Summarize the implications for third-party liability regarding various forms of agency. 10.1 Define agency and how an agency relationship is created. 10.2 Identify the various types of agency relationships. 10.3 Explain tort liability and how it relates to the agency relationship

Course Learning Outcomes for Unit VII Upon completion of this unit, students should be able to: 10. Summarize the implications for third-party liability regarding various forms of agency. 10.1 Define agency and how an agency relationship is created. 10.2 Identify the various types of agency relationships. 10.3 Explain tort liability and how it relates to the agency relationship. Reading Assignment

Chapter 20: Agency and Liability to Third Parties, pp. 410–436 Unit Lesson Agency

Agency relationships are a crucial part of the business world. Depending on the types of relationships, different laws are applicable. The creation and the nature of an agency relationship also have legal significance. Various forms of agency are given different types of authority. The agency relationship is the legal association between one party, the principal, and an agent who acts on behalf of that party. This is referred to as a fiduciary relationship because the agent has a duty to act primarily for the principal’s benefit. Lawyers, legal guardians, and directors of a corporation are all examples of fiduciaries. There are four processes for creation of an agency relationship: expressed agency, implied authority, agency by estoppel, and agency by ratification. Examples of agency by a written or oral agreement (expressed agency) include the written listing agreement between a seller of real estate and a broker, a power of attorney document, and a durable power of attorney document. Matters involving agency by implied authority are always fact-specific by implication through the conduct of the parties. The third process for creation of an agency relationship is by a principal leading a third party to believe that another serves as his or her agent but without agreement with the purported agent (agency by estoppel). The Case Nugget on page 415 in the textbook illustrates the significance of agency by estoppel. When an individual misrepresents himself or herself as an agent for another party and the principal accepts the unauthorized act, this is agency by ratification. The key difference between this form of agency and all others is the misrepresentation. For example, Allan has $500 of Paul’s money to purchase some supplies for Paul’s business next week. Rich asks Allan to borrow $500 and is willing to pay interest. Without Paul’s direction, Allan tells Rich that he can lend him $500 of Paul’s money plus interest, and Rich accepts the money. Allan tells Paul what he has done, and Paul says, “as soon as he pays you back, plus interest, I want it all back from you.” Several days later, Rich pays Allan the money plus interest, and Allen gives it all to Paul. There are three types of business relationships to which agency laws are relevant: the principal-agent relationship discussed earlier, the employer-employee relationship, and the employer-independent contractor relationship. The last two types are similar in nature, but there is one key distinction: the employer has a right UNIT VII STUDY GUIDE Agency and Liability, Business Law 2 UNIT x STUDY GUIDE Title to control the conduct of employees but not that of independent contractors. When courts are asked to decide whether a worker is an employee or an independent contractor, one of the most significant issues they consider is how much control the employer exerts over the agent. The principal owes four duties to the agent, which are as follows: 1. compensation, 2. reimbursement and indemnification for any losses the agent incurs while working within the scope of authority on the principal’s behalf, 3. cooperation, and 4. provision of safe working conditions. The agent owes five duties to the principal, which are as follows: 1. loyalty to act in the interest of the principal, 2. notification of all relevant information, 3. performance of the responsibilities specified in the agency agreement and doing so with reasonable skill and care, 4. obedience of lawful instructions from the principal, and 5. accounting of the transactions of money and property made on behalf of the principal (Kubasek, Browne, Herron, Dhooge, & Barkacs, 2016). Among these responsibilities, perhaps the most important is the duty of loyalty. There are abundant examples in business where an agent breached his or her duty of loyalty by stealing corporate assets (tangible or intangible) or by usurping a corporate opportunity for the agent’s own benefit. For example, Tom works for Petflix Corp., which is known for its service of Internet streaming music and movies geared toward dogs and cats. Tom is presented with an opportunity to expand the Petflix market to fish and reptiles, but instead, he pitches the idea to a friend and business partner who takes the idea to market and makes Tom a silent partner. Tom has usurped a corporate opportunity because he diverted the fish and reptile idea away from Petflix and breached his duty of loyalty. Tort Liability and the Agency Relationship Agents are always responsible for the torts they commit. The question remains of whether the principal can also be held liable. The term respondeat superior is a Latin term that literally means, “let the superior speak.” This legal concept places liability on the principal/employer for any harm caused by an agent/employee. This is liability without fault, also known as vicarious liability. The policy rationale for this is based on the connection between the agent/employee and the principal/employer because the agent/employee is used to further the business interests of the principal/employer. As such, any harm caused by the agent/employee is the responsibility of the principal/employer. Often, when a third party is injured, both the agent and the principal are sued by the third party. It is possible for an employer also to be liable for the intentional torts of an employee. For example, in the case of Manning v. Grimsley (1981), on September 16, 1975, there was a professional baseball game at Fenway Park in Boston, Massachusetts, between the Red Sox and the visiting Baltimore Orioles. The defendant, Ross Grimsley, a pitcher employed by the Baltimore Orioles, was warming up in the bullpen when some spectators seated nearby began heckling him. The heckling continued for several innings. After his catcher had left his catching position, and while he was walking over to the bench, Grimsley wound up and threw a baseball in the direction of the hecklers. This was close to 90 degrees from the path of the pitcher’s mound to the plate. The ball passed through the wire mesh fence, which separated the bullpen from the fans, and the ball struck Manning, the plaintiff. The plaintiff sued Ross Grimsley and the Baltimore Orioles. The court ruled that the Orioles were also liable for damages resulting from the intentional assault by an employee that was in response to the plaintiff’s interference of the employee’s duties. The court held that it could be possible for a jury to interpret Grimsley’s actions as an attempt to rid the hecklers so he could pitch more effectively. For more information on this case, see Manning v. Grimsley (1981). Further, consider a variation of the scenario discussed in the Case Opener on page 410 in the textbook. What if one of those FedEx single-route drivers was involved in a serious car accident that injured another driver? There is no question that the FedEx driver would be liable for his actions, but would FedEx be liable? In this, Business Law 3 UNIT x STUDY GUIDE Title situation, the answer is no, because an independent contractor is not an employee. The employer does not control the details of the independent contractor’s performance. As a result, the employer cannot be held liable for the independent contractor’s tortious actions under respondeat superior. There is an exception, however, for inherently dangerous activities.


Kubasek, N., Browne, M. N., Herron, D. J., Dhooge, L. J., & Barkacs, L. (2016). Dynamic business law: The essentials (3rd ed.). New York, NY: McGraw-Hill Education.

Manning v. Grimsley, 643 F. 2d 20 (U.S. Ct. App. 1st. Circ. 1981).

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