Business Enterprise Survey – Fall 2016, Professor Sokol
The Law of Agency
Case List
Nears v. Holiday Hospitality Franchising – P didn’t control the quality standards towards employees, therefore no agency relationship
Food Lion, Inc. v. Capital Cities/ABC, Inc. – Agents breached Duty of Loyalty by acting adversely to the interests of the Principal
Castillo v. Case Farms of Ohio – Implied authority to do what is necessary to accomplish tasks expressly authorized
Bethany Pharmaceutical Co. v. QVC, Inc. – No apparent authority where P does all that it can to show that Agent lacks authority; unreasonableness of actions can defeat estoppel
Creation of the Agency Relationship
Elements of Agency (need all 3)
Assent to Act: P & A manifest assent to be bound
A to act on behalf of P
A to be subject to P’s control
Consequences of an Agency Relationship:
Responsibility for voluntary commitments
Tort liability in some cases
Possible breaches of fiduciary and other duties
Can inadvertently create an agency relationship
Restatement 2nd & Restatement 3rd Read Differently:
Restatement 2nd §387:
Definition of Agency: “Agency is the fiduciary relationship which results from the manifestation of consent by one [principal] person to another that the other shall act on his behalf and subject to his control, and consent by the other [agent] so to act”
Restatement 3rd §1.01:
Definition of Agency: “Agency is the fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act”
Assent v. Consent: “The difference between terminology is intended to emphasize that unexpressed reservations or limitations harbored by the principal do not restrict the principal’s expression of consent to the agent” — Comment d
Although parties must agree to enter into this type of relationship described, no contract is required to form an agency relationship — §1.01, note d (many agents act or promise to act gratuitously)
PARTIES DO NOT HAVE TO HAVE THE INTENT TO ENTER INTO AN AGENCY RELATIONSHIP
§1.02 – “Whether a relationship is characterized as agency is an agreement between parties or in the context of industry or popular usage is not controlling”
Legal Consequences Theory – the creation of an agency relationship has both “inward-looking” and “outward-looking” consequences — §1.01, note c.
Inward-Looking Consequences: relate to the relationship between the principal and the agent and are largely governed by the contracts between parties and by the law of fiduciary duties
Outward-Looking Consequences: relate to the relationship among the principal, the agent, and a 3rd party and are governed by the various “principles of attribution”
Tend to be the primary focus in cases where the central issue is agency formation
Nears v. Holiday Hospitality Franchising, Inc. – 2010 (pg. 3)
Interim general manager was a dick to an employee; employee brought suit against manager, the management company that hired him, and the franchisor (HHFI)
Whether a franchisor is vicariously liable for the actions of an employee at one of its franchises, where the franchisor foes not have the right to control the acts of that employee and did not control that employee’s day-to-day actions?
NO – granted summary judgment, disposed all of employee’s claims against HHFI
Quality Control is NOT THE SAME as control for the purposes of agency law
Quality standards sent out by HHFI were outward-looking (interactions with 3rd parties), not inward-looking (interactions with employees)
No Agency Here Because:
No ownership interest, no comingling of funds, HHFI did not exercise employment decisions, HHFI did not fire workers, HHFI did not pay employees or the taxes on their behalf, Plaintiff did not report to HHFI
Manuals & inspections were geared toward ensuring guest satisfaction and not toward the management of the treatment — restatement commentary says “setting control standards in an agreement for acceptable service quality does not itself create a right of control”
Court concluded no agency relationship could be created from quality control standards
Takeaway – leave training to the employees or the local managers if you do not wantto get sued
Franchising Notes:
A franchise is a legal contract between the owner of a production process and a trademark [the franchisor] and a local businessman [the franchisee] to sell products or services under the franchisor’s trademark employing a production process developed by the franchisor
When a franchise contract is signed, the franchisee pays a lump sum, a franchise fee
After signing the contract, the franchisor gives the franchisee services needed to open the unit, including training and blueprints for the production process, and in some cases support for site selection or building, and equipment to open a particular site
Contentious Issues in Franchising:
Franchisor-Franchisee Conflict Over Quality
Contractual Efforts to Resolve Incentive Problems: specific performance clauses, product specifications, input purchase requirements or tying for quality control
Other Contractual Problems: encroachment, advertising and promotion, terminations and nonrenewal
Agent’s Power to Bind the Firm:
contract enforced
consent based
Apparent: 3rd party’s perspective
agent’s perspective
reliance based damages
post-contractual consent
unjust enrichment
Agent’s Fiduciary Duties to the Principal
Principals and agents owe duties to each other within an agency relationship — R 3rd of Agency Ch. 8
The consequence of a relationship being characterized as agency is that it takes on FIDUCIARY DUTIES
