Agency & Partnership Professor Donald J. Kochan

1. Agency & PartnershipProfessor Donald J. Kochan Class 13

2. Today’s Materials • Pages 321-360 • Fraudulent Acts of Agents

3. Introduction • “Fraud is a tort, exposing a principal to vicarious liability for misconduct of its agents.” • As the text states (citing Prosser and Keeton on Torts), the elements of fraud are: “1. A representation made by the defendant; 2. knowledge of the defendant that the representation is false, or that he has not a sufficient basis of information to make it; 3. intention of the defendant to induce the plaintiff to act (or refrain from action) in reliance upon the misrepresentation; 4. justifiable reliance by the plaintiff upon the representation; and 5. damage to plaintiff resulting from such reliance.”

4. Introduction (cont.) • Liability rules are meant to encourage principals to monitor their agents • Principals are in a better position to monitor than third parties • Least Cost Avoider Issues • Law must choose who bears the burden of behaviors – here a theme is that better to hold principals liable than require third parties to suffer loss – is that fair?

5. Restatement (Second) of Agency Sec. 261 “A principal who puts a servant or other agent in a position which enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is subject to such third persons for the fraud.”

6. Unscrupulous Agents:Grease Monkey International, Inc. v. Montoya • Obtainment of loan case • Scope of Employment Issues • Authorization Issues – When is one “acting on behalf” • Issue whether the act “furthers the employer’s business” • Right to Control Issues • Read concurrence re assignment of risk between principal and “innocent” third parties

7. Entente Mineral Co. v. Parker • Petroleum landman and royalties case • Vicarious liability of principal for actions of agent established under Restatement secs. 219 and 261 • Scope AGAIN key in the employment or Master/Servant relationship

8. Hydrolevel Corp. v. American Society of Mechanical Engineers, Inc. • “Ratification” issues • Antitrust case – Interference with business relations issues • Does agent action appear “regular on its face”? Does it appear to be in the “ordinary course of business”? Each go to reasonable reliance of the third party. • “Imposing liability on the principal to prevent misconduct by agents occupying especially sensitive or responsible positions that invite reliance . . .” – this is the monitoring principle we have discussed • REMEMBER, even if the principal is found liable he might still sue his agent.

9. Rothman v. Fillette • Attorney misconduct/insurance/settlement case • No question of an authorized agency relationship • Consistent “justice” theme for principal liability: “Where one of two innocent must suffer, the loss should be borne by him who put the wrongdoer in a position of confidence and trust and thus enabled him to perpetuate the wrong.” • LESSON: BE CAREFUL WHO YOU HIRE

10. Limits to Liability for Fraud:Light v. Chandler Improvement Co. • Real Estate broker/Mortgage foreclosure and fraud in the inducement of purchase of farm land case • Proof issues re false representations by agent – were they ever communicated or known” to the principal? If not, unclear whether the principal can be liable, but be careful because there are many precedents on the “should have known” and monitoring principles • Pay special attention to note 5 on page 345 that “The agent is liable for his own fraud, of course.” But remember we’ve talked about the principal usually having the deeper pocket.

11. Leafgreen v. American Family Mutual Insurance Co. • Insurance policy case, again • Respondeat Superior and Vicarious Liability issues • Focus on scope issues • Focus on the importance of “forseeability” on the part of the principal for him to be held liable • Restatement 261 and 231 – be sure to read the extensive excerpts • Consider Restatement 262 in dissenting opinion – there is a defense when the third party should have known an agent is acting for his own purposes or outside his authority • The Note on page 351 is very important regarding principal defenses

12. The Exculpatory Clause:Eamore v. Big Bear Land & Water Co. • Can a land sales contract include an enforceable exculpatory clause that waives liability for reliance on any representations, inducements, promises, or understandings? • Court holds it does not absolve the principal of liability • “[S]ome innocent person must be the loser” and it shouldn’t be the misled purchaser, so the court says – do you agree?

13. Dembowski v. Central Construction Co. • Home improvement company case • Contract stated there were “no representations, guarantees, or warranties” except as incorporated in the agreement, yet agent made oral representations. • Facts show plaintiff knew of limitation in the contract and evidenced fails to show principal had knowledge of agent’s fraudulent conduct • Consider the reliance issues • “A person with notice of a limitation of an agent’s authority cannot subject the principal to liability upon a transaction with the agent if he should know that the agent is acting improperly.” Restatement (Second) of Agency, Sec. 166.

14. King v. Horizon Corp • Reloading Real Estate case • Disclaimers in contracts/obligations to read before signing; merger clauses • General principle of law: buyer cannot maintain an action for fraud against the seller based on misrepresentations of the agent . . .” • But court finds apparent authority and attribution of agent fraud to the principal; why? • Monitoring and Duty of Care: “a principal may not turn loose his agent on the general public, and then merely sit back and exercise little or no supervision.” -- Does this make sense? How does such a rule change behaviors?

15. Concluding Thoughts • Remember all the litigation possibilities: • 3 v. P • 3 v. A • P v. A • A v. P