and then kept the balance of the rental for himself. When Kribbs learned about this arrangement three years later, he sued Jackson for the money Jackson had kept for himself and for the money which Jackson had paid Solomon. Jackson argued that Kribbs accepted the $275.00 per month and had been satisfied. Jackson argued that the additional funds were the sole result of Jackson’s “entrepreneurship.” The Court held in favor of Kribbs. The Court stated that an agent must account to the principal for all profits secretly made in an agency transaction and for all sums of money the agent improperly permitted third persons to receive in connection with such transactions.
In the Illinois case of Allen Industries v. Sheldon Company[5] Joan Kulwin owned Allen Industries. Allen Industries owned a commercial building in Evanston, Illinois. Kulwin granted to the Sheldon Company the exclusive right to sell the building and agreed to pay a commission to Sheldon upon the sale. This commission was to be divided in half between Sheldon and a cooperating broker, should the cooperating broker secure a purchaser. On August 21, 1985, Sheldon Company presented Kulwin with a written offer in final contract form from J. W. Collier. Kulwin rejected this offer of $335,000.00 and made a counteroffer of $350,000.00. On August 22, Collier accepted the counteroffer. The contract called for the seller to finance part of the transaction by taking back a mortgage for $249,000.00 from Collier. Kulwin later found out that Maurice Leviton, the president of TLC Company, on August 16, 1985, advised Sheldon that he was preparing an all-cash offer on the property. He made this offer to Sheldon on August 22, and it was rejected by Sheldon since Kulwin had accepted Collier’s offer at this point. Kulwin sued Sheldon for breach of fiduciary duty since he failed to inform her of all facts material to the sale. Kulwin argued that Sheldon failed to inform her of TLC’s communications because Sheldon did not want to share half the commission with the broker who showed TLC the property. The Court held in favor of Kulwin. The Court held that as of August 21, when Kulwin was presented with Collier’s offer by Sheldon, Sheldon knew that TLC’s president had inspected the premises and was preparing a cash offer. Since these facts might have influenced Kulwin in accepting or rejecting Collier’s offer, these were material facts that the agent had a duty to disclose to Kulwin. An agent who breaches the fiduciary duty to the principal is barred from recovery for services. Thus, Sheldon lost his commission.
An agent cannot act as an agent for both parties to a transaction unless both parties know that the agent is acting in a dual capacity and agree to the agent acting in this manner. For example, it is common for one attorney to close residential real estate transactions. However, both parties have to agree to this, and usually do.
An agent is not to accept secret gifts or commissions from third persons in connection with the agency. If the agent does this, the principal may sue the agent for the gifts or commissions.
Obedience and Performance: An agent is under a duty to obey all lawful instructions. An agent, who does not, is liable to the principal for any harm caused. For example, if an agent is instructed to only accept cash payments, but the agent accepts a check for payment, the agent is liable for any loss caused to the principal if the check is not honored (“bounces”).
Reasonable Care: An agent has the duty to act with care that a reasonable person would exercise under the circumstances. Also, if the agent possesses a special skill, such as an attorney or a broker, the agent must exercise this skill.
Accounting: An agent must account to the principal for all property or money belonging to the principal that comes into the agent’s possession. The agency agreement may state, and should state, the intervals that these accountings should be made or the dates on which they should be made.
An agent should keep the principal’s property and money separate from his own. For example, an attorney handling a real estate transaction should keep any funds of the buyer, seller, and lender in a separate trust account. If money of the principal and the agent become mixed, the agent is liable for any loss that occurs.
Information: It is the duty of an agent to keep the principal informed of all facts that are relevant as far as protecting the principal’s interests. In other words, the agent has a fiduciary duty to his principal.
TERMINATION OF AGENCY
An agency may be terminated by either the principal or the agent. It also may be terminated by operation of law.
TERMINATION BY ACT OF PARTIES
Expiration of Agency Contract: The agency may expire in accordance with the terms of the contract that created the agency. The contract may provide that agency shall last for a certain period of time – five years for example. It may state that the agency will last until a particular event happens – such as sale of a certain piece of real estate.
In the above two examples the agency will expire when:
- the period of time passes (five years); or
- the event occurs (e.g., the real estate is sold).
If no period of time is stated in the agency agreement, it will expire after a reasonable period of time – it may be terminated by either party. A better way of stating this is that if no period of time is stated, the agency will continue for a reasonable period of time, but it may be terminated at the will of either party.