Principals Duties: performance of contract obligations, good faith and fair dealing, and indemnification under certain circumstances — R 3rd §8.13-8.15
Agents Duties: performance of contract obligations, care, competence, diligence, obedience, and disclosure — R 3rd §8.07-8.12
MOST IMPORTANT DUTY – Agent’s duty of LOYALTY to the Principal — R 3rd §8.01 (the agent must act “loyally for the principal’s benefit in all maters connected with the agency relationship”
Includes a duty “not to use or communicate confidential information of the principal for the agent’s own purposes or those of a 3rd party” (8.05 – trade secrets), a duty not to compete with the principal in any matter within the scope of the agency relationship (8.04), and a duty not to act as an adverse party to the principal in a transaction connected with the agency relationship (8.03)
Remedies for Breach by Agent: damages & disgorgement of profits, if any
Default Rules:
We want a default rule that ends to be the most efficient in normal circumstances
Transaction Cost: costs necessary to accomplish a transaction, but that do not add to the value of the asset being transferred — there are ALWAYS transaction costs
Agency Costs: costs incurred when the interests of the agent does not fully align with the interests of the principal
If we have an inefficient default rule and high transaction costs, parties have to live with an inefficient result (even if the inefficient result is fairer) encourages people to contract around it; one way to think about that is to say the default rule should always reflect the result that most people would bargain for if the rule were otherwise, but this is not always the case
Violations of Duties:
Shirking: violation of the duty of care
violation of the duty of loyalty
Principal’s Fiduciary Duties to the Agent from 3rd Restatement:
§8.15 Good Faith & Fair Dealing – “A principal has a duty to deal with the agent fairly and in good faith, including a duty to provide the agent with information about risks of physical harm or pecuniary loss that the principal knows, or should know are present at the agent’s work but unknown to the agent”
§8.14 Indemnification – “A principal has a duty to indemnify an agent
in accordance with the terms of any contract between them; and
unless otherwise agreed,
when the agent makes a payment
within the scope of the agent’s actual authority, or
that is beneficial to the principal, unless the agent acts officiously in making the payment;
intent to act adversely to the second employer for the benefit of the first. Because P&B had the requisite intent to act against the interests of their second employer, Food Lion, for the benefit of their main employer, ABC, they were liable in tort for their disloyalty” —- it is okay to work for people and do an inadequate job at one, so long as there is NO INTENT to act adversely
Principal’s of Attribution
Inward-Looking Consequences: fiduciary duties, duty of loyalty, duty of care, etc.
Outward-Looking Consequences: come about because principals can be held liable for the tortious actions of their agents, and can be required to fulfill contracts into which those agents have entered; vicarious liability for agents
agents bind principals by acting with authority
power is the ability to affect the principal’s legal relations; power encompasses authority
Sources of Power:
Actual Authority — R 3rd §2.01
Apparent Authority — R 3rd §2.03
Estoppel — R 3rd §2.05
WHAT LEVEL OF CONTROL IS NECESSARY TO FIND LIABILITY?
R 3rd §1.01 Justification for Courts Holding Principal’s Liable for the Consequences of their Agents Actions – “The chief justification for the principal’s accountability for the agent’s acts are the principal’s ability to select and control the agents and to terminate the agency relationship, together with the fact that the agent has agreed expressly or implicitly, to act on the principal’s behalf.”
“Qui facit per alium facit per se” – “he who acts through another, acts himself,” those who gain from the actions of another should sometimes be held to answer for the costs inflicted by those actions — BENEFIT, CONTROL, CONSENT
Two Forms of Authority:
Actual Authority: when the Principal manifests consent to the Agent
Apparent Authority: when the Principal manifests consent to a 3rd Party
Actual Authority – Principal’s Actual Consent to be Bound
When an agent acts with authority, her action has legal consequences for the principal; such action, when taken “in accordance with the principal’s manifestations to the agent that the principal wishes the agent so to act” is actual authority — R 3rd §2.01
§2.01 Consent Based – “An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.”
actual authority is created by a manifestation from the principal to the agent that the principal consents to the agent taking actions on the principals behalf — R 3rd §3.01
Evaluation of Relationship: look to the communications between the principal and the agent
Actual authority may exist even when there is no written contract between the principal and the agent, although certain types of authority (such as the authority to sell real estate for another) must be in writing based on individual state law requirements
Since the principal is in the best position to know how to control the agency costs relating to his own use of agents, actual express authority makes the principal the cheaper cost avoider
Basically you must have: (1) a principal who consents to be bound, (2) where the principal is the least cost avoider —- in the absence of a contract, go to the default rules
Sources of Authority:
