P

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Foundations of American Law

The Nature of Law

The Resolution of Private Disputes
Business and The Constitution
Business Ethics, Corporate Social
Responsibility, Corporate Governance,
and Critical Thinking

1-2

C H A P T E R

The Nature of Law

The sacred rights of mankind . . . are written, as with a sun
beam in the whole volume of human nature, . . . and can
never be erased or obscured by mortal power.
Alexander Hamilton, 1775

1-3

Learning Objectives

Types and sources of law

Important legal doctrines
Classification of law
Jurisprudence and legal reasoning
Statutory interpretation
Limitations on judicial power

1-4

Types and
Classifications of Law
Federal, state, and tribal level:
Constitution: establishes governmental
structure, specific rights and duties
Statute: enacted by legislative body to
regulate conduct
Common Law: case law (judge-made)
Administrative Law: agency rules to
implement enforcement of statutes

1-5

Types and
Classifications of Law
Issued at the chief executive level:
Executive Order: under limited powers
Examples:
http://www.whitehouse.gov/news/orders/

Treaty: with other nations, by the U.S.

president on behalf of the nation, ratified
by the U.S. Senate
Example: The Antarctic Treaty

1-6

Important Doctrines
Stare Decisis (let the decision stand) is the
doctrine of precedent applied in common
law
Equity is applied by the judiciary to achieve
justice when legal rules would produce
unfair results
Federal supremacy: a rule of priority for
conflicts between laws that holds the U.S.
Constitution is the supreme law of the land
Supremacy Clause, Article VI, Section 2, of
the U.S. Constitution

1-7

Classification of Law
Criminal law establishes duties to society
Government charges and prosecutes defendant,
who is found guilty or innocent
Convicted defendant will be imprisoned or fined

Civil law establishes duties between

private parties
Plaintiff sues defendant for monetary damages or
equitable relief
A defendant will be held liable or not liable

1-8

Classification of Law
Substantive law establishes rights and
duties of people in society
Procedural law establishes how to
enforce those rights and duties
Public law refers to the relationship
between governments and private
parties
Private law refers to the regulation of
conduct between private parties
1-9

Jurisprudence
Jurisprudence refers to the philosophy
of law as well as the collection of laws
Legal positivism: law is the command
of a recognized political authority
Just or unjust, law must be obeyed

Natural law: universal moral rules bind

all people whether written or unwritten
Unjust positive laws are invalid
1-10

Jurisprudence
Legal realism defines law as the
behavior of the judiciary as they rule on
matters within the legal system
Thus law in action dominates positive law

Sociological jurisprudence unites

theories that examine law within its
social context

1-11

Legal Reasoning
Basically deductive, with legal rule as
major premise and facts as the minor
premise
Result is product of the two

Court may stand on precedent or

distinguish prior case from current case
If precedent inapplicable, new rule
developed

1-12

Statutory Interpretation
Plain meaning rule: court applies statute
according to usual meaning of the words
Courts examine legislative history and
purpose when plain meaning rule is
inadequate
Courts may interpret a statute in light of a
general public purpose or public policy
Courts follow prior interpretation of a statute
(precedent) to promote consistency
1-13

Limitations on Judicial Power

Courts limited to deciding existing
cases or controversies
In other words, the dispute must be current
and not yet resolved
However, a declaratory judgment allows
parties to determine rights and duties prior
to harm occurring

Parties must have standing (direct

interest in the outcome) to sue
1-14

Thought Question
What do you think the authors of the
U.S. Constitution would think about
current legal issues in our society?

1-15

P
A
R
T

Foundations of American Law

The Nature of Law

The Resolution of Private Disputes
Business and The Constitution
Business Ethics, Corporate Social
Responsibility, Corporate Governance,
and Critical Thinking

2-2

C H A P T E R

The Resolution of
Private Disputes
In case of
dissension, never
dare to judge till
you have heard
the other side.
Euripides

2-3

Learning Objectives
Identify sources and types of law
Identify the law that takes precedence when
two types of laws conflict
Differentiate criminal law from civil law
Differentiate schools of jurisprudence
Describe the role of precedent (stare decisis)
Explain major techniques of statutory
interpretation

