LAW

FOUNDATIONS OF

BUSINESS LAW

Don Mayer

University of Denver

Daniel Warner

Western Washington University

George Siedel

University of Michigan

Jethro K. Lieberman

New York Law School

REVISED ABRIDGED EDITION BY

Franklin G. Snyder

Texas A&M University

Open Source Law
FORT WORTH, TEXAS

2020

Chapter 1: Agency 2

This text was adapted by The Saylor Foundation under a Creative Commons

Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested

by the work’s original creator or licensee.

Permission is granted to reproduced this abridged and revised version in accordance

with the above license.

Chapter 1: Agency 3

Chapter 1

THE LAW OF AGENCY

1.1 Introduction to Agency Law

1.1.1 Why Is Agency Law Important?

An agent is a person who acts in the name of and on behalf of

another, having been given and assumed some degree of authority to do

so. Most organized human activity—and virtually all commercial

activity—is carried on through agency. No corporation would be

possible, even in theory, without such a concept.

We might say “General Motors is building cars in China,” for

example, but we can’t shake hands with General Motors. “The General,”

as people say, exists and works through agents. Likewise, partnerships

and other business organizations rely extensively on agents to conduct

their business. Indeed, it is not an exaggeration to say that agency is the

cornerstone of enterprise organization. In a partnership each partner is

a general agent, while under corporation law the officers and all

employees are agents of the corporation. Any situation in which one or

more people are involved in carrying on some sort of enterprise involves

agency law.

1.1.2 Restatements of Agency

Agency law is part of the common law of the various American

jurisdictions. It is not usually created by statutes, although there are

statutes that vary the common law in some jurisdictions. Because

common law is made by judges through case decisions, it has always

been difficult to find broad and reasonably clear statements of what the

general law of agency is.

Into the breach came the American Law Institute, which was

founded in 1923 to provide precisely that. Over the past century it has

produced a great many “Restatements” of various fields of law. They are

called Restatements because they are not themselves law, they are

merely recapitulations of what the authors—usually prominent lawyers

and law professors—have concluded the law is after reading and

analyzing thousands of cases. In 1933, they produced the first

Restatement of Agency. Because, as with all Restatements, it was a

Chapter 1: Agency 4

handy summary of the law, it began to be frequently relied on by courts

and over the years many sections were expressly adopted by various

courts as accurate statements of individual states’ law.

By the 1950s, changes in the law led the ALI to believe that they

needed to update their work. For some reason, they elected the odd

formulation “Restatement (Second)” instead of “Second Restatement” for

all of these works. The Restatement (Second) of Agency was produced in

1957, and has been similarly influential. Another revision, the

Restatement (Third) of Agency, was published in 2006, but has been less

successful. By the 21st century rules regarding employer-employee

relations had become much more politically contested than they were a

half-century earlier, and drafters of the Restatement (Third) found

themselves pleasing neither employee lawyers or employers.

In this chapter, we will use the Restatement (Second)—which

continues to reflect the law in most U.S. jurisdictions—for illustrations

and explanations. Keep ion mind, however, that it is not itself the law.

The dimensions of agency law in any given state require consultation

with lawyers who are expert in that state’s law.

1.1.3 What is an Agent?

An “agent” is someone who performs actions on behalf of and

under the control of another (called the “principal”) in a way that affects

the legal relations of the principal. The most obvious agents in our daily

lives are ordinary employees. When the cashier at the drive-thru

window takes our order, he is entering into a contract (e.g., selling us a

burger, fries, and drink) on behalf of the owner of the restaurant. He

affects the legal relations of the owner—if you fail to pay, the owner (not

the cashier) has a legal right to recover the price from you, and if the

burger is tainted you have a right to claim damages against the owner,

not the cashier. Obviously, the cashier is also under the control of the

owner. The cashier is plainly an agent.

While all ordinary employees are agents, not all agents are

employees. In many situations people act as agent when they are not

regular employees. We call such people independent contractors. A real

estate agent, a lawyer, or a person with a power of attorney who is

authorized to sign a contract on our behalf is an agent although he is not

an employee. Such agents may actually represent many principals at

the same time. Being an agent does not require that you receive money

Chapter 1: Agency 5

for it. Volunteer agents are agents to the same extent as those who are

paid.

Not everyone who does things for us is our agent. A stylist cuts

our hair, a painter paints our house, a mechanic fixes our car. These

people do things for us, but that is not the question. The question is

whether they are acting for us in the transaction—in other words, are

they purporting to represent us in dealing with a third party. They

painter, for example, is acting on his own behalf in performing a service.

He simply has a contract with us under which he performs a service and

we pay. If he goes to Home Depot to buy paint for the job, he is buying

it on his own account and he is liable to pay for it himself. If he does not

pay, Home Depot must collect the money from him—it has recourse

against us. On the other hand, if we authorize the painter to go to Home

Depot and charge the paint on our Home Depot account, we are asking

him to do something on our behalf. We have given him the power to

make us liable to Home Depot—and, it follows, means that he is not. He

has been given the power to change the legal relations between us and

Home Depot—we can sue Home Depot if the paint is defective and they

can sue us if we don’t pay the account.

The existence of agents does not require a whole new law of torts

or contracts. A tort is no less harmful when committed by an agent; a

contract is no less binding when negotiated by an agent. What does need

to be taken into account, though, is the manner in which an agent acts

on behalf of his principal and toward a third party.

To understand this chapter, it is necessary to realize that agency

involves a three-way relationship. The principal is the party who asks

another party to act on his behalf. The agent is the one who acts on

behalf of the principal. The third party is the one with whom the agent

deals. There are thus three relationships: (1) principal and agent, (2)

agent and third party, and (3) third party and principal.

1.1.4 Recurring Issues in Agency Law

Problems in agency law tend to follow predictable patterns. When

does an agent actually have the power to bind a principal? What duties

does the agent owe to the principal? Or the principal to the agent? What

rights does the third party have against the principal? Or the principal

as against the third party? Or the third party against the agent?

Chapter 1: Agency 6

To illustrate the typical problems, consider the famous literary

case of John Alden in Henry Wadsworth Longfellow’s The Courtship of

Miles Standish. Several problematic fact scenarios recur in agency, and

law has developed in response. Alden was a real person—a carpenter,

cooper, and diplomat who was said to have been the first Mayflower

emigrant to set foot on Plymouth Rock in 1620. Of interest here is his

task in Longfellow’s poem: to woo the lovely Priscilla Mullins on behalf

of Alden’s brave but tongue-tied commander, Captain Miles Standish.

Standish recruited the eloquent Alden, but did not realize that his young

protégé was also in love with the lovely “Puritan maiden.” Alden

accepted his captain’s assignment, despite the knowledge that he would

thus lose Priscilla for himself, and sought out the lady on the captain’s

behalf.

Let’s analyze this sequence of events in legal terms—recognizing,

of course, that this example is an analogy and that the law, even today,

would not impose consequences on Alden for his failure to carry out

Captain Standish’s wishes. Alden was the captain’s agent: he was

specifically authorized to speak in his name in a manner agreed on,

toward a specified end, and he accepted the assignment in consideration

of the captain’s friendship. But he had a conflict of interest. Ultimately,

Alden failed at his task—which he realized when Priscilla laughingly

asked at length, “Why don’t you speak for yourself, John?” Consider

these questions:

• How extensive was John’s authority? Could he have made

promises to Priscilla on the captain’s behalf—for example,

that Miles would have built her a fine house?

• Could he, if he committed a tort, have imposed liability on his

principal? If John committed fraud while soliciting Priscilla,

would Miles be liable? If he had been riding to Priscilla’s side

and negligently injured a pedestrian while en route could the

pedestrian have held Miles liable?

• Suppose John had injured himself on the journey. Would

Miles be obliged to recompense John for his injuries?

• Did John violate his duty to Miles by becoming betrothed to

Priscilla?

• Does John have any liability to Miles for stealing Priscilla’s

heart—that is, for taking the “profits” of the enterprise for

himself?

Chapter 1: Agency 7

We will be taking up each of these questions in this chapter. We will

start with the relationship between principals and agents.

1.2 The Principal-Agent Relationship

The first thing we need to do in exploring the relationships

between principals and agents is to get our terminology straight.

