CH-19-20 Relationship of Principal and Agent – Smith and Robersons Business Law : Chapter Notes

This Document Contains Chapters 19 to 20 Part Three: Agency CONTENTS Chapter 19 Relationship of Principal and Agent Chapter 20 Relationship with Third Parties ETHICS QUESTIONS RAISED IN THIS PART 1. Under what circumstances should a principal (employer) be responsible for the torts committed by an agent (employee)? If an agent injures a third party during the course of employment, to what extent should the employer be held liable? Under what circumstances should the agent be held personally liable? What ethical considerations underlie the doctrine of respondeat superior? 2. How much obedience and loyalty does an employee owe to an employer? 3. How much loyalty does an employer owe to an employee? 4. What ethical considerations underlie the concept of agency by estoppel? For whose protection was this concept developed? 5. To what extent does a principal have a duty to provide safe working conditions for his employees? To what extent does a principal have a duty to provide safe working conditions for his independent contractors? 6. Some ethicists have suggested that many of the greatest evils in history have been accomplished in the name of "duty" to a principal by placing the well-being of the principal above that of the public. Do you agree with this? Can you think of any examples of situations where loyalty to a principal causes harm to the public? ACTIVITIES AND RESEARCH PROBLEMS 1. Research cases in your state involving respondeat superior to find interesting cases in which an agency relationship has been found to exist. 2. Have students interview sales representatives, realtors, insurance agents and others who are commonly considered to be agents and then discuss some of their personal experiences in terms of the law of agency. 3. Have students research cases involving an undisclosed principal and discuss fact situations where the use of such a relationship would be useful. In light of the liability of the agent in such a relationship, why would the agent agree not to disclose the name of the principal? 4. Research the formal requirements necessary in your state to create an attorney in fact relationship through a written power of attorney. Discuss fact situations when a power of attorney could be a useful device. 5. Research the formal requirements for a durable power of attorney. Chapter 19 RELATIONSHIP OF PRINCIPAL AND AGENT Alexander v. FedEx Ground Package System Inc. Miller v. McDonald’s Corporation Detroit Lions, Inc. v. Argovitz Gaddy v. Douglass. Chapter Outcomes After reading and studying this chapter, the student should be able to: • Distinguish among the following relationships: (1) agency, (2) employment, and (3) independent contractor. • Explain the requirements for creating an agency relationship. • List and explain the duties owed by an agent to her principal. • List and explain the duties owed by a principal to his agent. • Identify the ways in which an agency relationship may be terminated. TEACHING NOTES The law of agency divides into 2 main parts: internal (relationship of principal and agent) and external (relationship of agent to third persons.) *** Chapter Outcome *** Distinguish among the following relationships: (1) agency, (2) employment, and (3) independent contractor. 19-1 NATURE OF AGENCY Agency is a consensual relationship involving three persons. An agent is one who represents another, the principal, in business dealings with a third person. In dealing with a third person, the agent acts for and in the name and place of the principal, who is a party to the transaction (usually contractual). 19-1a Scope of Agency Purposes The general rule regarding the scope of agency is that a person may do through an agent whatever business activity he may accomplish personally. Conversely, whatever he cannot legally do himself, he cannot authorize another to do for him. 19-1b Other Legal Relationships 1) In the employment relationship, employer has a right to control an employee’s physical conduct. Thus, all employees are agents, even those employees not authorized to contract on behalf of the employer or otherwise to conduct business with third parties. 2) The person who engages an independent contractor to do a particular job has no right to control how the contractor does the job. In determining whether an agent is an employee, the courts consider numerous factors including: (a) the extent of control that the agent and the principal have agreed the principal may exercise—or has exercised in practice—over details of the work ; (b) whether the agent is engaged in a distinct occupation or business; (c) whether the type of work done by the agent is customarily done under a principal’s direction or without supervision; (d) the skill required in the agent’s occupation; (e) whether the agent or the principal supplies the tools and other instrumentalities required for the work and the place in which to perform it; (f) the length of time during which the agent is engaged by a principal; (g) whether the agent is paid by the job or by the time worked; (h) whether the agent’s work is part of the principal's regular business; (i) whether the principal and the agent believe that they are creating an employment relationship; and (j) whether the principal is or is not in business. CASE 19-1 ALEXANDER v. FEDEX GROUND PACKAGE SYSTEM, INC. United States Court of Appeals, Ninth Circuit, 2014 765 F.3d 981 Fletcher, J. As a central part of its business, FedEx Ground Package System, Inc. (“FedEx”), contracts with drivers to deliver packages to its customers. The drivers must wear FedEx uniforms, drive FedEx-approved vehicles, and groom themselves according to FedEx's appearance standards. FedEx tells its drivers what packages to deliver, on what days, and at what times. Although drivers may operate multiple delivery routes and hire third parties to help perform their work, they may do so only with FedEx's consent. *** FedEx characterizes its drivers as independent contractors. FedEx’s Operating Agreement (“OA”) governs its relationship with the drivers. *** *** The OA requires FedEx drivers to pick up and deliver packages within their assigned “Primary Service Area[s].” Drivers must deliver packages every day that FedEx is open for business, and must deliver every package they are assigned each day. They must deliver each package within a specific window of time negotiated between FedEx and its customers. After each delivery, drivers must use an electronic scanner to send data about the delivery to FedEx. FedEx does not require drivers to follow specific delivery routes. However, FedEx tells its managers to design and recommend to its drivers routes that will “reduce travel time” and “minimize expenses and maximize earnings and service.” FedEx does not expressly dictate working hours, but it structures drivers' workloads to ensure that they work between 9.5 and 11 hours every working day. *** Drivers are compensated according to a somewhat complex formula that includes per day and per-stop components. Drivers are expected to arrive at their delivery terminals each morning, and they are not supposed to leave the terminal until all of their packages are available for pick-up. *** *** FedEx trains its drivers on how best to perform their job and to interact with customers. *** The OA requires drivers to conduct themselves “with integrity and honesty, in a professional manner, and with proper decorum at all times.” They must “[f]oster the professional image and good reputation of FedEx.” A driver's managers may conduct up to four ride-along performance evaluations each year, “to verify that [the driver] is meeting the standards of customer service” required by the OA. *** Drivers must follow FedEx’s “Safe Driving Standards.” *** *** Drivers enter into the OA for an initial term of one, two, or three years. At the end of the initial term, the OA provides for automatic renewal for successive one-year terms if neither party provides notice of their intent not to renew. The OA may be terminated (1) by the parties’ mutual agreement; (2) for cause, including a breach of any provision of the OA; (3) if FedEx stops doing business or reduces operations in all or part of the driver’s service area; or (4) upon thirty days’ written notice by the driver. The OA requires drivers to submit claims for wrongful termination to arbitration. *** FedEx requires its drivers to provide their own vehicles. Vehicles must not only meet “all applicable federal, state and municipal laws and regulations,” but also must be specifically approved by FedEx. The OA allows FedEx to dictate the “identifying colors, logos, numbers, marks and insignia” of the vehicles. All vehicles must be painted “FedEx white,” a specific shade of Sherwin–Williams paint, or its equivalent. They must be marked with the FedEx logo, and “maintained in a clean and presentable fashion free of body damage and extraneous markings.” FedEx requires vehicles to have specific dimensions, and all vehicles must also contain shelves with specific dimensions. *** *** FedEx offers a “Business Support Package,” which provides drivers with uniforms, scanners, and other necessary equipment. FedEx deducts the cost of the equipment from drivers’ pay. Purchase of the package is ostensibly optional, but more than 99 percent of drivers purchase it. *** [FedEx contends its drivers are independent contractors under California law. Plaintiffs, a class of FedEx drivers in California, contend they are employees and filed a class action asserting claims for employment expenses and unpaid wages on the ground that FedEx had improperly classified the drivers as independent contractors. The district court granted summary judgment to FedEx on the employment status issue. Plaintiffs appealed.] *** California’s right-to-control test requires courts to weigh a number of factors: “The principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” S.G. Borello & Sons, Inc. v. Department of Industrial Relations, [citation]. California courts also consider “several ‘secondary’ indicia of the nature of a service relationship.” Id. The right to terminate at will, without cause, is “[s]trong evidence in support of an employment relationship.” [Citation.] Additional factors include: (a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee. [Citation.] These factors “[g]enerally ... cannot be applied mechanically as separate tests; they are intertwined and their weight depends often on particular combinations.” [Citation.] FedEx argues that the OA creates an independent-contractor relationship. California law is clear that “[t]he label placed by the parties on their relationship is not dispositive, and subterfuges are not countenanced.” [Citation.] What matters is what the contract, in actual effect, allows or requires. [Citation.] The OA and FedEx’s policies and procedures unambiguously allow FedEx to exercise a great deal of control over the man¬ner in which its drivers do their jobs. Therefore, this factor strongly favors plaintiffs. First, FedEx can and does control the appearance of its drivers and their vehicles. *** *** Second, FedEx can and does control the times its drivers can work. *** Third, FedEx can and does control aspects of how and when drivers deliver their packages. *** *** In light of the powerful evidence of FedEx’s right to control the manner in which drivers perform their work, none of the remaining right-to-control factors sufficiently favors FedEx to allow a holding that plaintiffs are independent contractors. [Citations.] The first factor, the right to terminate at will, slightly favors FedEx. The OA contains an arbitration clause and does not give FedEx an unqualified right to terminate. Under California law, the right to discharge at will is “[s]trong evidence in support of an employment relationship,” [citations]. *** The second factor, distinct occupation or business, favors plaintiffs. As the California Court of Appeal rea¬soned in [citation], “the work performed by the drivers is wholly integrated into FedEx’s operation. The drivers look like FedEx employees, act like FedEx employees, [and] are paid like FedEx employees.” [Citation.] “The customers are FedEx’s customers, not the drivers’ customers.” [Citation.] While the drivers have opportunities to expand their businesses by taking on additional routes and hiring helpers, these opportunities themselves are only available subject to FedEx’s business needs. The third factor, whether the work is performed under the principal’s