2-4

The U.S. Judicial System

The United States has a federal court
system and each state has a court system
A Court is established by a government to
hear and decide matters before it and
redress past or prevent future wrongs
Jurisdiction (the power to hear and speak)
may be original (trial) or appellate (reviews
trial court)

2-5

General vs. Limited Jurisdiction

General jurisdiction courts (i.e., trial courts)
hear most types of cases
Levels generally classified according to dollar
amount of damages or location
Examples: county courts, district courts

Limited jurisdiction courts hear specialized

types of cases; appeals from decisions
often require new trial in general
jurisdiction court
Examples: traffic court, tax court, family court
2-6

Subject-Matter Jurisdiction
Subject-matter jurisdiction refers to a courts
authority to hear a particular type of dispute
Courts of criminal jurisdiction hear trials of
crimes and misdemeanors
Offenses against the public at large
Courts of civil jurisdiction hear and decide
issues concerning private rights and duties
(e.g., contracts, torts), and non-criminal
public matters (e.g., zoning, probate)

2-7

In Personam or In Rem Jurisdiction

Besides subject-matter jurisdiction, court
must have either in personam or in rem
jurisdiction
In personam jurisdiction requires that
defendant be resident of, located within, or
acted within physical boundaries of the
courts authority
In rem jurisdiction applies when property that
is the subject of the dispute is located within
physical boundaries of the courts authority
2-8

Federal Court Jurisdiction

Federal courts must have jurisdiction
based on diversity or federal question
Diversity jurisdiction exists when the
dispute is between citizens of different
states and amount in controversy
exceeds $75,000
Federal question jurisdiction exists when
the dispute arises under the Constitution,
laws, or treaties of the United States
2-9

Civil Procedure
A set of rules establishing how a lawsuit
proceeds from beginning to end
In an adversarial system, the plaintiff
bears the burden of proof to prove
his/her case by a preponderance of the
evidence
Once plaintiff has made a prima facie
case (i.e., proved the basic case), the
burden of proof may shift to defendant
2-10

Civil Pre-Trial Procedure

Plaintiffs complaint or petition plus the
defendants answer or response are
known as the pleadings
Defendant may enter a counterclaim
against plaintiff or cross-complaint
against 3rd party
Other parties may enter the case
Motion practice begins
2-11

Civil Pre-Trial Procedure

Discovery: Obtaining evidence from
other party through interrogatories,
requests for admissions, requests for
documents, and depositions
Discovery process can be a battleground
See Allstate Indemnity Co. v. Ruiz

Pretrial Conference: Where judge will

hear and rule on many evidentiary issues,
discovery disputes, and other concerns
2-12

Civil Trial Procedure

Jury Selection

Voir Dire or Jury

Questioning

Opening
Statement from
each party

2-13

Civil Trial Procedure

Plaintiffs case through direct examination
of witnesses (defendant performs crossexamination) and defendants case
through direct examination (and
plaintiffs cross-examination)
Closing argument or summation from
each party
Jury verdict

2-14

Civil Trial Procedure

Trial motions include: motions in limine
(motion to limit evidence), voluntary nonsuit or dismissal (drop the case), motion
for compulsory non-suit or summary
judgment
After summation or closing argument, a
party may move for a mistrial (injustice or
overwhelming prejudice) or directed
verdict (weight of evidence leads to only
one conclusion)
2-15

Civil Trial Procedure

Trier of Fact sees material evidence
(physical objects, documents), hears
testimony of witnesses (who provide factual
evidence), and decides outcome of the
case based on facts; trier of fact may be
judge or jury
Matters of law are issues not of fact, but of
law; matters of law decided only by a judge
E.g., whether a statute means X or Y, or
one law or another applies to the facts
2-16

Civil Post-Trial Procedure

After jury verdict, a party may make a
motion for new trial, judgment non obstanto
verdicto (notwithstanding the verdict) or
remittitur (defendant requests judge to
reduce amount of damages the jury
recommended)
After a judgment has been entered:
Losing party may appeal decision to higher court
Winning party must have the judgment executed
(carried out) to obtain money, property, or action
ordered by the court
2-17

Alternate Dispute Resolution

Arbitration: dispute settled by one or
more arbitrators selected by the parties
to a dispute; relatively formal; Uniform or
Federal Arbitration acts typically used
Mediation: parties choose neutral party
to aid resolution of dispute
Reference to Third Party: dispute
resolution by rent-a-judge, minitrial,
summary jury trial, or association tribunal
2-18

Thought Question
If you were served with a lawsuit, what
would you do about it?

