Chapter 17: Relationship of Principal and Agent

Question 1

legal relationship of principal and agent

Answer 1

involving an agent who is under the control of, and who is authorized to act on behalf of another person (a legal or natural person), the principal, which authority may include the authority to enter into contracts on behalf of the principal

Question 2

typically the principal is a …

Answer 2

legal entity (corporation)

Question 3

typical layout of principal agent relationship

Answer 3

• corporation is formed (principal)
• corp’s affairs are hired by a board of directors (natural persons)
• board elects officers who are agents of the corp
• officers hire employees who as agents of the corp. conduct the business of the corp
• 3rd parties come into contract with the corp through their interaction with he agents of the corp.

Question 4

utility of agency

Answer 4

multiply our economic activities by acting through others (our agents)

Question 5

master/servant relationship

Answer 5

servant under physical control of master-typical employment relationship

Question 6

employer/employee relationship

Answer 6

broad meaning-exact nature of relationship depends on facts and circumstances

Question 7

independent contractor relationship

Answer 7

independent contractor (who may or may not be an agent) is not physically controlled by person who engages independent contractor

Question 8

master

Answer 8

a principal who employs an agent to perform service in his affairs and who controls or has the right to control the physical conduct of the other in the performance of the service

Question 9

servant

Answer 9

an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or is subject to the right to control by the master

Question 10

independent contractor

Answer 10

a person who contracts with another to do something for him but who is not controlled by theater nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking (he may or may not be an agent)

Question 11

scope of authority determination

Answer 11

relevant issue of whether contract is binding on principal or only on the agent

Question 12

degree of control determination

Answer 12

relevant to issue of imputed tort liability-will tortuous acts of the sub. be imputed to the principal?

Question 13

does agency have to be contractual?

Answer 13

no-it could be non contractual (running and errand)

Question 14

creation of agency by expressed or implied agreement

Answer 14

-results in a grant of actual authority

Question 15

two aspects of actual authority

Answer 15

• express authority

- implied authority

Question 16

express authority

Answer 16

defined by the spoken or written word

Question 17

implied authority

Answer 17

to do what is customary and in addition to express authority

Question 18

apparent agency

Answer 18

the principal creates impression in midshipmen’s of third parties that an agency exists or that an agent has a certain scope of authority

Question 19

who can create apparent agency?

Answer 19

principals through their actions -agents do not

Question 20

what does the 3rd party think of the agent (when apparent authority exists)

Answer 20

• apparent authority may coincide with agent’s actual authority
• apparent authority may exceed/be less than agents actual authority
• the alleged agent may not in fact be an agent at all

Question 21

what is the issue on the agent’s authority?

Answer 21

are the contracts binding on the principal? of course 3rd parties want the contracts to be binding on the principal because they then have greater security that the contract will, in fact be formed

Question 22

what do 3rd parties have a right to believe about an agent’s scope of authority?

Answer 22

1. agent has usual and customary grant of authority given the nature of the agency relationship
2. 3rd parties not bound by “secret” limitations unless they know of them

Question 23

who bears the risk that no agency in fact exists?

Answer 23

• the third party bears the risk that the agent is not really an agent
• this is true unless apparent authority has been created by principal-then agent has apparent authority and principal will be bound

Question 24

when is the principal liable for the contract?

Answer 24

if the contract was entered into within scope of authority as reasonably perceived by third party-regardless of whether agent had actual authority

Question 25

when can agent be liable for contracts entered into on behalf of a principal?

Answer 25

• exceeds authority (liable to principal or 3rd party?)
• agent acts for nonexistent or incompetent principal (president of co. that hasn’t formed yet)
• agent acts for partially disclosed principal (3rd party knows of agent but not principal)
• agent acts as for undisclosed principal (3rd party doesn’t know agent is an agent)
• agent has no actual authority

Question 26

agent acts as for undisclosed principal

Answer 26

(3rd party doesn’t know agent is an agent)

Question 27

agent acts for partially disclosed principal

Answer 27

(3rd party knows of agent but not principal)

Question 28

agent acts for nonexistent or incompetent principal

Answer 28

(sign a letter as president of co. that hasn’t formed yet)

Question 29

agent has no actual authority

Answer 29

• principal not liable to 3rd party (unless agent has apparent authority)
• agent potentially liable to 3rd party

Question 30

what two theories would make the agent (who has no actual authority) liable to the 3rd party

Answer 30

• misrepresentation (did agent advise 3rd party he had authority?)
• breach of implied warranty of authority (agent impliedly warrant that he has the necessary authority when he enters into the contract with 3rd party)

Question 31

obligations of the principal to the agent

Answer 31

• abide by agreement
• maintain true account of any money owed to agent
• reimburse expenses incurred by agent
• warn agent of dangers
• indemnification (indemnify agent for any losses or expenses)

Question 32

obligations of agent to principal

Answer 32

• abide by agreement
• follow lawful and reasonable instructions of principal
• carry out agency using reasonable care
• duty to account to principal for any money in agent’s possession that belongs to principal
• duty to notify principal of any info learned by agent that bears on agency
• undivided loyalty
• agent must indemnify the principal for any loss caused by the agent’s breach of duty owed to principal

Question 33

undivided loyalty

Answer 33

cannot have any conflicts of interest and cannot be improperly benefitted at the expense of the principal

Question 34

sanctions for violation of duty of loyalty

Answer 34

(they’re severe)

• termination of agent
• principal can recover compensation paid to agent during the period of time that agent was disloyal
• principal can recover secret profits made by the agent

Question 35

in the context of employment relationship who is principal/agent?

Answer 35

employer = principal
employee = agent

Question 36

tort liability of principal and agent

Answer 36

everyone is liable for their own torts

Question 37

examples of liability theories against principal requiring traditional tort/negligence analysis arising as a result of other acts of agents

Answer 37

• the employee is instructed by supervisor to perform a tort
• negligent supervision of the employee by a supervisor who is acting on behalf of the employer and this wrongful act is imputed to the employer
• negligent entrustment of a dangerous piece of equipment or other instrumentality to the employee by a supervisor who is acting on behalf of the employer and this wrongful act is imputed to the employer
• negligent hiring practices by employer which results in unqualified employee being hired

Question 38

vicarious or imputed liability

Answer 38

• must have a master/servant relationship
• tort must have been committed w/in employee’s scope of employment
• if outside scope, only employee is liable to 3rd party
• if w/in scope, employee/employer are jointly and severally liable to 3rd party

Question 39

effect of an employee’s violation of rule of employment

Answer 39

principal not protected because there was a rule of employment which prohibited the conduct engaged in by the agent (but strengthens cause of action by employer v. employee for breach of employment agreement)

Question 40

termination by acts of parties or as a result of their agreement

Answer 40

• fulfillment of purpose
• lapse of time
• upon the occurrence of a specified event
• mutual agreement of the parties
• act of one party alone- power v. right to do so-employer rightfully or wrongfully fires employee, or employee rightfully or wrongfully quits

Question 41

termination by law

Answer 41

• death or incompetency or principal or agent
• bankruptcy
• change of law
• loss or destruction of subject matter of agency

Question 42

effect of termination

Answer 42

• agent’s actual authority terminates
• but agent may continue to have apparent authority
• notice required to cut off rights of third parties against principal because of agent’s continuing apparent authority

Question 43

types of notice required to cut off ights of third parties against principal because of agent’s continuing apparent authority

Answer 43

• actual notice to those who have had contact with agency in the past (notice must be received to be effective)
• constructive notice to the public in general who may have merely know of the existence of agency (notice in trade journal, newspaper, etc).