responsibility for action

attached is the discussion instructions and reading material (chapter 12). please read the scenario carefully and answer substantively using the reading material and one scholarly source to support claims.


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Karen is shopping at Big Mart. She has with her an umbrella which is the same brand Big Mart
carries. When a Big Mart employee, Steve, sees her leave with the umbrella without going
through the checkout lane, he asks her to come back into the store. Steve says that he thinks
Karen is shoplifting the umbrella. Karen tells him that she has had the umbrella for years and
shows him marks of wear and tear. Steve apologizes and tells Karen she is free to go. Can Karen
successfully sue for false imprisonment or defamation? From what you have learned about the
relationship between a principal and an agent, analyze whether Steve or Big Mart could be liable
because of Steve’s actions.
Your initial post should be at least 250 words in length. Support your claims with examples from
the required reading material and one outside scholarly source, and properly cite the reference.
Agency and
Employment Law
Learning Objectives
After studying this chapter, you will
be able to:
1. Describe how agencies are created and
2. Discuss the rights and duties of principals
and agents.
3. Explain the liability of principals and
agents to third parties.
4. Describe some ways in which employment
is regulated by the government.
Scott Anderson/Associated Press

Chapter Overview
12.1 Agency
12.4 Chapter Summary
Types of Agencies
Formation of the Agency
Agent’s Duties
Principal’s Duties
The Principal’s Liability for the Agent’s Contracts
The Agent’s Liability on the Contract
Tort Liability and Agency
• Focus on Ethics
• Case Study: Weingart v. Directoire Restaurant, Inc.
• Case Study: Christopher v. SmithKline Beecham Corp.
Critical Thinking Questions
• Hypothetical Case Problems
• Key Terms
12.2 Termination of Agency
Voluntary Termination
Termination by Operation of Law
Irrevocable Agencies
Notice to Third Parties Upon Termination of
an Agency
12.3 Employment and Labor Law
• Labor Law
• Employment Discrimination
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Section 12.1 Agency
oday’s businesses are primarily made up of a series of legal relationships. Companies hire employees and independent contractors to do their work. Although the
law gives the parties some freedom to structure their own relationships through
bargaining collectively or individually, both the common law and government regulations also impose some restrictions.
Although it sometimes may seem that government is taking on a big role in regulation of
business relationships, in fact the United States has fewer laws protecting workers than
any other industrialized nation. Most of these countries, including Canada, Japan, and
the Eurozone, prevent an employer from terminating employees without due cause, and
require more in terms of benefits.
The rules of agency law come from the common law, and potentially apply to any situation where one person is acting for another, even if it is as informal as picking up a carton
of milk from the grocery store for your roommate, or as complex as the president of a multinational corporation making a million-dollar deal. Employment and labor law, on the
other hand, are statutory regulations the government has enacted to govern some aspects
of employer-employee relations. In this chapter we shall examine all of these areas of law.
12.1 Agency
n agency is a relationship where one party, the agent, agrees to act on behalf
of another, the principal. Agencies are crucial to modern business relationships,
since it is almost impossible for the owner of a business to conduct all transactions without help. Without agency law, corporations could not exist at all. Corporations
can only function through their agents, since a corporation is an entity with no physical
body. If ABC Inc. is going to make a deal to sell their products to Walmart, agents for both
companies will have to make the contract for their companies.
Agencies do not have to be contracts,
although they frequently are. If you
agree to pick up that carton of milk for
your roommate, you have formed an
agency relationship even though you
are not employed by your roommate,
and have no contract with your roommate (because your roommate is not
giving you consideration; you are doing
this favor out of the goodness of your
heart). But regardless of whether there is
a contract or employment situation, the
parties in an agency relationship automatically have certain rights and duties,
and liability automatically attaches in
certain situations, regardless of what the
parties themselves agreed to.
FedEx is the principal and the man with the boxes is the agent.