1.2.1 General Agent

A general agent possesses the authority to carry out a broad range

of transactions in the name and on behalf of the principal. The general

agent may be the manager of a business or may have a more limited but

nevertheless ongoing role—for example, as a purchasing agent or as a

life insurance agent authorized to sign up customers for the home office,

or even as a cashier at the drive-thru window authorized to sell burgers

and fries to customers. (The scope of an individual agent’s authority is

an important question that we will explore below.) In either case, the

general agent has authority to alter the principal’s legal relationships

with third parties. One who is designated a general agent has the

authority to act in any way required by the principal’s business. To

restrict the general agent’s authority, the principal must spell out the

limitations explicitly, and even so the principal may be liable for any of

the agent’s acts in excess of his authority.

General agents are most common in business transactions, but

there are circumstances under which an individual may appoint a

general agent for personal purposes. One common form of a personal

general agent is the person who holds another’s power of attorney. This

is a delegation of authority to another to act in his stead; it can be

accomplished by executing a simple form,

Ordinarily, the power of attorney is used for a special purpose—

for example, to sell real estate or securities in the absence of the owner.

But a person facing a lengthy operation and recuperation in a hospital

might give a general power of attorney to a trusted family member or

friend.

1.2.2 Special Agent

This term is used in several ways unrelated to agency law, as for

example with the “special agents” used by the FBI and other law

enforcement agencies. That is not what we are talking about here. In

the law of agency, a “special agent” is one who has authority to act only

Chapter 1: Agency 8

in specifically designated instances or in certain kinds of transactions.

This category includes such people as lawyers who are empowered to

negotiate and settle specific disputes, brokers who are authorized to

locate and negotiate the purchase of particular pieces of real estate, and

consignment shops who are authorized to sell the property for you that

you have delivered to them. Note that if the lawyer or broker is an

employee of the seller and works on many such transactions, he may be

a general agent.

The authority of special agents may be limited in specific ways.

For example, a real estate broker is usually a special agent. Suppose

seller Sam appoints broker Alberta to find a buyer for Sam’s land; she is

to be paid on a commission on the ultimate price but she is required to

present the contract to Sam for signature, not to sign it herself. Assume

she locates buyer Bob. As an agent, Alberta is authorized to make

representations on behalf of Sam, and those representations will bind

Sam. If, for example, she falsely tells Bob that the property has never

had termite damage, Bob will have the right to recover against Sam.

(Note that Alberta thus changed Sam’s legal relations with respect to

Bob.) But Alberta has no authority to sign the contract, and so her

signature does not bind Sam and it does not give Bob a right to claim

the land against Sam. Alberta only had authority to negotiate a deal,

not to agree to it.

1.2.3 Agency Coupled with an Interest

An agent whose reimbursement depends on his continuing to

have the authority to act as an agent is said to have an agency coupled

with an interest if he has a property interest in the business. A literary

or author’s agent, for example, customarily agrees to sell a literary work

to a publisher in return for a percentage of all monies the author earns

from the sale of the work. The literary agent also acts as a collection

agent to ensure that his commission will be paid. By agreeing with the

principal that the agency is coupled with an interest, the agent can

prevent his own rights in a particular literary work from being

terminated to his detriment. Thus, if publisher Penguin fails to pay

author Arnie his royalties—but Arnie for some reason does not want to

sue—agent Ann has the right to pursue the claim against Penguin.

Chapter 1: Agency 9

1.2.4 Subagent

To carry out his duties, an agent will often need to appoint his

own agents. These appointments may or may not be authorized by the

principal. Suppose the Principal Insurance Company names a general

agent, Ann, to sell its life insurance products in a particular state. Ann

has the power to enter contracts on behalf of Principal. But Ann will

need lots of help to cover the state, and so she hires a number of people

to sell the products. These people will have the power to sell policies on

behalf of Principal, but they are actually agents of Ann, who hired and

supervises them. We call them “subagents.” These agents are

subagents of the principal if the general agent had the express or

implied authority of the principal to hire them. For legal purposes, they

are agents of both the principal and the principal’s general agent, and

both are liable for the subagent’s conduct although normally the general

agent agrees to be primarily liable.

1.2.5 Servant

A particularly important category of agent is the “servant.” We

do not use the term in the way it is used in Jane Austen or Downton

Abbey—until the early 19th century, anyone who employed people was

a “master” and the employees were “servants.” Today we use “employer”

and “employee,” but the archaic terms survive in this one particular

situation. or Today we tend to use the terms “employer” and

“employee,” but in olden days the terms were “master” and “servant,”

and the archaic terms have survived. A servant in legal terms is an

agent whose performance is specifically subject to explicit direction by

the principle Section 2 of the Restatement (Second) of Agency defines a

servant as “an agent employed by a master [employer] 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.” Put more

simply, if you are an agent and the principal has the right to tell you

when to show up for work, when to leave, what do during the day, and

so forth, you are a servant. A simple rule of thumb is that all employees

are servants. Status as a servant is important in tort law—an employer

(“master”) is liable for the torts committed by his servants, but not his

agents who are not servants.

Chapter 1: Agency 10

1.2.6 Independent Contractor

Not every contract for services necessarily creates a master-

servant relationship. There is an important distinction made between

the status of a servant and that of an independent contractor. According

to Restatement (Second) of Agency § 2, “an independent contractor is a

person who contracts with another to do something for him but who is

not controlled by the other nor subject to the other’s right to control with

respect to his physical conduct in the performance of the undertaking.”

As the name implies, the independent contractor is legally autonomous.

For example, a plumber who works as a salaried employee of a building

contractor is an agent and is also a servant, since the contractor has the

right to control all aspects of his performance. Thus, if you hire a lawyer

to settle a dispute, the lawyer is your agent, but not your servant,

because you have no authority to specifically direct the performance of

the task. The lawyer will use his own judgment on how to approach the

task, and will decide when to do what. You may decide that you do not

like the way the lawyer is doing the job and get a different lawyer, but

you have no right to directly control his own professional performance.

The term “independent contractor” causes a great deal of

confusion because it is used in two distinct senses. For example, those

who provide services to us without being our agents (such as plumbers,

lawn services, and personal trainers) are called “independent

contractors.” But agents can also be independent contractors if their

performance is not directly under the control of the principal. Thus we

can differentiate between three different categories of people who do

things for us: (1) independent contractors who are not agents; (2) agents

who are independent contractors, and (3) agents who are servants. If

the lines between these categories seem fuzzy, don’t be alarmed. As the

court in Flick v. Crouch, 434 P.2d 256 (Okla. 1967), noted wryly, “the

line of demarcation between an independent contractor and a servant is

not clearly drawn.”

But though the line is hard to distinguish clearly, it has important

legal consequences for taxation, workers’ compensation, and liability

insurance. Perhaps most important, employers are liable for torts

committed by their servants, but (in most cases) not by independent

contractors. Thus, if a lawyer is an employee of real estate developer,

and the lawyer runs over someone while driving somewhere on business,

the developer will be liable. But if the lawyer is a non-employee agent

Chapter 1: Agency 11

(that is, not a “servant”), the developer will not be. Similarly, employers

are required to withhold income taxes from their employees’ paychecks.

But payment to an independent contractor, such as the plumber for hire,

does not require such withholding.

Deciding who is an independent contractor is not always easy;

there is no single factor or mechanical answer. In Robinson v. New York

Commodities Corp., 396 N.Y.S.2d 725 (App. Div. 1977), an injured

salesman sought workers’ compensation benefits, claiming to be an

employee of the New York Commodities Corporation. But the state

workmen’s compensation board ruled against him, citing a variety of

factors. The claimant sold canned meats, making rounds in his car from

his home. The company did not establish hours for him, did not control

his movements in any way, and did not reimburse him for mileage or

any other expenses or withhold taxes from its straight commission

payments to him. He reported his taxes on a form for the self-employed

and hired an accountant to prepare it for him. The court agreed with the

compensation board that these facts established the salesman’s status

as an independent contractor.

The factual situation in each case determines whether a worker

is an employee or an independent contractor. Neither the company nor

the worker can establish the worker’s status by agreement. A s the

North Dakota Workmen’s Compensation Bureau put it in a bulletin to

real estate brokers, “It has come to the Bureau’s attention that many

employers are requiring that those who work for them sign ‘independent

contractor’ forms so that the employer does not have to pay workmen’s

compensation premiums for his employees. Such forms are meaningless

if the worker is in fact an employee.”

It is also sometimes critical for decisions involving personal

liability insurance policies, which usually exclude from coverage

accidents involving employees of the insureds. General Accident Fire &

Life Assurance Corp v. Pro Golf Association, 352 N.E.2d 441 (Ill. App.

