FOUNDATIONS OF
BUSINESS LAW
Don Mayer
University of Denver
Daniel Warner
Western Washington University
George Siedel
University of Michigan
Jethro K. Lieberman
New York Law School
REVISED ABRIDGED EDITION BY
Franklin G. Snyder
Texas A&M University
Open Source Law FORT WORTH, TEXAS
2020

Chapter 1: Agency 2
This text was adapted by The Saylor Foundation under a Creative Commons
Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested
by the work’s original creator or licensee.
Permission is granted to reproduced this abridged and revised version in accordance
with the above license.

Chapter 1: Agency 3
Chapter 1
THE LAW OF AGENCY
1.1 Introduction to Agency Law
1.1.1 Why Is Agency Law Important?
An agent is a person who acts in the name of and on behalf of
another, having been given and assumed some degree of authority to do
so. Most organized human activity—and virtually all commercial
activity—is carried on through agency. No corporation would be
possible, even in theory, without such a concept.
We might say “General Motors is building cars in China,” for
example, but we can’t shake hands with General Motors. “The General,”
as people say, exists and works through agents. Likewise, partnerships
and other business organizations rely extensively on agents to conduct
their business. Indeed, it is not an exaggeration to say that agency is the
cornerstone of enterprise organization. In a partnership each partner is
a general agent, while under corporation law the officers and all
employees are agents of the corporation. Any situation in which one or
more people are involved in carrying on some sort of enterprise involves
agency law.
1.1.2 Restatements of Agency
Agency law is part of the common law of the various American
jurisdictions. It is not usually created by statutes, although there are
statutes that vary the common law in some jurisdictions. Because
common law is made by judges through case decisions, it has always
been difficult to find broad and reasonably clear statements of what the
general law of agency is.
Into the breach came the American Law Institute, which was
founded in 1923 to provide precisely that. Over the past century it has
produced a great many “Restatements” of various fields of law. They are
called Restatements because they are not themselves law, they are
merely recapitulations of what the authors—usually prominent lawyers
and law professors—have concluded the law is after reading and
analyzing thousands of cases. In 1933, they produced the first
Restatement of Agency. Because, as with all Restatements, it was a

Chapter 1: Agency 4
handy summary of the law, it began to be frequently relied on by courts
and over the years many sections were expressly adopted by various
courts as accurate statements of individual states’ law.
By the 1950s, changes in the law led the ALI to believe that they
needed to update their work. For some reason, they elected the odd
formulation “Restatement (Second)” instead of “Second Restatement” for
all of these works. The Restatement (Second) of Agency was produced in
1957, and has been similarly influential. Another revision, the
Restatement (Third) of Agency, was published in 2006, but has been less
successful. By the 21st century rules regarding employer-employee
relations had become much more politically contested than they were a
half-century earlier, and drafters of the Restatement (Third) found
themselves pleasing neither employee lawyers or employers.
In this chapter, we will use the Restatement (Second)—which
continues to reflect the law in most U.S. jurisdictions—for illustrations
and explanations. Keep ion mind, however, that it is not itself the law.
The dimensions of agency law in any given state require consultation
with lawyers who are expert in that state’s law.
1.1.3 What is an Agent?
An “agent” is someone who performs actions on behalf of and
under the control of another (called the “principal”) in a way that affects
the legal relations of the principal. The most obvious agents in our daily
lives are ordinary employees. When the cashier at the drive-thru
window takes our order, he is entering into a contract (e.g., selling us a
burger, fries, and drink) on behalf of the owner of the restaurant. He
affects the legal relations of the owner—if you fail to pay, the owner (not
the cashier) has a legal right to recover the price from you, and if the
burger is tainted you have a right to claim damages against the owner,
not the cashier. Obviously, the cashier is also under the control of the
owner. The cashier is plainly an agent.
While all ordinary employees are agents, not all agents are
employees. In many situations people act as agent when they are not
regular employees. We call such people independent contractors. A real
estate agent, a lawyer, or a person with a power of attorney who is
authorized to sign a contract on our behalf is an agent although he is not
an employee. Such agents may actually represent many principals at
the same time. Being an agent does not require that you receive money

Chapter 1: Agency 5
for it. Volunteer agents are agents to the same extent as those who are
paid.
Not everyone who does things for us is our agent. A stylist cuts
our hair, a painter paints our house, a mechanic fixes our car. These
people do things for us, but that is not the question. The question is
whether they are acting for us in the transaction—in other words, are
they purporting to represent us in dealing with a third party. They
painter, for example, is acting on his own behalf in performing a service.
He simply has a contract with us under which he performs a service and
we pay. If he goes to Home Depot to buy paint for the job, he is buying
it on his own account and he is liable to pay for it himself. If he does not
pay, Home Depot must collect the money from him—it has recourse
against us. On the other hand, if we authorize the painter to go to Home
Depot and charge the paint on our Home Depot account, we are asking
him to do something on our behalf. We have given him the power to
make us liable to Home Depot—and, it follows, means that he is not. He
has been given the power to change the legal relations between us and
Home Depot—we can sue Home Depot if the paint is defective and they
can sue us if we don’t pay the account.
The existence of agents does not require a whole new law of torts
or contracts. A tort is no less harmful when committed by an agent; a
contract is no less binding when negotiated by an agent. What does need
to be taken into account, though, is the manner in which an agent acts
on behalf of his principal and toward a third party.
To understand this chapter, it is necessary to realize that agency
involves a three-way relationship. The principal is the party who asks
another party to act on his behalf. The agent is the one who acts on
behalf of the principal. The third party is the one with whom the agent
deals. There are thus three relationships: (1) principal and agent, (2)
agent and third party, and (3) third party and principal.
1.1.4 Recurring Issues in Agency Law
Problems in agency law tend to follow predictable patterns. When
does an agent actually have the power to bind a principal? What duties
does the agent owe to the principal? Or the principal to the agent? What
rights does the third party have against the principal? Or the principal
as against the third party? Or the third party against the agent?

Chapter 1: Agency 6
To illustrate the typical problems, consider the famous literary
case of John Alden in Henry Wadsworth Longfellow’s The Courtship of
Miles Standish. Several problematic fact scenarios recur in agency, and
law has developed in response. Alden was a real person—a carpenter,
cooper, and diplomat who was said to have been the first Mayflower
emigrant to set foot on Plymouth Rock in 1620. Of interest here is his
task in Longfellow’s poem: to woo the lovely Priscilla Mullins on behalf
of Alden’s brave but tongue-tied commander, Captain Miles Standish.
Standish recruited the eloquent Alden, but did not realize that his young
protégé was also in love with the lovely “Puritan maiden.” Alden
accepted his captain’s assignment, despite the knowledge that he would
thus lose Priscilla for himself, and sought out the lady on the captain’s
behalf.
Let’s analyze this sequence of events in legal terms—recognizing,
of course, that this example is an analogy and that the law, even today,
would not impose consequences on Alden for his failure to carry out
Captain Standish’s wishes. Alden was the captain’s agent: he was
specifically authorized to speak in his name in a manner agreed on,
toward a specified end, and he accepted the assignment in consideration
of the captain’s friendship. But he had a conflict of interest. Ultimately,
Alden failed at his task—which he realized when Priscilla laughingly
asked at length, “Why don’t you speak for yourself, John?” Consider
these questions:
• How extensive was John’s authority? Could he have made
promises to Priscilla on the captain’s behalf—for example,
that Miles would have built her a fine house?
• Could he, if he committed a tort, have imposed liability on his
principal? If John committed fraud while soliciting Priscilla,
would Miles be liable? If he had been riding to Priscilla’s side
and negligently injured a pedestrian while en route could the
pedestrian have held Miles liable?
• Suppose John had injured himself on the journey. Would
Miles be obliged to recompense John for his injuries?
• Did John violate his duty to Miles by becoming betrothed to
Priscilla?
• Does John have any liability to Miles for stealing Priscilla’s
heart—that is, for taking the “profits” of the enterprise for
himself?