direction, slightly favors plaintiffs. *** although drivers retain freedom to determine several aspects of their day-to-day work, FedEx also closely supervises their work through various methods. The fourth factor, the skill required in the occupation, also favors plaintiffs. FedEx drivers “need no experience to get the job in the first place and [the] only required skill is the ability to drive.” [Citation.] The fifth factor, the provision of tools and equipment, slightly favors FedEx. The drivers provide their own vehicles and are not required to get other equipment from FedEx. *** Ultimately, the vast majority of drivers get their other equipment from FedEx. [Citation.] *** The sixth factor, length of time for performance of services, favors plaintiffs. Drivers enter into the OA for a term of one to three years. At the end of the initial term, the OA provides for automatic renewal for successive one-year terms if there is no notice of non-renewal by either party. *** The seventh factor, method of payment, is neutral. FedEx pays its drivers according to a complicated scheme that *** cannot easily be compared to either hourly payment (which favors employee status) or per job payment (which favors independent contractor status). *** The eighth factor, whether the work is part of the principal’s regular business, favors plaintiffs. The work that the drivers perform, the pickup and delivery of packages, is “essential to FedEx’s core business.” [Citation.] The final factor, the parties’ beliefs, slightly favors FedEx. *** the OA’s statement of independent contractor status is evidence that the drivers believed that they were entering such a relationship. Ultimately, though, “neither [FedEx]’s nor the drivers’ own perception of their relationship as one of independent contracting” is dispositive. [Citation.] Viewing the evidence in the light most favorable to FedEx, the OA grants FedEx a broad right to control the manner in which its drivers’ perform their work. The most important factor of the right-to-control test thus strongly favors employee status. *** We hold that plaintiffs are employees as a matter of law under California’s right-to-control test. Accordingly, we reverse both the *** grant of summary judgment to FedEx and [the] denial of plaintiffs’ motion for partial summary judgment. We remand to the district court with instructions to enter summary judgment for plaintiffs on the question of employment status. *** Chapter Outcome *** Explain the requirements for creating an agency relationship. 19-2 CREATION OF AGENCY An agency may be created absent a contract, so consideration may not be required. What is required is a manifestation by the principal to have the agent act on his behalf and a consent to so act by the agent. In some circumstances a person is held liable as a principal, even though no actual agency has been created. Agency by estoppel exists when the situation reasonably leads someone to believe an agency exists. CASE 19-2 MILLER v. MCDONALD’S CORPORATION Court of Appeals of Oregon, 1997 150 Or.App. 274, 945 P.2d 1107 http://scholar.google.com/scholar_case?q=945+P.2d+1107&hl=en&as_sdt=2,34&case=16078633099320931234&scilh=0 Warren, J. Plaintiff seeks damages from defendant McDonald’s Corporation for injuries that she suffered when she bit into a heart-shaped sapphire stone while eating a Big Mac sandwich that she had purchased at a McDonald’s restaurant in Tigard. The trial court granted summary judgment to defendant on the ground that it did not own or operate the restaurant; rather, the owner and operator was a nonparty, 3K Restaurants (3K), that held a franchise from defendant. Plaintiff appeals, and we reverse. Most of the relevant facts are not in dispute. * * * 3K owned and operated the restaurant under a License Agreement (the Agreement) with defendant that required it to operate in a manner consistent with the “McDonald’s System.” The Agreement described that system as including proprietary rights in trade names, service marks and trade marks, as well as “designs and color schemes for restaurant buildings, signs, equipment layouts, formulas and specifications for certain food products, methods of inventory and operation control, bookkeeping and accounting, and manuals covering business practices and policies.” The manuals contain “detailed information relating to operation of the Restaurant,” including food formulas and specifications, methods of inventory control, bookkeeping procedures, business practices, and other management, advertising, and personnel policies. 3K, as the licensee, agreed to adopt and exclusively use the formulas, methods, and policies contained in the manuals, including any subsequent modifications, and to use only advertising and promotional materials that defendant either provided or approved in advance in writing. The Agreement described the way in which 3K was to operate the restaurant in considerable detail. It expressly required 3K to operate in compliance with defendant’s prescribed standards, policies, practices, and procedures, including serving only food and beverage products that defendant designated. 3K had to follow defendant’s specifications and blueprints for the equipment and layout of the restaurant, including adopting subsequent reasonable changes that defendant made, and to maintain the restaurant building in compliance with defendant’s standards. 3K could not make any changes in the basic design of the building without defendant’s approval. The Agreement required 3K to keep the restaurant open during the hours that defendant prescribed, including maintaining adequate supplies and employing adequate personnel to operate at maximum capacity and efficiency during those hours. 3K also had to keep the restaurant similar in appearance to all other McDonald’s restaurants. 3K’s employees had to wear McDonald’s uniforms, to have a neat and clean appearance, and to provide competent and courteous service. 3K could use only containers and other packaging that bore McDonald’s trademarks. The ingredients for the foods and beverages had to meet defendant’s standards, and 3K had to use “only those methods of food handling and preparation that [defendant] may designate from time to time.” In order to obtain the franchise, 3K had to represent that the franchisee had worked at a McDonald’s restaurant; the Agreement did not distinguish in this respect between a company-run or a franchised restaurant. The manuals gave further details that expanded on many of these requirements. In order to ensure conformity with the standards described in the Agreement, defendant periodically sent field consultants to the restaurant to inspect its operations. 3K trained its employees in accordance with defendant’s materials and recommendations and sent some of them to training programs that defendant administered. Failure to comply with the agreed standards could result in loss of the franchise. Despite these detailed instructions, the Agreement provided that 3K was not an agent of defendant for any purpose. Rather, it was an independent contractor and was responsible for all obligations and liabilities, including claims based on injury, illness, or death, directly or indirectly resulting from the operation of the restaurant. Plaintiff went to the restaurant under the assumption that defendant owned, controlled, and managed it. So far as she could tell, the restaurant’s appearance was similar to that of other McDonald’s restaurants that she had patronized. Nothing disclosed to her that any entity other than defendant was involved in its operation. The only signs that were visible and obvious to the public had the name “McDonald’s,” the employees wore uniforms with McDonald’s insignia, and the menu was the same that plaintiff had seen in other McDonald’s restaurants. The general appearance of the restaurant and the food products that it sold were similar to the restaurants and products that plaintiff had seen in national print and television advertising that defendant had run. To the best of plaintiff’s knowledge, only McDonald’s sells Big Mac hamburgers. * * * Under these facts, 3K would be directly liable for any injuries that plaintiff suffered as a result of the restaurant’s negligence. The issue on summary judgment is whether there is evidence that would permit a jury to find defendant vicariously liable for those injuries because of its relationship with 3K. Plaintiff asserts two theories of vicarious liability, actual agency and apparent agency. We hold that there is sufficient evidence to raise a jury issue under both theories. We first discuss actual agency. The kind of actual agency relationship that would make defendant vicariously liable for 3K’s negligence requires that defendant have the right to control the method by which 3K performed its obligations under the Agreement. The common context for that test is a normal master-servant (or employer-employee) relationship. [Citations.] The relationship between two business entities is not precisely an employment relationship, but the Oregon Supreme Court, in common with most if not all other courts that have considered the issue, has applied the right to control test for vicarious liability in that context as well. [Citation.] We therefore apply that test to this case. * * * A number of other courts have applied the right to control test to a franchise relationship. The Delaware Supreme Court, in [citation], stated the test as it applies to that context: If, in practical effect, the franchise agreement goes beyond the stage of setting standards, and allocates to the franchisor the right to exercise control over the daily operations of the franchise, an agency relationship exists. [Citation.] * * * * * * [W]e believe that a jury could find that defendant retained sufficient control over 3K’s daily operations that an actual agency relationship existed. The Agreement did not simply set standards that 3K had to meet. Rather, it required 3K to use the precise methods that defendant established, both in the Agreement and in the detailed manuals that the Agreement incorporated. Those methods included the ways in which 3K was to handle and prepare food. Defendant enforced the use of those methods by regularly sending inspectors and by its retained power to cancel the Agreement. That evidence would support a finding that defendant had the right to control the way in which 3K performed at least food handling and preparation. In her complaint, plaintiff alleges that 3K’s deficiencies in those functions resulted in the sapphire being in the Big Mac and thereby caused her injuries. * * * Plaintiff next asserts that defendant is vicariously liable for 3K’s alleged negligence because 3K was defendant’s apparent agent. The relevant standard is in Restatement (Second) of Agency, § 267, which we adopted in [citation]: One who represents that another is his servant or other agent and thereby causes a third person justifiably to rely upon the care or skill of such apparent agent is subject to liability to the third person for harm caused by the lack of care or skill of the one appearing to be a servant or other agent as if he were such. [Citation.] We have not applied § 267 to a franchisor/franchisee situation, but courts in a number of other jurisdictions have done so in ways that we find instructive. In most cases the courts have found that there was a jury issue of apparent agency. The crucial issues are whether the putative principal held the third party out as an agent and whether the plaintiff relied on that holding out. * * * In this case * * * there is an issue of fact about whether defendant held 3K out as its agent. Everything about the appearance and operation of the Tigard McDonald’s identified it with defendant and with the common image for all McDonald’s restaurants that defendant has worked to create through national advertising, common signs and uniforms, common menus, common appearance, and common standards. The possible existence of a sign identifying 3K as the operator does not alter the conclusion that there is an issue of apparent agency for the jury. There are issues of fact of whether that sign was sufficiently visible to the public, in light of plaintiff’s apparent failure to see it, and of whether one sign by itself is sufficient to remove the impression that defendant created through all of the other indicia of its control that it, and 3K under the requirements that defendant imposed, presented to the public. Defendant does not seriously dispute that a jury could find that it held 3K out as its agent. Rather, it argues that there is insufficient evidence that plaintiff justifiably relied on that holding out. It argues that it is not sufficient for her to prove that she went to the Tigard McDonald’s because it was a McDonald’s restaurant. Rather, she also had to prove that she went to it because she believed that McDonald’s Corporation operated both it and the other McDonald’s restaurants that she had previously patronized. * * * * * * * * * [I]n this case plaintiff testified that she relied on the general reputation of McDonald’s in patronizing the Tigard restaurant and in her expectation of the quality of the food and service that she would receive. Especially in light of defendant’s efforts to create a public perception of a common McDonald’s system at all McDonald’s restaurants, whoever operated them, a jury could find that plaintiff’s reliance was objectively reasonable. The trial court erred in granting summary judgment on the apparent agency theory. Reversed and remanded. 