1976), involved such a situation. The insurance policy in question

covered members of the Professional Golfers Association. Gerald Hall,

a golf pro employed by the local park department, was afforded coverage

under the PGA policy, which excluded “bodily injury to any employee of

the insured [that is, Hall] arising out of and in the course of his

employment by the insured.” Under the policy, anyone employed by Hall

would not be able to recover under the PGA policy, but rather would

Chapter 1: Agency 12

have coverage under workers’ compensation statutes). One day, when

thirteen-year-old Bradley Martin was at the golf course for junior league

play, Hall asked him retrieve or “shag” golf balls to be hit during a lesson

Hall was giving to a pupil. Hall agreed to compensate Bradley either in

money, hot dogs, or golf instruction. During the lesson, Hall hit a ball

that struck Bradley in the eye. a golf ball hit by Hall hit young Martin

in the eye. If Martin was an employee, the PGA insurance company

would be liable; if he was not an employee, the workers’ compensation

insurance company would be liable. The trial court determined he was

not an employee. The evidence showed that sometimes the boys who

shagged balls got paid, got golfing instructions, or got food, so the

question of compensation was ambiguous; Bradley was not directed in

ow to perform the task of retrieving golf balls; no control was exercised

over him; and no equipment was required other than a bag to collect the

balls.” The court found that the “the evidence is susceptible of different

inferences,” and therefore that the trial court was not wrong in

concluding that Bradley was not an employee.

1.3 Creation of the Agency Relationship

Agency is a consensual relationship. That is, the principal must

agree to employee the agent and the agent must agree to be employed

on behalf of the principal. But agreement does not have to be explicit.

An agency relationship can be created in two ways: by agreement

(expressly), or by operation of law (constructively or impliedly).

1.3.1 Agency Created by Agreement

Most agencies are created by contract. You should recall the basic

rules from your contracts class. All of the ordinary contract rules apply

in agency situations. But note that agencies can also be created without

any kind of contract, which means that three principals very important

in contract law may play out differently when dealing with agency

relationships.

Contracts, as you should recall, usually require consideration to

be valid. But agencies are often created by consent in agreements that

are not actually contracts. It is not uncommon for one person to act as

an agent for another without consideration. For example, health-related

powers of attorney create agencies even though the person who receives

the power has received and given nothing in exchange. Similarly, if Abe

asks Byron as a favor to run down to the lumber yard for him and

Chapter 1: Agency 13

purchase some things on Abe’s account, there is no contract. There is

agreement, but it is entirely gratuitous. If Byron in fact does not go, Abe

cannot sue him because there was no contract. But Byron’s agency is

nevertheless valid and Abe will be liable on the account for whatever

Byron purchases on his account.

You may also recall that while most oral contracts are valid, some

types of contracts must be in writing to be enforceable. Most oral agency

contracts, however, are legally binding without a writing. In practice,

many agency contracts are written to avoid problems of proof. And there

are situations where an agency contract must be in writing: (1) if the

agreed-on purpose of the agency cannot be fulfilled within one year if

the agency relationship is supposed to last more than one year; (2) in

many states, an agreement to pay a commission to a real estate broker;

(3) in many states, authority given to an agent to sell real estate; and (4)

in several states, contracts between companies and sales

representatives.

Even when the agency contract is not required to be in writing,

contracts that agents make with third parties often must be in writing.

Thus Section 2-201 of the Uniform Commercial Code specifically

requires contracts for the sale of goods for the price of five hundred

dollars or more to be in writing and “signed by the party against whom

enforcement is sought or by his authorized agent.”

A contract is void or voidable when one of the parties lacks

capacity to make one. If both principal and agent lack capacity—for

example, a minor appoints another minor to negotiate or sign an

agreement—there can be no question of the contract’s voidability. But

suppose only one or the other lacks capacity. Generally, the law focuses

on the principal. If the principal is a minor or otherwise lacks capacity,

the contract can be avoided even if the agent is fully competent. There

are, however, a few situations in which the capacity of the agent is

important. Thus, a mentally incompetent agent cannot bind a principal.

Most agencies are made by contract, but agency also may arise

impliedly or apparently.

1.3.2 Implied Agency

In areas of social need, courts have declared an agency to exist in

the absence of an agreement. The agency relationship then is said to

have been implied “by operation of law.” Children in most states may

Chapter 1: Agency 14

purchase necessary items—food or medical services—on the parent’s

account. Long-standing social policy deems it desirable for the head of a

family to support his dependents, and the courts will put the expense on

the family head in order to provide for the dependents’ welfare. The

courts achieve this result by supposing the dependent to be the family

head’s agent, thus allowing creditors to sue the family head for the debt.

Implied agencies also arise where one person behaves as an agent

would and the “principal,” knowing that the “agent” is behaving so,

acquiesces, allowing the person to hold himself out as an agent. Such

are the basic facts in Weingart v. Directoire Restaurant, Inc., 333

N.Y.S.2d 806 (N.Y. 1972), where a man with his own doorman’s uniform

stood in front of various New York bars and restaurants and offered to

park cars for diners in exchange for tips. One of these was a nightclub

called Le Directoire, whose management was aware of the man’s

practice and did not object. One night a patron drove up in a brand-new

Cadillac, handed the man a tip, and went inside. Neither the man nor

the Cadillac were ever seen again. The patron sued the club for the

value of his Cadillac. The club responded that the man was not his

agent. The court held that by knowingly allowing the uniformed man to

stand at its front door, the club had led the public to believe that he

worked for the club, and therefore it was liable for the loss. In such cases

we presume that if the principal is aware of the activity and does not

object, the principal will be bound.

1.3.3 Apparent Agency

Suppose Arthur is Paul’s agent, employed through October 31.

Arthur has regularly purchased materials at Home Depot on Paul’s

account. On November 1, the day after his agency ends, Arthur buys

materials at Home Depot and Lumber Yard—as he has been doing since

early spring—and charges them to Paul’s account. Assuming Home

Depot has not been informed that Arthur’s agency is terminated, Paul

will be liable to pay for the items. Note that because Arthur’s agency

had been terminated, he did not have authority to charge the items to

Paul’s account. But he was still apparently Paul’s agent. Paul, of

course, will have a right to recover for the items against Arthur because

Arthur was not acting as his agent.

This is a very simple example of apparent agency, but things can

get much more complex. Suppose, for example, you are shopping for a

new car and a salesman on the lot—an employee of the car dealer—

Chapter 1: Agency 15

negotiates with you and agrees to sell you a particular used car for

$14,000. Later the dealer claims that sale is not valid because the

salesman had been told that he was not to sell that particular car for

less than $15,000. If that is true, then the salesman had no actual

authority to sell you the car, yet he apparently had the authority because

you had no reason to think that he did not. The dealer put him in a

position in which everyone would assume he had authority to negotiate

and did not convey any limitations. In that case, the sale is valid. If the

salesman violated his instructions, he is liable to the dealer for the

$1,000 loss.

A principal is bound by apparent agency if (1) the third party

reasonably believes that the purported agent is acting on behalf of that

principal, and (2) that belief is traceable to manifestations from the

principal to the third party. Restatement (Second) § 8. A famous case in

this regard is Lind v. Schenley Industries, Inc., 278 F.2d 79 (3d Cir.

1960), where a newly hired salesman was told that his sales manager

would tell him what his compensation would be. The sales manager

promised him a bonus that he did not actually have authority to

promise. When the bonus was not paid, the employee sued. The court

held that it was reasonable for the employee to believe that the manager

had authority, and this belief was directly due to manifestations by the

company.

Apparent agency has become a particular hot issue in recent

years with the growth of franchise businesses. In a typical franchise

situation, it is the franchisee, not the franchisor, who owns the business.

Employees at a local McDonald’s, for example, usually work for the

franchisee-owner and not for McDonald’s Corporation. If an employee

negligently scalds you with hot coffee, the franchisee will be liable, but

what about McDonald’s Corporation? Is the franchisee an agent of the

franchisor? Courts have often been confused about this; the franchisor-

franchisee contract is a contract under which the franchisee pays the

franchisor for services, which is the opposite of a normal agency

arrangement. Yet both franchisor and franchisee benefit when a

hamburger is sold. The best argument for liability against the

franchisor usually is apparent agency: by putting the Golden Arches

sign on the building, making all the employees wear McDonald’s

uniforms, and holding it out to the world as a McDonald’s restaurant,

the franchisor is making manifestations to the public that it is acting on

behalf of the franchisor.

Chapter 1: Agency 16

As a practical matter, it usually doesn’t matter whether the

franchisor is held liable for not. Both franchisor and franchisee will have

insurance policies, and so the battle will usually be over which insurance

company will pay. Franchisors ordinarily also require indemnification

from franchisees. The problem really only becomes acute when a

plaintiff sues the franchisor, and not the franchisee, shortly before the

statute of limitations runs—at which point the plaintiff will lose unless

it can show that the franchisee is an agent. The law on this varies

sharply not merely from state to state, but even within particular

jurisdictions. This is one of the reasons why you may see signs at

franchised locations saying something like, “This McDonald’s is proudly

owned and operated by” the local franchisee.