Chapter 1: Agency 7
We will be taking up each of these questions in this chapter. We will
start with the relationship between principals and agents.
1.2 The Principal-Agent Relationship
The first thing we need to do in exploring the relationships
between principals and agents is to get our terminology straight.
1.2.1 General Agent
A general agent possesses the authority to carry out a broad range
of transactions in the name and on behalf of the principal. The general
agent may be the manager of a business or may have a more limited but
nevertheless ongoing role—for example, as a purchasing agent or as a
life insurance agent authorized to sign up customers for the home office,
or even as a cashier at the drive-thru window authorized to sell burgers
and fries to customers. (The scope of an individual agent’s authority is
an important question that we will explore below.) In either case, the
general agent has authority to alter the principal’s legal relationships
with third parties. One who is designated a general agent has the
authority to act in any way required by the principal’s business. To
restrict the general agent’s authority, the principal must spell out the
limitations explicitly, and even so the principal may be liable for any of
the agent’s acts in excess of his authority.
General agents are most common in business transactions, but
there are circumstances under which an individual may appoint a
general agent for personal purposes. One common form of a personal
general agent is the person who holds another’s power of attorney. This
is a delegation of authority to another to act in his stead; it can be
accomplished by executing a simple form,
Ordinarily, the power of attorney is used for a special purpose—
for example, to sell real estate or securities in the absence of the owner.
But a person facing a lengthy operation and recuperation in a hospital
might give a general power of attorney to a trusted family member or
friend.
1.2.2 Special Agent
This term is used in several ways unrelated to agency law, as for
example with the “special agents” used by the FBI and other law
enforcement agencies. That is not what we are talking about here. In
the law of agency, a “special agent” is one who has authority to act only

Chapter 1: Agency 8
in specifically designated instances or in certain kinds of transactions.
This category includes such people as lawyers who are empowered to
negotiate and settle specific disputes, brokers who are authorized to
locate and negotiate the purchase of particular pieces of real estate, and
consignment shops who are authorized to sell the property for you that
you have delivered to them. Note that if the lawyer or broker is an
employee of the seller and works on many such transactions, he may be
a general agent.
The authority of special agents may be limited in specific ways.
For example, a real estate broker is usually a special agent. Suppose
seller Sam appoints broker Alberta to find a buyer for Sam’s land; she is
to be paid on a commission on the ultimate price but she is required to
present the contract to Sam for signature, not to sign it herself. Assume
she locates buyer Bob. As an agent, Alberta is authorized to make
representations on behalf of Sam, and those representations will bind
Sam. If, for example, she falsely tells Bob that the property has never
had termite damage, Bob will have the right to recover against Sam.
(Note that Alberta thus changed Sam’s legal relations with respect to
Bob.) But Alberta has no authority to sign the contract, and so her
signature does not bind Sam and it does not give Bob a right to claim
the land against Sam. Alberta only had authority to negotiate a deal,
not to agree to it.
1.2.3 Agency Coupled with an Interest
An agent whose reimbursement depends on his continuing to
have the authority to act as an agent is said to have an agency coupled
with an interest if he has a property interest in the business. A literary
or author’s agent, for example, customarily agrees to sell a literary work
to a publisher in return for a percentage of all monies the author earns
from the sale of the work. The literary agent also acts as a collection
agent to ensure that his commission will be paid. By agreeing with the
principal that the agency is coupled with an interest, the agent can
prevent his own rights in a particular literary work from being
terminated to his detriment. Thus, if publisher Penguin fails to pay
author Arnie his royalties—but Arnie for some reason does not want to
sue—agent Ann has the right to pursue the claim against Penguin.

Chapter 1: Agency 9
1.2.4 Subagent
To carry out his duties, an agent will often need to appoint his
own agents. These appointments may or may not be authorized by the
principal. Suppose the Principal Insurance Company names a general
agent, Ann, to sell its life insurance products in a particular state. Ann
has the power to enter contracts on behalf of Principal. But Ann will
need lots of help to cover the state, and so she hires a number of people
to sell the products. These people will have the power to sell policies on
behalf of Principal, but they are actually agents of Ann, who hired and
supervises them. We call them “subagents.” These agents are
subagents of the principal if the general agent had the express or
implied authority of the principal to hire them. For legal purposes, they
are agents of both the principal and the principal’s general agent, and
both are liable for the subagent’s conduct although normally the general
agent agrees to be primarily liable.
1.2.5 Servant
A particularly important category of agent is the “servant.” We
do not use the term in the way it is used in Jane Austen or Downton
Abbey—until the early 19th century, anyone who employed people was
a “master” and the employees were “servants.” Today we use “employer”
and “employee,” but the archaic terms survive in this one particular
situation. or Today we tend to use the terms “employer” and
“employee,” but in olden days the terms were “master” and “servant,”
and the archaic terms have survived. A servant in legal terms is an
agent whose performance is specifically subject to explicit direction by
the principle Section 2 of the Restatement (Second) of Agency defines a
servant as “an agent employed by a master [employer] to perform service
in his affairs whose physical conduct in the performance of the service
is controlled or is subject to the right to control by the master.” Put more
simply, if you are an agent and the principal has the right to tell you
when to show up for work, when to leave, what do during the day, and
so forth, you are a servant. A simple rule of thumb is that all employees
are servants. Status as a servant is important in tort law—an employer
(“master”) is liable for the torts committed by his servants, but not his
agents who are not servants.

Chapter 1: Agency 10
1.2.6 Independent Contractor
Not every contract for services necessarily creates a master-
servant relationship. There is an important distinction made between
the status of a servant and that of an independent contractor. According
to Restatement (Second) of Agency § 2, “an independent contractor is a
person who contracts with another to do something for him but who is
not controlled by the other nor subject to the other’s right to control with
respect to his physical conduct in the performance of the undertaking.”
As the name implies, the independent contractor is legally autonomous.
For example, a plumber who works as a salaried employee of a building
contractor is an agent and is also a servant, since the contractor has the
right to control all aspects of his performance. Thus, if you hire a lawyer
to settle a dispute, the lawyer is your agent, but not your servant,
because you have no authority to specifically direct the performance of
the task. The lawyer will use his own judgment on how to approach the
task, and will decide when to do what. You may decide that you do not
like the way the lawyer is doing the job and get a different lawyer, but
you have no right to directly control his own professional performance.
The term “independent contractor” causes a great deal of
confusion because it is used in two distinct senses. For example, those
who provide services to us without being our agents (such as plumbers,
lawn services, and personal trainers) are called “independent
contractors.” But agents can also be independent contractors if their
performance is not directly under the control of the principal. Thus we
can differentiate between three different categories of people who do
things for us: (1) independent contractors who are not agents; (2) agents
who are independent contractors, and (3) agents who are servants. If
the lines between these categories seem fuzzy, don’t be alarmed. As the
court in Flick v. Crouch, 434 P.2d 256 (Okla. 1967), noted wryly, “the
line of demarcation between an independent contractor and a servant is
not clearly drawn.”
But though the line is hard to distinguish clearly, it has important
legal consequences for taxation, workers’ compensation, and liability
insurance. Perhaps most important, employers are liable for torts
committed by their servants, but (in most cases) not by independent
contractors. Thus, if a lawyer is an employee of real estate developer,
and the lawyer runs over someone while driving somewhere on business,
the developer will be liable. But if the lawyer is a non-employee agent