19-2a Formalities In most situations a written contract is not required to create an agency relationship, except where the contract is to run for more than a year and in some states which require a writing if an agent is to sell land. Some states have “equal dignity” statutes providing that a principal must grant his agent in a written instrument the authority to enter into any contract required to be in writing. A power of attorney is a formal, written agency appointment. 19-2b Capacity A principal must have the capacity to contract while capacity is not absolutely required of an agent. This distinction is made since in consummating a contract on behalf of the principal an agent is creating a legal relationship that is binding on the principal, not the agent. A durable power of attorney is a written instrument that expresses the principal’s intention that the agent’s authority will not be affected by the principal’s subsequent incapacity or that the agent’s authority will be come effective upon the principal’s subsequent incapacity. (In 2006, the new UPOAA was promulgated to replace Uniform Durable Power of Attorney Act. To date, at least thirteen States have adopted the 2006 Act. A power of attorney created under the UPOAA is durable unless it expressly provides that it is terminated by the incapacity of the principal.) An “electronic agent” is a computer program or other automated means used to initiate an action or respond to electronic records or performances without review or action by an individual. Electronic agents are not persons and, therefore, are not considered agents. In 2000, Congress enacted the Electronic Signatures in Global and National Commerce (E-Sign). The Act makes electronic records and signatures valid and enforceable across the United States for many types of transactions. E-Sign specifically excludes certain transactions, including (1) wills, codicils, and testamentary trusts; (2) adoptions, divorces, and other matters of family law; and (3) the Uniform Commercial Code other than sales and leases of goods. *** Chapter Outcome *** List and explain the duties owed by an agent to her principal. 19-3 DUTIES OF AGENT TO PRINCIPAL The duties are usually defined in the contract. Other duties are imposed by law, unless the parties agree otherwise. An agent is a fiduciary (a person in a position of trust and confidence) and owes her principal the duties of obedience, diligence, and loyalty; duty to inform; and duty to provide an accounting. 19-3a Duty of Obedience An agent must act within the limits of his authority and follow all lawful instructions. Any unauthorized action, improper delegation of authority, or commission of a tort within the scope of employment would constitute a breach of this duty. 19-3b Duty of Good Conduct An agent must act reasonably and to avoid conduct that is likely to damage the principal’s enterprise. 19-3c Duty of Diligence An agent must exercise reasonable care and skill in conducting the principal's business (must not act negligently), but he may also be held to a higher, special skill level if he possesses this capability. 19-3d Duty to Inform Information provided to an agent is deemed to be received by the principal, and the agent has a duty to make all reasonable efforts to actually inform his principal. 19-3e Duty to Account An agent must keep and render accounts to the principal of money or other property received or paid out on the principal’s account. Commingling of the principal's assets with those of any other person is not permitted and the agent may not deal with the principal’s property so that it appears to be the agent’s property. 19-3f Fiduciary Duty Requires that an agent demonstrate utmost loyalty and good faith in conducting the principal's business. Conflicts of Interest — An agent must act solely in the principal’s interest and may not take action in conflict with his principal's interest. Self-dealing — Agent may not buy from himself on the principal’s behalf without the principal's consent. Duty Not to Compete — An agent cannot compete with his principal or otherwise act on behalf of a competitor. Misappropriation — An agent may not use property of the principal for the agent’s own purposes or for the benefit of a third party. Confidential Information — An agent may not personally use or disclose to another confidential information of his principal. Duty to Account for Financial Benefits — An agent has a duty to fully disclose to her principal any financial benefit received as a direct result of the agency relationship. An agent may not make any secret profit: all such profits belong to the principal. Principal's Remedies — An agent who violates his fiduciary duty is liable to his principal (1) for breach of contract, (2) in tort for losses caused, and (3) in restitution for profits he made or property he received in breach of the fiduciary duty. CASE 19-3 DETROIT LIONS, INC. v. ARGOVITZ United States District Court, Eastern District of Michigan, 1984 580 F. Supp. 542, affirmed, 767 F. 2d 919 http://scholar.google.com/scholar_case?q=580+F.Supp.+542&hl=en&as_sdt=2,34&case=17442812739569541102&scilh=0 Demascio, J. [Jerry Argovitz was employed as an agent of Billy Sims, a professional football player. Early in 1983, Argovitz informed Sims that he was awaiting the approval of his application for a U.S. Football League franchise in Houston. Sims was unaware, however, of Argovitz’s extensive ownership interest in the new Houston Gamblers organization. Meanwhile, during the spring of 1983, Argovitz continued contract negotiations on behalf of Sims with the Detroit Lions of the National Football League. By June 22, Argovitz and the Lions were very close to an agreement, although Argovitz represented to Sims that the negotiations were not proceeding well. Argovitz then sought an offer for Sims’s services from the Gamblers. The Gamblers offered Sims a $3.5 million, five-year deal. Argovitz told Sims that he thought the Lions would match this figure; however, he did not seek a final offer from the Lions and then present the terms of both packages to Sims. Sims, convinced that the Lions were not negotiating in good faith, signed with the Gamblers on July 1, 1983. On December 16, 1983, Sims signed a second contract with the Lions. The Lions and Sims brought an action against Argovitz, seeking to invalidate Sims’s contract with the Gamblers on the ground that Argovitz breached his fiduciary duty when negotiating the contract with the Gamblers.] * * * The relationship between a principal and agent is fiduciary in nature, and as such imposes a duty of loyalty, good faith, and fair and honest dealing on the agent. [Citation.] A fiduciary relationship arises not only from a formal principal-agent relationship, but also from informal relationships of trust and confidence. [Citations.] In light of the express agency agreement, and the relationship between Sims and Argovitz, Argovitz clearly owed Sims the fiduciary duties of an agent at all times relevant to this lawsuit. An agent’s duty of loyalty requires that he not have a personal stake that conflicts with the principal’s interest in a transaction in which he represents his principal. As stated in [citation]: (T)he principal is entitled to the best efforts and unbiased judgment of his agent. * * * (T)he law denies the right of an agent to assume any relationship that is antagonistic to his duty to his principal, and it has many times been held that the agent cannot be both buyer and seller at the same time nor connect his own interests with property involved in his dealings as an agent for another. A fiduciary violates the prohibition against self-dealing not only by dealing with himself on his principal’s behalf, but also by dealing on his principal’s behalf with a third party in which he has an interest, such as a partnership in which he is a member. * * * Where an agent has an interest adverse to that of his principal in a transaction in which he purports to act on behalf of his principal, the transaction is voidable by the principal unless the agent disclosed all material facts within the agent’s knowledge that might affect the principal’s judgment. [Citation.] The mere fact that the contract is fair to the principal does not deny the principal the right to rescind the contract when it was negotiated by an agent in violation of the prohibition against self-dealing. * * * Once it has been shown that an agent had an interest in a transaction involving his principal antagonistic to the principal’s interest, fraud on the part of the agent is presumed. The burden of proof then rests upon the agent to show that his principal had full knowledge, not only of the fact that the agent was interested, but also of every material fact known to the agent which might affect the principal and that having such knowledge, the principal freely consented to the transaction. It is not sufficient for the agent merely to inform the principal that he has an interest that conflicts with the principal’s interest. Rather, he must inform the principal “of all facts that come to his knowledge that are or may be material or which might affect his principal’s rights or interests or influence the action he takes.” [Citation.] Argovitz clearly had a personal interest in signing Sims with the Gamblers that was adverse to Sims’ interest—he had an ownership interest in the Gamblers and thus would profit if the Gamblers were profitable, and would incur substantial personal liabilities should the Gamblers not be financially successful. Since this showing has been made, fraud on Argovitz’s part is presumed, and the Gamblers’ contract must be rescinded unless Argovitz has shown by a preponderance of the evidence that he informed Sims of every material fact that might have influenced Sims’ decision whether or not to sign the Gamblers’ contract. We conclude that Argovitz has failed to show by a preponderance of the evidence either: (1) that he informed Sims of the [material] facts, or (2) that these facts would not have influenced Sims’ decision whether to sign the Gamblers’ contract. * * * As a court sitting in equity, we conclude that recision is the appropriate remedy. We are dismayed by Argovitz’s egregious conduct. The careless fashion in which Argovitz went about ascertaining the highest price for Sims’ service convinces us of the wisdom of the maxim: no man can faithfully serve two masters whose interests are in conflict. Judgment will be entered for the plaintiffs rescinding the Gamblers’ contract with Sim. *** Chapter Outcome *** List and explain the duties owed by a principal to his agent. 19-4 DUTIES OF PRINCIPAL TO AGENT 19-4a Contractual Duties Principal owes agent the contractual duties of compensation, reimbursement, and indemnification. But agent may agree to exclude or modify any of these. Compensation — Principal must compensate agent, unless agent agrees to serve without pay. If contract does not specify amount of compensation, principal has a duty to pay the reasonable value of authorized services that the agent performs. Indemnification and Reimbursement — Principal must indemnify agent for losses agent incurred while acting as directed by the principal in a transaction not illegal or not known by agent to be wrongful. Principal must reimburse agent for authorized expenses incurred and for authorized payments made by agent on principal’s behalf. CASE 19-4 GADDY v. DOUGLASS Court of Appeals of South Carolina, 2004 359 S.C. 329, 597 S.E.2d 12 http://scholar.google.com/scholar_case?q=359+S.C.+329&hl=en&as_sdt=2,34&case=12426376097857542113&scilh=0 Kittredge, J. Ms. M was born in 1918 and grew up in Fairfield County [South Carolina]. She moved to Greenville, where she majored in sociology at Furman University and later worked for the South Carolina Department of Social Services. After retiring, Ms. M returned to Fairfield where she lived on her family farm with her brother, a dentist, until his death in the early 1980s. Ms. M never married. Dr. Gaddy was Ms. M’s physician and a close family friend. * * * Conversely, Ms. M had little contact with many of her relatives, including Appellants [third cousins of Ms. M]. In 1988, * * * Ms. M then executed a durable general power of attorney (1988 durable power of attorney) designating Dr. Gaddy as her attorney-in-fact. * * * * * * Concerns about Ms. M’s progressively worsening mental condition prompted Dr. Gaddy to file the 1988 durable power of attorney in November 1995. Pursuant to the 1988 durable power of attorney, Dr. Gaddy began to act as Ms. M’s attorney-in-fact and assumed control of her finances, farm, and health care. His responsibilities included paying her bills, tilling her garden, repairing fences, and hiring caregivers. In March 1996, Dr. Gaddy discovered Ms. M had fallen in her home and fractured a vertebra. Ms. M was hospitalized for six weeks. During the hospitalization, Dr. Gaddy fumigated and cleaned her home, which had become flea-infested and unclean to the point where rat droppings were found in the house. Finding that Ms. M was not mentally competent to care for herself, he arranged for full-time caretakers to attend to her after she recovered from the injuries she sustained in her fall. He made improvements in her home, including replacing moth-eaten area rugs with new rugs and upgraded her kitchen to enable caretakers to prepare her meals. Dr. Gaddy also made plumbing repairs to the house, and took steps to adapt a bathroom to make it safer for caretakers to bathe Ms. M, who was incapable of doing so unassisted. During Ms. M’s hospitalization, neither of the Appellants visited her in the hospital or sought to assist her in any manner. Dr. Gaddy had Ms. M examined and evaluated by Dr. James E. Carnes, a neurologist, in December 1996. After examining Ms. M, Dr. Carnes found that she suffered from dementia and confirmed she was unable to handle her affairs. As Ms. M’s Alzheimer’s disease progressed and her faculties deteriorated, Dr. Gaddy managed her financial affairs, oversaw maintenance of her properties, and ensured that she received constant care including food, clothing, bathing, and housekeeping. * * * Ms. M’s long-standing distant relationship with some members of her family, including Appellants, changed in March of 1999. On March 12, 1999, Appellants visited Ms. M, and with the help of disgruntled caretaker Lil Heller, took her to an appointment with Columbia attorney Douglas N. Truslow to “get rid of Dr. Gaddy.” On the drive to Truslow’s office, Heller had to remind Ms. M several times of their destination and purpose. At Truslow’s office, Ms. M signed a document revoking the 1988 Will and the 1988 durable power of attorney. She also signed a new durable power of attorney (1999 durable power of attorney) naming Appellants as her attorneys-in-fact. Appellants failed to disclose Ms. M’s dementia to Truslow. David Byrd, a witness to the execution of the March 12 documents, was likewise not informed of Ms. M’s dementia. Armed with the revocation of the 1988 power of attorney and recently executed power of attorney in their favor, Appellants prohibited Dr. Gaddy from contacting Ms. M. Dr. Gaddy was even threatened with arrest if he tried to visit Ms. M. On March 15, 1999, three days after Ms. M purportedly revoked the 1988 documents and executed the 1999 durable power of attorney, Dr. Gaddy initiated the present action as her attorney-in-fact pursuant to the 1988 durable power of attorney. He alleged, among other things, that the purported revocation of the 1988 durable power of attorney and the execution of the 1999 durable power of attorney were invalid because “on March 12, 1999, the date on which Ms. M purportedly signed the 1999 power of attorney and the revocation, she was not mentally competent” due to “senile dementia of the Alzheimer’s type.” The action sought declaratory judgment to render the 1999 durable power of attorney invalid and declare the 1988 durable power of attorney valid. * * * Medical testimony was presented from five physicians who had examined Ms. M. * * * [They concluded that Ms. M. (1) was “unable to handle her financial affairs” and “would need help managing her daily activities,” and (2) would not “ever have moments of lucidity” to “understand legal documents.”] * * * The trial court concluded that Ms. M lacked contractual * * * capacity “from March 12, 1999 and continuously thereafter.” As a result, he invalidated the 1999 revocation of the 1988 durable power of attorney and * * * the 1999 durable power of attorney, and declared valid the 1988 durable power of attorney. Finally, he awarded Dr. Gaddy litigation expenses to be paid from Ms. M’s assets. Since 1986, the South Carolina Legislature has expressly authorized and sanctioned the use and efficacy of durable powers of attorneys. * * * Upon the execution of a durable power of attorney, the attorney-in-fact retains authority to act on the principal’s behalf notwithstanding the subsequent physical disability or mental incompetence of the principal. To honor this unmistakable legislative intent, it is incumbent on courts to uphold a durable power of attorney unless the principal retains contractual capacity to revoke the then existing durable power of attorney or to execute a new power of attorney. Otherwise, the very purpose of [the statute] would be undermined. * * * “In order to execute or revoke a valid power of attorney, the principal must possess contractual capacity.” [Citation.] Contractual capacity is generally defined as a person’s ability to understand in a meaningful way, at the time the contract is executed, the nature, scope and effect of the contract. [Citation.] Where, as here, the mental condition of the principal is of a chronic nature, evidence of the principal’s prior or subsequent condition is admissible as bearing upon his or her condition at the time the contract is executed. [Citation.] * * * Here, the credible medical * * * testimony presented compellingly indicates that Ms. M suffered from at least moderate to severe dementia caused by Alzheimer’s Disease, a chronic and permanent organic disease, on March 12, 1999. We are firmly persuaded that Ms. M’s dementia, chronic and progressive in nature, clearly rendered her incapable of possessing contractual capacity to revoke the 1988 durable power of attorney or execute the 1999 power of attorney. We find this conclusion inescapable based on the record before us. * * * The very idea of a durable power of attorney is to protect the principal should he or she become incapacitated. This case is precisely the type of situation for which the durable power of attorney is intended. On March 12, 1999, Ms. M, due to her chronic and severe dementia, lacked capacity to revoke the 1988 durable power of attorney and execute the 1999 power of attorney, and the evidence in this regard is overwhelming. In so holding, we return to Dr. Gaddy his fiduciary obligations to Ms. M, which he faithfully discharged prior to Appellants’ regrettable involvement. The decision of the trial court is AFFIRMED IN PART AND VACATED IN PART. 19-4b Tort and Other Duties A principal owes his agent the same duties under tort law that the principal owes all parties. A principal has a duty to disclose to an agent the risks that the principal knows or should know, if the principal should realize the agent is unaware of such risks. And where the agent is an employee, the principal owes additional duties. NOTE: See Figure 19-1 for a summary of the duties of principals and agents. *** Chapter Outcome *** Identify the ways in which an agency relationship may be terminated. 19-5 TERMINATION OF AGENCY Agency is terminated when the principal’s consent is withdrawn. Agency can be terminated by the acts of the parties or by operation of law. 19-5a Acts of the Parties Lapse of Time — Authority conferred on agent for a specified period of time terminates when the time expires or, if no period is specified, at the end of a reasonable period. Mutual Agreement of the Parties — The principal and agent by mutual agreement may terminate the agency relationship at any time. Revocation of Authority — A principal may revoke an agent’s authority at any time. But if such revocation constitutes a breach of contract by the principal, the agent may recover damages. Renunciation by the Agent — The agent has the power to end the agency by notifying the principal that she renounces the authority given her by the principal. If the renunciation violates a contractual obligation then the agent is liable to the principal. 19-5b Operation of Law Certain events, by operation of law, automatically terminate agency. Death — The death of the agent terminates the agent’s authority. The death of the principal also terminates the agent’s authority when the agent has notice of the principal’s death. The Uniform Durable Power of Attorney Act and the UPOAA allow the holder of any power of attorney, durable or otherwise, to exercise it on the death of the principal, if its exercise is in good faith and without knowledge of the principal’s death. Incapacity — Incapacity of the principal or agent that occurs after the formation of the agency terminates the agent’s authority. But a durable power of attorney is an agency relationship that remains effective despite the subsequent incapacity of the principal. The Uniform Durable Power of Attorney Act and the UPOAA allow the holder of a power of attorney that is not durable to exercise it on the incapacity of the principal, if its exercise is in good faith and without knowledge of the principal’s incapacity. 19-5c Change in Circumstances An agent’s actual authority terminates upon the occurrence of circumstances on the basis of which the agent should reasonably conclude that the principal no longer would assent to the agent’s taking action on the principal’s behalf. The Second Restatement specified a number of subsequent changes in circumstances that would terminate an agent’s actual authority, including accomplishment of authorized act, bankruptcy of principal or agent, change in business conditions, loss or destruction of subject matter, disloyalty of agent, change in law, and outbreak of war. The Third Restatement takes a different approach by providing a basic rule that 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.” 