1.3.4 Inherent Agency Power

A final category of agency power is what is called “inherent”

agency power, which is unhelpfully defined as, “the power of an agent

which is derived not from authority, apparent authority or estoppel, but

solely from the agency relation and exists for the protection of persons

harmed by or dealing with a servant or other agent.” Restatement

(Second) § 84. In other words, sometimes courts will hold a party liable

for the acts of another who is not his agent if it is necessary to protect

an innocent party, even though there was no agency relationship and

the third party did not think there was.

The main situation in which inherent power is relevant is in cases

of undisclosed principals. Sometimes agents act on behalf of principals

who do not want their identities disclosed. A real estate developer

planning on building a new shopping center, for example, may want to

buy up property in an area without disclosing its plans, and thus use

agents who are told not to reveal the ultimate buyer. In such cases the

agents have full authority and the third party who deals with them will

be able to sue the developer if the deal goes bad even though they did

not know of its role. Where an agent has authority, an undisclosed

principal is bound as surely as a disclosed principal.

But what happens when the agent for an undisclosed principal

exceeds his authority? Suppose the developer had told the agent not to

agree to more than $500,000 on the property, but the agent nevertheless

agrees to a price of $550,000? The agent had no actual authority, so the

principal cannot be bound on that theory. Apparent authority does not

work, because it requires that the principal have done something to lead

Chapter 1: Agency 17

the third party to believe that the agent is working on behalf of that

principal, and in this case the third party is completely unaware of the

principal’s existence. Yet it seems unfair that the innocent third party

should be stuck in this scenario. The agent did something wrong, and

either the principal or the third party is going to be stuck. In this case,

the law favors the innocent third party on the ground that the

principal—not the third party—has the power and authority to control

the agent, and so should be the one liable when the agent errs.

An old English case, Watteau v. Fenwick, [1893] 1 QB 346, is a

good illustration. A man named Humble was the owner of a pub, which

was purchased by a brewery. Humble was kept on as the manager, and

continued to be listed as the proprietor of the pub. Customers and

suppliers were unaware that Humble had sold the business, and

continued to think he was the owner. The brewery allowed Humble to

buy certain things for the pub, but forbade him to purchase cigars.

Humble nevertheless ordered cigar deliveries from the plaintiff, who did

not get paid. When he learned that Humble was only an employee and

had no significant assets, he sued the brewery. The court held that the

brewery was bound, holding that “the principal is liable for all the acts

of the agent which are within the authority usually confided to an agent

of that character, not withstanding limitations, as between the principal

and the agent, put on that authority.”

1.3.5 Ratification

There is yet another way a principal may be bound to a contract

negotiated by someone who is not, in fact, his agent: ratification.

Assume that Alan, with no authority whatsoever, claims to represent

Paula in negotiating a contract with Tom. There is no manifestation

from Paula to Tom, so apparent authority does not apply. Alan is not

an agent at all, so inherent power does not apply. Paula has no

obligation under the contract. But assume Paula, with knowledge of the

transaction, agrees to it or remains silent and accepts the benefits. In

that case, she will be said to have ratified the contract. In that case, she

becomes liable on it. Note that Alan has given Paula what is, in effect,

an option on the deal—she can accept it and become liable, or reject it,

in which case Alan is personally liable to Tom.

Chapter 1: Agency 18

1.4 Relations Between Principal and Agent

Agency is a reciprocal relationship in which each of the parties

owes duties to the other. In the business context, most of the

relationship is governed by contract. In ordinary employment

situations, for example, most of the actual duties of the agent, along with

the compensation he will receive, are spelled out in the employment

agreement, which may partly be oral and party written, as in the case

of employee handbooks. But certain duties are imposed by law on all

agency relationships. These duties may be varied by agreement, but

usually they cannot be entirely disclaimed.

1.4.1 Agent’s Duties to Principal

In ordinary commercial agreements, the parties’ responsibilities

terminate at the borders of the contract. In general, if they have

complied with the precise terms of the agreement, they owe each other

no further duties. But in addition to their ordinary contractual duties,

agents owe principals a fiduciary duty.

1.4.1.1 Fiduciary Duties

In a non-agency contractual situation, the parties’ responsibilities

usually terminate at the border of the contract. There is no relationship

beyond the agreement. Each party ordinarily is entitled to act in his own

interest, not that of the other. But the agency relationship is more than

a contractual one, and the agent’s responsibilities go beyond the border

of the contract. Agency imposes a higher duty than simply to abide by

the contract terms—what the law calls a “fiduciary” duty.

The concept of “fiduciary” goes back a long way. It is used for any

number of situations in which we expect one party to act in the best

interest of the other party. Traditional fiduciary relationships are those

of guardian and ward, trustee and beneficiary, and executor and estate.

In these cases the one charged with responsibility—the “fiduciary”—has

taken on the burden of putting others’ interests ahead of his own.

It may seem odd that this idea of fiduciary relations has a role in

ordinary business relationships. We generally assume that employers

and employees, for example, are free to bargain over whatever terms

they choose. An employee is not required to take the employer’s interest

into account when demanding a raise, and the employer generally has

no legal duty to consider the best interests of the employee in deciding

whether to fire him. Each is free to take honest advantage of the other.

Chapter 1: Agency 19

Thus, an agent of a principal is (absent an agreement to the contrary)

free to quit and start his own business in direct competition with his

former principal, even to the point of driving him out of business. The

principal is (again, absent agreement) free to fire the agent and hire

someone who will do a better job. Agency law has nothing to say with

respect to these transactions. In negotiating his own contract and his

compensation, the agent is acting on his own behalf, and owes no

fiduciary

duties.

But it plays a major role when the agent is dealing on behalf of

the principal with respect to a third party. Here, he is not acting for

himself, but for the principal, and, in these transactions, he must put the

interests of the principal ahead of his own. What this means in practice

we shall soon see.

Duty to Avoid Self-Dealing. A fiduciary may not lawfully profit

from a conflict between his personal interest in a transaction and his

principal’s interest in that same transaction. A broker hired as a

purchasing agent, for instance, may not buy the things himself and then

sell them at an undisclosed profit to the principal. Nor can he, without

full disclosure and acceptance by the principal, sell to his principal

through a company in which he or his family has a financial interest. In

such cases the remedy for breach of trust is “disgorgement”—the term

comes from the Old French word for “vomiting”—which means that the

agent must turn over all the profits he made from the breach to the

principal.

Duty to Preserve Confidential Information. To further his

objectives, a principal will usually need to reveal a number of secrets to

his agent—how much he is willing to sell or pay for property, marketing

strategies, and the like. Such information could easily be turned to the

disadvantage of the principal if the agent were to compete with the

principal or were to sell the information to those who do. (Imagine a real

estate agent who passed on to the prospective buyer the smallest

amount you would take for the house you were urgently trying to sell—

especially if the agent were getting paid for that information by the

buyer .) The law therefore prohibits an agent from using information

confidentially given or acquired for his own purposes or in ways that

would injure the interests of the principal,. This prohibition extends to

information gleaned from the principal though unrelated to the agent’s

assignment. As section 395 of the Restatement (Second) explains it, “[A]n

Chapter 1: Agency 20

agent who is told by the principal of his plans, or who secretly examines

books or memoranda of the employer, is not privileged to use such

information at his principal’s expense.” Nor may the agent use

confidential information after resigning his agency. Though he is free,

in the absence of contract, to compete with his former principal, he may

not use information learned in the course of his agency, such as trade

secrets and customer lists. The case of Bacon v. Volvo Service Center,

Inc., 597 S.E.2d 440 (Ga. App. 2004), which is excerpted below, deals

with just such an agent’s breach of the duty of confidentiality.

1.4.1.2 Other Duties

In addition to fiduciary responsibility (and whatever special

duties may be contained in the specific contract) the law of agency

imposes other duties on an agent. These duties are not necessarily

unique to agents: a nonfiduciary employee could also be bound to these

duties on the right facts.

Duty of Skill and Care. An agent often is taken on because he has

special knowledge or skills that the principal wishes to tap, and nearly

always because he appears competent and reliable. The agent is under

a legal duty to perform his work with the care and skill that is “standard

in the locality for the kind of work which he is employed to perform,”

Restatement (Second) of Agency § 379, and to exercise any special skills,

if these are greater or more refined than those prevalent among those

normally employed in the community. In short, the agent may not

lawfully do a sloppy job.