Chapter 1: Agency 11
(that is, not a “servant”), the developer will not be. Similarly, employers
are required to withhold income taxes from their employees’ paychecks.
But payment to an independent contractor, such as the plumber for hire,
does not require such withholding.
Deciding who is an independent contractor is not always easy;
there is no single factor or mechanical answer. In Robinson v. New York
Commodities Corp., 396 N.Y.S.2d 725 (App. Div. 1977), an injured
salesman sought workers’ compensation benefits, claiming to be an
employee of the New York Commodities Corporation. But the state
workmen’s compensation board ruled against him, citing a variety of
factors. The claimant sold canned meats, making rounds in his car from
his home. The company did not establish hours for him, did not control
his movements in any way, and did not reimburse him for mileage or
any other expenses or withhold taxes from its straight commission
payments to him. He reported his taxes on a form for the self-employed
and hired an accountant to prepare it for him. The court agreed with the
compensation board that these facts established the salesman’s status
as an independent contractor.
The factual situation in each case determines whether a worker
is an employee or an independent contractor. Neither the company nor
the worker can establish the worker’s status by agreement. A s the
North Dakota Workmen’s Compensation Bureau put it in a bulletin to
real estate brokers, “It has come to the Bureau’s attention that many
employers are requiring that those who work for them sign ‘independent
contractor’ forms so that the employer does not have to pay workmen’s
compensation premiums for his employees. Such forms are meaningless
if the worker is in fact an employee.”
It is also sometimes critical for decisions involving personal
liability insurance policies, which usually exclude from coverage
accidents involving employees of the insureds. General Accident Fire &
Life Assurance Corp v. Pro Golf Association, 352 N.E.2d 441 (Ill. App.
1976), involved such a situation. The insurance policy in question
covered members of the Professional Golfers Association. Gerald Hall,
a golf pro employed by the local park department, was afforded coverage
under the PGA policy, which excluded “bodily injury to any employee of
the insured [that is, Hall] arising out of and in the course of his
employment by the insured.” Under the policy, anyone employed by Hall
would not be able to recover under the PGA policy, but rather would

Chapter 1: Agency 12
have coverage under workers’ compensation statutes). One day, when
thirteen-year-old Bradley Martin was at the golf course for junior league
play, Hall asked him retrieve or “shag” golf balls to be hit during a lesson
Hall was giving to a pupil. Hall agreed to compensate Bradley either in
money, hot dogs, or golf instruction. During the lesson, Hall hit a ball
that struck Bradley in the eye. a golf ball hit by Hall hit young Martin
in the eye. If Martin was an employee, the PGA insurance company
would be liable; if he was not an employee, the workers’ compensation
insurance company would be liable. The trial court determined he was
not an employee. The evidence showed that sometimes the boys who
shagged balls got paid, got golfing instructions, or got food, so the
question of compensation was ambiguous; Bradley was not directed in
ow to perform the task of retrieving golf balls; no control was exercised
over him; and no equipment was required other than a bag to collect the
balls.” The court found that the “the evidence is susceptible of different
inferences,” and therefore that the trial court was not wrong in
concluding that Bradley was not an employee.
1.3 Creation of the Agency Relationship
Agency is a consensual relationship. That is, the principal must
agree to employee the agent and the agent must agree to be employed
on behalf of the principal. But agreement does not have to be explicit.
An agency relationship can be created in two ways: by agreement
(expressly), or by operation of law (constructively or impliedly).
1.3.1 Agency Created by Agreement
Most agencies are created by contract. You should recall the basic
rules from your contracts class. All of the ordinary contract rules apply
in agency situations. But note that agencies can also be created without
any kind of contract, which means that three principals very important
in contract law may play out differently when dealing with agency
relationships.
Contracts, as you should recall, usually require consideration to
be valid. But agencies are often created by consent in agreements that
are not actually contracts. It is not uncommon for one person to act as
an agent for another without consideration. For example, health-related
powers of attorney create agencies even though the person who receives
the power has received and given nothing in exchange. Similarly, if Abe
asks Byron as a favor to run down to the lumber yard for him and

Chapter 1: Agency 13
purchase some things on Abe’s account, there is no contract. There is
agreement, but it is entirely gratuitous. If Byron in fact does not go, Abe
cannot sue him because there was no contract. But Byron’s agency is
nevertheless valid and Abe will be liable on the account for whatever
Byron purchases on his account.
You may also recall that while most oral contracts are valid, some
types of contracts must be in writing to be enforceable. Most oral agency
contracts, however, are legally binding without a writing. In practice,
many agency contracts are written to avoid problems of proof. And there
are situations where an agency contract must be in writing: (1) if the
agreed-on purpose of the agency cannot be fulfilled within one year if
the agency relationship is supposed to last more than one year; (2) in
many states, an agreement to pay a commission to a real estate broker;
(3) in many states, authority given to an agent to sell real estate; and (4)
in several states, contracts between companies and sales
representatives.
Even when the agency contract is not required to be in writing,
contracts that agents make with third parties often must be in writing.
Thus Section 2-201 of the Uniform Commercial Code specifically
requires contracts for the sale of goods for the price of five hundred
dollars or more to be in writing and “signed by the party against whom
enforcement is sought or by his authorized agent.”
A contract is void or voidable when one of the parties lacks
capacity to make one. If both principal and agent lack capacity—for
example, a minor appoints another minor to negotiate or sign an
agreement—there can be no question of the contract’s voidability. But
suppose only one or the other lacks capacity. Generally, the law focuses
on the principal. If the principal is a minor or otherwise lacks capacity,
the contract can be avoided even if the agent is fully competent. There
are, however, a few situations in which the capacity of the agent is
important. Thus, a mentally incompetent agent cannot bind a principal.
Most agencies are made by contract, but agency also may arise
impliedly or apparently.
1.3.2 Implied Agency
In areas of social need, courts have declared an agency to exist in
the absence of an agreement. The agency relationship then is said to
have been implied “by operation of law.” Children in most states may

Chapter 1: Agency 14
purchase necessary items—food or medical services—on the parent’s
account. Long-standing social policy deems it desirable for the head of a
family to support his dependents, and the courts will put the expense on
the family head in order to provide for the dependents’ welfare. The
courts achieve this result by supposing the dependent to be the family
head’s agent, thus allowing creditors to sue the family head for the debt.
Implied agencies also arise where one person behaves as an agent
would and the “principal,” knowing that the “agent” is behaving so,
acquiesces, allowing the person to hold himself out as an agent. Such
are the basic facts in Weingart v. Directoire Restaurant, Inc., 333
N.Y.S.2d 806 (N.Y. 1972), where a man with his own doorman’s uniform
stood in front of various New York bars and restaurants and offered to
park cars for diners in exchange for tips. One of these was a nightclub
called Le Directoire, whose management was aware of the man’s
practice and did not object. One night a patron drove up in a brand-new
Cadillac, handed the man a tip, and went inside. Neither the man nor
the Cadillac were ever seen again. The patron sued the club for the
value of his Cadillac. The club responded that the man was not his
agent. The court held that by knowingly allowing the uniformed man to
stand at its front door, the club had led the public to believe that he
worked for the club, and therefore it was liable for the loss. In such cases
we presume that if the principal is aware of the activity and does not
object, the principal will be bound.
1.3.3 Apparent Agency
Suppose Arthur is Paul’s agent, employed through October 31.
Arthur has regularly purchased materials at Home Depot on Paul’s
account. On November 1, the day after his agency ends, Arthur buys
materials at Home Depot and Lumber Yard—as he has been doing since
early spring—and charges them to Paul’s account. Assuming Home
Depot has not been informed that Arthur’s agency is terminated, Paul
will be liable to pay for the items. Note that because Arthur’s agency
had been terminated, he did not have authority to charge the items to
Paul’s account. But he was still apparently Paul’s agent. Paul, of
course, will have a right to recover for the items against Arthur because
Arthur was not acting as his agent.
This is a very simple example of apparent agency, but things can
get much more complex. Suppose, for example, you are shopping for a
new car and a salesman on the lot—an employee of the car dealer—

