CH 32: Agency Formation and Duties

a document required by the Securities and Exchange Commission (SEC) that publicly traded companies must provide to shareholders before annual or special meetings. It offers crucial information on voting matters, including board elections, executive compensation, and corporate policies, enabling shareholders to vote by proxy without attending in person

proxy statement

One of the most common, important, and pervasive legal relationships is that of:

agents

A relationship between two parties in which one party (the agent) agrees to represent or act for the other (the principal).

agency

T/F: The principal has the right to control the agent’s conduct in matters entrusted to the agent

T

T/F: Agency relationships are crucial in the business world. By using agents, a principal can conduct multiple business operations at the same time in different locations. The only way certain business entities can function is through their agents.

T

the fiduciary relation that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests or otherwise consents so to act. Law’s definition of ___.

agency

As a noun, a person having a duty created by their undertaking to act primarily for another’s benefit in matters connected with the undertaking; as an adjective, a relationship founded on trust and confidence.

fiduciary

Agency relationships exist between:

Employers and employees
Employers and independent contractors who are hired to perform special tasks and services

All employees who deal with third parties are deemed to be agents, thus employment law and agency law overlap a lot. However, __ law has broader reach than _ law

agency
employment

Agency law is based on ___, and employment law is mostly ___ law

common law
statutory

Employment laws (state and federal) only apply to the ___ relationship. Statutes governing Social Security, withholding taxes, workers’ compensation, unemployment compensation, workplace safety, and employment discrimination apply only in an ___ relationship. (These laws do not apply to independent contractors)

Employer-employee

One who works for, and receives payment from, an employer but whose working conditions and methods are not controlled by the employer.
ex: hiring people to start up an oil well

independent contractor

An independent contractors are not ___ but may be an ___ such as an insurance agent is both an independent contractor and an agent of the insurance company for which he sells policies

employee
agent

How do you make sure you keep someone a subcontractor/contractor and not an employee

make sure that the contractor maintains control of how the work is done

In deciding whether a worker is categorized as an employee or an independent contractor, courts often consider the following questions:

How much control does the employer exercise over the details of the work?
Is the worker engaged in an occupation or business distinct from that of the employer?
Is the work usually done under the employer’s direction or by a specialist without supervision?
Does employer supply the tools at the place of work?
How long is the person employed?
What is the method of payment (by time period or at completion of the job)?
What degree of skill is required of the worker?

If the employer exercises considerable control over the details of the work and the day to day activities of the worker, this indicates:

employee status

If the worker is engaged in an occupation that is distinct from that of the employer, this indicates:

independent contractor status

If the work is usually done under the employer’s direction, this indicates:

employee status

If the employer supply the tools at the place of work, this indicates:

employee status

If the person is employed for a long period of time, this indicates:

employee status

If the person is paid using payment by time period, such as once every 2 weeks, indicates:

employee status

If a great deal of skill is required, this may indicate that a person is hired for a specialized purpose and indicates:

independent contractor status

Any copyrighted work created by an employee within the scope of her employment at the request of the employer is a ___, and the employer owns the copyright to the work.

work for hire

In contrast, when an employer hires an independent contractor—such as a freelance artist, writer, or computer programmer—the ___ normally owns the copyright. Therefore the employer typically has the contractor sign documents giving the company the rights to the created works

independent contractor

The Internal Revenue Service (I R S) has established its own criteria for determining whether a worker is an independent contractor or an employee. The I R S tends to closely scrutinize a firm’s classification of its workers because employers can avoid certain tax liabilities by hiring independent contractors instead of employees.

− The most important factor is the :

degree of control the business exercises over the worker

Why does the IRS really watch companies that hire independent contractors?

there is tax avoidance for the employer of contractors

Federal law states that employers must pay certain employees at least one-and-one-half times their regular hourly rate for overtime. Independent contractors are:

exempt from these overtime rules

T/F: Agency relationships normally NOT consensual.

F: They come about by voluntary consent and agreement between the parties (agreement need not be in writing)

T/F: A person must have contractual capacity to be a principal. BUT any person can be an agent, regardless of whether they have the capacity to contract (including minors).

T

T/F: An agency relationship can be created for any legal purpose.

T: any relationship for illegal purposes is unenforceable

T/F: Consideration is not required to form an agency relationship.

T

An agency relationship can arise in 4 ways;

Agreement
Ratification
Estoppel
Operation of Law

Most agency relationships are based on an agreement that the agent will act for the principal and that the principal agrees to have the agent so act. An agency agreement can:

Take the form of an express written contract
Be created by an oral agreement
Be implied by conduct

If a person who is in fact not an agent (or who is an agent acting outside the scope of their authority) makes a contract on behalf of another (a principal), and the principal approves or affirms that contract by word or by action, an agency relationship is created by ___ .

ratification

Ratification involves a question of ___ whether words or conduct

intent

When a principal causes a third person to believe that another person is the principal’s agent, and the third person acts to their detriment in reasonable reliance on that belief, the principal is “estopped to deny” (prevented from denying) the agency relationship. The principal’s actions have created the appearance of an agency that does not in fact exist, creating an :

agency by estoppel

The third person must prove that they ___. Facts and circumstances must show that an ordinary, prudent person familiar with business practice and custom would have been justified in concluding that the agent had authority.

reasonably believed that an agency relationship existed

The ___, rather than the acts or declarations of a purported agent in and of themselves, create an agency by estoppel.

deeds or statements of the principal

The courts may find an agency relationship in the absence of a formal agreement (agency by operation of law). This may occur in:

Family relationships
Emergency situations

What is an example of a family relationship that creates an agency by operation of law?

if a spouse purchases certain basic necessaries and charges them to the other spouse’s account, the courts often rule that a spouse is liable for payment for the necessaries because of either a social policy or a legal duty to supply necessaries to family members.

What is an example of a emergency situation that creates an agency by operation of law?

If an agent cannot contact the principal and failure to act would cause the principal substantial loss, the agent may take steps beyond the scope of their authority.
Example: A railroad engineer may contract on behalf of their employer for medical care for an injured motorist hit by the train.

Once the principal–agent relationship has been created, both parties have duties that govern their conduct.
The principal–agent relationship is fiduciary—based on trust. Each party owes the other the duty to act:

with the utmost good faith

Generally, the agent owes the principal 5 duties:

Performance
Notification
Loyalty
Obedience
Accounting

An implied condition in every agency contract is the agent’s agreement to use reasonable diligence and skill in performing the work.

Duty of performance

the degree of skill or care required of an agent is usually that expected of a reasonable person under similar circumstances

duty of performance

the degree of skill or care required of an agent is usually that expected of a reasonable person under similar circumstances UNLESS the agent has:

Represented themselves as possessing a special skill (must exercise skill claimed)

An agent who acts gratuitously—that is, without payment is:

Subject only to tort liability (They cannot be liable for breach of contract because there is no contract.)
Required to perform in an acceptable manner
Subject to the same standards of care and duty to perform as other agents

An agent is required to notify the principal of all matters that come to their attention concerning the subject matter of the agency. The law assumes that the principal is aware of any information acquired by the agent that is relevant to the agency—regardless of whether the agent actually passes on this information to the principal. (generally materiality is applied)

duty of notification

The agent has the duty to act solely for the benefit of their principal and not in the interest of the agent or a third party. Any information or knowledge acquired through the agency relationship is confidential. It is breach of loyalty to disclose such information during the agency relationship or after its termination. The agent’s loyalty must be undivided.

duty of loyalty

According to the duty of loyalty, any information or knowledge acquired through the agency relationship is:

confidential

When acting on behalf of the principal, an agent has a duty to follow all lawful and clearly stated instructions of the principal. Any deviation from such instructions is a violation of this duty (except during emergency situations when the principal cannot be consulted).

duty of obedience

What is the exception for the duty of obedience?

in emergency situations when the principal cannot be consulted

Unless the agent and principal agree otherwise, the agent must keep and make available to the principal an account of all property and funds received and paid out on the principal’s behalf. The agent has a duty to maintain a separate account for the principal’s funds and must not intermingle these funds with the agent’s personal funds. A licensed professional (such as an attorney) who violates this duty will not only be liable to their client (the principal) for failure to account, but may also be subject to disciplinary action by the licensing authority (such as the state bar association).

duty of accounting

Duty of ___: Agent must use reasonable diligence and skill when performing duties

performance

Duty of ___: agent is required to notify the principal of all matters that concern the subject of the agency

notification

Duty of ___: agent has a duty to act solely for the principal’s benefit

loyalty

Duty of ___: agent must follow all lawful and stated instructions from the principal

obedience

Duty of ___: agent must provide records of all property and funds received or paid out on the principal’s behalf

accounting

The principal has certain duties to the agent relating to:

Compensation
Reimbursement and indemnification
Cooperation
Safe working conditions

What are the limits to indemnity?

Can’t do tortious behavior (must do the duties of the agent as you should)

The principal has a duty to reimburse the agent:
Whenever ___
and For ___

Whenever an agent distributes funds at the request of the principal
For any necessary expenses incurred in the course of the reasonable performance of their agency duties

The principal has the duty to indemnify (compensate) an agent for the:

Liabilities incurred because of authorized and lawful acts and transactions
Value of benefits that the agent confers on the principal (applies to gratuitous agents as well)

Does the principal have a duty to indemnify (compensate) a gatuitous agent?

Yes

The principal has a duty to pay the agent for services rendered and to pay that compensation in a timely manner. Unless the agency relationship is ___ and the agent does not act in exchange for payment, the principal must pay the agreed-on value for the agent’s services. If no amount has been expressly agreed on, then the principal owes the agent the customary compensation for such services.

gratuitous

A principal has a duty to cooperate with the agent and to assist the agent in performing their duties. This means that the principal must do nothing to ___ performance.

prevent

An agency in which a principal grants an agent an exclusive territory and does not allow another agent to compete in that territory.

exclusive agency

If a principal violates an exclusive agency, they are exposed to liability for the___.

agent’s lost profits

The common law requires the principal to provide safe working premises, equipment, and conditions for all agents and employees. Therefore, the principal has a duty to ___

Inspect working areas
Warn agents and employees about any unsafe conditions

Principal must pay the agreed on (or reasonable) value for the agent’s services

compensation

Principal must reimburse the agent for any funds paid out at the principal’s request, as well as for necessary expenses

Reimbursement and Indemnification

Principal must cooperate with and assist an agent in performing their duties

cooperation

Principal must provide a safe working environment for agents and employees

safe working conditions

For every duty of the principal, the agent has a corresponding right, and vice versa. When one party to the agency relationship violates their duty to the other party, the nonbreaching party is entitled to a remedy.

The remedies arise out of contract and tort law and include:

Monetary damages
Termination of the agency relationship
An injunction
Required accountings