Duty of Good Conduct. In the absence of an agreement, a

principal may not ordinarily dictate how an agent must live his private

life. An overly fastidious florist may not instruct her truck driver to steer

clear of the local bar on his way home from delivering flowers at the end

of the day. But there are some jobs on which the personal habits of the

agent may have an effect. The agent is not at liberty to act with

impropriety or notoriety, so as to bring disrepute on the business in

which the principal is engaged. A lecturer at an anti-alcohol clinic may

be directed to refrain from frequenting bars. A bank cashier who

becomes known as a gambler may be fired.

Duty to Act Only as Authorized. This duty states a truism but is

one for which there are limits. A principal’s wishes may have been stated

ambiguously or may be broad enough to confer discretion on the agent.

Chapter 1: Agency 21

As long as the agent acts reasonably under the circumstances, he will

not be liable for damages later if the principal ultimately repudiates

what the agent has done: “Only conduct which is contrary to the

principal’s manifestations to him, interpreted in light of what he has

reason to know at the time when he acts . . . subjects the agent to liability

to the principal.”

Duty to Obey. As a general rule, the agent must obey reasonable

directions concerning the manner of performance. What is reasonable

depends on the customs of the industry or trade, prior dealings between

agent and principal, and the nature of the agreement creating the

agency. A principal may prescribe uniforms for various classes of

employees, for instance, and a manufacturing company may tell its sales

force what sales pitch to use on customers. On the other hand, certain

tasks entrusted to agents are not subject to the principal’s control; for

example, a lawyer may refuse to permit a client to dictate courtroom

tactics.

Duty to Give Information. Because the principal cannot be every

place at once—that is why agents are hired, after all—much that is vital

to the principal’s business first comes to the attention of agents. If the

agent has actual notice or reason to know of information that is relevant

to matters entrusted to him, he has a duty to inform the principal. This

duty is especially critical because information in the hands of an agent

is, under most circumstances, imputed to the principal, whose legal

liabilities to third persons may hinge on receiving information in timely

fashion. Service of process, for example, requires a defendant to answer

within a certain number of days; an agent’s failure to communicate to

the principal that a summons has been served may bar the principal’s

right to defend a lawsuit. The imputation to the principal of knowledge

possessed by the agent is strict: even where the agent is acting adversely

to the principal’s interests—for example, by trying to defraud his

employer—a third party may still rely on notification to the agent,

unless the third party knows the agent is acting adversely.

Duties with Respect to Inventions. Agents also have duties to

principals when they use their principals’ time, facilities, equipment, or

supplies to develop or invent new products. This “shop rights” doctrine

is a complex area, but one that every employee should be aware of. An

illustrative case is Grip Nut Co. v. Sharp, 150 F.2d 192 (7th Cir. 1945).

In that case, Sharp signed a five-year contract with Grip Nut Company

Chapter 1: Agency 22

that in return for a salary and bonuses as company president, he would

assign to the company any inventions he made. When the contract

expired, Sharp continued to serve as chief executive officer, but no new

contract was negotiated concerning either pay or rights to inventions.

During the next ten years, Sharp invented a number of new products

and developed new machinery to manufacture them; patent rights went

to the company. However, he made one invention with two other

employees and they assigned the patent to him. A third employee

invented a safety device and also assigned the patent to Sharp. At one

time, Sharp’s son invented a leakproof bolt and a process to manufacture

it; these, too, were assigned to Sharp. These inventions were developed

in the company’s plants at its expense.

When Sharp died, his family claimed the rights to the inventions

on which Sharp held assignments and sued the company, which used

the inventions, for patent infringement. The family reasoned that after

the expiration of the employment contract, Sharp was employed only in

a managerial capacity, not as an inventor. The court disagreed and

invoked the shop rights doctrine, under which an invention “developed

and perfected in [a company’s] plant with its time, materials, and

appliances, and wholly at its expense” may be used by the company

without payment of royalties. “Because the servant uses his master’s

time, facilities and materials to attain a concrete result,” wrote the

court, “the employer is entitled to use that which embodies his own

property and to duplicate it as often as he may find occasion to employ

similar appliances in his business.” The company would have been given

complete ownership of the patents had there been an express or implied

(e.g., the employee is hired to make inventions) contract to this effect

between Sharp and the company.

1.4.2 Principal’s Duty to Agent

Just as agents have duties to principals, principals have duties to

agents. Some of these, such as salary and obligations to provide

company vehicles, arise out of the contract between them and are thus

governed by contract law. Others are governed by statute, such as

workers’ compensation and wage and hour labor obligations. Some arise

solely due to the agency relationship, and thus are governed by agency

law. The fiduciary relationship of agent to principal does not run in

reverse—that is, the principal is not the agent’s fiduciary.

Chapter 1: Agency 23

1.4.1 General Contract Duties

These duties are analogues of many of the agent’s duties that we

have just examined. In brief, a principal has a duty “to refrain from

unreasonably interfering with [an agent’s] work.” Restatement (Second)

§ 434. This does not mean that the principal must not interfere at all,

however. A principal may compete with the agent unless the agreement

specifically prohibits it. Thus, a manufacturer who distributes products

through agents is free (unless the contract specifies otherwise) to bring

in other agents who compete with existing agents, or even to sell directly

in competition with its agents.

Principals also have a duty to inform agents of potential physical

harm or pecuniary loss that inhere in the agent’s performance. For

example, failure to warn an agent that travel in a particular area

required by the job may be dangerous (a fact unknown to the agent but

known to the principal) can subject the principal to a suit for damages if

the agent is injured while in the area performing his job. This applies

only where the principal has information the agent does not; if the agent

is being asked to perform hazardous duty in an active hurricane

situation, the risks are likely to be apparent to both.

Principals are obliged to render accounts of monies due to agents.

The duty depends, however, on a variety of factors, including the degree

of independence of the agent, the method of compensation, and the

customs of the particular business. An ordinary employee, for example,

should expect the employer to keep track of hours, including overtime

hours worked. A lawyer working as an agent on a transaction might

reasonably be expected to keep track of his own hours and the amount

to be billed to the principal.

1.4.2 Employment at Will

Under the traditional “employment-at-will” doctrine, an

employee who is not hired for a specific period can be fired at any time,

for any reason. Similarly, the employee can quit at any time, without

warning. This is today limited by certain “public policy” limitations

designed to protect employees who act to prevent wrongdoing by the

employer. An employee who is fired for correctly reporting that his

employer’s paper mill is illegally polluting groundwater, or complaining

about unlawful business practices by salesmen, may be entitled to get

his job back, along with damages caused by the firing.

Chapter 1: Agency 24

1.4.3 Duty to Indemnify

Agents commonly spend money pursuing the principal’s business.

Unless the agreement explicitly provides otherwise, the principal has a

duty to indemnify or reimburse the agent. A familiar form of indemnity

is the employee expense account.

Similarly, principals have a duty to indemnify agents when

agents commit torts or other infractions while in the course of

performing their duties. This does not extend to intentional acts of

wrong-doing.

1.4.3 Workers’ Compensation

The employer owes the employee—any employee, not just

agents—certain statutorily imposed tort and workers’ compensation

duties.

To understand the workers’ compensation system, suppose Andy,

who works in a dynamite factory, stores explosives in a shed. Andy

warns his fellow employee, Bill, that he has done so. Bill nevertheless

lights up a cigarette near the shed, setting off the explosives and

injuring Bill. Can Bill recover for his injuries from the factory? Under

traditional tort law, the answer was no, for several reasons. First, there

was no negligence by Andy that would lead to liability. Second, even if

Andy had been negligent in storing the dynamite, Bill knew of the

danger and decided to smoke there anyway, which meant, in legal terms,

that he had “assumed the risk” of injury and could not recover. Third,

Bill’s own negligence in smoking near explosives led to his injuries,

which would bar his recovery under the doctrine of “contributory

negligence.” And finally, he would be barred by what was called the

“fellow servant” rule, under which the principal was liable for injuries

his agents caused to third parties, but not to other agents. Relatively

few employees were thus able to maintain legal actions for on-the-job

industries. But because these were jury cases, the relatively few

employees who recovered could often get large payouts for “pain and

suffering,” which meant that injured employees tended to sue a lot,

hoping at least for small settlements.