Revocation by Principal: Any revocation by the principal must be clearly expressed. The intent to revoke must be clearly expressed. In Kinmon v. King Auction Co.,[6] a 1973 Alabama case, Kinmon owned a summer home he wanted to sell at auction. He hired King Auction Co. to make the sale. Kinmon later complained about King’s efforts. King sold the property to the highest bidder for $35,000.00. Kinmon had expected twice that much and refused to convey title or pay King’s commission. King sued Kinmon. Kinmon claimed that he had revoked King’s authority to sell the property. The Court held in favor of King Auction Co., stating that King’s authority had not been revoked by Kinmon. No revocation was made by the expression of dissatisfaction made by Kinmon of King’s work. The intent to revoke must “be clearly and unequivocally expressed.”
When the agency is based on a contract with the agent for a specified time, the principal is liable to the agent for damages if he discharges the agent without just cause. However, even if the principal terminates the agency without just cause, the agency is still terminated. The principal has the power to terminate the agency by discharging him, but not the right to do so.
If the agency agreement states that it can be terminated by either party at any time with or without cause, it is an agency at will. In this type of agency relationship, the agent has the right as well as the power to terminate the agency at any time. In any event, the agent has the right to terminate the agency if the principal is guilty of misconduct. If the agency contract states that it is to last for a specified period of time, the agent has no right to terminate the agency if the principal is not guilty of misconduct. If the agent wrongfully terminates the agency, he can be liable to the principal for damages.
TERMINATION BY OPERATION OF LAW
Anything that makes one of the parties to the agency contract unable to perform his duties will cause the agency to be terminated by operation of law:
- Death: The death of either the principal or the agent will generally cause the agency to be automatically terminated.
- Insanity: The insanity of either the principal or the agent will ordinarily terminate the agent’s authority.
- Bankruptcy: Bankruptcy of either the principal or the agent usually terminates the agency.
- Impossibility: An agent’s authority is terminated if it becomes impossible for the agent to perform his duties. For example, if an agent is appointed to sell a house for his principal, and the house burns down, the agency is terminated.
- War: When the Country of the principal is at war with the Country of the agent, the authority of the agent is usually terminated, or at least suspended until hostilities end.
DISABILITY OF THE PRINCIPAL UNDER THE UDPAA
The Uniform Durable Power of Attorney Act permits a power of attorney to provide that it will not be affected by any disability or incapacity which occurs after the power of attorney is created. This can be either a physical or mental incapacity. The UDPAA changes the common law and the general rule that insanity of the principal terminates the agency.
TERMINATION OF AGENCY COUPLED WITH AN INTEREST
An agency coupled with an interest is an exception to the general rule as to the termination of an agency. Such an agency cannot be revoked by the principal before the expiration of the interest. It is not terminated by the death or insanity of either the principal or the agent.
EFFECT OF TERMINATION OF AUTHORITY
If the agency is revoked by the principal, the authority of the agent to act for the principal is not terminated until notice is received by the agent. The right of the agent to bind the principal to third persons generally ends immediately upon termination of the agent’s authority. Notice to third persons is not necessary as far as termination of the right of the agent to bind the principal to third persons. However, if the agency is terminated by the principal, notice should be given to third parties. If notice is not given, the agent may have the power to make contracts that will bind the principal and third persons. The reason for this rule is that a known agent (i.e., known to third persons) can continue to have the appearance of being an agent until notice is given to third persons. In the New Hampshire case of Record v. Wagner[7], Record owned a farm which was operated by his agent, Berry. Berry also lived on the farm. Berry hired Wagner in 1953 to bale hay. Berry told Wagner to bill Record for this work, which he did. Record paid Wagner. By the summer of 1954, the agency relationship had been terminated by Record, but Berry continued to live on the farm. From all outward appearances, nothing had changed. Berry asked Wagner again to bale hay and charge Record. Wagner performed the work, but Record refused to pay on the grounds that Berry was not his agent anymore. Wagner sued Record, and the Court held in favor of Wagner. The court said that since Berry had been terminated by Record, it was necessary for Record to give notice of the termination to third persons who had dealt with Berry. Since no notice had been given to Wagner, it was reasonable for him to assume that Berry was still Record’s agent. Berry continued to have apparent authority to bind Record. Record could have a cause of action against Berry though.
LIABILITY OF AGENT TO THIRD PERSON — ACTION OF AUTHORIZED AGENT OF DISCLOSED PRINCIPAL
If an agent makes a contract with a third person on behalf of a disclosed principal and the agent has proper authority to do this, and if the contract is executed properly, the agent has no personal liability on the contract. Even if the principal fails to perform the contract, the agent cannot be held liable by the third party.