2-19

P
A
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T

Crimes and Torts

Crimes
Intentional Torts
Negligence and Strict Liability
Intellectual Property and Unfair
Competition

6-2

C H A P T E R

Intentional Torts

The good have

no need of an
advocate.
Phocion

6-3

Learning Objectives
Define tort and explain types of
wrongfulness
Understand concept of damages
Understand elements of intentional
torts that interfere with personal or
property rights, including assault,
defamation, invasion of privacy,
nuisance, and trespass
6-4

Definition of a Tort
A tort is a civil wrong that is not a
breach of a contract
Four types of wrongfulness are
involved:
Intent
Recklessness
Negligence
Strict liability
6-5

The Basics
Standard of proof that plaintiff must
satisfy in a tort case is preponderance of
the evidence standard
A plaintiff who wins a tort case usually
recovers compensatory damages for the
harm suffered as a result of defendants
wrongful act
Particularly bad behavior may result in an
award of punitive damages
6-6

Interference with Personal Rights

Battery
Assault
Intentional Infliction of Emotional Distress
False Imprisonment
Defamation
Invasion of Privacy
Misuse of Legal Proceedings
Deceit (Fraud)
6-7

Battery
Intentional and harmful or offensive
touching of another without the
persons consent
No liability if person consented

Contact is harmful if it produces bodily

injury, but battery includes nonharmful
contact that is offensive (reasonable
person standard)
Example: Howard v. Wilson case
6-8

Assault
Assault occurs when there is an intentional
attempt or threat to cause a harmful or
offensive contact with another person, if the
attempt causes a reasonable apprehension
of imminent battery in other persons mind
Irrelevant whether threatened contact really
occurs, as long as plaintiff had apprehension
of immediate or imminent contact
Plaintiff must actually see or feel the potential
contact
6-9

Intentional Infliction of
Emotional Distress
Most courts allow recovery for emotional
distress even if no other tort is proven
All courts require the wrongdoers conduct
to be outrageous before liability is imposed
Most courts apply reasonable person test
See Durham v. McDonalds Restaurants of
Oklahoma, Inc.: Court applied elements of

intentional infliction of emotional distress to facts

involving a managers allegedly inappropriate
treatment of an employee
6-10

False Imprisonment
False imprisonment is intentional
confinement of another for an appreciable
time without his or her consent
confinement must be complete, though a few
minutes is enough
no liability if plaintiff consented to confinement

Example: Pope v. Rostraver Shop and Save

Defendants conduct did not constitute a
confinement as required by the elements of
false imprisonment and plaintiff never tested the
reasonableness of her belief of confinement
6-11

Defamation
Defamation is an
1)
2)
3)
4)

unprivileged
publication of
false and defamatory
statements concerning another person

Libel refers to written defamation and

slander refers to oral defamation
Truth is a complete defense in a
defamation case
6-12

Defamation
Another defense to defamation is
privilege (Calor v. Ashland Hospital Corp.)
Examples: statements made by
participants in judicial proceedings, by
officials in the course of their duties, by one
spouse to the other in private, and fair and
accurate media reports (fair comment) of
defamatory matter that appears in
proceedings of official government action
or originates from public meetings
6-13

Defamation & Free Speech

New York Times Co. v. Sullivan (1964): the U.S.
Supreme Court held that when a public
official brings a defamation case, s/he must
prove the usual elements of defamation and
actual malice (a First Amendmentbased
fault requirement)
Actual malice means knowledge of falsity or
reckless disregard for the truth
(See Kipper v. NYP Holdings Co.)