19-5d Irrevocable Powers A power given as security “is a power to affect the legal relations of its creator that is created in the form of a manifestation of actual authority and held for the benefit of the holder or a third person.” Restatement, Section 3.12. A power given as security creates neither a relationship of agency nor actual authority, although the power enables its holder to affect the legal relations of the creator of the power. Restatement, Section 3.12, comment b. The power arises from a manifestation of assent by its creator that the holder of the power may, for example, dispose of property or other interests of the creator. The Restatement’s definition includes, but is more extensive than, the rule in some States regarding an agency coupled with an interest, in which the holder (agent) has a security interest in the power conferred upon him by the creator (principal).For example, an agency coupled with an interest would arise where an agent has advanced funds on behalf of the principal and the agent’s power to act is given as security for the loan. Unless otherwise agreed, a power given as security may not be revoked. In addition, the incapacity of the creator or of the holder of the power does not terminate the power. Nor will the death of the creator terminate the power, unless the duty for which the power was given terminates with the death of the creator. Restatement, Section 3.13(2). A power given as security is terminated by an event that discharges the obligation secured by it (such as repayment of a loan) or that makes execution of the power illegal or impossible. Restatement, Section 3.13(1). Chapter 20 RELATIONSHIP WITH THIRD PARTIES Relationship of Principal and Third Persons Contract Liability of the Principal [20-1] Types of Authority [20-1a] Actual Express Authority Actual Implied Authority Apparent Authority Delegation of Authority [20-1b] Effect of Termination of Agency on Authority [20-1c] Second Restatement Third Restatement Ratification [20-1d] Requirements of Ratification Effect of Ratification Fundamental Rules of Contractual Liability [20-1e] Tort Liability of the Principal [20-2] Direct Liability of Principal [20-2a] Authorized Acts of Agent Unauthorized Acts of Agent Vicarious Liability for Unauthorized Acts of Agent [20-2b] Respondeat Superior Agent Acts with Apparent Authority Torts of Independent Contractor Criminal Liability of the Principal [20-3] Relationship of Agent and Third Persons Contract Liability of Agent [20-3] Disclosed Principal [20-3a] Authorized Contracts Unauthorized Contracts Agent Assumes Liability Unidentified Principal [20-3b] Undisclosed Principal [20-3c] Nonexistent or Incompetent Principal [20-3d] Tort Liability of Agent [20-4] Rights of Agent Against Third Person [20-5] Cases in This Chapter Schoenberger v. Chicago Transit Authority. Parlato v. Equitable Life Assurance Society of the United States Connes v. Molalla Transport System, Inc. A.E. Robinson Oil Co., Inc. v. County Forest Products, Inc. Chapter Outcomes After reading and studying this chapter, the student should be able to: • Distinguish among actual express authority, actual implied authority, and apparent authority. • Explain the contractual liability of the principal, agent, and third party when the principal is (1) disclosed, (2) unidentified (partially disclosed), and (3) undisclosed. • Explain how apparent authority is terminated and distinguish between actual and constructive notice. • Describe the tort liability of a principal for the (1) authorized acts of agents, (2) authorized acts of employees, and (3) unauthorized acts of independent contractors. • Explain the criminal liability of a principal for the acts of agents. TEACHING NOTES RELATIONSHIP OF PRINCIPAL & THIRD PERSONS 20-1 CONTRACT LIABILITY OF THE PRINCIPAL *** Chapter Outcome *** Distinguish among actual express authority, actual implied authority, and apparent authority. 20-1a Types of Authority Authority is of two basic types: actual and apparent. Actual authority exists when the principal gives actual consent to the agent. Actual Express Authority — The principal’s spoken or written words directing the agent to do something specific. Actual Implied Authority — The implied authority of an agent does not come from the principal’s express words but is inferred by the agent from the words or conduct of the principal. Implied authority may arise from customs and usages of the principal’s business. Furthermore, the authority granted to an agent to accomplish a particular purpose necessarily includes the authority to employ the means to do so. Unless the parties agree otherwise, the authority to make a contract may be inferred from the authority to conduct a transaction. Apparent Authority — is power conferred on the agent by acts or conduct of the principal that reasonably lead a third person not only to believe that the agent has actual authority but also to rely justifiably on that belief. In contrast with implied authority, which is inferred by the agent, apparent authority is inferred by the third party from the conduct of the principal. (For that reason, there can be no apparent authority if the principal is undisclosed.) NOTE: See Figures 20-1, 20-2 and 20-3. CASE 20-1 SCHOENBERGER v. CHICAGO TRANSIT AUTHORITY Appellate Court of Illinois, First District, First Division, 1980 84 Ill.App.3d 1132, 39 Ill.Dec. 941, 405 N.E.2d 1076 http://scholar.google.com/scholar_case?case=2870525977617933992&q=405+N.E.2d+1076&hl=en&as_sclt=2,34 Campbell, J. The plaintiff, James Schoenberger, brought a small claims action * * * in the * * * circuit court of Cook County against the defendant, Chicago Transit Authority (herein-after C.TA.) to recover contract damages. The trial court ruled in favor of the defendant and against the plaintiff. The plaintiff appeals from this judgment. At issue is whether the C.T.A. may be held liable under agency principles of a promise allegedly made by an employee of the C.T.A. to the plaintiff at the time that he was hired to the effect that he would receive a $500 increase in salary within a specified period of time. We affirm. Schoenberger was employed by the C.T.A. from August 16, 1976, to October, 1976, at a salary of $19,300. The facts surrounding his employment with the C.T.A. are controverted. The plaintiff’s position at the trial was that he took the job with the C.T.A. at a salary of $19,300 upon the condition that he would receive a $500 salary increase, above and beyond any merit raises, within a year. Schoenberger testified at trial that, after filling out a job application and undergoing an initial interview with a C.T.A. Placement Department interviewer, he met several times with Frank ZuChristian, who was in charge of recruiting for the Data Center. At one of the meetings with ZuChristian, the Director of Data Center Operations, John Bonner, was present. At the third meeting held between ZuChristian and the plaintiff, ZuChristian informed the plaintiff that he desired to employ him at $19,800 and that he was making a recommendation to this effect. Schoenberger told ZuChristian that he would accept the offer. ZuChristian informed him that a formal offer would come from the Placement Department within a few days. However, when the offer was made, the salary was stated at $19,300. Schoenberger did not accept the offer immediately. Rather, he called ZuChristian for an explanation of the salary difference. After making inquiries, ZuChristian informed Schoenberger that a clerical error had been made and that it would take a number of weeks to have the necessary paperwork reapproved because several people were on vacation. To expedite matters, ZuChristian suggested Schoenberger take the job at the $19,300 figure and that he would see that the $500 would be made up to him at the April, October, 1976, or at the latest, the April, performance and salary review. The $500 increase was to be prospective and not retroactive in nature. John Hogan, the head of the Data Center, was aware of this promise, ZuChristian informed Schoenberger. Because the defendant was found to be ineligible for the October, 1976 performance evaluation and the April, 1976 review was cancelled, the April, 1977 evaluation was the first evaluation at which the issue of the salary increase was raised. When the increase was not given at that time, the plaintiff resigned and filed this suit. * * * The trial court, after hearing the evidence and reviewing the exhibits, ruled in favor of the defendant. The trial court ruled: (1) that it was inconceivable that the plaintiff thought ZuChristian had final authority in regard to employment contracts; and (2) that it was not shown that a commitment or promise was made to the plaintiff by an authorized agent of the C.T.A. * * * The main question before us is whether ZuChristian, acting as an agent of the C.T.A., orally contracted with Schoenberger for $500 in compensation in addition to his $19,300 salary. The authority of an agent may only come from the principal and it is therefore necessary to trace the source of an agent’s authority to some word or act of the alleged principal. [Citations.] The authority to bind a principal will not be presumed, but rather, the person alleging authority must prove its source unless the act of the agent has been ratified. [Citations.] Moreover, the authority must be founded upon some word or act of the principal, not on the acts or words of the agent. [Citations.] * * * Both Hogan and Bonner, ZuChristian’s superiors, testified that ZuChristian had no actual authority to either make an offer of a specific salary to Schoenberger or to make any promise of additional compensation. Furthermore, ZuChristian’s testimony corroborated the testimony that he lacked the authority to make formal offers. From this evidence, it is clear that the trial court properly determined that ZuChristian lacked the actual authority to bind the C.T.A. for the additional $500 in compensation to Schoenberger. Nor can it be said that the C.T.A. clothed ZuChristian with the apparent authority to make Schoenberger a promise of compensation over and above that formally offered by the Placement Department. The general rule to consider in determining whether an agent is acting within the apparent authority of his principal was stated in [citation] in this way: Apparent authority in an agent is such authority as the principal knowingly permits the agent to assume or which he holds his agent out as possessing—it is such authority as a reasonably prudent man, exercising diligence and discretion, in view of the principal’s conduct, would naturally suppose the agent to possess. * * * Here, Schoenberger’s initial contact with the C.T.A. was with the Placement Department where he filled out an application and had his first interview. There is no evidence that the C.T.A. did anything to permit ZuChristian to assume authority nor did they do anything to hold him out as having the authority to hire and set salaries. ZuChristian was not at a management level in the C.T.A. nor did his job title of Principal Communications Analyst suggest otherwise. The mere fact that he was allowed to interview prospective employees does not establish that the C.T.A. held him out as possessing the authority to hire employees or set salaries. Moreover, ZuChristian did inform Schoenberger that the formal offer of employment would be made by the Placement Department. * * * Our final inquiry concerns the plaintiff’s contention that irrespective of ZuChristian’s actual or apparent authority, the C.T.A. is bound by ZuChristian’s promise because it ratified his acts. Ratification may be express or inferred and occurs where “the principal, with knowledge of the material facts of the unauthorized transaction, takes a position inconsistent with nonaffirmation of the transaction.” [Citations.] Ratification is the equivalent to an original authorization and confirms that which was originally unauthorized. [Citation.] Ratification occurs where a principal attempts to seek or retain the benefits of the transaction. [Citations.] Upon review of the evidence, we are not convinced that the C.T.A. acted to ratify ZuChristian’s promise. * * * * * * For the reasons we have indicated, the judgment of the circuit court of Cook County granting judgment in favor of the defendant, C.T.A., is affirmed. 20-1b Delegation of Authority The general rule is that an agent may not delegate his authority to another or appoint a sub-agent. To determine if acts or duties may be delegable consideration is given to the principal's expectation as to which person should perform the task and how much of the agent’s unique expertise is required. Where an agent exceeds authority by making a delegation of responsibility, she will be considered as having acted outside the scope of her agency and will be personally liable on the unauthorized contracts. Where the agent makes a proper delegation of authority, the principal becomes responsible for the subagent's conduct and interaction with third persons. 