An introduction to the fundamentals of dynamic business law and business ethics chap019

Chapter 19
Agency and Liability to Third
Parties

McGraw-Hill/Irwin

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter 19 Case Hypothetical
Robert “Red” Newman, attorney-at-law, just attended a pretrial conference for a trial
scheduled to begin next week. The case, Effingham v. Atwater, involves his client,
Jessica Effingham. On September 8, 2009, Jessica sustained serious injuries in
automobile accident when a car driven by Harvey Atwater (the defendant) struck her car
from behind. Jessica sustained permanent partial disability as a result of the accident,
and Red believes the case is worth $250,000 for his client’s permanent partial disability,
pain and suffering, medical expenses, and other compensatory/consequential damages.
During the pretrial conference, Atwater’s defense counsel, Gunner Vader, offered the
plaintiff $20,000 in full and final settlement of the Effingham v. Atwater litigation. Attorney
Vader proclaimed that $20,000 was all of the settlement authority he had, and his client
would not pay a penny more to settle the case. Judge Clarence Ginsburg strongly
recommended that the plaintiff take the $20,000 settlement offer, but Red considered the
“low-ball” offer to be a personal insult as well as an affront to his client, and he
immediately rejected the offer.
In rejecting the offer, did Robert “Red” Newman violate his professional duty as his
client’s agent?
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Chapter 19 Case Hypothetical and Ethical Dilemma
Maximillian Snell is having a very bad Monday at his “pre-owned” car dealership, Maximillian Motors. Known countywide for his “eye-catching” (some would say obnoxious) television advertisements (with staged customers proclaiming

“Thanks a million, Maximillian!”) Snell is having a difficult time attracting and retaining an effective and reliable sales
staff; in fact, not a single salesperson has appeared for work on Monday. The only employee who does shows up for
work that day is his secretary of three years, Daisy Martinez, whose responsibilities include processing “tax, title and
tag” paperwork after the sale.
Business is slow that Monday, with only two “window shoppers” appearing on the lot from 8:00 a.m. to 2:00 p.m.
Famished, and eager to try out the new Italian restaurant down the street, Snell instructs Martinez to tell any
prospective customers he will return at 3:30 p.m. When Snell returns at 3:30, he asks Martinez whether any potential
customers visited the lot in his absence. Daisy beams with pride, and says “why yes, Max, there was a young couple
who came by right after you left. They wanted to buy that red BMW sedan on the front row, and I knew business was
slow, so I went ahead and sold it to them. The contract is here on my desk. Aren’t you proud of me?!”
Curious, Maximillian examines the contract. It describes the red BMW sedan, and includes the signatures of both
purchasers, as well as Daisy’s signature (indicating “Daisy Martinez, for Maximillian Motors.”) The contract price is
$21,000. Maximillian’s face reddens as he heads for the car inventory purchase price records on his computer.
Computer records reflect that he purchased the car at auction last Wednesday for $28,000, and that his established
retail price for the car was $31,000. When he confronts Daisy with the facts, she bursts into tears, saying “please
boss, don’t fire me, I’ve made a terrible mistake!” Daisy is inconsolable, but that is irrelevant to Snell; he is not exactly
in the mood for consoling.
Through her tears, Daisy indicates that the couple will return at 5:30 p.m. to take possession and ownership of the car;
they have gone to their bank to retain the $21,000.
Is Snell legally obligated to sell the car to the couple? From an ethical standpoint, should the couple agree to pay at
least Snell’s cost for the car ($28,000?)

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Chapter 19 Case Hypothetical and Ethical Dilemma
Jonathan A. Jacobs has worked diligently all of his life, saved every penny he could, and is now
worth an estimated $2 million. Advanced in his years (he is now seventy-nine years old),
Jonathan recently executed a general power attorney naming his son, Willard T. Jacobs, as his
“attorney-in-fact” (an attorney-in-fact is the agent named in a power of attorney relationship.)