Chapter 1: Agency 15
negotiates with you and agrees to sell you a particular used car for
$14,000. Later the dealer claims that sale is not valid because the
salesman had been told that he was not to sell that particular car for
less than $15,000. If that is true, then the salesman had no actual
authority to sell you the car, yet he apparently had the authority because
you had no reason to think that he did not. The dealer put him in a
position in which everyone would assume he had authority to negotiate
and did not convey any limitations. In that case, the sale is valid. If the
salesman violated his instructions, he is liable to the dealer for the
$1,000 loss.
A principal is bound by apparent agency if (1) the third party
reasonably believes that the purported agent is acting on behalf of that
principal, and (2) that belief is traceable to manifestations from the
principal to the third party. Restatement (Second) § 8. A famous case in
this regard is Lind v. Schenley Industries, Inc., 278 F.2d 79 (3d Cir.
1960), where a newly hired salesman was told that his sales manager
would tell him what his compensation would be. The sales manager
promised him a bonus that he did not actually have authority to
promise. When the bonus was not paid, the employee sued. The court
held that it was reasonable for the employee to believe that the manager
had authority, and this belief was directly due to manifestations by the
company.
Apparent agency has become a particular hot issue in recent
years with the growth of franchise businesses. In a typical franchise
situation, it is the franchisee, not the franchisor, who owns the business.
Employees at a local McDonald’s, for example, usually work for the
franchisee-owner and not for McDonald’s Corporation. If an employee
negligently scalds you with hot coffee, the franchisee will be liable, but
what about McDonald’s Corporation? Is the franchisee an agent of the
franchisor? Courts have often been confused about this; the franchisor-
franchisee contract is a contract under which the franchisee pays the
franchisor for services, which is the opposite of a normal agency
arrangement. Yet both franchisor and franchisee benefit when a
hamburger is sold. The best argument for liability against the
franchisor usually is apparent agency: by putting the Golden Arches
sign on the building, making all the employees wear McDonald’s
uniforms, and holding it out to the world as a McDonald’s restaurant,
the franchisor is making manifestations to the public that it is acting on
behalf of the franchisor.

Chapter 1: Agency 16
As a practical matter, it usually doesn’t matter whether the
franchisor is held liable for not. Both franchisor and franchisee will have
insurance policies, and so the battle will usually be over which insurance
company will pay. Franchisors ordinarily also require indemnification
from franchisees. The problem really only becomes acute when a
plaintiff sues the franchisor, and not the franchisee, shortly before the
statute of limitations runs—at which point the plaintiff will lose unless
it can show that the franchisee is an agent. The law on this varies
sharply not merely from state to state, but even within particular
jurisdictions. This is one of the reasons why you may see signs at
franchised locations saying something like, “This McDonald’s is proudly
owned and operated by” the local franchisee.
1.3.4 Inherent Agency Power
A final category of agency power is what is called “inherent”
agency power, which is unhelpfully defined as, “the power of an agent
which is derived not from authority, apparent authority or estoppel, but
solely from the agency relation and exists for the protection of persons
harmed by or dealing with a servant or other agent.” Restatement
(Second) § 84. In other words, sometimes courts will hold a party liable
for the acts of another who is not his agent if it is necessary to protect
an innocent party, even though there was no agency relationship and
the third party did not think there was.
The main situation in which inherent power is relevant is in cases
of undisclosed principals. Sometimes agents act on behalf of principals
who do not want their identities disclosed. A real estate developer
planning on building a new shopping center, for example, may want to
buy up property in an area without disclosing its plans, and thus use
agents who are told not to reveal the ultimate buyer. In such cases the
agents have full authority and the third party who deals with them will
be able to sue the developer if the deal goes bad even though they did
not know of its role. Where an agent has authority, an undisclosed
principal is bound as surely as a disclosed principal.
But what happens when the agent for an undisclosed principal
exceeds his authority? Suppose the developer had told the agent not to
agree to more than $500,000 on the property, but the agent nevertheless
agrees to a price of $550,000? The agent had no actual authority, so the
principal cannot be bound on that theory. Apparent authority does not
work, because it requires that the principal have done something to lead

Chapter 1: Agency 17
the third party to believe that the agent is working on behalf of that
principal, and in this case the third party is completely unaware of the
principal’s existence. Yet it seems unfair that the innocent third party
should be stuck in this scenario. The agent did something wrong, and
either the principal or the third party is going to be stuck. In this case,
the law favors the innocent third party on the ground that the
principal—not the third party—has the power and authority to control
the agent, and so should be the one liable when the agent errs.
An old English case, Watteau v. Fenwick, [1893] 1 QB 346, is a
good illustration. A man named Humble was the owner of a pub, which
was purchased by a brewery. Humble was kept on as the manager, and
continued to be listed as the proprietor of the pub. Customers and
suppliers were unaware that Humble had sold the business, and
continued to think he was the owner. The brewery allowed Humble to
buy certain things for the pub, but forbade him to purchase cigars.
Humble nevertheless ordered cigar deliveries from the plaintiff, who did
not get paid. When he learned that Humble was only an employee and
had no significant assets, he sued the brewery. The court held that the
brewery was bound, holding that “the principal is liable for all the acts
of the agent which are within the authority usually confided to an agent
of that character, not withstanding limitations, as between the principal
and the agent, put on that authority.”
1.3.5 Ratification
There is yet another way a principal may be bound to a contract
negotiated by someone who is not, in fact, his agent: ratification.
Assume that Alan, with no authority whatsoever, claims to represent
Paula in negotiating a contract with Tom. There is no manifestation
from Paula to Tom, so apparent authority does not apply. Alan is not
an agent at all, so inherent power does not apply. Paula has no
obligation under the contract. But assume Paula, with knowledge of the
transaction, agrees to it or remains silent and accepts the benefits. In
that case, she will be said to have ratified the contract. In that case, she
becomes liable on it. Note that Alan has given Paula what is, in effect,
an option on the deal—she can accept it and become liable, or reject it,
in which case Alan is personally liable to Tom.

Chapter 1: Agency 18
1.4 Relations Between Principal and Agent
Agency is a reciprocal relationship in which each of the parties
owes duties to the other. In the business context, most of the
relationship is governed by contract. In ordinary employment
situations, for example, most of the actual duties of the agent, along with
the compensation he will receive, are spelled out in the employment
agreement, which may partly be oral and party written, as in the case
of employee handbooks. But certain duties are imposed by law on all
agency relationships. These duties may be varied by agreement, but
usually they cannot be entirely disclaimed.
1.4.1 Agent’s Duties to Principal
In ordinary commercial agreements, the parties’ responsibilities
terminate at the borders of the contract. In general, if they have
complied with the precise terms of the agreement, they owe each other
no further duties. But in addition to their ordinary contractual duties,
agents owe principals a fiduciary duty.
1.4.1.1 Fiduciary Duties
In a non-agency contractual situation, the parties’ responsibilities
usually terminate at the border of the contract. There is no relationship
beyond the agreement. Each party ordinarily is entitled to act in his own
interest, not that of the other. But the agency relationship is more than
a contractual one, and the agent’s responsibilities go beyond the border
of the contract. Agency imposes a higher duty than simply to abide by
the contract terms—what the law calls a “fiduciary” duty.
The concept of “fiduciary” goes back a long way. It is used for any
number of situations in which we expect one party to act in the best
interest of the other party. Traditional fiduciary relationships are those
of guardian and ward, trustee and beneficiary, and executor and estate.
In these cases the one charged with responsibility—the “fiduciary”—has
taken on the burden of putting others’ interests ahead of his own.
It may seem odd that this idea of fiduciary relations has a role in
ordinary business relationships. We generally assume that employers
and employees, for example, are free to bargain over whatever terms
they choose. An employee is not required to take the employer’s interest
into account when demanding a raise, and the employer generally has
no legal duty to consider the best interests of the employee in deciding
whether to fire him. Each is free to take honest advantage of the other.

