Chapter 25

1. Chapter 25 Creation of Agency

2. 25.1 Goals • Describe when an agency relationship exists • Identify who is qualified to be a principal and who is qualified to be an agent • Discuss how the law treats principals and agents who lack contractual capacity

3. Bruce owned an apartment complex. He hired a maintenance manager named Tom to “make minor repairs requested by tenants such as fixing plumbing leaks, replacing light switches, and replacing broken garbage disposals.” Things worked well until Tom ordered a new refrigerator and stove for one of the apartments without consulting Bruce. Tom had given the business card Bruce had printed for him to the appliance store. The card described Tom as the “Maintenance Manager” for the apartment complex. Based on the business card, the retailer delivered the appliances. 1. Why should Bruce be bound to pay for the appliances? 2. Why should Bruce not be bound to pay for the appliances?

4. Employee - Person who works for pay under the supervision and control of another • Some have special legal status • Make contracts for their employer • When one person is authorized to alter another's legal relationships, the relationship of agency exists.

5. Example of Agency • Salesperson makes sales contracts with customers for a business owner. • Principal: person who authorizes another to alter one of his or her legal relationships (the business owner) • Agent: Party authorized by the principal to act on his or her behalf (the salesperson). The agent represents the principal in reaching agreements that bind the principal and a third party (customers).

6. Case • Joe worked at the Civic Center Service Station. His duties included selling gasoline, oil, and accessories, for which he either collected cash or made out credit tickets. Joe also changed oil and filters, provided lubrication services, and cleaned the premises. • Was Joe an agent, an employee, or both?

7. Answer • Both • Joe an employee when he changed oil and filters, lubricated cars, and cleaned the premises. • Joe an agent when he sold gas, oil, and accessories. • Agency existed because Joe was altering the legal relationships of the service station by making contracts on its behalf. • Who is the principal and who are the third parties? • Principal: Service station owner • Third parties: Customers

8. Altering Legal Relationships • Contracting (most common way) • Marriage • Divorce • Sue • Waive legal rights • Others

9. Scope of Authority • Scope of Authority – range of acts authorized by the principal • Agent must act within S of A in order to bind the principal • If agent acts outside of S of A, principal is not bound.

10. Fiduciary Duties • Fiduciary Duties – agent serve the best interests of the principal. • Loyalty • Obedience • Reasonable care and skill • Confidentiality • Accounting • If agent violates a FD, principal may sue and recover damages from the agent

11. Consensual Nature • Agency is consensual. • Both parties always have the power to terminate the relationship. • May be contractual liability for ending the agency, but no one can be compelled to continue in an agency relationship.

12. Diagram •  Look at visual • In an agency relationship, both the principal and the third party deal with the agent. • Why is the relationship between the principal and the third party indicated by a broken line in this diagram?

13. 1. In a blank Excel spreadsheet, write three examples of agency relationships. 2. Identify the parties as principal, agent, or third party in each example.

14. Who Can Be a Principal? Todd, a minor, wished to sell his Beats headphones for $150. He agreed to pay Vince 10 percent of the sales price of $150 if Vince would sell them for him. Vince agreed, but after he had found a buyer, Todd decided not to sell. He claimed that, as a minor, he had the power to avoid the agency agreement and to avoid the contract made by Vince, his agent. Was Todd correct?

15. Who Can be a Principal? • Those who lack contractual capacity: • Minors • Legally intoxicated • Mentally Insane • Can be principals and act through agents. • Retain their rights to lack contractual capacity for non-necessaries. • In What’s Your Verdict, Todd can avoid the contract with the buyer of his headphones. • Law to protect third parties: • Warranty of the Principal’s Capacity – law on the agent. • Law assumes agent promised the third party that the principal had capacity. If the principal lacked capacity, avoided the contract, and thus injured the third party, the third party can recover from the agent.

16. In This Case: Abi was a minor. She moved out of her parents’ home before graduating from high school. A salesperson appeared at her apartment one night when her sister was there but Abi wasn’t. He offered a year’s supply of groceries for only $150 a month. Abi’s sister called her and asked if she wanted the deal. Abi said yes and her sister signed the contract on Abi’s behalf. When Abi learned that the fair market value of the groceries was only about $80 per month, she refused to pay more for these necessaries. The company then sued the sister and recovered the difference from her because she did not tell the salesperson that Abi was a minor.

17. Who Can Be an Agent?What’s Your Verdict? • Kelly Clark, a 17-year-old minor, was asked to buy a car on behalf of Mrs. Clark, her elderly grandmother. Mrs. Clark signed documents appointing Kelly as her agent for this purpose. Then Kelly found a car and executed a contract to buy it, signing as an agent. Later, her grandmother decided she did not like the color and said she was not bound by the contract because Kelly was underage. • Is Mrs. Clark correct?

18. Who Can Be an Agent • General requirement – agent must understand the transaction entered into on behalf of the principal. • Only in situations where minor doesn’t understand the transaction is the minor unable to act as an agent. • In What’s Your Verdict – Mrs. Clark is wrong. She is bound by the contract even though her agent, Kelly, was a minor.

19. Why can an eight-year-old act as an agent by going to the neighborhood market for his mother but would not be recognized as a valid agent in purchasing a lawn mower?

20. Enrichment 1. Every employee is an agent. True or False? 2. If an agent acts outside the agent’s authority, then (a) principal is not bound (b) agent is liable to the third party for any injury caused by acting outside the scope of authority (c) both a and b 3. Minors who act through agents have the same rights they would have if they acted directly. True or False?

21. Enrichment 4. Alonzo hired Lawrence to help him sell a valuable Persian rug. He authorized Lawrence to sell it for $400,000 cash. Lawrence did so. Later, Alonzo discovered that the rug was worth more than $600,000. Because Alonzo was a minor, he disaffirmed the contract, returned the $400,000 to the buyer, and got the rug back. The buyer sued Lawrence for $200,000 – the difference between the $400,000 contract price and the $600,000 value. Will the buyer collect? Why?

22. Enrichment 5. Sweet Store, Inc., hired Li to work in the store. Mrs. Sweet, the owner, asked Li to be in charge of the vegetable displays. This involved spraying the vegetables with water periodically and sorting out vegetables that lost the fresh look. Another employee was in charge of ordering and taking deliveries of the vegetables. Cash register clerks were in charge of selling the vegetables. One day, Li was taking a break on the loading dock when a load of vegetables arrived. He signed the shipping receipt, although he was not authorized to do so. Unfortunately, the order was short and about $600 worth of vegetables was missing. Is the store liable for the loss because of Li’s signature? Why?

23. Enrichment 6. Answer the following question: Contract law assumes that all parties will look out for their own self-interests, whereas agency law requires the agent to look out for the best interests of the principal. Why do you think these bodies of law have such different orientations?