Jonathan has recently been dating Mildred Eubanks, who is fifty-seven years old. Concerned
that Mildred is a “gold-digger” and that she will abscond with the majority (if not all) of his
father’s wealth, Willard created a trust, with the “corpus” (body) of the trust amounting to $1.75
million (the majority of his father’s wealth.) Willard named himself as the trustee, and he
designated his two children (Jonathan’s grandchildren), Tobias and Heather, as co-beneficiaries
of the trust. When he created the trust, Willard did not notify his father.
Upon discovering the existence of the trust, Jonathan became furious. “How dare you go
behind my back and steal my money. I worked hard for that money, it is mine, and I have the
right to decide what to do with it. If I choose to give all of the money to my dear friend Mildred,
that is my decision!”
In exercising the general power of attorney, did Willard T. Jacobs act appropriately? Upon
Jonathan A. Jacobs’s request, should a court invalidate the trust?
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Chapter 19 Case Hypothetical
The law firm of Poe, Patterson and Henderson, a general partnership, represents 20 plaintiffs in a class-action product
liability lawsuit, with trial scheduled to begin Monday of next week. It will be the biggest trial in the history of the firm,
and the partners understand that success will depend, for the most part, on a collaborative effort on the part of all
professionals at the firm, including partners, associate attorneys, paralegals, and secretarial staff. It is the Friday
before the trail, and there will be no weekend for those working at Poe, Patterson and Henderson.
The partners and the associate attorneys are reviewing depositions in the conference room. The clock on the wall
shows 11:00 p.m. Partner Henderson turns to a first-year associate, J. Benjamin Fotheringham, and says “Ben, how
about going to Donovan’s Delicatessen and picking up a few subs for all of us? Here’s $100.” Donovan’s Delicatessen
is a favorite of the firm for “late-night” trial preparation sustenance, and is located approximately two miles away, down
Chestnut Avenue.
Eager to make a positive impression on senior partner Henderson, and ready to escape the “tunnel-vision” brought on
by twelve hours of deposition review, Ben heads for his car. In a rush to complete the “deli run” quickly, Ben
accelerates his car to 50 miles per hour. The posted speed limit on Chestnut Avenue is 35 miles per hour.
Fidgeting with his compact disc player in order to listen to an audio-recorded deposition, Ben inadvertently crosses the

center line and collides with an oncoming automobile operated by Brandi Kernigan. Ms. Kernigan is severely injured,
and experiences $22,000 in medical expenses; her $25,000 Volkswagen is a total loss. She sues Fotheringham
individually, and the law firm partnership of Poe, Patterson and Henderson. Kernigan also lists Poe, Patterson and
Henderson as individual defendants.
Is the law firm of Poe, Patterson and Henderson liable for Brandi Kernigan’s injuries? Are Poe, Patterson and
Henderson individually liable for Kernigan’s injuries?

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Introduction to Agency Law
• Agency: Relationship between principal and
agent
• Agent: One authorized to act for/on behalf of
principal
• Principal: One who hires agent to represent
him/her
• Fiduciary: One with duty to act primarily for
another person’s benefit
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Creation of Agency Relationship
• Expressed Agency: Agency formed by making written/oral agreement
• Power of Attorney: Document giving agent authority to sign legal
documents on behalf of principal
• Durable Power of Attorney: Power of attorney intended to continue to
be effective/take effect after principal incapacitated
• Agency By Implied Authority: Agency formed by implication, through
conduct of parties

• Agency By Estoppel: Agency formed when principal leads third party
to believe that another individual serves as his/her agent (although
principal had actually made no agreement with purported agent)
• Agency By Ratification: Agency that exists when individual
misrepresents himself/herself as agent for another party, and principal
accepts/ratifies unauthorized act

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Requirements for “Agency By Ratification”
• Individual must misrepresent himself/herself as
agent for another party
• Principal accepts/ratifies unauthorized act
• Principal has complete knowledge of all
material facts regarding contract
• Principal must ratify entirety of agent’s act