Chapter 1: Agency 19
Thus, an agent of a principal is (absent an agreement to the contrary)
free to quit and start his own business in direct competition with his
former principal, even to the point of driving him out of business. The
principal is (again, absent agreement) free to fire the agent and hire
someone who will do a better job. Agency law has nothing to say with
respect to these transactions. In negotiating his own contract and his
compensation, the agent is acting on his own behalf, and owes no
fiduciary duties.
But it plays a major role when the agent is dealing on behalf of
the principal with respect to a third party. Here, he is not acting for
himself, but for the principal, and, in these transactions, he must put the
interests of the principal ahead of his own. What this means in practice
we shall soon see.
Duty to Avoid Self-Dealing. A fiduciary may not lawfully profit
from a conflict between his personal interest in a transaction and his
principal’s interest in that same transaction. A broker hired as a
purchasing agent, for instance, may not buy the things himself and then
sell them at an undisclosed profit to the principal. Nor can he, without
full disclosure and acceptance by the principal, sell to his principal
through a company in which he or his family has a financial interest. In
such cases the remedy for breach of trust is “disgorgement”—the term
comes from the Old French word for “vomiting”—which means that the
agent must turn over all the profits he made from the breach to the
principal.
Duty to Preserve Confidential Information. To further his
objectives, a principal will usually need to reveal a number of secrets to
his agent—how much he is willing to sell or pay for property, marketing
strategies, and the like. Such information could easily be turned to the
disadvantage of the principal if the agent were to compete with the
principal or were to sell the information to those who do. (Imagine a real
estate agent who passed on to the prospective buyer the smallest
amount you would take for the house you were urgently trying to sell—
especially if the agent were getting paid for that information by the
buyer .) The law therefore prohibits an agent from using information
confidentially given or acquired for his own purposes or in ways that
would injure the interests of the principal,. This prohibition extends to
information gleaned from the principal though unrelated to the agent’s
assignment. As section 395 of the Restatement (Second) explains it, “[A]n

Chapter 1: Agency 20
agent who is told by the principal of his plans, or who secretly examines
books or memoranda of the employer, is not privileged to use such
information at his principal’s expense.” Nor may the agent use
confidential information after resigning his agency. Though he is free,
in the absence of contract, to compete with his former principal, he may
not use information learned in the course of his agency, such as trade
secrets and customer lists. The case of Bacon v. Volvo Service Center,
Inc., 597 S.E.2d 440 (Ga. App. 2004), which is excerpted below, deals
with just such an agent’s breach of the duty of confidentiality.
1.4.1.2 Other Duties
In addition to fiduciary responsibility (and whatever special
duties may be contained in the specific contract) the law of agency
imposes other duties on an agent. These duties are not necessarily
unique to agents: a nonfiduciary employee could also be bound to these
duties on the right facts.
Duty of Skill and Care. An agent often is taken on because he has
special knowledge or skills that the principal wishes to tap, and nearly
always because he appears competent and reliable. The agent is under
a legal duty to perform his work with the care and skill that is “standard
in the locality for the kind of work which he is employed to perform,”
Restatement (Second) of Agency § 379, and to exercise any special skills,
if these are greater or more refined than those prevalent among those
normally employed in the community. In short, the agent may not
lawfully do a sloppy job.
Duty of Good Conduct. In the absence of an agreement, a
principal may not ordinarily dictate how an agent must live his private
life. An overly fastidious florist may not instruct her truck driver to steer
clear of the local bar on his way home from delivering flowers at the end
of the day. But there are some jobs on which the personal habits of the
agent may have an effect. The agent is not at liberty to act with
impropriety or notoriety, so as to bring disrepute on the business in
which the principal is engaged. A lecturer at an anti-alcohol clinic may
be directed to refrain from frequenting bars. A bank cashier who
becomes known as a gambler may be fired.
Duty to Act Only as Authorized. This duty states a truism but is
one for which there are limits. A principal’s wishes may have been stated
ambiguously or may be broad enough to confer discretion on the agent.

Chapter 1: Agency 21
As long as the agent acts reasonably under the circumstances, he will
not be liable for damages later if the principal ultimately repudiates
what the agent has done: “Only conduct which is contrary to the
principal’s manifestations to him, interpreted in light of what he has
reason to know at the time when he acts . . . subjects the agent to liability
to the principal.”
Duty to Obey. As a general rule, the agent must obey reasonable
directions concerning the manner of performance. What is reasonable
depends on the customs of the industry or trade, prior dealings between
agent and principal, and the nature of the agreement creating the
agency. A principal may prescribe uniforms for various classes of
employees, for instance, and a manufacturing company may tell its sales
force what sales pitch to use on customers. On the other hand, certain
tasks entrusted to agents are not subject to the principal’s control; for
example, a lawyer may refuse to permit a client to dictate courtroom
tactics.
Duty to Give Information. Because the principal cannot be every
place at once—that is why agents are hired, after all—much that is vital
to the principal’s business first comes to the attention of agents. If the
agent has actual notice or reason to know of information that is relevant
to matters entrusted to him, he has a duty to inform the principal. This
duty is especially critical because information in the hands of an agent
is, under most circumstances, imputed to the principal, whose legal
liabilities to third persons may hinge on receiving information in timely
fashion. Service of process, for example, requires a defendant to answer
within a certain number of days; an agent’s failure to communicate to
the principal that a summons has been served may bar the principal’s
right to defend a lawsuit. The imputation to the principal of knowledge
possessed by the agent is strict: even where the agent is acting adversely
to the principal’s interests—for example, by trying to defraud his
employer—a third party may still rely on notification to the agent,
unless the third party knows the agent is acting adversely.
Duties with Respect to Inventions. Agents also have duties to
principals when they use their principals’ time, facilities, equipment, or
supplies to develop or invent new products. This “shop rights” doctrine
is a complex area, but one that every employee should be aware of. An
illustrative case is Grip Nut Co. v. Sharp, 150 F.2d 192 (7th Cir. 1945).
In that case, Sharp signed a five-year contract with Grip Nut Company

Chapter 1: Agency 22
that in return for a salary and bonuses as company president, he would
assign to the company any inventions he made. When the contract
expired, Sharp continued to serve as chief executive officer, but no new
contract was negotiated concerning either pay or rights to inventions.
During the next ten years, Sharp invented a number of new products
and developed new machinery to manufacture them; patent rights went
to the company. However, he made one invention with two other
employees and they assigned the patent to him. A third employee
invented a safety device and also assigned the patent to Sharp. At one
time, Sharp’s son invented a leakproof bolt and a process to manufacture
it; these, too, were assigned to Sharp. These inventions were developed
in the company’s plants at its expense.
When Sharp died, his family claimed the rights to the inventions
on which Sharp held assignments and sued the company, which used
the inventions, for patent infringement. The family reasoned that after
the expiration of the employment contract, Sharp was employed only in
a managerial capacity, not as an inventor. The court disagreed and
invoked the shop rights doctrine, under which an invention “developed
and perfected in [a company’s] plant with its time, materials, and
appliances, and wholly at its expense” may be used by the company
without payment of royalties. “Because the servant uses his master’s
time, facilities and materials to attain a concrete result,” wrote the
court, “the employer is entitled to use that which embodies his own
property and to duplicate it as often as he may find occasion to employ
similar appliances in his business.” The company would have been given
complete ownership of the patents had there been an express or implied
(e.g., the employee is hired to make inventions) contract to this effect
between Sharp and the company.
1.4.2 Principal’s Duty to Agent
Just as agents have duties to principals, principals have duties to
agents. Some of these, such as salary and obligations to provide
company vehicles, arise out of the contract between them and are thus
governed by contract law. Others are governed by statute, such as
workers’ compensation and wage and hour labor obligations. Some arise
solely due to the agency relationship, and thus are governed by agency
law. The fiduciary relationship of agent to principal does not run in
reverse—that is, the principal is not the agent’s fiduciary.