20-1c Effect of Termination of Agency on Authority When an agency terminates, the agent’s actual authority ceases. The Second and Third Restatements differ, however, regarding when an agent’s apparent authority ceases. *** Chapter Outcome *** Explain how apparent authority is terminated and distinguish between actual and constructive notice. Second Restatement – Where the performance of an authorized transaction becomes impossible, such as when the subject matter of the transaction is destroyed or the transaction is made illegal, the agent’s apparent authority also expires and notice of such termination to third persons is not required. The bankruptcy of the principal terminates without notice the power of an agent to affect the principal’s property, which has passed to the bankruptcy trustee. When the termination is by the death or incapacity of the principal or agent, the Second Restatement provides that the agent’s apparent authority also expires and notice of such termination to third persons is not required. However, with respect to the death or incapacity of the principal, this rule has been legislatively changed the great majority of States by the adoption of the Uniform Durable Power of Attorney Act or the UPOAA. Each Act provides that the death of a principal, who has executed a written power of attorney, whether or not it is durable, does not terminate the agency as to the attorney in fact (agent) or a third person who without actual knowledge of the principal’s death acts in good faith under the power. Moreover, the Act provides that the incapacity of a principal, who has previously executed a written power of attorney that is not durable, does not terminate the agency as to the attorney in fact or a third person who without actual knowledge of the principal’s incapacity acts in good faith under the power. If an agent is appointed under a durable power of attorney, the actual authority of an agent survives the incapacity of the principal. Apparent authority continues until the third party has actual knowledge or receives actual notice, if that third party is one (1) with whom the agent had previously dealt on credit, (2) to whom the agent has been specially accredited, or (3) with whom the agent has begun to deal, as the principal should know. Actual notice requires a communication to the third party, either oral or written. If notice is given by mail, it is effective as actual notice upon delivery, not upon dispatch. All other third parties as to whom there was apparent authority must have actual knowledge or be given constructive notice through, for example, publication in a newspaper of general circulation in the area where the agency is regularly carried on or in a trade bulletin. Third Restatement— Section 3.11 of the Third Restatement applies the same rule to all causes of termination of agency—it applies a reasonableness standard. (1) The termination of actual authority does not by itself end any apparent authority held by an agent. (2) Apparent authority ends when it is no longer reasonable for the third party with whom an agent deals to believe that the agent continues to act with actual authority. The general rule of the Third Restatement is that it is reasonable for third parties to assume that an agent’s actual authority continues (“lingers”), unless and until a third party has notice of circumstances that make it unreasonable to continue that assumption. Consistent with this general rule—but contrary to the rule under the Second Restatement—a principal’s death or loss of capacity does not automatically end the agent’s apparent authority. In these instances, apparent authority terminates when the third party has (1) notice of the principal’s death or (2) has notice that the principal’s loss of capacity is permanent or that the principal has been adjudicated to lack capacity. Restatement, Sections 3.07 and 3.08. The Third Restatement’s rule is consistent with the Uniform Durable Power of Attorney Act. CASE 20-2 PARLATO v. EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES Supreme Court of New York, Appellate Division, First Department, 2002 299 A.D.2d 108, 749 N.Y.S.2d 216 http://scholar.google.com/scholar_case?case=7183003785471009812&q=749+N.Y.S.2d+216&hl=en&as_sdt=2,34 Friedman, J. Plaintiffs [Parlato and Perry], who are sisters, were defrauded by Kenneth Soule, an agent of defendant Equitable Life Assurance Society of the United States (Equitable), beginning while Soule was employed by Equitable and continuing after Equitable terminated him in July 1992. Soule actually opened an Equitable account for one plaintiff, but he did not do so for the other, instead stealing all the funds that plaintiff entrusted to him. * * * * * * Equitable hired Soule on or about April 1, 1990, as an agent authorized to sell Equitable financial products, such as insurance policies and annuities, to the public. Before becoming an Equitable agent, Soule from 1986 onward had been plaintiff Parlato’s accountant and financial advisor. Parlato, a resident of Queens, began investing in Equitable financial products through Soule in May 1990, and Soule actually opened several Equitable accounts in Parlato’s name while he was an Equitable agent. In the spring of 1992, however, Soule began criminally defrauding Parlato. Between March and May of 1992, Parlato, at Soule’s urging, liquidated certain of her non-Equitable investments, and entrusted the proceeds to Soule for investment in Equitable financial products. Soule converted these funds, and all additional funds that Parlato subsequently entrusted to him, to his personal use. In 1991, Soule began soliciting plaintiff Perry, Parlato’s sister and a resident of Hawaii, to invest in Equitable products. In May 1992, Perry began entrusting funds to Soule to be used to open investment accounts for her at Equitable. Unlike Parlato, however, Perry alleges that Soule never opened any Equitable account for her, and that, from the start, he misappropriated every penny she ever entrusted to him. Thus, prior to the instant litigation, Perry was unknown to Equitable. Equitable terminated Soule’s employment in July 1992. Although Parlato allegedly still had an account with Equitable at that time, Equitable did not notify her of the termination. For approximately four years after his termination, Soule allegedly continued to represent himself to plaintiffs as an Equitable agent and to solicit their further investment in purported Equitable financial products. Plaintiffs do not allege, however, that they were exposed to any manifestations by Equitable of a continuing connection between Soule and Equitable after July 1992. In August 1996, plaintiffs contacted Equitable to verify the status of their investments. At that time, Equitable informed plaintiffs that Soule had been terminated by Equitable in July 1992. This allegedly was the first time plaintiffs became aware that Soule’s relationship with Equitable had been severed. Plaintiffs then alerted law enforcement authorities to Soule’s misconduct. Ultimately, Soule pleaded guilty to a federal charge of mail fraud, and was sentenced to 27 months in prison and three years of supervised release, conditioned on his promise to make restitution in the amount of $416,000. Plaintiffs commenced this action against Equitable in December 1999. Each plaintiff asserted a cause of action for fraud, based on the contention that she entrusted her money to Soule in reliance on the appearance of authority to act for Equitable with which the company had clothed him. [The trial court granted the defendant’s motion to dismiss the complaint], and plaintiffs have appealed. * * * * * * [I]t is well established that a principal may be held liable in tort for the misuse by its agent of his apparent authority to defraud a third party who reasonably relies on the appearance of authority, even if the agent commits the fraud solely for his personal benefit, and to the detriment of the principal [citations]; Restatement [Second] of Agency §§261, 262, 265 [1]; [citations]. The reason for this rule is that the principal, by virtue of its ability to select its agents and to exercise control over them (see Restatement [Second] of Agency §1 [1]), is in a better position than third parties to prevent the perpetration of fraud by such agents through the misuse of their positions. Thus, the principal should not escape liability when an innocent third person suffers a loss as the result of an agent’s abuse, for his own fraudulent purposes, of the third person’s reasonable reliance on the apparent authority with which the principal has invested the agent. * * * * * * [The plaintiffs’ claims based on frauds perpetrated during Soule’s employment by Equitable are barred by the statute of limitations.] * * * The final question before us, therefore, is whether, under these circumstances, Equitable’s termination of Soule’s employment in July 1992 had the effect, as a matter of law, of immediately cutting off his apparent authority to act for Equitable vis-à-vis the two plaintiffs. This question cannot be answered in the abstract. Rather, since the two plaintiffs are situated differently, the question must be addressed separately as to each plaintiff. We hold that Parlato’s claim, to the extent it is not time-barred, should not have been dismissed on a motion addressed to her pleading. The Court of Appeals has held that a third party who, like Parlato, is known by a principal to have previously dealt with the principal through the principal’s authorized agent, is entitled to assume that the agent’s authority continues until the third party receives notice the principal has revoked the agent’s authority [citations]. The law of other states appears to be similar (see Restatement [Second] of Agency §§124A, 125, 127, 135, 136 [1], [2]; [citations]). In recognizing this duty of a principal to give notice of the revocation of an agent’s authority, we are simply applying established principles. In this case, Parlato alleges that Soule opened actual Equitable investment accounts for her while he was still an authorized agent of Equitable. If this is proven to be so, Parlato will be entitled to the benefit of the above-described rule permitting her, as a person known to have done business with Equitable through Soule in the past, to presume that Soule remained authorized to act for Equitable in the absence of either (1) notice that his authority had been revoked or (2) other circumstances that would have rendered it unreasonable to believe that Soule had authority to act for Equitable in the transactions he proposed [citation]; Restatement [Second] of Agency §125, Comment b; [citation]. Before any determination can be made as to whether it was reasonable for Parlato to believe that Soule had authority to act for Equitable in the transactions for which her claims are not time-barred, the particular facts of this case must be developed through discovery. Therefore, it was error to dismiss Parlato’s claim on this pleading motion. This brings us to the question of the viability of Perry’s claim against Equitable. Perry alleges that Soule stole all of the money she entrusted to him, and that he never opened any Equitable account in her name. Thus, Perry’s own allegations establish that Equitable had no way of notifying her of Soule’s termination in July 1992. Under these circumstances, we hold that any apparent authority Soule may have had vis-a-vis Perry terminated along with his actual authority when his employment by Equitable came to an end. Considerations of fairness, practicality and sound public policy lead us to this conclusion. Even in the case of a third party unknown to the principal, it seems fair to hold the principal responsible for the agent’s misuse of his apparent authority while the principal-agent relationship continues to exist, bringing benefits to the principal and giving the principal a measure of control over the agent’s conduct (see Restatement [Second] of Agency §1 [1] [an agent acts on behalf of the principal subject to the principal’s control]). It seems unfair, however, to hold the principal responsible for torts its former agent commits after termination against an unknown third party, even if the former agent facilitates his wrongdoing by misrepresenting to the victim that the agency relationship is still in existence. Once the agent’s employment has been terminated, the principal no longer has any power to control the agent’s conduct. Moreover, the principal obviously cannot give notice of the agent’s termination to a third party that is totally unknown to it. The law, of course, “does not require the impossible …” [Citation.] Further, allowing claims against a principal based on a former agent’s post-termination torts against unknown third parties would subject the principal to potentially unlimited liability. * * * Finally, the amended complaint alleges that Equitable “made no effort to alert the public in general that Soule was no longer its agent…” It is true that section 136 (3) of the Restatement (Second) of Agency (published in 1958) takes the position that, absent public notice (as by advertisement in a newspaper of general circulation) of revocation of an agent’s authority in the area in which he formerly acted for the principal, apparent authority continues to exist after such revocation as to persons who previously knew of the agency and do not receive actual notice of the revocation, even if such persons never previously did business with the agent and thus are unknown to the principal. While this rule (hereinafter, the “public notice rule”) finds support in a number of very old New York cases [citation], we do not regard the public notice rule as binding at this late date, at least under the particular facts alleged by plaintiffs. There is no statutory or regulatory mandate for public notice in this context * * * and the most recent New York cases giving support to the rule appear to be from the era when the telephone was a relatively new and uncommon