Business Law Chapter 31 Notes

•Agency – a relationship between two parties in which one party (the agent) agrees to represent or act for the other party (the principal)

Section 1: Agency Relationships.•The Restatement (Second) or Agency (an authoritative summary of the law of agency) defines agencies as fiduciary relationships •Fiduciary – (adj) involving trust and confidence.•Agency relationships commonly exist between employers and employees •Agency relationships can also exist between employers and independent contractors.

Employer-Employee Relationships.•Normally, all employees who deal with third parties are considered to be agents •Employment laws apply only to employer-employee relationships, not to independent contractors •Agency law overlaps considerably with employment law but has a broader reach because agency relationships can exist outside employer-employee relationships

Employer-Independent Contractor Relationships .•Independent contractor – one who works for, and receives payment from, an employer but whose working conditions and methods are not controlled by the employer •The relationship between a principal and an independent contractor may or may not involve and agency relationship.

Determining Employee Status•A court’s decision on whether a worker is an employee or an independent contractor can have a significant effect on the rights and liabilities of the parties oex. For tax purposes or protection under certain employment laws

Criteria Used by the Courts•Courts consider the following questions:1.How much control does the employer exercise over the details of work? -Most important factor weighed by the courts-Considerable control = employee status2.Is the worker engaged in an occupation or business distinct from that of the employer? -Indicates independent-contractor status3.Is the work usually done under the employer’s direction or by a specialist without supervision? -Under employer’s direction = employee status4.Does the employer supply the tools at the place of work?-Indicates employee status5.For how long is the person employed?-Long period of time = employee status6.What is the method of payment – by time or at the completion of the job? -Payment by time period = employee status7.What degree of skill is required of the worker?-Great degree of skill = independent contractor hired for specialized job

Criteria Used by the IRS•The IRS has established its own criteria for determining whether a worker is an independent contractor or an employee •IRS examiners are encouraged to look closely at just one factor – the degree of control the business exercises over the worker •The IRS tends to scrutinize closely a firm’s classification of a worker as an independent contractor rather than an employee because employers can avoid certain tax liabilities by hiring independent contractors instead of employees

Employee Status and “Works for Hire”•Any copyrighted work created by an employee within the scope of his or her employment at the request of the employer is a “work for hire” and the employer owns the copyright •When an employer hires an independent contractor to do the work, however, the independent contractor normally owns the copyright oIn this situation, an employer can own the copyright only if the parties agree in writing that the work is a “work for hire” and the work falls into one of nine specific categories.

Section 2: Formation of the Agency Relationship .•Agency relationships are normally consensual and do not need to be in writing oThere are two main exceptions to this. An agency agreement must be in writing: 1.Whenever agency authority empowers the agent to enter into a contract that the Statute of Frauds requires to be in writing (equal dignity rule) 2.Whenever an agent is given power of attorney.

•A person must have contractual capacity to be a principal oSome states allow a minor to be a principal, however, any resulting contracts will be voidable by the minor principal but not by the adult third party •Any person can be an agent, however, regardless of whether he or she has the capacity to contract oThis is because an agent derives the authority to enter into contracts from the principal •An agency relationship can be created for any legal purpose; agencies created for illegal purposes are unenforceable •Agency relationships can arise in four ways: by agreement of the parties, by ratification, by estoppel, and by operation of law Agency by Agreement.

•The agency relationship is formed through express consent (oral or written) or implied by conduct •This is how most agency relationships are formed.

Agency by Ratification•On occasion a person who is not an agent may make a contract on behalf of another (a principal) •When the principal affirms this contract by word or by action an agency relationship is created.

Agency by Estoppel•When the principal causes a third person to believe that another person is the principal’s agent and the third person acts to hire or her detriment in reasonable reliance on that belief, the principal is “estopped to deny” (prevented from denying), the agency relationship •In this situation, the principal has created the appearance of an agency that does not exist •The third party must prove they reasonably believed the agency relationship existed oThese concepts also apply when a person who is in fact an agent undertakes an action that is beyond the scope of his or her authority •An agency by estoppel is not created by the acts of the agent, only the principal.

Agency by Operation of Law•An agency relationship can be based on a social duty (such as the need to support family members) •An agency relationship can also be formed in emergency situations when the agent is unable to contact the principal and failure to act outside the scope of the agent’s authority would cause the principal substantial loss

Section 3: Duties of Agents and Principals

Agent’s Duties to the Principal•Generally, the agent owes the principal five duties: performance, notification, loyalty, obedience and accounting.

Performance•An agent must use reasonable diligence and skill in performing their work •When an agent fails to perform his or her duties, liability for breach of contract may result •The degree of skill or care required of an agent is usually that expected of a reasonable person under similar circumstances oHowever, if an agent has represented herself or himself as possessing special skills, the agent is expected to exercise the degree of skill claimed •In some situations, an agent acts gratuitously – without payment and cannot be liable for breach of contract but still has the duty to perform.

Notification•An agent is required to notify the principal of all matters that come to her or his attention concerning the subject matter of the agency •Generally, the law assumes the principal is aware of any information acquired by the agent that is relevant to the agency.

Loyalty•The agent has the duty to act solely for the benefit of his or her principal and not in the interest of the agent or a third party •This duty also means that any information or knowledge acquired through the agency relationship is confidential.

Obedience•When an agent is acting on behalf of the principal, the agent has a duty to follow all lawful and clearly stated instructions given by the principal oDeviation from instructions is a violation of this duty except during emergency situations when the principal cannot be consulted •Whenever instructions are not clearly stated, the agent can fulfill this duty by acting in good faith and in a manner reasonable under the circumstances

Accounting•Unless an agent and principal agree otherwise, the agent has a duty to keep and make available to the principal an account of all property and funds received and paid out on behalf of the principal •The agent has a duty to maintain separate accounts for the principal’s funds and the agent’s personal funds

Principal’s Duties to the Agent•The principal’s duties to the agent relate to: compensation, reimbursement and indemnification, cooperation and safe working conditions

Compensation•In general, when a principal requests certain services from an agent, the agent reasonably expects payment and the principal has a duty to pay the agent for services rendered in a timely manner oThis does not apply in a gratuitous agency relationship.

•If no amount has been expressly agreed on, the principal owes the agent the customary compensation for such services.

Reimbursement and Indemnification•Whenever an agent disburses funds to fulfill the request of the principal or to pay for necessary expenses in the course of a reasonable performance of agency duties, the principal has the duty to reimburse the agent for these payments oThis applies to acts by gratuitous agents as well oAgents cannot recover from expenses incurred by their own misconduct or negligence though •Cooperation

Safe Working Conditions

Section 4: Rights and Remedies of Agents and Principals

Agent’s Rights and Remedies against the Principal

Tort and Contract Remedies

Demand for an Accounting

No Right to Specific Performance

Principal’s Rights and Remedies against the Agent

Constructive Trust

Avoidance

Indemnification.