UNAUTHORIZED ACTION
If a person makes a contract as agent for another, but does not have authority to make this contract, the contract does not bind the principal. When a person claims to act as an agent for a principal, an implied warranty legally arises that this person has authority to act in the manner claimed. If the agent does not indeed have this authority, there is a breach of this warranty. If this breach results in damages to the third person, the third person might generally hold the agent liable. However, the agent is not liable for actions in excess of his authority when the third person knows that the agent is acting beyond the authority given by the principal. In the Missouri case of Husky Industries v. Craig,[8] Craig Industries was in the business of manufacturing charcoal at its two plants. Craig, the corporation’s president, made a contract in the name of the corporation to sell the two plants to Husky Industries. However, Craig did not have authority from the board of directors of his company to make this contract. And in fact, the board of directors later voted not to accept the contract. Husky Industries sued Craig personally on the theory that he, as agent for the corporation, exceeded his authority and should be held personally liable for damages. The Court held in favor of Husky Industries. The Court held that an agent who claims to be contracting in the name of his principal, but does not have authority or is acting in excess of his authority, will be personally liable to the other party for the agent’s breach of implied warranty of authority. In this case, it was significant that Husky Industries was not aware that Craig was unauthorized to make the contract. Had Husky known this, the result would have been different.
DISCLOSURE OF PRINCIPAL
There are three degrees to which the existence and identity of the principal may be disclosed or not disclosed. An agent’s liability to a third person is affected by the degree of disclosure.
Disclosed Principal: When the agent makes the identity of the principal known to the third person and the agent also discloses to the third person that the agent is acting on behalf of that principal, the principal is called a disclosed principal. The agent is not a party to, nor is the agent bound by, any contract made by the agent on behalf of the principal in such a situation.
Partially Disclosed Principal: When the agent discloses to the third person that there is a principal, but he does not give the principal’s identity, the principal is a partially disclosed principal. In this situation, since the third party does not know the identity of the principal, the third person is making the contract with the agent, and the agent is therefore a party to the contract.
Undisclosed Principal: When the third person is not told and does not know that the agent is acting for a principal, the unknown principal is called an undisclosed principal. In this type of situation, the third person is making the contract with the agent, and the agent is a party to the contract.
ASSUMPTION OF LIABILITY
Agents may intentionally make themselves liable on contracts with third persons. For example, when the principal is located out of town and is not known locally, the agent may agree to potential liability in a situation if the agent is well known and the third person knows and trusts the agent, but does not know the principal.
EXECUTION OF CONTRACT
A simple contract that appears to be the contract of an agent can be shown by other evidence to have been intended as a contract between the principal and the third party. In the New York case of Memorial Hospital v. Baumann[9],Beverly Baumann went with her mother to Memorial Hospital, where her mother was placed in intensive care for heart problems. A nurse asked Beverly to sign various documents including one that authorized the hospital to release medical information and to receive the mother’s insurance benefits direct. This form stated: “I understand I am financially responsible to the hospital for charges not covered by this authorization.” Beverly’s mother died during her hospitalization, and the hospital sued Beverly to recover $19,013.42 in unpaid hospital charges, based on the form which Beverly signed. Beverly contended that she had signed the document as an agent for her mother, and therefore was not personally liable. The Court agreed with Beverly. The Court held that she acted as agent for a disclosed principal, her mother.
To avoid any question of interpretation, an agent should execute an instrument by signing the principal’s name and either by or per and the agent’s name. For example, Beverly should have signed this hospital form by printing her mother’s name and underneath it, putting,
By: Beverly Baumann.
TORTS AND CRIMES
Agents are liable for harm caused to third persons by the agents’ fraudulent acts, intentional acts, or negligent acts. The fact that an agent was acting as an agent does not release him from liability if his conduct would have made him liable had he been acting for himself personally. Regarding liability for torts and crimes, there is no distinction made as to whether the person causing harm is an agent or an employee as far as the agent’s liability is concerned. Jones was an employee of the State Highway Department. While repairing a state highway, Jones negligently backed a state truck onto the highway and caused a collision with Smith’s car. Smith sued Jones, who argued that he was acting on behalf of the state, and therefore he should not be held liable for his negligence. Judgment for Smith. The fact that an employee or agent is acting on behalf of someone else does not excuse the agent or employee from liability for torts committed by the agent or employee. Jones was therefore liable for his negligence even though it occurred within the scope of his employment by the state.