Chapter 1: Agency 23
1.4.1 General Contract Duties
These duties are analogues of many of the agent’s duties that we
have just examined. In brief, a principal has a duty “to refrain from
unreasonably interfering with [an agent’s] work.” Restatement (Second)
§ 434. This does not mean that the principal must not interfere at all,
however. A principal may compete with the agent unless the agreement
specifically prohibits it. Thus, a manufacturer who distributes products
through agents is free (unless the contract specifies otherwise) to bring
in other agents who compete with existing agents, or even to sell directly
in competition with its agents.
Principals also have a duty to inform agents of potential physical
harm or pecuniary loss that inhere in the agent’s performance. For
example, failure to warn an agent that travel in a particular area
required by the job may be dangerous (a fact unknown to the agent but
known to the principal) can subject the principal to a suit for damages if
the agent is injured while in the area performing his job. This applies
only where the principal has information the agent does not; if the agent
is being asked to perform hazardous duty in an active hurricane
situation, the risks are likely to be apparent to both.
Principals are obliged to render accounts of monies due to agents.
The duty depends, however, on a variety of factors, including the degree
of independence of the agent, the method of compensation, and the
customs of the particular business. An ordinary employee, for example,
should expect the employer to keep track of hours, including overtime
hours worked. A lawyer working as an agent on a transaction might
reasonably be expected to keep track of his own hours and the amount
to be billed to the principal.
1.4.2 Employment at Will
Under the traditional “employment-at-will” doctrine, an
employee who is not hired for a specific period can be fired at any time,
for any reason. Similarly, the employee can quit at any time, without
warning. This is today limited by certain “public policy” limitations
designed to protect employees who act to prevent wrongdoing by the
employer. An employee who is fired for correctly reporting that his
employer’s paper mill is illegally polluting groundwater, or complaining
about unlawful business practices by salesmen, may be entitled to get
his job back, along with damages caused by the firing.

Chapter 1: Agency 24
1.4.3 Duty to Indemnify
Agents commonly spend money pursuing the principal’s business.
Unless the agreement explicitly provides otherwise, the principal has a
duty to indemnify or reimburse the agent. A familiar form of indemnity
is the employee expense account.
Similarly, principals have a duty to indemnify agents when
agents commit torts or other infractions while in the course of
performing their duties. This does not extend to intentional acts of
wrong-doing.
1.4.3 Workers’ Compensation
The employer owes the employee—any employee, not just
agents—certain statutorily imposed tort and workers’ compensation
duties.
To understand the workers’ compensation system, suppose Andy,
who works in a dynamite factory, stores explosives in a shed. Andy
warns his fellow employee, Bill, that he has done so. Bill nevertheless
lights up a cigarette near the shed, setting off the explosives and
injuring Bill. Can Bill recover for his injuries from the factory? Under
traditional tort law, the answer was no, for several reasons. First, there
was no negligence by Andy that would lead to liability. Second, even if
Andy had been negligent in storing the dynamite, Bill knew of the
danger and decided to smoke there anyway, which meant, in legal terms,
that he had “assumed the risk” of injury and could not recover. Third,
Bill’s own negligence in smoking near explosives led to his injuries,
which would bar his recovery under the doctrine of “contributory
negligence.” And finally, he would be barred by what was called the
“fellow servant” rule, under which the principal was liable for injuries
his agents caused to third parties, but not to other agents. Relatively
few employees were thus able to maintain legal actions for on-the-job
industries. But because these were jury cases, the relatively few
employees who recovered could often get large payouts for “pain and
suffering,” which meant that injured employees tended to sue a lot,
hoping at least for small settlements.
This system, which was bad for employees and unpredictable for
employers, was largely replaced by legislators in the early twentieth
century. The resulting system was a compromise under which
employees traded their rights to sue their employers for guaranteed,

Chapter 1: Agency 25
predetermined payments. Employees can now recover for workplace
injuries no matter who was at fault, but their recovery will be under a
strict schedule of payments. The main exception to this is when the
employer has deliberately injured an employee. In that case the
employee is free to sue. Workers’ compensation is aimed at redressing
accidental injuries.
Most workers’ compensation acts provide 100 percent of the cost
of a worker’s hospitalization and medical care necessary to cure the
injury and relieve him from its effects. They also provide for payment of
lost wages and death benefits. Even an employee who is able to work
may be eligible to receive compensation for specific injuries. The injury
schedules are complex, as you can see from this Kansas statute:
Article 5.—Workers’ Compensation
44-510d. Compensation for certain permanent partial
disabilities; schedule. If there is an award of permanent disability as a
result of the injury there shall be a presumption that disability existed
immediately after the injury and compensation is to be paid for not to
exceed the number of weeks allowed in the following schedule:
(1) For loss of a thumb, 60 weeks.
(2) For the loss of a first finger, commonly called the index
finger, 37 weeks.
(3) For the loss of a second finger, 30 weeks.
(4) For the loss of a third finger, 20 weeks.
(5) For the loss of a fourth finger, commonly called the little
finger, 15 weeks.
(6) Loss of the first phalange of the thumb or of any finger shall
be considered to be equal to the loss of 1/2 of such thumb or finger, and
the compensation shall be 1/2 of the amount specified above. The loss
of the first phalange and any part of the second phalange of any finger,
which includes the loss of any part of the bone of such second phalange,
shall be considered to be equal to the loss of 2/3 of such finger and the
compensation shall be 2/3 of the amount specified above. The loss of
the first phalange and any part of the second phalange of a thumb
which includes the loss of any part of the bone of such second phalange,
shall be considered to be equal to the loss of the entire thumb. The loss
of the first and second phalanges and any part of the third proximal
phalange of any finger, shall be considered as the loss of the entire
finger. Amputation through the joint shall be considered a loss to the
next higher schedule.
(7) For the loss of a great toe, 30 weeks.

Chapter 1: Agency 26
(8) For the loss of any toe other than the great toe, 10 weeks.
(9) The loss of the first phalange of any toe shall be considered
to be equal to the loss of 1/2 of such toe and the compensation shall be
1/2 of the amount above specified.
(10) The loss of more than one phalange of a toe shall be
considered to be equal to the loss of the entire toe.
(11) For the loss of a hand, 150 weeks.
(12) For the loss of a forearm, 200 weeks.
(13) For the loss of an arm, excluding the shoulder joint,
shoulder girdle, shoulder musculature or any other shoulder
structures, 210 weeks, and for the loss of an arm, including the
shoulder joint, shoulder girdle, shoulder musculature or any other
shoulder structures, 225 weeks.
(14) For the loss of a foot, 125 weeks.
(15) For the loss of a lower leg, 190 weeks.
(16) For the loss of a leg, 200 weeks.
(17) For the loss of an eye, or the complete loss of the sight
thereof, 120 weeks.
The injured worker is typically entitled to two-thirds his or her average
pay, not to exceed some specified maximum, for two hundred weeks. If
the loss is partial (like partial loss of sight), the recovery is decreased by
the percentage still usable.
Although workers’ compensation laws are on the books of every
state, in two states—New Jersey and Texas—they are not compulsory.
In those states the employer may decline to participate, in which event
the employee must seek redress in court. But in those states, the old
common-law defenses (fellow-servant rule, contributory negligence, and
assumption of risk) have been statutorily eliminated, greatly enhancing
an employee’s chances of winning a suit. The incentive is therefore
strong for employers to elect workers’ compensation coverage.
Not all employees are covered by workers’ compensation. Farm
and domestic laborers are often not covered, while and public employees,
railroad, and maritime workers are covered under different but fairly
similar laws. Approximately half the states now provide coverage for
household workers, although the threshold of coverage varies widely
from state to state. Some use an earnings test; other states impose an
hours threshold. People who fall within the domestic category include