This system, which was bad for employees and unpredictable for

employers, was largely replaced by legislators in the early twentieth

century. The resulting system was a compromise under which

employees traded their rights to sue their employers for guaranteed,

Chapter 1: Agency 25

predetermined payments. Employees can now recover for workplace

injuries no matter who was at fault, but their recovery will be under a

strict schedule of payments. The main exception to this is when the

employer has deliberately injured an employee. In that case the

employee is free to sue. Workers’ compensation is aimed at redressing

accidental injuries.

Most workers’ compensation acts provide 100 percent of the cost

of a worker’s hospitalization and medical care necessary to cure the

injury and relieve him from its effects. They also provide for payment of

lost wages and death benefits. Even an employee who is able to work

may be eligible to receive compensation for specific injuries. The injury

schedules are complex, as you can see from this Kansas statute:

Article 5.—Workers’ Compensation

44-510d. Compensation for certain permanent partial

disabilities; schedule. If there is an award of permanent disability as a

result of the injury there shall be a presumption that disability existed

immediately after the injury and compensation is to be paid for not to

exceed the number of weeks allowed in the following schedule:

(1) For loss of a thumb, 60 weeks.

(2) For the loss of a first finger, commonly called the index

finger, 37 weeks.

(3) For the loss of a second finger, 30 weeks.

(4) For the loss of a third finger, 20 weeks.

(5) For the loss of a fourth finger, commonly called the little

finger, 15 weeks.

(6) Loss of the first phalange of the thumb or of any finger shall

be considered to be equal to the loss of 1/2 of such thumb or finger, and

the compensation shall be 1/2 of the amount specified above. The loss

of the first phalange and any part of the second phalange of any finger,

which includes the loss of any part of the bone of such second phalange,

shall be considered to be equal to the loss of 2/3 of such finger and the

compensation shall be 2/3 of the amount specified above. The loss of

the first phalange and any part of the second phalange of a thumb

which includes the loss of any part of the bone of such second phalange,

shall be considered to be equal to the loss of the entire thumb. The loss

of the first and second phalanges and any part of the third proximal

phalange of any finger, shall be considered as the loss of the entire

finger. Amputation through the joint shall be considered a loss to the

next higher schedule.

(7) For the loss of a great toe, 30 weeks.

Chapter 1: Agency 26

(8) For the loss of any toe other than the great toe, 10 weeks.

(9) The loss of the first phalange of any toe shall be considered

to be equal to the loss of 1/2 of such toe and the compensation shall be

1/2 of the amount above specified.

(10) The loss of more than one phalange of a toe shall be

considered to be equal to the loss of the entire toe.

(11) For the loss of a hand, 150 weeks.

(12) For the loss of a forearm, 200 weeks.

(13) For the loss of an arm, excluding the shoulder joint,

shoulder girdle, shoulder musculature or any other shoulder

structures, 210 weeks, and for the loss of an arm, including the

shoulder joint, shoulder girdle, shoulder musculature or any other

shoulder structures, 225 weeks.

(14) For the loss of a foot, 125 weeks.

(15) For the loss of a lower leg, 190 weeks.

(16) For the loss of a leg, 200 weeks.

(17) For the loss of an eye, or the complete loss of the sight

thereof, 120 weeks.

The injured worker is typically entitled to two-thirds his or her average

pay, not to exceed some specified maximum, for two hundred weeks. If

the loss is partial (like partial loss of sight), the recovery is decreased by

the percentage still usable.

Although workers’ compensation laws are on the books of every

state, in two states—New Jersey and Texas—they are not compulsory.

In those states the employer may decline to participate, in which event

the employee must seek redress in court. But in those states, the old

common-law defenses (fellow-servant rule, contributory negligence, and

assumption of risk) have been statutorily eliminated, greatly enhancing

an employee’s chances of winning a suit. The incentive is therefore

strong for employers to elect workers’ compensation coverage.

Not all employees are covered by workers’ compensation. Farm

and domestic laborers are often not covered, while and public employees,

railroad, and maritime workers are covered under different but fairly

similar laws. Approximately half the states now provide coverage for

household workers, although the threshold of coverage varies widely

from state to state. Some use an earnings test; other states impose an

hours threshold. People who fall within the domestic category include

Chapter 1: Agency 27

maids, baby-sitters, gardeners, and handymen but generally not

plumbers, electricians, and other independent contractors.

There are three general methods by which employers may comply

with workers’ compensation laws. First, they may purchase employer’s

liability and workers’ compensation policies through private commercial

insurance companies. These policies consist of two major provisions:

payment by the insurer of all claims filed under workers’ compensation

and related laws (such as occupational disease benefits) and coverage of

the costs of defending any suits filed against the employer, including any

judgments awarded. The second method of compliance with workers’

compensation laws is to insure through a state fund established for the

purpose. The third method is to self-insure. The laws specify conditions

under which companies may resort to self-insurance, and generally only

the largest corporations qualify to do so. In short, workers’ compensation

systems create a tax on employers with which they are required (again,

in most states) to buy insurance.

The amount the employer has to pay for the insurance depends

iin large part on how dangerous the work is. In 2020, for example, the

base rate in Washington State for aerial fire fighters and crop dusters

was $12.44 an hour, compared to $0.14 for software designers. Some

other categories include local law enforcement officers ($1.91), exotic

dancers ($6.52), lawyers ($.20), convenience store workers ($.46), bakers

($1.12), dockyard workers ($2.42), bridge construction workers ($4.25),

corporate officers ($0.17), and professional football players ($25.71). The

base rate, however, is adjusted by the individual employer’s injury

history. Employers whose workers suffer more injuries pay more.

There are a number of legal issues that recur in workers’

compensation cases. Both the employer and the insurer will sometimes

try to deny coverage. Some recurring legal issues include:

• Is the injured person an employee? This has always been an

important issue, but it takes on even more importance in the modern

economy, where many workers work as independent contractors. What

makes it complex is that sometimes workers want to be classified as

employees so they can get workers’ compensation; sometimes they do

not want to be employees because they would prefer to bring suit for

damages. Courts generally have opted for fairly wide coverage. In Betts

v. Ann Arbor Public Schools, 271 N.W.2d 498 (Mich. 1978), for example,

a college student majoring in physical education was a student teacher

Chapter 1: Agency 28

in a junior high school. During a four-month period, he taught two

physical education courses. On the last day of his student teaching,

thirty of his students grabbed him and tossed him into the swimming

pool—apparently a tradition at the school for student PE teachers. In a

freak accident, he lost an eye when it was struck by a whistle on an

elastic band. He filed a compensation claim. (Note that he would not

have likely been able to recover from the school district since the

students, not school employees, injured him.) The school board argued

he was not an employee because he received no pay. The state workers’

compensation appeal board ruled against the school on the ground that

payment in money was not required: “Plaintiff was paid in the form of

training, college credits towards graduation, and meeting of the

prerequisites of a state provisional certificate.” The state supreme court

affirmed the award.

• Is the injury work related? As a general rule, on-the-job injuries

are covered no matter what their relationship to the employee’s specific

duties. Thus, almost anything that happens at the workplace will

normally be covered, unless it involves some sort of culpable behavior by

the employee, such as drunkenness or fighting—and even there,

sometimes the employee wins. Injuries that occur while an employee is

outside the workplace on business are usually covered, such as when an

employee is driving to visit a customer. It becomes more complicated,

however, if the employee has taken a personal detour on the way to the

customer’s place and is injured on the detour. Workers kicking a ball

around at the workplace while on break are usually covered, but may or

may not be if they are injured while playing on a company team in a city

softball league. It is impossible to state any firm rules in this area.

• How palpable must the “injury” be? A difficult issue is whether

a worker is entitled to compensation for psychological injury, including

cumulative trauma. Until the 1970s, insurance companies and

compensation boards required physical injury before making an award.

Claims that job stresses led to nervous breakdowns or other mental

disorders were rejected. But many courts have liberalized the definition

of injury and now recognize that psychological trauma can be real and

that job stress can bring it on. A leading case is Wolfe v. Sibley, Lindsay

& Curr Co., 330 N.E.2d 603 (N.Y. 1975), where the security manager for

a department store, under intense stress at work, killed himself. His

assistant discovered his body in a pool of blood. She suffered severe

depression and was wracked with guilt over her perceived failure to

Chapter 1: Agency 29

notice his mood and prevent his suicide. Despite medical treatment, she

was unable to continue work. The court held that this was sufficient

injury to allow her to recover under workers’ compensation for the

disability.

1.6 Tort Liability of Principals

The rules regarding the contracts entered into by agents on behalf

of principals are governed by the concepts of “authority” or “power”

described above. They depend a great deal on the intentions and

understandings of the principal and agent. When we get to tort law,

however, the rules are very different. We even use different

terminology. As noted above, we still use the terms “master” and

“servant” in the realm of tort law. Masters are directly or vicariously

liable for torts committed by their servants.