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Agency Relationships
• Agency Relationship: Fiduciary relationship
(relationship of trust) in which agent acts on behalf
of principal
• Principal-Agent Relationship: Employer hires
employee to enter into contracts on behalf of
employer; parties have agreed that agent will have
power to bind principal in contract
• Employer-Employee Relationship: Employer hires

employee to perform certain tasks; employer has
right to control conduct of employees
• Employer-Independent Contractor Relationship:
Employer hires persons (other than employee) to
conduct some sort of task; employer has no control
over details of conduct of independent contractor
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Employee or Independent Contractor?
• Does worker engage in distinct
occupation/independently established business?
• Is work done under employer’s supervision, or does
specialist without supervision complete the work?
• Does employer supply the tools?
• What skill is required for the occupation?
• What is the length of time for which worker
employed?
• Is worker a regular part of the employer’s business?
• How is worker paid?

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Principal’s Duties To Agent
• Compensation
• Reimbursement and Indemnification
• Cooperation
• Safe Working Conditions

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Agent’s Duties To Principal
• Loyalty
• Notification
• Performance
• Obedience
• Accounting
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Principal’s Rights and Remedies
Against Agent
• Constructive Trust
• Avoidance
• Indemnification

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Agent’s Rights and Remedies
Against Principal
• Tort and Contract Remedies
• Demand For An Accounting
• Specific Performance

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Authority of the Agent: The Link to
the Principal’s Liability

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Authority of Agent and Liability of
Principal
Express Authority: Principal explicitly instructed
agent to perform act
Implied Authority: Relationship inferred from
actions/conduct of parties; authority inferred from
nature of relationship
Apparent Authority and Estoppel: Third party
reasonably believes (based on actions of
principal) that agency relationship exists between
principal and another individual

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Contractual Liability of Principal and Agent For
Authorized Agent Acts
“Authorized” Acts: Agent acts within scope of agent’s
authority;
• Classification of Principal: Must be classified as either
disclosed, partially disclosed, or undisclosed
-Disclosed Principal—Agent not liable, principal liable
-Partially Disclosed Principal—Agent possibly liable,
principal liable

-Undisclosed Principal—Agent liable, principal liable
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Contractual Liability of Principal and
Agent for Unauthorized Agent Acts
“Unauthorized” Acts: Acts that go beyond scope of agent’s
authority
• Third Party Reasonably Believes Agent Has Authority:
-Agent liable
-Principal not liable
• Third Party Believes Agent Mistaken About His/Her Authority:
-Agent not liable
-Principal not liable

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Tort Liability and the Agency Relationship
• Agent’s Tortious Conduct—Principle directly responsible
if:
-Principal directs agent to commit tortious act; or
-Principal fails to provide proper instruments, tools, or
adequate instructions
• Agent Misrepresentation—If agent misrepresents
himself/herself to third party, principal may be tortiously
liable for agent’s misrepresentation
• Respondeat Superior—Principal/employer liable if
employee wrongfully injures third party (not because
he/she personally at fault, but because he/she

negligently hired agent)
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Questions Regarding “Course and Scope” of
Employment
• Did employer authorize employee’s act?
• Did act occur within time and space limits of employment?
• Was act performed (at least in part) on behalf of employer?
• To what extent were employer’s interests advanced by act?
• To what extent were private interests of employee involved?
• Did employer provide the means by which act occurred?
• Did employee use force that employer did not expect?
• Did employer know that act would involve commission of crime?
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Principal’s Liability and the
Independent Contractor
General Rule: Individual who hires independent
contractor not liable for independent contractor’s
tortious actions under doctrine of “respondeat
superior”, unless contractor engages in hazardous
activities

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Termination of Agency Relationship
Termination By Acts of Parties

• Lapse of Time
• Fulfillment of Purpose
• Occurrence of Specific Event
• Mutual Agreement
• Revocation of Authority
• Renunciation By Agent
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Termination of Agency Relationship
Termination By Operation of Law
• Death (Of either principal or agent)
• Insanity (Of either principal or agent)
• Bankruptcy (Of either principal or agent)
• Change in Circumstances
• Change in Law
• Impossibility of Performance
• Disloyalty of Agent

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