Rule of this case extended to include a public

figure, but does not include private figures
6-14

6-15

Invasion of Privacy
Invasion of privacy refers to four distinct
torts:
Intrusion on Solitude or Seclusion
Applies only with reasonable expectation of
privacy

Public Disclosure of Private Facts

False Light Publicity
Commercial Appropriation of Name or
Likeness (See C.B.C. Distribution & Marketing, Inc. v.
Major League Baseball Advanced Media, L.P.)

6-16

Misuse of Legal Proceedings

Three intentional torts protect people
against the harm that can result from
wrongfully instituted legal proceedings:
Malicious prosecution: wrongful institution of
criminal proceedings
Wrongful use of civil proceedings: wrongfully
instituted civil suits
Abuse of process: imposes liability on those who
initiate legal proceedings, whether criminal or
civil, for a primary purpose other than the one for
which the proceedings were designed
6-17

Deceit (Fraud)
Deceit (or fraud) is the formal name for
the tort claim available to victims of
knowing or intentional misrepresentations
Often tied to a breach of contract claim
Requires proof of false statement of material
fact, knowingly or recklessly made by
defendant with intent to induce reliance by
the plaintiff, along with actual, justifiable,
and detrimental reliance on plaintiffs past

6-18

Interference with Property Rights

Trespass to Land
Private Nuisance
Conversion

6-19

Trespass to Land
Any unauthorized or unprivileged intentional
intrusion upon anothers real property,
including physically entering plaintiffs land,
causing another person or object to do so,
remaining on the land after ones right to
remain has ceased, and invading airspace
above land or subsurface below
Intent required for liability is simply the intent to
be on the land, so a person may be liable even if
the trespass resulted from a mistaken belief that
entry was legally justified
6-20

Private Nuisance
Involves some interference with plaintiff s
use and enjoyment of the land
Unlike trespass to land, nuisance does not
require a physical invasion of the property
Includes odors, noise, smoke, light, vibration

Liability requires the interference to be

intentional, substantial and unreasonable
Stephens v. Pillen
concerned odor from hog
farming operations
6-21

Conversion
Defendants intentional exercise of
dominion or control over plaintiffs
personal property without plaintiffs
consent through:

Acquisition
Removal
Transfer to another
Withholding possession
Destruction or alteration
Use
6-22

Thought Question
For several intentional
torts, such as defamation
or false imprisonment,
there may be rights
belonging to the
defendant, such as free
speech or protection of
property. How should a
judge or jury balance
these interests?
6-23

P
A
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Crimes and Torts

Crimes
Intentional Torts
Negligence and Strict Liability
Intellectual Property and Unfair
Competition

7-2

C H A P T E R

Negligence and
Strict Liability

Mistakes are a
fact of life.
It is the response
to error that
counts.
Nikki Giovanni

7-3

Learning Objectives
Identify the elements of negligence
Define the reasonable care standard
and the role of for eseeability
Explain whether a defendant has
breached a duty of reasonable care
and applicable defenses
Understand special doctrines and
injuries in the law of negligence
7-4

Negligence
Elements of a negligence
claim are:
1. Defendant owed a duty of
care to plaintiff,
2. Defendant committed a
breach of duty,
3. Breach was actual and
proximate cause of the injury
experienced by plaintiff
7-5

Duty of Due Care

In general, a defendant owed the
plaintiff a duty of reasonable care if the
plaintiff would foreseeably be at risk of
harm from the defendants conduct
A duty may arise if a special relationship
existed between the parties
Examples of a special relationship:
doctor-patient, lawyer-client,
accountant-client
7-6

Breach of Duty of Due Care

If a duty exists, then the question is
whether the defendant acted as a
reasonable person of ordinary prudence
would have acted under the same or
similar circumstances
Reasonable person standard

The test focuses on defendants

behavior, not defendants intent
Reckless behavior may be unreasonable
7-7

Premises Liability Cases

Based on the duty a property owner or
tenant has to those on the property
Duty varies with type of person on
property
Invitee (business visitor or member of
the public)
Owner or tenant must exercise
reasonable care for safety of his/her
invitees
7-8

Premises Liability Cases

Licensee (those on property for his/her
own purpose)
Owner or tenant obligated only to warn
licensee of hidden, dangerous conditions

Trespasser (those on property illegally)

