Chapter 35 – The Agency Relationship

1. 35-1
The Agency Relationship
PA ET RHC35
I’ve got an ego and all that,
but I know I need help. So I go
and hire the very best people.
H. Ross Perot, EDS founder
Inc. magazine (Jan. 1989)

2. 35-2
Learning Objectives
•Know how an agency relationship
is created and terminated
•Distinguish employees from
nonemployee agents
•Recognize when an agent risks
breaching a fiduciary duty

3. 35-3
•Agency is a two-party
relationship in which one
party (agent) is authorized to
act on behalf of, and under
the control of another party
(principal)
–MDM Group Associates, Inc. v. CX Reinsurance Company Ltd.
: agent owes a fiduciary duty
to principal, but not vice versa
Overview
Aspen, Colorado

4. 35-4
•Anybody may be an agent or principal,
but the agreement is voidable by minors
and the mentally incapacitated
•Certain duties are non-delegable
Creation of Agency

5. 35-5
•An agent can bind his principal only
when the agent has authority to do so
•Two forms: actual or apparent authority
•Actual authority is express or implied
–Express authority is created by the
principal’s actual words (written or oral)
•Example: “I want to hire you as my real
estate agent to sell my house.”
Agency Authority

6. 35-6
•Agent has implied authority to do
whatever it is reasonable to assume
that the principal wanted the agent to
do given principal’s statements and
surrounding circumstances
–Example: a person hired as general
manager in a restaurant will have broad
authority to run the business while a person
hired as a cashier will have limited authority
Implied Authority

7. 35-7
•Apparent authority arises when principal’s
conduct leads a third party to believe
that an agent (who lacks actual authority)
is authorized to act a certain way and the
third party reasonably relies on the
appearance (cloak) of authority
•To protect third parties, agency law allows
agents to bind a principal on the basis of
apparent authority
Apparent Authority

8. 35-8
•An agency-based case may depend on
whether a person who contracts with the
principal is an employee (servant) or
independent contractor
•No clear distinction, but the “Reid” factors
(listed in Eisenberg v. Advance Relocation &
Storage, Inc.) aid in decision making: right to
control physical details of the work, skill required,
source of tools, location, schedule control, duration
of relationship, payment method, benefits, tax
treatment of hired party, uniqueness of work…
Employee or
Independent Contractor?

9. 35-9
•In
Eisenberg v. Advance Relocation & Storage, Inc.
, the court disregarded Eisenberg’s short
tenure and found that she was an
employee:
–She loaded trucks for a moving company that
supplied all tools and paid her an hourly wage,
and the company controlled the way she
performed her assigned tasks
•As an employee, Eisenberg had the right to
file a sexual harassment lawsuit under Title
VII of the Civil Rights Act of 1964
Employee or
Independent Contractor?

10. 35-10
•Since agency is a fiduciary relationship of
trust and confidence, an agent has a duty
of loyalty to the principal
•Agent must (1) avoid conflicts of interest
with the principal, (2) maintain
confidentiality of information received
from the principal
–The duty of confidentiality survives agency
Duties of Agent to Principal

11. 35-11
•Conflicts of interest include self-dealing,
competition with the principal, or acting for
another party
–These duties end after the period of agency
Duties of Agent to Principal

12. 35-12
ABKCO Music Inc. v. Harrisongs Music, Ltd.
•Facts:
–1971: George Harrison, managed by ABKCO
Music (A.B. Klein), was sued by the copyright
holder of hit song, “He’s So Fine” (Bright Tunes),
which claimed Harrison’s song, “My Sweet
Lord,” infringed on their copyright
–Klein tried unsuccessfully to settle the suit, then
his contract with Harrison expired
–At the copyright trial in 1976, Harrison found
liable for infringement, but damages issue
remained

13. 35-13
•Facts:
–1978: After agency termination, Klein (ABKCO)
used Harrison’s information in negotiations to
purchase Bright Tunes and all rights to lawsuit
•ABKCO became the plaintiff in 1979 trial for
damages
–At trial, Harrison counterclaimed for damages
from ABKCO’s breach of the duty of loyalty
–Trial court found a breach of duty and
reduced ABKCO’s recovery; ABKCO appealed
ABKCO Music Inc. v.
Harrisongs Music, Ltd.

14. 35-14
•Legal Reasoning and Issue:
–An agent has a duty not to use confidential
knowledge acquired in employment to
compete with principal and the duty exists
after the employment
–However, using information based on
general business knowledge is not covered
by the rule
–Did Klein use confidential information from
his agency to purchase Bright Tunes?
ABKCO Music Inc. v.
Harrisongs Music, Ltd.