1.6.1 Direct Liability

A principal, like any other person, is liable for torts he commits

himself. But he is also directly liable for torts that he directed the

servant to commit. This can be thought of in the same way that we

think of accomplice liability in criminal law. One who directs another

to commit a crime is liable for the crime to the same extent as the actor.

Similarly, if the master directs a servant to injure someone—or to

engage in some activity that the master has reason to know is likely to

injure someone, such as dumping toxic materials into a watercourse—

the principal is directly liable.

In the same way, a principal can be liable for negligently selecting

agents. Suppose Paula hires Alan to be an armed security guard at her

nightclub, without bothering to check his background. If Alan gets

angry and deliberately shoots a customer because he is wearing a T-

shirt that Alan doesn’t like, Paula may well be liable. Her liability is

based on the fact that she hired Alan for a sensitive job without doing

rudimentary background checks. She was negligent. Similarly, if Alan

is inadequately trained, or given bad instructions, she will be liable

because of her own failures, not his.

1.6.2 Vicarious Liability

But liability of masters for their servants’ torts is far broader.

Masters are liable even when they have no knowledge of the acts, had

no intention of committing them, and may, in fact, have absolutely

forbidden them. This concept, called in the law respondeat superior (“let

Chapter 1: Agency 30

the master answer”) goes back several millennia, and is rooted in the

idea that where a master puts an enterprise in operation, the master

should be liable for all the injuries that result from it. The goal is to

create incentives for masters to operate their enterprises safely. In

modern times, the doctrine has also been justified on the grounds that

it allows the injured party to recover from the master’s “deep pocket”

rather than the presumably less wealthy employee. Masters, at least

sophisticated ones, can often offload the risk through insurance that

may not be available to, or affordable by, the servant.

Respondeat superior raises three difficult questions: (1) Is the

particular agent a “servant” for whose torts a master may be liable? (2)

Was the servant acting within the “course of his employment” when he

committed the tort? (3) If the tort was intentional, may the master

nevertheless be liable?

1.6.2.1 Vicarious Liability

In general, the broadest liability is imposed on the master in the

case of tortious physical conduct by a servant, as defined above in § 1.2.5.

If the servant acted within the scope of his employment (as we note in

the next section), the master will be liable to the victim for damages

unless, as we have seen, the victim was another employee, in which

event the workers’ compensation system (§ 1.4.3) will be invoked. Recall

that employees are almost always servants for legal purposes; other

agents may become servants to the extent that their actual performance

of their tasks is under the direct control of the principal.

Ordinarily, an individual or a company is not vicariously liable

for the tortious acts of independent contractors. The plumber who

rushes to a client’s house to repair a leak and causes a traffic accident

does not subject the homeowner to liability. But there are exceptions to

the rule. Generally, these exceptions fall into a category of duties that

the law deems nondelegable. In some situations, one person is obligated

to provide protection to or care for another. The failure to do so results

in liability whether or not the harm befell the other because of an

independent contractor’s wrongdoing. Thus, a homeowner has a duty to

ensure that physical conditions in and around the home are not

unreasonably dangerous. If the owner hires an independent contracting

firm to dig a sewer line and the contractor negligently fails to guard

passersby against the danger of falling into an open trench, the

homeowner is liable because the duty of care in this instance cannot be

Chapter 1: Agency 31

delegated. (The contractor is, of course, liable to the homeowner for any

damages paid to an injured passerby.)

1.6.2.2 Scope of Employment

Masters are not liable for all the torts committed by their

servants, only those that occur within the “scope of employment.” If a

company driver runs over a pedestrian while delivering products to a

customer, the master is liable; if the same driver runs over someone

while driving from home to his daughter’s softball game, the master is

not. These examples are easy, but determining what this means is not

easy.

The simplest case is whether the servant is actually following his

instructions to the letter. In such cases there is no doubt about liability.

But things get complicated quickly. A classic old English case, Joel v.

Morrison.Joel v. Morrison, 6 Carrington & Payne 501 (1833), illustrates

the problem. The plaintiff was run over on a highway by a speeding cart

and horse owned by the defendant. The driver was the servant of the

defendant, and a fellow servant was with him. The driver had plainly

been careless. But no one could explain what the cart was doing on that

road, since the master had no business going on there. The defendant

argued that the driver had taken the cart and was out driving for his

own purposes. If that were true, said the court, the employer would not

be liable: “If the servants, being on their master’s business, took a detour

to call upon a friend,” the court wrote, “the master will be responsible. .

. . But if he was going on a frolic of his own, without being at all on his

master’s business, the master will not be liable.” The “frolic of his own”

language has been used repeatedly down the years. In this particular

case, the court held the evidence suggested that the employer was liable.

Trying to define the difference between a “detour” and a “frolic of

one’s own” is obviously difficult. The test is thus one of degree, and it is

not always easy to decide when a detour has become so great as to be

transformed into a frolic. For a time, a rather mechanical rule was

invoked to aid in making the decision. The courts looked to the servant’s

purposes in “detouring.” If the servant’s mind was fixed on

accomplishing his own purposes, then the detour was held to be outside

the scope of employment; hence the tort was not imputed to the master.

But if the servant also intended to accomplish his master’s purposes

during his departure from the letter of his assignment, or if he

committed the wrong while returning to his master’s task after the

Chapter 1: Agency 32

completion of his frolic, then the tort was held to be within the scope of

employment.

This test is not always easy to apply. If a hungry deliveryman

stops at a restaurant outside the normal lunch hour, intending to

continue to his next delivery after eating, he is within the scope of

employment. But suppose he decides to take the truck home that

evening, in violation of rules, in order to get an early start the next

morning. Suppose he decides to stop by the beach, which is far away

from his route. Does it make a difference if the employer knows that his

deliverymen do this?

Court decisions in the last forty years have moved toward a

different standard, one that looks to the foreseeability of the agent’s

conduct. By this standard, an employer may be held liable for his

employee’s conduct even when devoted entirely to the employee’s own

purposes, as long as it was foreseeable that the agent might act as he

did. This is the “zone of risk” test. The employer will be within the zone

of risk for vicarious liability if the employee is where she is supposed to

be, doing—more or less—what she is supposed to be doing, and the

incident arose from the employee’s pursuit of the employer’s interest

(again, more or less). That is, the employer is within the zone of risk if

the servant is in the place within which, if the master were to send out

a search party to find a missing employee, it would be reasonable to look.

For example, in Cockrell v. Pearl River Valley Water Supply District, 865

So.2d 357 (2004), police officer was acting within the scope of his

employment when he arrested a female driver, but not when he later

drove her to a secluded location and attempted to assault her. On the

other hand, in Lyon v. Carey, 385 F. Supp. 272 (D.D.C. 1974), the master

was liable when its deliveryman assaulted and raped a woman who was

in the apartment where he was delivering merchandise.

1.6.2.3 Intentional Torts

In the nineteenth century, a principal was rarely held liable for

intentional wrongdoing by the agent if the principal did not command

the act complained of. The thought was that one could never infer

authority to commit a willfully wrongful act. Today, liability for

intentional torts is imputed to the principal if the agent is acting to

further the principal’s business. Thus, in the Lyon v. Carey case

mentioned in the last section, even deliberate rape can be imputed to

the master when it is done within the scope of the job. Thus, a bouncer

Chapter 1: Agency 33

who severely beats a customer to a pulp while on the job or a cashier

who screams racist threats at customers while at the register can create

liability for the master.

PROBLEMS

Problem 1

GoodBurger, Inc., is a company that operates fast-food

restaurants in the United States. It has about 500 outlets. Two hundred

of those are owned by Goodburger itself; the other 300 are franchised

restaurants that are actually owned by local business people. Leona

owns a GoodBurger franchise in a middle-class suburb. To get the

franchise, she paid GoodBurger a “franchise fee” of $75,000, and makes

annual payments to GoodBurger amounting to 3 percent of sales. She is

responsible for all costs relating to building, operating, and managing

the restaurant, including rent, wages, utilities, and taxes. The

restaurant design plans are drawn up by GoodBurger’s architectural

team, and Leona is required to follow those plans. The plans specify all

of the public signage at the restaurant, including the large sign with the

famous black-gold-teal GoodBurger logo. Customers cannot tell the

difference between company-owned and franchised stores.