Owner or tenant owes no duty, but may
not willfully injure trespassers

7-9

Negligence Per Se
The defendants violation of such laws
may create a breach of duty and may
allow the plaintiff to win the case if the
plaintiff
(1) was within the class of persons
intended to be protected by the statute
or other law, and
(2) suffered harm of a sort that the statute
or other law was intended to protect
against
7-10

Causation and Injury

Injuries may include bodily or emotional
injury, and property or economic damage
Causal link between the alleged
misconduct and the injury requires:
Actual cause: plaintiff would not have
been hurt but for defendants breach of
duty (act or omission)
Proximate cause: plaintiffs injury was
foreseeable consequence of defendants
act or omission
7-11

Causation and Injury

An event that occurs after initial breach of
duty may worsen a plaintiffs injury
Example: plaintiff injured in accident and
while unconscious, a thief steals the
plaintiffs wallet

If latter event is foreseeable, defendant will

be deemed liable
If latter event not foreseeable, defendant
will be absolved from liability
Example: Stahlecker v. Ford Motor Co.

7-12

Causation and Injury

An important doctrine concerning causation
is res ipsa loquitur (the thing speaks for itself)
Res ipsa applies when: (1) defendant has
total control of the instrument of harm, (2)
harm would not occur in absence of
negligence, and (3) plaintiff not responsible
for his own injury
Example: after abdominal surgery, patient
complains of pain in abdomen and X-ray
shows surgical clamp left in abdomen
7-13

Defenses:
Contributory Negligence
Contributory negligence is the plaintiff
s failure to exercise reasonable care
for his/her own safety
Example: auto accident in which
defendant rear-ended plaintiff but
alleges that plaintiff was talking on a
cell phone and not driving carefully

7-14

Comparative Negligence
Contributory negligence used to
be a complete defense, but
most states enacted
comparative negligence
systems in which a court or jury
determines relative negligence
of parties and awards damages
in proportion to each partys
degree of negligence
See Berberich v. Jack
7-15

Defenses:
Assumption of Risk
Assumption of risk is plaintiffs
voluntary consent to known
danger
Example: plaintiff snowboards
and breaks leg during a fall

Exculpatory clause: plaintiff

expressly assumes risk of injury by

a contract term that attempts to
relieve defendant of a duty of
care otherwise owed to plaintiff
7-16

Strict Liability
Liability without or irrespective of fault
Thus, a defendant is liable even though
s/he did not intend to cause harm and
did not act recklessly or negligently
Basic for product liability cases

7-17

Strict Liability
Imposing strict liability is a social policy
decision that risk associated with an
activity, especially abnormally dangerous
activities, should be borne by those who
pursue it, rather than by innocent persons
who are exposed to that risk

7-18

Thought Question
Does tort law have a useful purpose in
society? Do the remedies make sense?

7-19

Sales

P
A
R
T

Formation and Terms of Sales Contracts

Product Liability
Performance of Sales Contracts
Remedies for Breach of Sales Contracts

20-2

C H A P

E R

20

Product Liability
A manufacturer is not through with
his customer when a sale is
completed. He has then only
started with his customer.
Henry Ford, founder of Ford Motor
Company, in My Life and Work
(co-written with Samuel Crowther,
1922)

20-3

Learning Objectives
Explain what is required to create an
express or implied warranty
Identify major categories of product
liability claims based in negligence
Differentiate strict liability claims from
those based on negligence theory
Describe the role of comparative
negligence
20-4

Product Liability Theories

Product liability law is partly grounded
in contract law and partly grounded in
tort law
Contract theories are based on an
express or implied warranty
Tort theories are based on arguments
of negligence or strict liability

20-5

Express Warranty
UCC 2313(1): express warranty may
be created in any of three ways:
If affirmation of fact or promise about
goods becomes part of the basis of
the bargain
Statements of value or opinion and sales
puffery do not constitute a warranty
Advertisements may contain statements
of warranty as well as sales puffery
20-6

Express Warranty
Two other express warranties:
A description of the goods that
becomes part of the bargain
creates an express warranty that the
goods will conform to description
A sample or model of goods to be
sold creates an express warranty
that goods will conform to sample
20-7