If an agent commits a crime, such as stealing from a third person or shooting a third person, the agent is liable for the crime without regard to whether the agent acted in his own self interest or in the interest of his principal. We will discuss the liability of the principal in such a situation later.
LIABILITY OF PRINCIPAL TO THIRD PERSONS – AGENT’S CONTRACTS
The liability of a principal to a third person on a contract made by an agent depends upon the extent of the disclosure of the principal.
Simple Contract With Principal Disclosed: When a disclosed principal authorizes an agent’s transaction with a third person, and when the agent properly executes a contract with the third person, a binding contract exists between the principal and the third person. The principal and the third person may sue each other in the event of a breach of contract. The agent is not a party to the contract and is not liable for his performance, and therefore cannot be sued for any breach.
Simple Contract With Principal Partially Disclosed: A partially disclosed principal is liable for a simple contract made by an authorized agent. This is a situation where the third party knows that there is a principal, but does not know who it is. In such a situation, the third party may also sue the agent.
Simple Contract With Principal Undisclosed: What happens when a third person does not know there is a principal? An undisclosed principal is liable for a simple contract made by an authorized agent. Even though the third person initially contracted with the agent alone, the third person, upon learning of the principal, may sue the principal. He may also sue the agent.
PAYMENT TO AGENT
When the third person makes payment to an authorized agent, this payment is legally deemed to have been made to the principal. The principal must give the third person full credit for the payment even if the agent never delivers the payment to the principal. This is assuming that the third person made the payment in good faith and had no reason to know that the agent would be guilty of misconduct.
A payment made to a person with apparent authority to receive the payment is legally deemed to be a payment to the apparent principal. When payment by the debtor is made to a person who is not the actual or apparent agent of the creditor, this payment is not credited to the debt unless the person in fact pays the money over to the creditor. In the case of Liberty Mutual Insurance Co. v. Enjay Chemical Co.[10] DuPont licensed Exxon and Johnson & Johnson to use certain chemical processes in return for royalty payments to be made by check to DuPont. The parties agreed that these payments, which were to be made to DuPont, were to actually be made by check sent to a specified DuPont employee (CHD), in its control division. These checks were sent during the next nine years. CHD altered some of them so that he was named on the checks as the payee. He then cashed them and used the money for his own purposes. DuPont sued Exxon and Johnson & Johnson on the grounds that they still owed the money represented by the checks that CHD had forged. The Court held in favor of Exxon and Johnson & Johnson. The Court held that payment to an authorized agent has the legal effect of payment to the principal regardless of whether the agent later delivers the payment to the principal or embezzles it. CHD was the agent authorized to receive the royalty checks. Therefore, the defendants had effectively paid the royalties when they sent CHD the checks.
AGENT’S STATEMENTS
A principal is bound by a statement made by an agent while transacting business within the scope of his authority. This can be an important point if the agent is guilty of misrepresentation or fraud.
AGENT’S KNOWLEDGE
The principal is bound by the knowledge of any fact that is acquired by an agent while acting within the scope of actual or apparent authority. In the Louisiana case of Miguez Funeral Home v. First National Life Insurance Co[11], Trahan, who was in prison on a narcotics charge, wanted to apply for a funeral expense insurance policy. His father talked with an agent of First National Life Insurance Co. The father signed the application, and the agent falsely stated on the application that Trahan had signed it in his presence. Trahan was later killed in prison. When Miguez Funeral Home filed for payment on the policy, the insurance company refused to pay on the grounds that the application had not been signed by Trahan personally. (The insurance company probably would not have issued the policy if it had known Trahan was in prison.) The Court held in favor of the funeral home. The Court held that the insurance agent was the agent of the insurance company, and since the agent knew the facts, the insurance company was deemed to have the same knowledge as its agent.
Exceptions: There are exceptions to this rule regarding a principal being deemed to have the same knowledge as his agent. For example, if the subject matter is outside the scope of the agent’s authority, and the agent has no duty to inform the principal of this knowledge, the principal is not deemed to have this knowledge (unless he in fact has it). Other exceptions are when the agent is acting adversely to the principal’s interest or when the third person acts in collusion with the agent for the purpose of cheating the principal. In these cases it is not likely that the agent would communicate knowledge to the principal, and the principal is therefore not bound by the knowledge of the agent.
Communication to Principal: When the law requires that a third person communicate with the principal, that duty may be satisfied by communicating with the agent. For example, an offeree effectively communicates the acceptance of an offer to the offeror when the offeree makes the communication to the offeror’s agent. Also, an offeror effectively communicates the revocation of an offer to the offeree by communicating the revocation to the offeree’s agent.