Chapter 1: Agency 27
maids, baby-sitters, gardeners, and handymen but generally not
plumbers, electricians, and other independent contractors.
There are three general methods by which employers may comply
with workers’ compensation laws. First, they may purchase employer’s
liability and workers’ compensation policies through private commercial
insurance companies. These policies consist of two major provisions:
payment by the insurer of all claims filed under workers’ compensation
and related laws (such as occupational disease benefits) and coverage of
the costs of defending any suits filed against the employer, including any
judgments awarded. The second method of compliance with workers’
compensation laws is to insure through a state fund established for the
purpose. The third method is to self-insure. The laws specify conditions
under which companies may resort to self-insurance, and generally only
the largest corporations qualify to do so. In short, workers’ compensation
systems create a tax on employers with which they are required (again,
in most states) to buy insurance.
The amount the employer has to pay for the insurance depends
iin large part on how dangerous the work is. In 2020, for example, the
base rate in Washington State for aerial fire fighters and crop dusters
was $12.44 an hour, compared to $0.14 for software designers. Some
other categories include local law enforcement officers ($1.91), exotic
dancers ($6.52), lawyers ($.20), convenience store workers ($.46), bakers
($1.12), dockyard workers ($2.42), bridge construction workers ($4.25),
corporate officers ($0.17), and professional football players ($25.71). The
base rate, however, is adjusted by the individual employer’s injury
history. Employers whose workers suffer more injuries pay more.
There are a number of legal issues that recur in workers’
compensation cases. Both the employer and the insurer will sometimes
try to deny coverage. Some recurring legal issues include:
• Is the injured person an employee? This has always been an
important issue, but it takes on even more importance in the modern
economy, where many workers work as independent contractors. What
makes it complex is that sometimes workers want to be classified as
employees so they can get workers’ compensation; sometimes they do
not want to be employees because they would prefer to bring suit for
damages. Courts generally have opted for fairly wide coverage. In Betts
v. Ann Arbor Public Schools, 271 N.W.2d 498 (Mich. 1978), for example,
a college student majoring in physical education was a student teacher

Chapter 1: Agency 28
in a junior high school. During a four-month period, he taught two
physical education courses. On the last day of his student teaching,
thirty of his students grabbed him and tossed him into the swimming
pool—apparently a tradition at the school for student PE teachers. In a
freak accident, he lost an eye when it was struck by a whistle on an
elastic band. He filed a compensation claim. (Note that he would not
have likely been able to recover from the school district since the
students, not school employees, injured him.) The school board argued
he was not an employee because he received no pay. The state workers’
compensation appeal board ruled against the school on the ground that
payment in money was not required: “Plaintiff was paid in the form of
training, college credits towards graduation, and meeting of the
prerequisites of a state provisional certificate.” The state supreme court
affirmed the award.
• Is the injury work related? As a general rule, on-the-job injuries
are covered no matter what their relationship to the employee’s specific
duties. Thus, almost anything that happens at the workplace will
normally be covered, unless it involves some sort of culpable behavior by
the employee, such as drunkenness or fighting—and even there,
sometimes the employee wins. Injuries that occur while an employee is
outside the workplace on business are usually covered, such as when an
employee is driving to visit a customer. It becomes more complicated,
however, if the employee has taken a personal detour on the way to the
customer’s place and is injured on the detour. Workers kicking a ball
around at the workplace while on break are usually covered, but may or
may not be if they are injured while playing on a company team in a city
softball league. It is impossible to state any firm rules in this area.
• How palpable must the “injury” be? A difficult issue is whether
a worker is entitled to compensation for psychological injury, including
cumulative trauma. Until the 1970s, insurance companies and
compensation boards required physical injury before making an award.
Claims that job stresses led to nervous breakdowns or other mental
disorders were rejected. But many courts have liberalized the definition
of injury and now recognize that psychological trauma can be real and
that job stress can bring it on. A leading case is Wolfe v. Sibley, Lindsay
& Curr Co., 330 N.E.2d 603 (N.Y. 1975), where the security manager for
a department store, under intense stress at work, killed himself. His
assistant discovered his body in a pool of blood. She suffered severe
depression and was wracked with guilt over her perceived failure to

Chapter 1: Agency 29
notice his mood and prevent his suicide. Despite medical treatment, she
was unable to continue work. The court held that this was sufficient
injury to allow her to recover under workers’ compensation for the
disability.
1.6 Tort Liability of Principals
The rules regarding the contracts entered into by agents on behalf
of principals are governed by the concepts of “authority” or “power”
described above. They depend a great deal on the intentions and
understandings of the principal and agent. When we get to tort law,
however, the rules are very different. We even use different
terminology. As noted above, we still use the terms “master” and
“servant” in the realm of tort law. Masters are directly or vicariously
liable for torts committed by their servants.
1.6.1 Direct Liability
A principal, like any other person, is liable for torts he commits
himself. But he is also directly liable for torts that he directed the
servant to commit. This can be thought of in the same way that we
think of accomplice liability in criminal law. One who directs another
to commit a crime is liable for the crime to the same extent as the actor.
Similarly, if the master directs a servant to injure someone—or to
engage in some activity that the master has reason to know is likely to
injure someone, such as dumping toxic materials into a watercourse—
the principal is directly liable.
In the same way, a principal can be liable for negligently selecting
agents. Suppose Paula hires Alan to be an armed security guard at her
nightclub, without bothering to check his background. If Alan gets
angry and deliberately shoots a customer because he is wearing a T-
shirt that Alan doesn’t like, Paula may well be liable. Her liability is
based on the fact that she hired Alan for a sensitive job without doing
rudimentary background checks. She was negligent. Similarly, if Alan
is inadequately trained, or given bad instructions, she will be liable
because of her own failures, not his.
1.6.2 Vicarious Liability
But liability of masters for their servants’ torts is far broader.
Masters are liable even when they have no knowledge of the acts, had
no intention of committing them, and may, in fact, have absolutely
forbidden them. This concept, called in the law respondeat superior (“let

Chapter 1: Agency 30
the master answer”) goes back several millennia, and is rooted in the
idea that where a master puts an enterprise in operation, the master
should be liable for all the injuries that result from it. The goal is to
create incentives for masters to operate their enterprises safely. In
modern times, the doctrine has also been justified on the grounds that
it allows the injured party to recover from the master’s “deep pocket”
rather than the presumably less wealthy employee. Masters, at least
sophisticated ones, can often offload the risk through insurance that
may not be available to, or affordable by, the servant.
Respondeat superior raises three difficult questions: (1) Is the
particular agent a “servant” for whose torts a master may be liable? (2)
Was the servant acting within the “course of his employment” when he
committed the tort? (3) If the tort was intentional, may the master
nevertheless be liable?
1.6.2.1 Vicarious Liability
In general, the broadest liability is imposed on the master in the
case of tortious physical conduct by a servant, as defined above in § 1.2.5.
If the servant acted within the scope of his employment (as we note in
the next section), the master will be liable to the victim for damages
unless, as we have seen, the victim was another employee, in which
event the workers’ compensation system (§ 1.4.3) will be invoked. Recall
that employees are almost always servants for legal purposes; other
agents may become servants to the extent that their actual performance
of their tasks is under the direct control of the principal.
Ordinarily, an individual or a company is not vicariously liable
for the tortious acts of independent contractors. The plumber who
rushes to a client’s house to repair a leak and causes a traffic accident
does not subject the homeowner to liability. But there are exceptions to
the rule. Generally, these exceptions fall into a category of duties that
the law deems nondelegable. In some situations, one person is obligated
to provide protection to or care for another. The failure to do so results
in liability whether or not the harm befell the other because of an
independent contractor’s wrongdoing. Thus, a homeowner has a duty to
ensure that physical conditions in and around the home are not
unreasonably dangerous. If the owner hires an independent contracting
firm to dig a sewer line and the contractor negligently fails to guard
passersby against the danger of falling into an open trench, the
homeowner is liable because the duty of care in this instance cannot be