Mark Lennihan/Associated Press
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Section 12.1 Agency
Types of Agencies
An agency can be either gratuitous, meaning the agent is doing the principal’s task for
free, or compensated, as in most employment agencies.
Example 12.1. Petra asks her roommate Angel to drop off Petra’s dry cleaning on her way to work. Angel is simply doing this as a favor, not for any
compensation, which makes her a gratuitous agent. Petra is the principal,
and the dry cleaner is the third party. Angel is obligating Petra to pay the
dry cleaner’s bill when she leaves the clothes at the store. Angel has made
a contract on behalf of her principal, in other words.
Example 12.2. Pretty Flower Shoppe hires Andrew to drive the delivery
van, at a salary of $15 per hour. Andrew, halfway through his daily delivery route, notices that the “check engine” light has gone on. He discovers
the van is down a quart of oil, and stops at a BP station to buy oil and put
it in the van. Pretty Flower is the principal, Andrew is the compensated
agent, and the gas station is the third party.
Issues of contract liability are generally no different between compensated and gratuitous
agents, but a principal has less tort liability for a gratuitous agent. For example, if both
Angel and Andrew accidentally run over a pedestrian while doing their tasks for their
principals, Petra will not be liable but Pretty probably will be.
Compensated agents also come in two types: employees (or servants, in the older common
law terminology) and independent contractors. Although the principal’s contract liability is
again basically the same, the tort issues are different. Principals are generally liable for the
torts of servants that are committed within the scope of the relationship, but not for those
of independent contractors.
What determines whether an agent is an employee or an independent contractor? Courts
will look at a number of factors, the most important of which is degree to which the principal had the right to control how the agent did the work. The more control, the more likely
the agent is an employee. Other factors include whether the principal supplies the tools
and place of work, whether the agent works only for the principal or is in a distinct business of his own, whether the agent is paid by time, rather than the job, and whether the
work is part of the regular business of the principal.
Example 12.3. Pretty Flower Shoppe has Andrew to drive the delivery
van, which is owned by Pretty. Andrew is paid an hourly wage, and works
hours set by Pretty. Andrew is given the delivery addresses each day by
Pretty. Andrew is an employee. If Andrew runs over Teresa, a pedestrian,
while delivering flowers for Pretty, Pretty will likely be liable.
Example 12.4. Pretty Flower Shoppe pays $15 for UPS to deliver a large
envelope containing financial information to Pretty’s accountant. Pretty
does not tell UPS what route to use, or supply any tools to them. UPS is
an independent contractor. If the UPS driver runs over Teresa while on the
way to deliver Pretty’s package, Pretty is not liable.
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Section 12.1 Agency
We shall examine the tort liability issue
in more detail later. There are other reasons why it may be significant whether
an agent is an employee or independent
contractor: for example, employers may
have to deduct payroll taxes for their
employees, while they do not do so for
their independent contractors. Note that
what the parties call themselves is not
terribly significant to a court. In other
words, a principal may label an agent an
independent contractor, but if that agent
otherwise has the characteristics of an
employee, a court will likely impose an
employer’s liability on the principal.
People such as plumbers or carpenters are often independent
contractors rather than employees. They have their own
businesses and are hired to do a specific project.
Formation of the Agency
There are no particular formalities to
forming an agency; it does not usually
have to be in writing, for example. However, under the equal dignities rule, if an agent’s
task for the principal must be in writing under the Statute of Frauds, the agent’s authority
to act must also be in writing.
Example 12.5. Pamela is selling her house, and she cannot be at the closing to sign off on the title. She appoints Adam as her agent to do it for
her. Adam will need written authority from Pamela, since transfers of real
estate must be in writing.
What is necessary is that the principal and agent both consent. Also, both parties need a
certain degree of capacity (or mental competency). The principal must have contractual
capacity (discussed in Chapter Five), and the agent must have enough capacity to carry
out the task. If you hire an agent to act as your attorney, obviously that person needs contractual capacity, but if you hire an agent to carry your groceries for you, a lesser degree
would suffice.