device. Today, a person dealing with an individual known to have represented a company in the past can easily verify that the individual is still an agent for the company by contacting the company by telephone. Moreover, there is no reason to believe that the newspaper advertisements contemplated by the public notice rule would actually be read by customers such as plaintiffs in this action. This is particularly so in the case of plaintiff Perry, who, as a resident of Hawaii, would have been highly unlikely to come across a newspaper advertisement announcing Soule’s termination in the New York area (see Restatement [Second] of Agency §136 [3] [a] [public notice rule is satisfied by publication “in a newspaper of general circulation in the place where the agency is regularly carried on”]). We therefore decline to ascribe legal significance to Equitable’s alleged failure to give public notice of Soule’s termination. [Judgment modified in part and affirmed in part.] 20-1d Ratification Ratification is the confirmation or affirmance by one person of a prior unauthorized act performed by another who is his agent or who purports to be his agent. The ratification of such act or contract binds the principal and the third party as if the agent or purported agent had been acting initially with actual authority. The principal's intent, either express or implied, will be determined by his actions or in some cases, by a failure to act. Requirements of Ratification — Knowledge. A principal must have knowledge of all material facts concerning the transaction at the time ratification occurs. Disclosure. Under the Second Restatement, he agent must have disclosed to the third person that the act was being done on behalf of the purported principal. Under the Third Restatement and a number of relatively recent cases, an undisclosed principal may ratify an agent’s unauthorized act. Notice of withdrawal. Where a third person provides notice to the agent or principal that he is withdrawing from the agreement, a subsequent ratification will be ineffective. Intervening Events. If an intervening event materially alters the transaction to the point that it would be inequitable for the third person, the third person may choose to avoid the ratification. Legal Existence. The principal must have been in existence when the act was completed. A principal may ratify a contract that is voidable due to incapacity when the incapacity no longer exists. Effect of Ratification — The principal becomes bound by the actions of the agent as if the agent had been originally authorized to act. Assuming no tortious or criminal conduct on the part of the agent, the agent will be released from liability for the transaction. The principal can sue a third person who refuses to perform for breach of contract. The agent has a right to receive appropriate compensation from the principal. *** Chapter Outcome *** Explain the contractual liability of the principal and third party when the principal is (1) disclosed, (2) unidentified (partially disclosed), and (3) undisclosed. (NOTE: Contract liability of agent is discussed later in this chapter.) 20-1e Fundamental Rules of Contractual Liability A disclosed principal and third party are bound if the agent acts within her actual or apparent authority in making a contract. The same is true of a partially disclosed principal. (Some courts refer to the partially disclosed principal as an “unidentified principal.”) An undisclosed principal and third party are bound if the agent acts within her actual authority in making a contract. No principal is bound to a third party if the agent acts without authority unless a disclosed or partially disclosed principal ratifies the contract. NOTE: See Figures 20-1, 20-2, and 20-3 for a summary of contract liability. *** Chapter Outcome *** Describe the tort liability of a principal for the (1) authorized acts of agents, (2) authorized acts of employees, and (3) unauthorized acts of independent contractors. 20-2 TORT LIABILITY OF THE PRINCIPAL 20-2a Direct Liability of Principal A principal is liable for his own tortious conduct involving the use of agents. Such liability primarily arises in one of two ways. Authorized Acts of Agent — First, a principal is directly liable in damages for harm resulting from his directing an agent to commit a tort. Unauthorized Acts of Agent — Second, the principal is directly liable if he fails to exercise care in employing competent agents, or if the principal (employer) is negligent in supervising, training or controlling the employee/agent. NOTE: See Figure 20-4. CASE 20-3 CONNES v. MOLALLA TRANSPORT SYSTEM, INC. Supreme Court of Colorado, 1992 831 P.2d 1316 http://scholar.google.com/scholar_case?case=2485973325983137183&q=831+P.2d+1316&hl=en&as_sclt=2,34 Quinn, J. [Terry Taylor was an employee of Molalla Transport. In hiring Taylor, Molalla followed its standard hiring procedure, which includes a personal interview with each applicant and requires the applicant to fill out an extensive job application form and to produce a current driver’s license and a medical examiner’s certificate. Molalla also contacts prior employers and other references about the applicant’s qualifications and conducts an investigation of the applicant’s driving record in the state where the applicant obtained the driver’s license. Although applicants are asked whether they have been convicted of a crime, Molalla does not conduct an independent investigation to determine whether an applicant has been convicted of a crime. Approximately three months after Taylor began working for Molalla, he was assigned to transport freight from Kansas to Oregon. While traveling through Colorado, Taylor left the highway and drove by a hotel where Grace Connes was working as a night clerk. Observing that Connes was alone in the lobby, Taylor pulled his truck into the parking lot and entered the lobby. Once inside, Taylor sexually assaulted Connes at knifepoint. Although Taylor denied any prior criminal convictions on his application and during his interview, police and court records obtained since these events show that Taylor had been convicted of three felonies in Colorado and had been issued three citations for lewd conduct and another citation for simple assault in Seattle, Washington. Connes sued Molalla on the theory of negligent hiring, claiming that Molalla knew or should have known that Taylor would come into contact with members of the public, that Molalla had a duty to hire and retain high quality employees so as not to endanger members of the public, and that Molalla had breached its duty by failing to investigate fully and adequately Taylor’s criminal background. The district court granted Molalla’s motion for summary judgment. The Court of Appeals upheld the lower court’s ruling, holding that Molalla had no legal duty to investigate the non-vehicular criminal record of its driver prior to hiring him as an employee. Connes appealed.] * * * II The elements of a negligence claim consist of the existence of a legal duty by the defendant to the plaintiff, breach of that duty by the defendant, injury to the plaintiff, and a sufficient causal relationship between the defendant’s breach and the plaintiff’s injuries. [Citations.] A negligence claim will fail if it is predicated on circumstances for which the law imposes no duty of care upon the defendant. [Citations.] “A court’s conclusion that a duty does or does not exist is ‘an expression of the sum total of those considerations of policy which lead the law to say that the plaintiff is [or is not] entitled to protection.”’ [Citations.] The initial question in any negligence action, therefore, is whether the defendant owed a legal duty to protect the plaintiff against injury. The issue of legal duty is a question of law to be determined by the court. [Citations.] A duty of reasonable care arises when there is a foreseeable risk of injury to others from a defendant’s failure to take protective action to prevent the injury. [Citation.] While foreseeability is a prime factor in the duty calculus, a court also must weigh other factors, including the social utility of the defendant’s conduct, the magnitude of the burden of guarding against the harm caused to the plaintiff, the practical consequences of placing such a burden on the defendant, and any additional elements disclosed by the particular circumstances of the case. [Citations.] “No one factor is controlling, and the question of whether a duty should be imposed in a particular case is essentially one of fairness under contemporary standards—whether reasonable persons would recognize a duty and agree that it exists.” [Citation.] The tort of negligent hiring is based on the principle that a person conducting an activity through employees is subject to liability for harm resulting from negligent conduct “in the employment of improper persons or instrumentalities in work involving risk of harm to others.” Restatement (Second) of Agency §213(b)(1958). This principle of liability is not based on the rule of agency but rather on the law of torts. In [citation], the New Jersey Supreme Court offered the following distinction between the tort of negligent hiring and the agency doctrine of vicarious liability based on the rule of respondeat superior: Thus, the tort of negligent hiring addresses the risk created by exposing members of the public to a potentially dangerous individual, while the doctrine of respondeat superior is based on the theory that the employee is the agent or is acting for the employer. Therefore the scope of employment limitation on liability which is part of the respondeat superior doctrine is not implicit in the wrong of negligent hiring. Accordingly, the negligent hiring theory has been used to impose liability in cases where the employee commits an intentional tort, an action almost invariably outside the scope of employment, against the customer of a particular employer or other member of the public, where the employer either knew or should have known that the employee was violent or aggressive, or that the employee might engage in injurious conduct toward third persons. Several jurisdictions, in addition to New Jersey, have recognized the tort of negligent hiring, * * * and we now join those jurisdictions in formally recognizing this cause of action. In recognizing the tort of negligent hiring, we emphasize that an employer is not an insurer for violent acts committed by an employee against a third person. On the contrary, liability is predicated on the employer’s hiring of a person under circumstances antecedently giving the employer reason to believe that the person, by reason of some attribute of character or prior conduct, would create an undue risk of harm to others in carrying out his or her employment responsibilities. See Restatement (Second) of Agency §213, comment d. The scope of the employer’s duty in exercising reasonable care in a hiring decision will depend largely on the anticipated degree of contact which the employee will have with other persons in performing his or her employment duties. Where the employment calls for minimum contact between the employee and other persons, there may be no reason for an employer to conduct any investigation of the applicant’s background beyond obtaining past employment information and personal data during the initial interview. [Citation.] * * * * * * We endorse the proposition that where an employer hires a person for a job requiring frequent contact with members of the public, or involving close contact with particular persons as a result of a special relationship between such persons and the employer, the employer’s duty of reasonable care is not satisfied by a mere review of personal data disclosed by the applicant on a job application form or during a personal interview. However, in the absence of circumstances antecedently giving the employer reason to believe that the job applicant, by reason of some attribute of character or prior conduct, would constitute an undue risk of harm to members of the public with whom the applicant will be in frequent contact or to particular persons standing in a special relationship to the employer and with whom the applicant will have close contact, we decline to impose upon the employer his duty to obtain and review official records of an applicant’s criminal history. To impose such a requirement would mean that an employer would be obligated to seek out and evaluate official police and perhaps court records from every jurisdiction in which a job applicant had any significant