Implied Warranties
Implied warranties are created by
operation of law rather than sellers
express statements
Warranty of merchantability [UCC 2-314(1)]
Seller must be a merchant in the goods of the
kind sold

Warranty of fitness for a particular purpose

[UCC section 2315]
Seller must know the goods are to be used for
special purpose
20-8

Implied Warranty of Merchantability

In implied warranty cases, plaintiff
argues that seller breached warranty by
selling unmerchantable goods and
plaintiff should recover damages
Privity of contract between consumer and
manufacturer is not required

Merchantability, essentially, is that

goods must be fit for the ordinary
purposes for which such goods are used
20-9

Implied Warranty of
Fitness for a Particular Purpose
Warranty of fitness for a particular purpose
implied if: (1) seller has reason to know a
particular purpose for which buyer requires
the goods; (2) seller has reason to know that
buyer is relying on sellers skill or judgment
for the selection of suitable goods; and (3)
buyer actually relies on sellers skill or
judgment in purchasing the goods
See Moss v. Batesville Casket Co.

20-10

Negligence Theory
Product liability suits based on negligence
allege that manufacturer or seller
breached a duty to plaintiff by failing to
eliminate a reasonably foreseeable risk of
harm:
negligent manufacture of the goods (including
improper materials and packaging)
negligent inspection
negligent failure to provide adequate warnings
negligent design
20-11

Strict Liability Theory

American Law Institute published
section 402A of Restatement (Second)
of Torts (1965)
Most important reason is socialization-of-risk
strategy: strict liability makes it easier for
plaintiffs to prove breach of duty and sellers
pass on costs in higher prices
Another reason: stimulates manufacturers to
design and build safer products

20-12

Restatement (Third) of Torts

Published in 1998, basic rule is: One engaged in
the business of selling or otherwise distributing
products who sells or distributes a defective
product is subject to liability for harm to persons
or property caused by the defect.
Three kinds of product defects: manufacturing
defects, inadequate warnings or instructions,
design defects

20-13

Other Product Liability Theories

Federal Magnuson-Moss Warranty Act
applies to sales of consumer products
more than $10 per item:
If written warranty, it must be full or limited
Full warranty promises to (1) remedy any defects
in the product and (2) replace product or refund
purchase price if, after reasonable number of
attempts, it cannot be repaired
Seller who gives a limited warranty is bound to
whatever promises it actually makes

20-14

Other Product Liability Theories

A sellers misrepresentation about a material
fact about the product a fact that would
matter to a reasonable buyer may invoke
liability to a buyer
Industrywide liability: plaintiffs bypass
problems of causation that exist where
several firms within an industry manufactured
a harmful standardized product, and plaintiff
cannot prove which firm produced the
injurious product

20-15

Damages
Consequential damages: personal
injury, property damage, indirect
economic loss (e.g., lost profits or lost
business reputation), and noneconomic
loss, such as pain and suffering, physical
impairment, mental distress, loss of
enjoyment of life, loss of companionship
or consortium, inconvenience, and
disfigurement
20-16

Damages
Basis-of-the-bargain damages:
Buyers of defective goods loss of full value for
the goods purchase price is direct economic
loss (value of goods as promised under the
contract minus value of goods as received)

Punitive damages:
Intended to punish defendants who have
acted in an especially outrageous fashion,
and to deter them and others from so acting
in the future
20-17

Disclaimers
Product liability disclaimer is a clause in the
sales contract whereby the seller attempts
to eliminate liability it might otherwise have
under the theories of recovery described
earlier in the chapter
Remedy limitation is a clause attempting
to block recovery of certain damages
Example of time limitation: 30 day
warranty

20-18

Defenses
Three main defenses in
a product liability suit
are the overlapping trio
of product misuse,
assumption of risk, and
contributory negligence
What could happen on a
construction site? What
defenses would exist?