15. 35-15
•Holding:
–Evidence showed that Klein gave Bright Tunes
confidential earnings schedules belonging to
Harrison and that Klein’s former position aided
in his purchase of Bright Tunes pending
litigation
–Sufficient evidence exists to state that Klein’s
conduct did not meet the standard of a
former fiduciary
–Judgment affirmed
ABKCO Music Inc. v.
Harrisongs Music, Ltd.

16. 35-16
•Agents must obey the principal’s
reasonable instructions for agency
business, exercise the degree of care
and skill standard for the job, promptly
communicate to the principal matters
reasonably relevant or material to the
agency business, and duty to account
–No duty to obey illegal or unethical orders
Other Agent Duties

17. 35-17
•Employee (Sanders) sued former employer
for discrimination and defendant employer
responded with “faithless servant” doctrine,
arguing that Sanders acted unethically by
tax fraud or by operating a side business
•Faithless servant doctrine applies if worker’s
disloyal acts were related to performance of
duties and employer suffered damages
–Employer failed to prove either point
Sanders v.
Madison Square Garden L.P.

18. 35-18
•A written agency contract normally
states the duties the principal owes the
agent, but law implies certain duties on
the principal:
To compensate the agent
To reimburse the agent for money spent in
the principal’s service
To indemnify the agent for losses suffered in
conducting the principal’s business
Duties of Principal to Agent

19. 35-19
•Termination by act of the
parties includes:
–At a time or event stated in the
agreement
–When agency was created to
achieve a special purpose and
the purpose was achieved
–By mutual agreement of the
parties
–At the option of either party
Termination of Agency

20. 35-20
•Termination by operation of law includes:
–Serious breach of the agent’s duty of loyalty
–Principal’s permanent loss of capacity or
agent’s loss of capacity to perform agency
business
–Change in value of agency property or
subject matter (including loss or destruction)
–Changes in law making the agency illegal
–Changed business conditions or outbreak of
war
Termination of Agency

21. 35-21
•Termination by operation of law also
includes:
–Impossibility of performance by the agent
–Death or bankruptcy of principal or agent
•Exception: if agent’s power is coupled
with an interest, agency does not
terminate by the principal’s revocation,
loss of capacity by principal or agent, or
death of either principal or agent
Termination of Agency

22. 35-22
•Plaintiff attended summer camp and was
assaulted by former camp counselor two
months after summer season ended
•Actual authority terminated at season’s end
•Apparent authority ceased when plaintiff
learned the counselor left camp’s employ
•Therefore, defendant camp was not liable
for former counselor’s assault on plaintiff
Gniadek v. Camp Sunshine at Sebago Lake, Inc.

23. 35-23
•After agency terminates, agent’s express
and implied authority ends
–Caution: ex-agents may retain apparent
authority that could bind a former principal
•Principals should reduce risk of liability for
third parties relying on ex-agent’s
apparent authority by actual or
constructive notice to third parties about
agency termination
Effect of Agency Termination

24. 35-24
Test Your Knowledge
•True=A, False = B
–Agency is a contract in which an agent is
authorized to act on behalf of, and under
the control of, a principal.
–All employees are agents, and all agents
are employees.
–Agents may bind a principal on the basis of
apparent authority.
–Agency may be created unintentionally.

25. 35-25
•True=A, False = B
–All duties are delegable.
–An agent’s duty of confidentiality
continues after the agency ends.
–To be considered actual authority, the
authority must be expressed in words
orally or in writing.
–Agency is a fiduciary relationship.
Test Your Knowledge

26. 35-26
•Multiple Choice
–Principals have the following duties to
agent:
a)Duty to compensate
b)Duty to reimburse for reasonable expenses
for doing agency business
c)Duty to indemnify the agent for losses
suffered due to agency’s business
d)Both A and B
e)All of the above
Test Your Knowledge

27. 35-27
•Multiple Choice
–Manuel asked his friend Sunil, a good
salesman, to sell his car and Sunil agreed.
Does an agency relationship exist?
a)Yes, Sunil is an agent for Manuel
b)Yes, but only if there is a written contract
describing the agency’s purpose
c)No, since friends cannot engage in an
agency relatioship
d)No, unless Sunil sells Manuel’s car
Test Your Knowledge

28. 35-28
Thought Questions
•Have you been an
agent or a principal?
•Do you think the
agency rules of liability
are fair?
•What are the ethical
issues involved in an
agency relationship?