Chapter 29

Relationship of Principal and Agent

 

Objectives:

1.  Distinguish (1) agency, (2) employment, (3) independent contractor

2.  Requirements for creating agency

3.  Duties of agent to principal

4.  Duties of principal to agent

5.  Termination of agency

 

I. Nature of Agency

          A. Agency is a consensual relationship between two persons, where principal authorizes agent to act on behalf of principal.

          B. Scope of agency: Principal may authorize agent to do anything the principal may legally do.  

          C.  Other legal relationships

                   1. Employment relationship.  Employer has right to control the employee.  Employer is responsible for acts of agent, and agent may obligate the principal.  All employees are agents.

                   2.  Independent contractor.  Engaged to do a specific job.  Might be an agent with regard to that job.  Look at whether the contractor has control of how the contract is carried out.

          Example:  Insurance “agents.”  Many companies, like Allstate or State Farm, will have agents that are employees.  If they say something, company will probably be stuck with it.  Compare an independent agent or broker.  There, the agent/broker works for an independent brokerage, and therefore the insurer will not be bound by their statements.

         

          Jaeger v. Western Rivers Fly Fisher, 855 F.Supp 1217 (D.Utah 1994)

          Facts:  Case deals with Green River fishing trip.  Law requires “outfitters” to be registered with the government.  Fishing guides must use outfitter to take people on fishing trips.  Western is an outfitter, Petragallo is a guide.  Petragallo uses Western as outfitter for trips.  Western pays Petragallo a fee, and Western’s logos are on Petragallo’s boats.  IRS recognizes Petragallo as an independent contractor.  Petragallo does not have to take customers Western refers to him.  

          Plaintiff went to Western for a fishing trip, they arranged the trip, and they sent him to Petragallo.  Petragallo said he worked for Western.  After fishing trip, Petragallo had a car accident, injuring plaintiff.

          Issue:  Is Western vicariously liable as Petragallo’s principal?
          Holding: There is a triable issue of fact for a jury.  There are facts from which the jury could conclude there is an agency.

          Reasoning:  Factors to look at:  (1) agreement regarding degree of control of principal over agent; (2) right to hire and fire; (3) method of payment; (4) furnishing of equipment.  This is a close call, but there are some indications that there is an agency.  Western set up the deal, degree of control and advertising is not clear, license indicates Western has some degree of control.  

 

II. Creation of Agency

          A. Look at intent of the parties.  Did they intend to create an agency?  Objective test.

          B.  Gratuitous agency.  Agency without consideration.  

          C. Agency by estoppel.  Principal causes third person to reasonably believe that agent is an agent, and third party reasonably relies.

          Miller v. McDonald’s Corporation, 945 P.2d 1107 (Ore. 1997)

          Facts: P got a sapphire in his Big Mac, which damaged his teeth.  Local shop is owned by franchisee.  Franchise agreement with McD corp. specifically said franchisee is not an agent.  However, McD maintains great control, all stores look alike, quality is all the same, etc.  There was a sign mentioning local owner, but P said she did not notice that.  She thought McD ran all the stores.

          Issue:  Is McD vicariously liable as principal?
          Holding: Jury could conclude that there was a principal/agent relationship.  There is enough degree of control here.

          D. Formalities (generally none required)

                   1.  Power of attorney.  Written agency agreement.  Ends if principal becomes incompetent.

                   2.  Durable power of attorney.  Same thing, except keeps going if principal becomes incompetent.  Also, sometimes becomes effective on incompetency.

          E. Capacity

                   1. Capacity of agent depends on capacity of principal.

                   2. Usually, incapacity of agent does not affect power to bind the principal.

         

III. Duties of Agent to Principal

          A. Duty of obedience

          B. Duty of diligence

          C. Duty to inform

          D. Duty to account

          E. Fiduciary duty

                   1. Conflict of interest

                   2. Self-dealing

                   3. Duty not to compete

                   4. Confidential information

                   5. Duty to account for financial benefits
          Detroit Lions, Inc. v. Argovitz, 580 F.Supp 542 (E.D.Mich 1984)

          Facts: Billy Sims won the 1978 Heisman Trophy.  He signed with the Detroit Lions of the NFL.  Early in 1983, his agent negotiated both with the Lions and the Houston Gamblers of the USFL.  Unknown to Sims, the agent owned a share of the Gamblers.  Sims believes Lions are not giving him a fair deal, so he signs with the Gamblers (5 years, $3.5m.).  Agent did not seek a “final” offer from Lions, which might have been more.  Later in 1983, Sims signs with Lions.  Lions and Sims sued the agent for breach of fiduciary duty.

          Issue: Did agent breach his duty to Sims?
          Holding: Yes. Court ordered rescission of Gamblers contract.

          Reasoning:  Agent has fiduciary duty to principal.  Agent here had a conflict of interest, and acted in his own interest and not Sims’.  He also did not disclose his interest to Sims, who had no reason to know about it.

 

IV. Duties of Principal to Agent

          A. Contractual duties

                   1. Compensation

          Holzman v. Fiola Blum, Inc., 726 A.2d 818 (Ct.App.Md 1999)

          Holzman’s wanted to sell their house.  Listed with Blum.  Initial price was $1.95m, later reduced to $1.65m.  

          Sterns offered $600k.  Noravians offered $715k.  Sterns then went up to $850k.  Holzmans signed K with Noravians (no reason given).  Later, Holzmans broke K with Noravians, paid liquidated damages (return of deposit), and signed K with Sterns.  Contract with Sterns went to close, no problem.

          Issue: Do sellers owe broker two commissions?  If so, do they get offset for second commission?

          Holding: Yes, but they get an offset.

          Reasoning:  Contract with realtor stated that when sellers agreed to accept an offer, the commission was owed.  There was no need to wait until close.  There was a commission due on first sale.  Tougher issue is the offset.  Book omits court’s reasoning, but basically the court interprets the contract as not contemplating double recovery for broker.  If there had been more of time spread (sellers reject, then broker does a lot more work to find second buyer), then maybe there is no offset.

                   2. Reimbursement

                   3. Indemnification

          B. Tort duties (duty to act reasonably)

         

V. Termination of agency

          A. Acts of the parties

                   1. Lapse of time

                   2. Fulfillment of purpose

                   3. Mutual agreement of the parties

                   4. Revocation of authority

                   5. Renunciation of agent

          B. Operation of law

                   1. Bankruptcy

                   2. Death

                   3. Incapacity

                   4. Change of circumstances

                   5. Loss or destruction of the subject matter

                   6. Disloyalty of agent

                   7. Change of law

                   8. Outbreak of war

 

VI. Irrevocable Agencies

          Example: Agent loans money to principal, and principal grants agency in order to secure the loan.