20-19

Comparative Negligence
Most states require fact-finder to apportion
damages based on relative fault of plaintiffs
and defendants percentage shares of the
total fault for the injury
Plaintiff is awarded total provable damages
times defendants percentage of fault
Green v. Ford Motor Co.: fact-finder shall
apportion fault to injured person only if fault of
injured person is a proximate cause of injuries
for which damages are sought
20-20

Preemption and
Regulatory Compliance
Preemption defense rests on a federal
supremacy premise, that federal law
overrides state law when the two conflict
Riegel v. Medtronic, Inc.: state claims by
plaintiffs preempted by federal statute
dealing with medical devices

Courts mixed whether to treat regulatory

compliance as full defense or mere
factor in determining defendants liability

20-21

Thought Question
What is your opinion
of product liability
lawsuits? If you were
injured by a defective
product, would you
file a lawsuit against
the manufacturer?

20-22

Agency Law

P
A
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T

The Agency Relationship

Third-Party Relations of the
Principal and the Agent

35-2

C H A P

E R

35

The Agency Relationship

Ive got an ego and all that,
but I know I need help. So I go
and hire the very best people.
H. Ross Perot, EDS founder
Inc. magazine (Jan. 1989)

35-3

Learning Objectives
Know how an agency relationship
is created and terminated
Distinguish employees from
nonemployee agents
Recognize when an agent risks
breaching a fiduciary duty

35-4

Overview
Agency is a two-party relationship in
which one party (agent) is authorized to
act on behalf of and under the control
of another party (principal)
Anybody may be an agent or principal,
but the agreement is voidable by
minors and the mentally incapacitated

35-5

Agency Authority
An agent can bind his principal only when
the agent has authority to do so
Two forms: actual or apparent authority
Actual authority is express or implied
Express authority is created by the
principals actual words (written or oral)
Example: I want to hire you as my real
estate agent to sell my house.

35-6

Implied Authority
Agent has implied authority to do
whatever it is reasonable to assume
that the principal wanted the agent to
do given principals statements and
surrounding circumstances
Example: a person hired as general
manager in a restaurant will have broad
authority to run the business while a person
hired as a cashier will have limited authority
35-7

Apparent Authority
Apparent authority arises when principals
conduct leads a third party to believe
that an agent (who lacks actual authority)
is authorized to act a certain way and the
third party reasonably relies on the
appearance (cloak) of authority
To protect third parties, agency law allows
agents to bind a principal on the basis of
apparent authority
35-8

Employee or
Independent Contractor?
An agency-based case may depend on
whether a person who contracts with the
principal is an employee (servant) or
independent contractor
No clear distinction, but the Reid factors
(listed in Eisenberg v. Advance Relocation &
Storage, Inc.) aid in decision making: right to
control physical details of the work, skill required,
source of tools, location, schedule control, duration
of relationship, payment method, benefits, tax
treatment of hired party, uniqueness of work

35-9

Duties of Agent to Principal

Since agency is a fiduciary relationship of
trust and confidence, an agent has a duty
of loyalty to the principal
Agent must (1) avoid conflicts of interest
with the principal, (2) maintain
confidentiality of information received
from the principal
The duty of confidentiality survives agency

35-10

Duties of Agent to Principal

Conflicts of interest include self-dealing,
competition with the principal, or acting for
another party
Agents must obey the principals
reasonable instructions for agency business,
exercise the degree of care and skill
standard for the job, promptly
communicate to the principal matters
reasonably relevant or material to the
agency business, and duty to account
35-11

Duties of Principal to Agent

A written agency contract normally states
the duties the principal owes the agent,
but law implies certain duties on the
principal:
1. To compensate the agent
2. To reimburse the agent for money spent in
the principals service
3. To indemnify the agent for losses suffered in
conducting the principals business
35-12

Termination of Agency
Termination by act of the
parties includes:
At a time or event stated in the
agreement
When agency was created to
achieve a special purpose and
the purpose was achieved
By mutual agreement of the
parties
At the option of either party
35-13

Termination of Agency
Termination by operation of law includes:
Serious breach of the agents duty of loyalty
Principals permanent loss of capacity or
agents loss of capacity to perform agency
business
Change in value of agency property or
subject matter (including loss or destruction)
Changes in law making the agency illegal
Changed business conditions or outbreak of
war
35-14

Effect of Agency Termination

After agency terminates, agents express
and implied authority ends
Caution: ex-agents may retain apparent
authority that could bind a former principal