LIABILITY OF PRINCIPAL FOR TORTS AND CRIMES OF AGENT
Under certain circumstances the principal may be liable to the third person for the torts or crimes of the agent or employee. This is an extremely important area of principal and agency law.
VICARIOUS LIABILITY FOR TORTS AND CRIMES
Assume that an agent or an employee causes harm to a third person. Is the principal or employer liable for this conduct? If the conduct constitutes a crime, can the principal or employer be criminally prosecuted? The answer is that in many instances the principal or employer is liable civilly and may be prosecuted criminally. This concept of causing one person to be liable for the fault of another is known as vicarious liability. The rules of law governing vicarious liability of the principal and the employer are basically the same. Courts speak in terms of employees acting in the course of employment rather than agents acting within the scope of the agency.
The rule of law which makes an employer vicariously liable for the wrong of an employee is also known as the doctrine of respondeat superior.
Nature of Act: The wrongful act committed by the employee may be a negligent act, an intentional act, a fraudulent act, or a violation of a government regulation. This act may cause civil liability to the employer, or it may also subject the employer to criminal prosecution.
Negligent Act: An employer is generally liable under the doctrine of respondeat superior for a negligent act committed by his employee within the scope of employment.
Intentional Act: Under English Common Law, and later American Common Law, an employer was not liable for an intentional tort committed by an employee. However, the modern rule holds that an employer is liable for an intentional tort committed by an employee for the purpose of furthering the employer’s business. An employer would not be liable for an intentional and unprovoked assault committed by an employee on a third person or customer of the employer because of a personal grudge or for no reason. However, an employer would be liable by the modern view when the employee’s assault was committed in the belief that the employee was somehow advancing the employer’s interests. For example, when an employee is hired to repossess property, such as in the case of an employee of a finance company hired to repossess automobiles, the employee is generally liable for any unlawful force used by the employee in retaking the property, such as an assault on the debtor.
Fraud: The Court decisions in recent years hold that an employer is liable for fraudulent acts or misrepresentations of his employee. However, in states that follow the common law rule of no liability for intentional torts, the employer is not liable for the employee’s fraud when the employer did not authorize or know about the fraud.
Governmental Regulation: The principal may be liable because of the agent’s violation of a governmental regulation. These regulations are most common in the area of business and of protection of the environment (for example, the Exxon Valdez incident in Alaska).
Course of Employment: The fact that a tort or crime is committed by an employee does not necessarily cause vicarious liability on the employer. It must also be shown that the employee was acting within the scope of his employment.
Employee of the United States: The Federal Tort Claims Act states that the U. S. shall be vicariously liable whenever a federal employee driving a motor vehicle in the course of employment causes harm if the circumstances are such that a private employer would be liable. However, the statute also states that the employee shall be exempt from liability.
NEGLIGENT HIRING AND RETENTION OF EMPLOYEES
An employer is liable for an employee’s tort according to the theory of negligent hiring or retention of an employee if the employer knew or should have known the employee posed an undue risk to others and harm is caused to a third party as a result of the employee’s actions.
AGENT’S CRIMES
The principal is liable for the crimes of the agent committed at the principal’s direction. However, a principal is not ordinarily held liable for a crime of an agent merely because it was committed while otherwise acting within the scope of the agent’s authority or employment. This is assuming that the crime was not authorized by the principal. There are exceptions. Some states will impose liability on the principal when the agent has, in the course of employment, violated liquor sales laws or pure food laws. Some Courts hold that a principal may be criminally responsible for an agent’s sale of liquor to a minor in violation of a liquor law, even though the sale was not known to the principal and violated specific instructions given to the agent.
OWNER’S LIABILITY FOR ACTS OF AN INDEPENDENT CONTRACTOR
If the work is done by an independent contractor rather than by an employee, the owner is not liable for harm caused by the contractor to third persons on their property. Also, the owner is not bound by the contracts made by the independent contractor. In the case of Guillory v. Conoco[12] (a Louisiana case), Conoco contracted with Daniel Construction Company to build an oil refinery. Daniel Company was to award and manage all subcontracts, enforce safety rules on its employees and subcontractors, and control and manage the entire project. Daniel subcontracted the roofing work to Morgan Roofing Company. Guillory, a Morgan employee, was working on the roof of a 48-foot-high tank without fall protection when he fell from the roof and was seriously injured. Two weeks earlier, a Conoco supervisor visiting the work site saw that Morgan Roofing employees were working without fall protection in violation of safety rules. The supervisor immediately notified Daniel Company. Guillory brought suit against Conoco, claiming it violated its duty to him by knowingly allowing the subcontractor to work employees without fall protection. Conoco argued that it was not liable for the harm caused by an independent contractor a subcontractor working under the control of the independent contractor. The Court held in favor of Conoco. The Court held that Conoco was not liable to Guillory for the torts of the independent contractor Daniel Company and the subcontractor Morgan Roofing Company since the right to control the work of the subcontractor was exclusively reserved to Daniel Company. This right to control is an extremely important element in determining whether or not a person is an agent or an independent contractor.