GoodBurger stores—whether company-owned or franchised—

must all be strictly operated under terms of the 500-page “Operations

Manual,” which is informally known as “the GoodBurger Bible.” As with

company-owned stores, all of Leona’s employees are required to wear

uniforms with the GoodBurger logo and may wear no other

identification. The Operations Manual specifies in detail the job of each

category of employee, the correct way to make each of the company’s

100-plus menu items (e.g., exactly how many pickle chips should be

placed on each of thee company’s ten signature burgers), and such

details as how and how often restrooms must be cleaned. Failure to

follow these guidelines may result in a loss of Leona’s the franchise.

Under the franchise agreement, GoodBurger is responsible for providing

bookkeeping and accounting services to Leona, and is responsible for

designing, managing, and placing all national and regional advertising.

Leona has some discretion in the operation of the store. She is

responsible for deciding which (and how many) employees to hire, so

long as she meets the “minimum staffing” guidelines in the Operations

Manual. The store must be open from 6:30 a.m. to 11:00 p.m., but Leona

Chapter 1: Agency 34

can set longer hours if she chooses. She is required to set prices at the

levels specified by GoodBurger, but may vary those prices in special

cases with approval of the GoodBurger regional office. When

GoodBurger offers regional or national promotions, she can elect

whether to opt out of the promotion. She is also authorized to advertise

locally, provided her ads are approved by the regional office.

Is Leona an agent of GoodBurger? Explain.

Problem 2

Based on his experience working for the CIA, a former CIA agent

published a book about certain CIA activities in South Vietnam. The

CIA did not approve of the publication of the book although, as a

condition of his employment, the agent had signed an agreement not to

publish any information relating to the CIA without specific approval of

the agency. The government brought suit against the agent, claiming

that all the agent’s profits from publishing the book should go to the

government.

Assuming that the government suffered only nominal damages

because the agent published no classified information, will the

government prevail? Why or why not?

Problem 3

The Spiders (owned by Pat) and the Hornets (owned by Dana) are

two independent minor-league baseball teams. During a game at the

Spiders’ home field, members of the Spiders repeatedly taunt Joe, the

pitcher for the Hornets, from the bench. Finally infuriated, Joe

retaliates by firing a 98 mph fastball at the dugout. In fact, the pitch

goes over the dugout and hits Ann, who is sitting in the first row. The

Spiders’ manager, Lefty, in violation of team and league rules, charges

out of the dugout at Joe, tackling him and bringing him to the ground,

where he proceeds to pummel him. The benches empty, and many of the

Hornets players surround Lefty, kicking him repeatedly. Ann

(concussion), Lefty (concussion and broken hand), and Joe (torn

meniscus) are all taken to the hospital with injuries.

Is Dana liable to Ann for her injury? Is Pat liable to Joe for his

injury? Are Lefty and Joe entitled to workers’ compensation?

Chapter 1: Agency 35

Problem 4

Alphonse is a sales professional who goes to work for Zambuco

Beverages Group, a company that manufactures a range of distilled

spirits, including bourbon, gin, vodka, rum, and various specialty

liqueurs. Zambuco has a sales force that sells to independent liquor

retailers, and whose members are paid largely on commission. At the

time Alphonse is hired, Zambuco’s standard commission paid to the

sales professionals is 6 percent.

On his first day, Alphonse is welcomed by Hairston, the

company’s Vice President for Sales & Marketing. Hairston tells

Alphonse that the Sales Manager, Boyle, will give him all the details

about his new job. Alphonse subsequently goes to Boyle’s office, where

Boyle tells him all about the job. When they get to the discussion of

commissions, Boyle tells Alphonse that in one region, Zambuco has had

trouble penetrating the market, and that while the standard

commission is 6 percent, Alphonse will get 7.5 percent commission on all

sales within that region.

Time goes by, and Alphonse is successful selling, but Zambuco

pays him only 6 percent on all his sales, including those in the region

that Boyle mentioned. Alphonse later quits and sues for the extra

commission he claims he should have been paid.

What result? Outline each and every theory on which Alphones

may be able to recover from Zambuco.

Please post your responses to the four problems at the end of this week’s reading assignment (Chapter 1: The Law of Agency). They are provided below for your convenience.

Problem 1

GoodBurger, Inc., is a company that operates fast-food restaurants in the United States. It has about 500 outlets. Two hundred
of those are owned by Goodburger itself; the other 300 are franchised restaurants that are actually owned by local business people. Leona owns a GoodBurger franchise in a middle-class suburb. To get the franchise, she paid GoodBurger a “franchise fee” of $75,000, and makes annual payments to GoodBurger amounting to 3 percent of sales. She is responsible for all costs relating to building, operating, and managing the restaurant, including rent, wages, utilities, and taxes. The restaurant design plans are drawn up by GoodBurger’s architectural team, and Leona is required to follow those plans. The plans specify all
of the public signage at the restaurant, including the large sign with the famous black-gold-teal GoodBurger logo. Customers cannot tell the difference between company-owned and franchised stores.

GoodBurger stores—whether company-owned or franchised—must all be strictly operated under terms of the 500-page “Operations Manual,” which is informally known as “the GoodBurger Bible.” As with company-owned stores, all of Leona’s employees are required to wear uniforms with the GoodBurger logo and may wear no other identification. The Operations Manual specifies in detail the job of each category of employee, the correct way to make each of the company’s 100-plus menu items (e.g., exactly how many pickle chips should be placed on each of thee company’s ten signature burgers), and such
details as how and how often restrooms must be cleaned. Failure to follow these guidelines may result in a loss of Leona’s the franchise. Under the franchise agreement, GoodBurger is responsible for providing bookkeeping and accounting services to Leona, and is responsible for designing, managing, and placing all national and regional advertising.

Leona has some discretion in the operation of the store. She is responsible for deciding which (and how many) employees to hire, so long as she meets the “minimum staffing” guidelines in the Operations Manual. The store must be open from 6:30 a.m. to 11:00 p.m., but Leona can set longer hours if she chooses. She is required to set prices at the levels specified by GoodBurger, but may vary those prices in special cases with approval of the GoodBurger regional office. When GoodBurger offers regional or national promotions, she can elect whether to opt out of the promotion. She is also authorized to advertise locally, provided her ads are approved by the regional office.

Is Leona an agent of GoodBurger? Explain.

Problem 2

Based on his experience working for the CIA, a former CIA agent published a book about certain CIA activities in South Vietnam. The CIA did not approve of the publication of the book although, as a condition of his employment, the agent had signed an agreement not to publish any information relating to the CIA without specific approval of the agency. The government brought suit against the agent, claiming that all the agent’s profits from publishing the book should go to the government.

Assuming that the government suffered only nominal damages because the agent published no classified information, will the government prevail? Why or why not? 

Problem 3

The Spiders (owned by Pat) and the Hornets (owned by Dana) are two independent minor-league baseball teams. During a game at the Spiders’ home field, members of the Spiders repeatedly taunt Joe, the pitcher for the Hornets, from the bench. Finally infuriated, Joe retaliates by firing a 98 mph fastball at the dugout. In fact, the pitch goes over the dugout and hits Ann, who is sitting in the first row. The Spiders’ manager, Lefty, in violation of team and league rules, charges out of the dugout at Joe, tackling him and bringing him to the ground, where he proceeds to pummel him. The benches empty, and many of the
Hornets players surround Lefty, kicking him repeatedly. Ann (concussion), Lefty (concussion and broken hand), and Joe (torn
meniscus) are all taken to the hospital with injuries.

Is Dana liable to Ann for her injury? Is Pat liable to Joe for his injury? Are Lefty and Joe entitled to workers’ compensation?

Problem 4

Alphonse is a sales professional who goes to work for Zambuco Beverages Group, a company that manufactures a range of distilled spirits, including bourbon, gin, vodka, rum, and various specialty liqueurs. Zambuco has a sales force that sells to independent liquor retailers, and whose members are paid largely on commission. At the time Alphonse is hired, Zambuco’s standard commission paid to the sales professionals is 6 percent.

On his first day, Alphonse is welcomed by Hairston, the company’s Vice President for Sales & Marketing. Hairston tells Alphonse that the Sales Manager, Boyle, will give him all the details about his new job. Alphonse subsequently goes to Boyle’s office, where Boyle tells him all about the job. When they get to the discussion of commissions, Boyle tells Alphonse that in one region, Zambuco has had trouble penetrating the market, and that while the standard commission is 6 percent, Alphonse will get 7.5 percent commission on all sales within that region.

Time goes by, and Alphonse is successful selling, but Zambuco pays him only 6 percent on all his sales, including those in the region that Boyle mentioned. Alphonse later quits and sues for the extra commission he claims he should have been paid.

What result? Outline each and every theory on which Alphones may be able to recover from Zambuco.