contact. We have serious doubts whether such a task could be effectively achieved. Even if it could, there would remain the significant problem of interpreting the records and relating them in a practical way to the job in question. Accordingly, in the absence of circumstances antecedently giving the employer reason to believe that a job applicant, by reason of some attribute of character or prior conduct, would constitute an undue risk of harm to members of the public with whom the applicant will be in frequent contact or to particular persons who stand in a special relationship to the employer and with whom the applicant will be in close contact, the employer’s duty of reasonable care does not extend to searching for and reviewing official records of a job applicant’s criminal history. III In the instant case, we agree with the court of appeals’ determination that Molalla had no duty to conduct an independent investigation into Taylor’s non-vehicular criminal background before hiring him as a long-haul driver. Molalla had no reason to foresee that its hiring of Taylor under the circumstances of this case would create a risk that Taylor would sexually assault or otherwise endanger a member of the public by engaging in violent conduct. To be sure, Molalla had a duty to use reasonable care in hiring a safe driver who would not create a danger to the public in carrying out the duties of the job. Far from requiring frequent contact with members of the public or involving close contact with persons having a special relationship with the employer, Taylor’s duties were restricted to the hauling of freight on interstate highways and, as such, involved only incidental contact with third persons having no special relationship to Molalla or to Taylor. After checking on Taylor’s driving record and contacting some of his references, Molalla had no reason to believe that Taylor would not be a safe driver or a dependable employee. In addition, Molalla specifically instructed its drivers to stay on the interstate highways and, except for an emergency, to stop only in order to service the truck and to eat and to sleep. It further directed its drivers to sleep in the sleeping compartment behind the driver’s seat of the truck at rest areas or truck stops located along the interstate highway system. Furthermore, Molalla required Taylor to fill out a job application and to submit to a personal interview. Taylor stated on the application form and at the interview that he had never been convicted of a crime. Nothing in the hiring process gave Molalla reason to foresee that Taylor would pose an unreasonable risk of harm to members of the public with whom he might have incidental contact during the performance of his duties. * * * We accordingly hold that Molalla, in hiring Taylor as a long-haul truck driver, had no legal duty to conduct an independent investigation into Taylor’s non-vehicular criminal background in order to protect a member of the public, such as Connes, from a sexual assault committed by Taylor in the course of making a long-haul trip over the interstate highway system. The judgment of the court of appeals is affirmed. 20-2b Vicarious Liability for Unauthorized Acts of Agents A principal is liable for torts that are committed by his employee where the employee is acting within the scope of employment, even if the tort committed is attributable solely to negligence of the employee. The third person can bring action against either the principal or the employee, or both. This is because the principal and employee (“respondeat”) are jointly and severally liable. Respondeat Superior — is the doctrine just described imposing liability on the employer (“superior”) for unauthorized acts of an employee committed within the scope of employment. Agent Acts with Apparent Authority— “A principal is subject to vicarious liability for a tort committed by an agent in dealing or communicating with a third party on or purportedly on behalf of the principal when actions taken by the agent with apparent authority constitute the tort or enable the agent to conceal its commission.” Restatement, Section 7.08. This liability applies to (1) agents, whether or not they are employees, and (2) agents who are employees but whose tortious conduct is not within the scope of employment under respondeat superior. The torts to which this rule applies include fraudulent and negligent misrepresentations, defamation, wrongful institution of legal proceedings, and conversion of property. Torts of Independent Contractors — The general rule is that employers are not responsible for torts committed by independent contractors. However, the employer may be liable if it can be demonstrated that he was negligent in hiring the independent contractor or where the job involves ultrahazardous activities. In the latter case the employer owes a duty to the public that cannot be delegated to the independent contractor. NOTE: See Figure 20-4. *** Chapter Outcome *** Explain the criminal liability of a principal for the acts of agents.. 20-3 CRIMINAL LIABILITY OF THE PRINCIPAL The general rule is that a principal is not liable for the unauthorized criminal acts of the agent, even if the act occurs within the scope of employment. However, liability will be imposed where the principal directed, participated in, or ratified the criminal act. RELATIONSHIP OF AGENT & THIRD PERSONS *** Question to Discuss *** Explain the contractual liability of the agent and third party when the principal is (1) disclosed, (2) unidentified (partially disclosed), and (3) undisclosed. (NOTE: Contract liability of principal is discussed earlier in this chapter.) 20-4 CONTRACT LIABILITY OF AGENT 20-4a Disclosed Principal The third person is aware that an agency relationship exists and knows the identity of the principal. The agent is not a party to the contract and the third person is liable directly to the principal. Generally, agents cannot bring suit on the contract. Authorized Contracts — When an agent acting with actual or apparent authority makes a contract with a third party on behalf of a disclosed principal, the agent is not a party to the contract unless she and the third party agree otherwise. Unauthorized Contracts — If an agent exceeds his actual and apparent authority, the principal is not bound. The fact that the principal is not bound does not, however, make the agent a party to the contract unless the agent had agreed to be a party to the contract. The agent’s liability, if any, arises from express or implied representations about his authority that he makes to the third party. Agent Assumes Liability — An agent may agree to assume liability on a contract. If so, he may have a right of reimbursement from the principal if the third party ever collects a judgment from the agent. 20-4b Unidentified Principal The third person is aware that an agency relationship exists but does not know the identity of the principal. The agent is liable on the contract to the third party. 20-4c Undisclosed Principal The third person is unaware that an agency relationship exists and believes that the agent is acting personally. The agent is liable as a party to the contract but may recover any losses or cost from the principal if he acted with actual authority. Subsequent to learning the identity of an undisclosed or partially disclosed principal, the third party may elect to hold either the principal or the agent to performance of the contract. He may not elect to require performance by both. CASE 20-4 A.E. ROBINSON OIL CO., INC. v. COUNTY FOREST PRODUCTS, INC. Supreme Judicial Court of Maine, 2012 40 A.3d 20, 2012 ME 29, 77 UCC Rep.Serv.2d 59 Gorman, J. Galen R. Porter Jr. is the sole shareholder in County Forest, a corporation that has existed since 1986. In 2004, Porter spoke with a vice president of A.E. Robinson at a charity golf event. Subsequently, the two orally agreed that A.E. Robinson would begin delivering fuel products to G.R. Porter & Sons, another corporation with which Porter was involved. In 2005, Porter began operating a fuel delivery business as Porter Cash Fuel but never registered that name with the Secretary of State. Porter testified that he intended to operate Porter Cash Fuel as a trade name of County Forest and not as a separate sole proprietorship. The record reveals that Porter ordered fuel and gas over the phone from A.E. Robinson in a series of transactions that continued for three years and eventually gave rise to this suit. Several types of writings confirmed these oral agreements. Within two days after A.E. Robinson delivered its products, it mailed invoices directed to Porter Cash Fuel. A.E. Robinson also regularly sent Porter Cash Fuel statements of account. Further, an authorization for direct payment listed "Porter Cash Fuel" and bore two signatures, one of which belonged to Porter. None of the writings made any reference to County Forest and none indicated the corporate status of Porter Cash Fuel. All of A.E. Robinson's dealings were with Porter or with Porter Cash Fuel; it had no reason to believe it was dealing with County Forest. Over the years of this business relationship, A.E. Robinson added terms to the bottom of its invoices asserting its entitlement to financing charges, collection costs, attorney fees, and court costs. Although Porter never expressly agreed to these terms, when Porter paid sporadically, some of the payments were applied to financing charges, and Porter never complained. Ultimately, the business relationship deteriorated, and A.E. Robinson refused to deliver any more products. A.E. Robinson sued County Forest and Porter seeking payment on the account. Following a non-jury trial, the court entered judgment for A.E. Robinson jointly and severally against County Forest and Porter in the amount of the invoices plus financing charges and attorney fees. County Forest and Porter appeal from the entry of that judgment. First, County Forest and Porter contend that the trial court erred in holding them jointly and severally liable for the debt. *** Porter became personally liable, as did County Forest, based on principles of agency. In his transactions with A.E. Robinson, Porter, through Porter Cash Fuel, was acting as an agent for an undisclosed principal—County Forest. The Restatement (Third) of Agency *** states that "[w]hen an agent acting with actual authority makes a contract on behalf of an undisclosed principal ... unless excluded by the contract, the principal is a party to the contract," as is the agent. Restatement (Third) of Agency § 6.03 (2006). This rule is justified because "a third party's reasonable expectations will receive adequate protection only if an undisclosed principal is liable on a contract made on its behalf by an agent." Id. cmt. b. Notably, however, "[a]n undisclosed principal only becomes a party to a contract when an agent acts on the principal's behalf in making the contract." Id. cmt. c. Here, Porter testified that he intended to operate Porter Cash Fuel as a trade name of County Forest. His brief to this Court reiterates that this was his intent. This testimony establishes that he was not operating Porter Cash Fuel as a separate sole proprietorship, which might have permitted County Forest to escape liability. Because Porter operated Porter Cash Fuel as an agent for County Forest without disclosing that County Forest was the principal, he and County Forest are parties to the contract. See Restatement (Third) of Agency § 6.03. *** *** Judgment modified to remove the award of attorney fees. As modified, judgment affirmed. 20-4d Nonexistent or Incompetent Principal A person acting as an agent when there is no principal will be personally liable if the third party knows of these facts. An agent who makes a contract for a disclosed principal whose contracts are voidable for lack of contractual capacity is not liable to the third party. 20-5 TORT LIABILITY OF AGENT An agent is personally liable for his own tortious acts that injure third persons, whether or not such acts are authorized by the principal and whether or not the principal may also be liable. 20-6 RIGHTS OF AGENT AGAINST THIRD PERSON An agent who makes a contract with a third person on behalf of a disclosed principal usually has no right of action against the third person for breach of contract. An agent for a partially disclosed or undisclosed principal may maintain an action in her own name against the third person. Instructor Manual for Smith and Robersons Business Law Richard A. Mann, Barry S. Roberts 9781337094757, 9780357364000, 9780538473637