Exceptions to Owner’s Immunity: There is a trend toward imposing liability on an owner when the work undertaken by the independent contractor is inherently dangerous. The law is beginning to take the position that if the owner wishes to engage in a particular activity, the owner must be responsible for the harm it causes and cannot be insulated from liability by hiring an independent contractor to do the work. The Courts in such cases regard the activity as having such a high potential of harm that the owner is not permitted to delegate to another the duty to protect the public from harm. For example, hiring someone to dynamite for you when you are constructing a road will not insulate you from any damages caused by the independent contractor while doing the dynamiting if the independent contractor is negligent. Regardless of the nature of the activity, the owner may be liable for torts in contracts of an independent contractor when the owner controls the conduct of the independent contractor. For example, if a franchisor, such as McDonald’s, exercises a high degree of control over the franchisee, such as a local owner of a McDonald’s franchise, the relationship will be recognized as an agency relationship, and the franchisor can be held bound by the actions of the franchisee. An example may be McDonald’s control over the play land of each specific franchisee. If McDonald’s has very specific rules and designs for the play equipment and these designs and rules are found to be negligent or defective, the franchisor, McDonald’s, could be liable for injury to children that occur on the play land.
When the shield from liability based on the use of an independent contractor would make it possible for an enterprise using the contractor to avoid liability under copyright laws or to defraud others, the shield will be ignored.
Undisclosed Independent Contractor: In some situations, the owner appears to be doing the act in question because the existence of the independent contractor is not disclosed or apparent. This situation occurs most frequently when a franchisee does business under the name of a franchisor. Another example of this might be a restaurant in a hotel which appears to be the hotel restaurant, although it is operated by an independent business. In cases of an undisclosed independent contractor, it is generally held that the franchisor is liable for the torts and contracts of the undisclosed independent contractor.
ENFORCEMENT OF CLAIM BY THIRD PERSON
A lawsuit may be brought against both the principal and agent if both are liable to a third person. However, the third person can only recover only once. He can recover part of his damages from the principal and part from the agent, or all from one of them.
TRANSACTIONS WITH SALES PERSONNEL
Many transactions with sales personnel do not result in a contract with the third person that the sales person is dealing with.
SOLICITING AND AGENTS
Giving an order to a salesman ordinarily does not cause a contract to be created because ordinarily the salesman is an agent whose authority is limited to soliciting offers from customers and then communicating these offers to the principal for acceptance or rejection. A soliciting agent does not have authority to make a contract that will bind the principal. The employer of the salesman is not bound by a contract until the employer accepts the order. To make this clear to buyers, an order form signed by the customer, who is given a copy, should state that the salesman’s authority is limited, and no contract with the employer comes into existence until the order is approved by the home office. The customer also is not bound by any contract until the employer approves the order. If the customer withdraws his offer under these circumstances, there is no breach of contract since there is no contract to be broken.
If the person with whom the buyer deals has authority to make contracts, there is, by definition, a binding contract between the principal and customer from the moment the agent agrees with the customer. In other words, when the agent accepts the customer’s order, a contract is formed. If the customer attempts to withdraw his order under such circumstances, this can constitute a breach of contract, making the customer liable for any damages to the seller.
[1] Hill v. Newman, 316 A.2d 8 (N. J. 1973)
[3] Walker v. Pacific Mobile Homes, 413 P.2d 3 (WN 1966)
[4] 129 A. 2d 490 (PA 1957)
[5] 505 N.E.2d 1104
[6] 276 So.2d 569 (1973)
[7] 128 A.2d 921, 922 (1957).
[8] 618 S.W.2d 458 (1981)
[9] 474 N.Y.S.2d 636
[10] 316 A.2d 219 (Del. Super. Ct. 1974)
[11] 234 So.2d 496 (LA. APP. 1970)
[12] 526 So.2d 801 (1988)