An agency must also have a legal purpose. The head of a drug cartel’s arrangements with
his dealers are not agencies.
Agent’s Duties
Agency is a fiduciary relationship—a relationship based on trust, in which the agent
owes the principal a duty to act with absolute good faith and honesty. In addition to the
good faith and honesty demanded of fiduciaries, an agent owes his principal the duties
of loyalty, obedience, performance, notification, and accounting. Each of these is briefly
defined below.
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Section 12.1 Agency
Agent’s Duty of Loyalty
The agent owes his principal an absolute duty of loyalty. This means that in carrying out
his duties as agent, the agent must put the interest of his principal above his own or those
of third parties. This applies whether the agent is an employee or an independent contractor. The duty of loyalty extends to, among other things, keeping confidential any sensitive
information the agent learns through the agency relationship, as well as refraining from
using the agency relationship for his own advantage or that of third parties—whether or
not such use injures the principal. If the agent breaches the duty of loyalty, the principal
can sue him for actual damages, as well as recover any profits that he has made through
the abuse of the agency relationship. In addition, the agent’s authority will terminate.
Example 12.6. Phoebe hires Roseanne to act as her agent in buying a house
at an auction and authorizes her to bid up to $200,000 on the property. While
at the auction, Roseanne is surprised to find that no one bids more than
$20,000 on the property and, finding it to be a bargain at that price, buys it
for $20,500 for herself. She has violated the duty of loyalty to her principal
in bidding on the house herself and can be sued by Phoebe for damages.
The agent must follow the reasonable, legal instructions of the principal to the letter. If she
fails to do so, she is in breach of the agency agreement and can be sued for damages. When
the principal’s instructions are vague or subject to more than one reasonable interpretation, the agent discharges her duty of obedience by acting in good faith in a manner that
is reasonable under the circumstances.
If in the last example Roseanne refuses to bid more than $50,000 for the house on Phoebe’s
behalf, despite her specific instructions to buy it for up to $200,000, she would be guilty of
violating her duty of obedience and could be sued for damages by Phoebe.
An agent must use reasonable diligence and skill in performing his duties under an
agency agreement. If the agent is a skilled professional, such as an attorney, physician, or
accountant, then he must demonstrate the basic competence and skill for a practitioner in
his profession. If the agent is acting pursuant to a valid agency contract (e.g., if he is being
paid for his services), he can be sued for breach of contract if he fails to act as promised.
Even if the agent is acting gratuitously, he is still subject to liability in tort for failure to
exercise reasonable care in carrying out his duties under the agency (e.g., negligence or
Under an agency agreement, the principal is held to have putative (implied) knowledge of
all that the agent knows concerning the agency; whatever knowledge the agent has that is
relevant to the agency is held to also be known by the principal, whether or not she is actually aware of it. Therefore, the agent has the duty to give timely notification to her principal about any matter concerning the agency that she learns in carrying out her duties.
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Section 12.1 Agency
In the last example, if Roseanne finds that the house is infested with termites prior to the
bidding but still bids $200,000 on the house without first informing Phoebe of the termite
infestation, she will be liable to Phoebe for breaching her duty of notification. (She will
also be guilty of negligence in carrying out her duties.)
Agent’s Duty to Render an Accounting
If there is no specific agreement to the contrary, agents have the duty to keep records of
all transactions concerning the agency and to make them available to the principal upon
request. All income and expenses resulting from the agency agreement for property in the
agent’s control must be reported—even illegal transactions. If, for example, an agent is
given a bonus or cash incentive for entering into a contract with a third party on the principal’s behalf, he must make an accounting to the principal of such a gift; it legally belongs
to the principal. If the agent fails to account for such proceeds and to turn them over to the
principal, he is guilty of breaching both his duty to account and his duty of loyalty.