Principals should reduce risk of liability for

third parties relying on ex-agents
apparent authority by actual or
constructive notice to third parties about
agency termination
35-15

Thought Questions
Have you been an
agent or a principal?
Do you think the
agency rules of liability
are fair?
What are the ethical
issues involved in an
agency relationship?
35-16

Agency Law

P
A
R
T

The Agency Relationship

Third-Party Relations of the
Principal and the Agent

36-2

C H A P

E R

36

Third-Party Relations of the

Principal and the Agent
We intend to conduct our
business in a way that not only
meets but exceeds the
expectations of our customers,
business partners, shareholders,
and creditors, as well as the
communities in which we
operate and society at large.
Akira Mori , President and CEO
Mori Trust Co., Ltd. (Japan)

36-3

Learning Objectives
Know when an agent has authority
to bind a principal to a contract
Understand when an agent may be
liable on contracts s/he makes for
the principal
Recognize when an agents
conduct makes a principal liable for
torts committed by the agent
36-4

Actual v. Apparent Authority

An agents actual authority may be express
(by words) or implied (by conduct)
Apparent authority arises if communications
by principal to third party creates reasonable
appearance of authority in the agent
See Opp v. Wheaton Van Lines, Inc.:
Plaintiff sued Wheaton for damages and the
company alleged her ex-husband had actual
or apparent authority to limit coverage

36-5

Ratification
In ratification, a principal becomes
obligated for an unauthorized act done
by an agent or person posing as an agent
Act in question usually is contract creation

Ratification relates back to contract

creation and binds principal as if agent
had authority
May be express or implied
Basic contract law applies
36-6

Contract Liability of Agent

An agents liability for a contract depends
on the nature of the principle:
Agent who represents a disclosed principal is
not liable on contracts made for the principal
Agents are liable on contracts made for a
partially disclosed principal unless parties
agree otherwise
An agent is liable to third parties on contracts
made for an undisclosed principal

36-7

Implied Warranty of Authority

If agent contracts for a competent and
existing principal but lacks authority, the
principal is not bound
The result is unfair to a third party, so the
agent is bound on the theory of an
implied warranty of authority to contract
See In re Interbank Funding Corp. v.
Chadmoore Wireless Group Inc.

36-8

Principals Tort Liability

A principal may be liable
for a tort in four
circumstances:
Direct liability for torts
Respondeat superior
Independent
contractor activities
Misrepresentation

36-9

Direct Liability
A principal may incur direct liability for an
agents torts because the principal is at
fault and liability need not be imputed
Example: sales agent merely applied the
dealerships deceptive sales policies

36-10

Respondeat Superior
The doctrine of respondeat superior (let
the master answer): a principal who is an
employer is liable for torts committed by
agents (1) who are employees and (2)
who commit the tort while acting within
the scope of their employment
Principal liable for employees negligent
and intentional torts
A rule of imputed or vicarious liability

36-11

Scope of Employment
Generally an employees conduct is
within the scope of employment if the
conduct meets each of four tests:

Conduct was of the kind that the employee

was employed to perform
Conduct occurred substantially within the
authorized time period
Conduct occurred substantially within the
location authorized by the employer
Conduct was motivated at least in part by
the purpose of serving the employer
36-12

Liability for Torts of

Independent Contractors
Since a principal does not control the work
of an independent contractor, a principal
is not liable for an independent
contractors torts except:
A principal may be directly liable for
negligent retention of an independent
contractor (e.g., hiring a dangerously
incompetent independent contractor)

36-13

Liability for Misrepresentations

A principal may be liable for
agents false statements
directly (intentionally or
negligently) or vicariously
(agent authorized to make
true statements on the
subject)
Example: misrepresentation
about the safety of medical
devices by sales personnel
36-14

Tort Liability of Agent

Agents liable for their torts except when:
Agent exercises a privilege of the principal
(e.g., uses an easement)
Agent takes privileged action to defend his
person or principals property
Agent makes a false statement in conduct of
principals business but doesnt know the
falsity of the statements
Third parties are injured by defective tools or
instrumentalities furnished by the principal
36-15

Thought Questions
Do you think the doctrine of respondeat
superior is good policy? Why or why not?

36-16