Agency & Unincorporated Businesses Outline
I. The Agency Relationship
Carrier v. McLLarky
– Facts/ID/Proc Hist: ∆ McLLarky installed new water heater in home of ∏ Carrier. ∆ told ∏ he believed old one (installed by different plumber) was under warranty and that he would try to obtain a credit for it and pass it on to ∏. ∆ returned the defective unit to a supplier but had not given ∏ the credit, claiming that he did not b/c he did not receive payment from the manufacturer.
– Issue: (1) Was an Agency Relationship established? (2) If there was an Agency relationship, was there a breach of duty on the part the Agent?
– Rule: (1) was there Agency Relationship?: is created when a principle gives authority to another to act on his or her own behalf and the agent consents to do so [Real Authority]. The granting of authority or consent can be written but doesn’t need to be, it may be implied from the parties conduct or other evidence of intent [Apparent Authority; was there an Appearance of an agency relationship].
(2) duty of the Agent: to conduct the affairs of the principle with a certain level of diligence, skill and competence. (this is also a question of fact that can’t be overturned unless “no rational trier of fact could come to the conclusion that the trial court has reached.”) The Agent, upon his promise to act, must only make reasonable efforts to accomplish the directed result.
– Hold: Sup Ct. NH here: (1) Agrees w/ dist ct that an Agency Relationship had been formed. (This is a question of fact to be determined by trial court and cant be overturned unless the finding is compellingly unsupported by the evidence.) (2) Court overturns dist ct here, believing that ∆ did make a reasonable attempt to obtain a refund for ∏.
– Reasoning: ∆ gave the old water heater to supplier to return to manufacturer (as he promised he would do) for a possible credit but did not guarantee that the credit would be obtained.
Shoup case
– Facts: ∆ Shoup insurance agent recommended to ∏ Violette Scaroni a financial planner he met at a seminar, ∏ had asked ∆ if he knew anyone who could sell her an aggressive tax shelter. ∏ invested heavily with Scaroni ($60k), ∆ received $2,400 for the referral. ∆ claimed he didn’t expect compensation from the recommendation. IRS determined it was a potentially abusive tax shelter and it became insolvent. ∏ sued ∆ claiming (1) there was an agency relationship b/t she and Shoup and (2) that Shoup breached his duty for referring ∏ to an incompetent financial planner.
– Hold: Court felt there was no manifestation of intent (no Appearance of Authority), no actual agency (no Real Authority) here. “a person cannot become the agent of another simply by offering help or making a suggestion.”
à Could possibly argue for Appearance of Authority
Restatement Third of Agency – def of Agency
Is the fiduciary relationship that arises when one person (a “Principle”) manifests assent to another person (an “agent”) that the agent shall (1) act on the principle’s behalf and (2) is subject to the principle’s control, and (3) the agent manifests assent or otherwise consents so to act. [Acting on behalf and Control Elements are necessary to prove Agency Relationship]
Explan: (1) Agent acts on behalf of principle (this creates the special powers and liabilities)
– Agent must not be acting on its own behalf; Must be working in manner that advances the interest of the principle.
Clapp
– ∏ sued Northwoods, owners of shopping mall after getting food poisoning from eating at Skewer, a tenant in the food court. ∏ argued for an Agency Relationship (Skewer is Agent of Northwoods, principle) b/c Northwoods exercised substantial control over how Skewer operates, had Skewer join association that promoted the mall and collected a percentage of gross sales on top of fixed rent.
– Hold: Skewer was not an Agent of Northwoods (no Agency Relationship)
– Rule: A true Agency requires that the agent’s function be the carrying out of the Principle’s affairs.
– Reasoning: nothing suggests Skewer was tending to the affairs of Northwoods…it just so happens that in the course of furthering its own business, Skewer benefits Northwoods
Explan: (2) Agent is subject to the Principle’s Control
– involves an element of subservience
– the proof of control (whether strict or relaxed to the point of ignoring) required by the courts will differ from court to court and the facts of the case
Explan: (3) Agent consents to act for Principle
– consent (mutual agreement) by both parties is required but it can be either Expressed or Implied. Parties sometimes don’t realize they have entered into Agency Relationship, exa: when one asks a friend to do a slight service for him
– This element is frequently not addressed by courts
*The burden of proof is on the person asserting the existence of an Agency Relationship. And its based on the facts on record
A. Duties of Principle to Agent – Duty to Deal Fairly and in Good Faith
Taylor v. Cordis Corp
– Facts/ID/Proc Hist: ∏ Taylor was employed by ∆ Cordis, sold pacemakers, turns out that pacemakers had battery problems and were deemed unsafe by FDA. ∏ had signed no compete clause (good for 1 year after resigning).
àBrought action against ∆ to rescind of K (took job with other medical supply co.), claiming ∆ breached its duty of good faith and fair dealing by failing to timely provide him with material information relating to problems ∆ had discovered in its pacemakers.
– Issue:
– Rule: (a) Principle has a duty to deal fairly and in good faith with an agent and to provide the agent with any information which might subject the agent to physical or pecuniary loss in dealing with the product. (b) The principle’s good faith duty to the agent also demands that the principle must maintain a standard of conduct which will not harm the agent’s business reputation or reasonable self-respect.