Principal’s Duties
Although the agency relationship primarily benefits the principal whom the agent serves,
principals also owe certain duties to the agents who serve them. These include the duties
of cooperation, compensation, indemnification, and reimbursement.
A principal must assist the
agent in the performance of her
duties and must refrain from
doing anything that impedes
the agent from successfully
carrying out her duties under
the agency. The duty of cooperation requires a principal to
make available to his agent
any information she needs in
order to successfully carry out
her duties under the agency.
The duty prevents the principal from directly or indirectly
impeding the agent from faithfully executing the assigned
If this salesman’s supervisor were to come in and try
to take this sale for himself and deprive the salesman
of his commission, he would be breaching his duty of
cooperation with the salesman.
Example 12.7. Peter,
owner of a luxury car
dealership, sees that
Anna, one of his sales staff, is showing a $200,000 sports car to a local billionaire. Not wanting to pay Anna her 10 percent commission, Peter hurries down to the sales floor and insists that Anna take her lunch break.
Peter then sells the car to the billionaire himself. Peter is breaching his duty
to Anna, who was acting properly in trying to sell the car.
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Section 12.1 Agency
Example 12.8. Big Oil Inc. hires Aliya as an agent to negotiate drilling
leases in Alaska. Aliya is to be paid partly on commission for each successful lease she obtains. In order to obtain the leases, Big Oil must first prepare
certain environmental impact assessments. Aliya negotiates five separate
leases, but because of Big Oil’s not completing the impact assessments in
time, the deals fall through. Aliya has a case against Big Oil for breaching
the principal’s duty of cooperation.
Unless the agent has made it clear that he is willing to undertake the duties of the agency
gratuitously (free of charge), the agent is entitled to be compensated for his services, and
the principal is obligated to compensate him. Usually, the compensation is agreed upon
as part of the agency agreement. If no compensation is specified, and if it is not clear from
the circumstances that the agent has agreed to render performance gratuitously, the agent
is entitled to receive the reasonable value of his services.
Example 12.9. Larry asks Cathy, an attorney, to write the XYZ Department
Store credit department to demand that they adjust an error in his account.
Cathy (Larry’s agent for purposes of writing the letter) drafts the letter
and bills Larry $100 for her services. Larry refuses to pay, claiming that
he believed Cathy would not charge him for the service, and that no fee
was specified at the time he asked her to draft the letter. Cathy would be
entitled to the payment of a reasonable fee for her services, since no fee was
specified; assuming $100 is the reasonable value of the service performed
by Cathy in the locality where she practices law, Larry is under a duty to
pay the fee. (Larry’s only defense is to prove that Cathy agreed to draft the
letter gratuitously).
Duty of Indemnification
The principal has the duty to indemnify, or compensate the agent for any losses suffered
as a result of authorized legal acts that the agent performs under the agency agreement.
Example 12.10. Harry, the president of ZYX Corporation, is personally
sued for breach of a contract he had entered into on behalf of his company.
If he loses, he is entitled to indemnification from ZYX for any judgment he
is forced to pay the plaintiff.
Example 12.11. Rhianna is an independent insurance agent who sells policies on behalf of different companies. She sells a car insurance policy for
Acme Insurance Inc. to Melissa. When Melissa’s car is damaged and Acme
doesn’t pay, Melissa sues Rhianna. Acme must indemnify Rhianna for any
legal costs.
The principal must reimburse the agent for any expenses incurred as a result of carrying
out legal authorized acts under the agency agreement. (The agent must, of course, properly document and account for all expenses to the principal.)
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Section 12.1 Agency
Example 12.12. In the earlier example, if ZYX does not provide Harry with
counsel at its expense, he is also entitled to be reimbursed by ZYX for the
cost of his legal defense.
The Principal’s Liability for the Agent’s Contracts
When an agent acts within the scope of t …
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