– Hold: Court disagrees with ∏’s argument of what ∆’s duty to him was. “The duty cannot be interpreted to require the principle to distribute to the agent copies of consumer complaints relating to the product performance or to report the progress of all ongoing research into product efficiency…The duty to inform its sales agents of product problems attached only when the company, in the exercise of reasonable diligence, knew that specific product defects posed a threat of harm to consumers and a concomitant threat to the professional reputation of the sales agent. The court concluded that ∆’s actions were reasonable.
– Reasoning:
B. Duties of Agent to Principle
– An Agent is a fiduciary and is subject to the directions of the principle.
– Fiduciary: a person who has a duty, created by his undertaking, to act primarily for the benefit of another in matters connected with his undertaking.
àA fiduciary must: account for $ or property received on account of the principle (must keep principle’s assets separate from own); full disclosure; not prefer his own (or other’s) interests; cannot compete with principle; cannot sell his own property to principle without disclosure of his interest; Has a duty of normal care.
I.E. (1) Care; (2) Disclosure; (3) Loyalty.
1. Duty of Good Conduct and to Obey
– Agent has a duty not to act in a manner that will bring disrepute to principle or “make friendly relations with principle impossible”
– Agent must obey all reasonable directions of the principle
– However, an Agent has NO DUTY to perform acts which are illegal, unethical or unreasonable.
– If Agent does not act in these ways = breach of fiduciary duty. Exa: employee claims unemployment compensation benefits but denied b/c he was in breach of fiduciary duty by making disparaging remarks at a social function about the quality of merchandise his employer sold at a social function OR bank teller gambling repeatedly while off-duty
2. Duty to Indemnify Principle for Loss Caused by Misconduct
– An Agent (Servant) is under a duty to indemnify the Principle (Master) for damages the Principle had to pay resulting from the Agent’s negligence while acting within the scope of employment.
à Principle has an action in tort or in contract against an agent who wrongfully causes loss for the principle where the agent: (1) negligently damages the property of the principle; or (2) exceeds his authority; or (3) by negligence or fraud causes the principle to be liable to a third person; or (4) violates a duty of loyalty owed the principle
– An innocent employer who is vicariously liable is entitled to indemnity from the employee.
3. Duty to Account
– An agent has a duty to keep and render accounts of money or other things which he has received or paid out on behalf of the principle.
4. The Fiduciary Duties of Agents
(a) Commencement of Fiduciary Relationship
Martin v. Heinhold Commodities
– class action suit by custom
mployment.
(2) [Damages Issue] (a) broker is not entitled to compensation where he acts adversely to his principal’s interest. [Trial Court correctly offset the profits ∏ collected via the sale of the property (but only this)] (b) Where an Agent seeks to recover compensation growing out of the same transaction in which he was guilty of being disloyal to his principle, the court is justified in denying the compensation, and the equitable principle applicable to the fiduciary that he is not to profit from his own wrong comes into play. (c) A fiduciary who has made it possible for others to profit by violating his obligation of loyalty to the Principle MAY be held accountable for that profit. The liability of the fiduciary and the profiting third party is said to be joint and several.
– Hold: (1) There was a fiduciary duty owed by ∏ to ∆ and a violation of the fiduciary relationship was blatant.
(2)(b) Court holds that this transaction was part of the breach of the fiduciary relationship, [Reasoning] as ∏ was using his wife for the indirect purpose of gaining a profit which could not be given to him directly.
(2)(c) Thus, court could have held ∏ accountable [To whom???] for the $37,500 profit made by the third-parties Braums and Simms. However, here, court affirms the decision of the trial court and refuses to use its broad equity powers to take away Braums and Simms profits.
– Reasoning: [(2)(c)] (i) court was not obligated to compel a fiduciary to reimburse the beneficiary [being who???] for third party profits.
(ii) [Rule] doing justice is central to equity and requires case by case evaluation. thus:
à∆ did not have a policy which forbade land purchases by employees or required disclosures;
à∆’s management execs were not wholly ignorant of the circumstances surrounding this transaction;
àthere was no evidence of a strict trusteeship [Rule: Where self-interest and representative interests are combined] applicable to the third-parties’ profits. i.e. there was no possibility of reciprocal tipping arrangements, no evidence that Braums and Simms were in any position to return ∏’s favor through questionable real estate transactions or other means.
– Comment: What happens to the $20k that ∏’s wife is supposed to return? She obtained that money from selling the option to Professional Homes which had nothing to do with ∆ Horizon, who received their required profits by the sales. They have not connection or legitimate claim to the option profits received by ∏’s wife and the same holds true for the profits taken by the other third-parties ($37,500). Would this money have been returned to Professional Homes as well, then ∏ be responsible for paying Brauns and Simms? Did ∆ want these amounts to be offset from the money they still owed ∏? = YES, ∆ could have recovered these monies for himself. The rationale is that this serves as a deterrant. “Requiring the fiduciary to disgorge his own unjustly acquired gains serves as a punative as well as a compensatory function even if no loss to the Beneficiary is proven!!!
Notes
The Middleman
In regards to forfeiture of compensation and duty of full disclosure.
– The Middle man is distinguished from the Agent – Middle man can work for both parties to a transaction and receive compensation from each without disclosure. A finder or middle man has no fiduciary relationship and therefore no duty to disclose b/c the finder merely introduces and brings parties together “without any obligation or power to negotiate the transaction in order to earn a finder’s fee.”