Chapter 1: Agency 31
delegated. (The contractor is, of course, liable to the homeowner for any
damages paid to an injured passerby.)
1.6.2.2 Scope of Employment
Masters are not liable for all the torts committed by their
servants, only those that occur within the “scope of employment.” If a
company driver runs over a pedestrian while delivering products to a
customer, the master is liable; if the same driver runs over someone
while driving from home to his daughter’s softball game, the master is
not. These examples are easy, but determining what this means is not
easy.
The simplest case is whether the servant is actually following his
instructions to the letter. In such cases there is no doubt about liability.
But things get complicated quickly. A classic old English case, Joel v.
Morrison.Joel v. Morrison, 6 Carrington & Payne 501 (1833), illustrates
the problem. The plaintiff was run over on a highway by a speeding cart
and horse owned by the defendant. The driver was the servant of the
defendant, and a fellow servant was with him. The driver had plainly
been careless. But no one could explain what the cart was doing on that
road, since the master had no business going on there. The defendant
argued that the driver had taken the cart and was out driving for his
own purposes. If that were true, said the court, the employer would not
be liable: “If the servants, being on their master’s business, took a detour
to call upon a friend,” the court wrote, “the master will be responsible. .
. . But if he was going on a frolic of his own, without being at all on his
master’s business, the master will not be liable.” The “frolic of his own”
language has been used repeatedly down the years. In this particular
case, the court held the evidence suggested that the employer was liable.
Trying to define the difference between a “detour” and a “frolic of
one’s own” is obviously difficult. The test is thus one of degree, and it is
not always easy to decide when a detour has become so great as to be
transformed into a frolic. For a time, a rather mechanical rule was
invoked to aid in making the decision. The courts looked to the servant’s
purposes in “detouring.” If the servant’s mind was fixed on
accomplishing his own purposes, then the detour was held to be outside
the scope of employment; hence the tort was not imputed to the master.
But if the servant also intended to accomplish his master’s purposes
during his departure from the letter of his assignment, or if he
committed the wrong while returning to his master’s task after the

Chapter 1: Agency 32
completion of his frolic, then the tort was held to be within the scope of
employment.
This test is not always easy to apply. If a hungry deliveryman
stops at a restaurant outside the normal lunch hour, intending to
continue to his next delivery after eating, he is within the scope of
employment. But suppose he decides to take the truck home that
evening, in violation of rules, in order to get an early start the next
morning. Suppose he decides to stop by the beach, which is far away
from his route. Does it make a difference if the employer knows that his
deliverymen do this?
Court decisions in the last forty years have moved toward a
different standard, one that looks to the foreseeability of the agent’s
conduct. By this standard, an employer may be held liable for his
employee’s conduct even when devoted entirely to the employee’s own
purposes, as long as it was foreseeable that the agent might act as he
did. This is the “zone of risk” test. The employer will be within the zone
of risk for vicarious liability if the employee is where she is supposed to
be, doing—more or less—what she is supposed to be doing, and the
incident arose from the employee’s pursuit of the employer’s interest
(again, more or less). That is, the employer is within the zone of risk if
the servant is in the place within which, if the master were to send out
a search party to find a missing employee, it would be reasonable to look.
For example, in Cockrell v. Pearl River Valley Water Supply District, 865
So.2d 357 (2004), police officer was acting within the scope of his
employment when he arrested a female driver, but not when he later
drove her to a secluded location and attempted to assault her. On the
other hand, in Lyon v. Carey, 385 F. Supp. 272 (D.D.C. 1974), the master
was liable when its deliveryman assaulted and raped a woman who was
in the apartment where he was delivering merchandise.
1.6.2.3 Intentional Torts
In the nineteenth century, a principal was rarely held liable for
intentional wrongdoing by the agent if the principal did not command
the act complained of. The thought was that one could never infer
authority to commit a willfully wrongful act. Today, liability for
intentional torts is imputed to the principal if the agent is acting to
further the principal’s business. Thus, in the Lyon v. Carey case
mentioned in the last section, even deliberate rape can be imputed to
the master when it is done within the scope of the job. Thus, a bouncer

Chapter 1: Agency 33
who severely beats a customer to a pulp while on the job or a cashier
who screams racist threats at customers while at the register can create
liability for the master.
PROBLEMS
Problem 1
GoodBurger, Inc., is a company that operates fast-food
restaurants in the United States. It has about 500 outlets. Two hundred
of those are owned by Goodburger itself; the other 300 are franchised
restaurants that are actually owned by local business people. Leona
owns a GoodBurger franchise in a middle-class suburb. To get the
franchise, she paid GoodBurger a “franchise fee” of $75,000, and makes
annual payments to GoodBurger amounting to 3 percent of sales. She is
responsible for all costs relating to building, operating, and managing
the restaurant, including rent, wages, utilities, and taxes. The
restaurant design plans are drawn up by GoodBurger’s architectural
team, and Leona is required to follow those plans. The plans specify all
of the public signage at the restaurant, including the large sign with the
famous black-gold-teal GoodBurger logo. Customers cannot tell the
difference between company-owned and franchised stores.
GoodBurger stores—whether company-owned or franchised—
must all be strictly operated under terms of the 500-page “Operations
Manual,” which is informally known as “the GoodBurger Bible.” As with
company-owned stores, all of Leona’s employees are required to wear
uniforms with the GoodBurger logo and may wear no other
identification. The Operations Manual specifies in detail the job of each
category of employee, the correct way to make each of the company’s
100-plus menu items (e.g., exactly how many pickle chips should be
placed on each of thee company’s ten signature burgers), and such
details as how and how often restrooms must be cleaned. Failure to
follow these guidelines may result in a loss of Leona’s the franchise.
Under the franchise agreement, GoodBurger is responsible for providing
bookkeeping and accounting services to Leona, and is responsible for
designing, managing, and placing all national and regional advertising.
Leona has some discretion in the operation of the store. She is
responsible for deciding which (and how many) employees to hire, so
long as she meets the “minimum staffing” guidelines in the Operations
Manual. The store must be open from 6:30 a.m. to 11:00 p.m., but Leona

Chapter 1: Agency 34
can set longer hours if she chooses. She is required to set prices at the
levels specified by GoodBurger, but may vary those prices in special
cases with approval of the GoodBurger regional office. When
GoodBurger offers regional or national promotions, she can elect
whether to opt out of the promotion. She is also authorized to advertise
locally, provided her ads are approved by the regional office.
Is Leona an agent of GoodBurger? Explain.
Problem 2
Based on his experience working for the CIA, a former CIA agent
published a book about certain CIA activities in South Vietnam. The
CIA did not approve of the publication of the book although, as a
condition of his employment, the agent had signed an agreement not to
publish any information relating to the CIA without specific approval of
the agency. The government brought suit against the agent, claiming
that all the agent’s profits from publishing the book should go to the
government.
Assuming that the government suffered only nominal damages
because the agent published no classified information, will the
government prevail? Why or why not?
Problem 3
The Spiders (owned by Pat) and the Hornets (owned by Dana) are
two independent minor-league baseball teams. During a game at the
Spiders’ home field, members of the Spiders repeatedly taunt Joe, the
pitcher for the Hornets, from the bench. Finally infuriated, Joe
retaliates by firing a 98 mph fastball at the dugout. In fact, the pitch
goes over the dugout and hits Ann, who is sitting in the first row. The
Spiders’ manager, Lefty, in violation of team and league rules, charges
out of the dugout at Joe, tackling him and bringing him to the ground,
where he proceeds to pummel him. The benches empty, and many of the
Hornets players surround Lefty, kicking him repeatedly. Ann
(concussion), Lefty (concussion and broken hand), and Joe (torn
meniscus) are all taken to the hospital with injuries.
Is Dana liable to Ann for her injury? Is Pat liable to Joe for his
injury? Are Lefty and Joe entitled to workers’ compensation?

Chapter 1: Agency 35
Problem 4
Alphonse is a sales professional who goes to work for Zambuco
Beverages Group, a company that manufactures a range of distilled
spirits, including bourbon, gin, vodka, rum, and various specialty
liqueurs. Zambuco has a sales force that sells to independent liquor
retailers, and whose members are paid largely on commission. At the
time Alphonse is hired, Zambuco’s standard commission paid to the
sales professionals is 6 percent.
On his first day, Alphonse is welcomed by Hairston, the
company’s Vice President for Sales & Marketing. Hairston tells
Alphonse that the Sales Manager, Boyle, will give him all the details
about his new job. Alphonse subsequently goes to Boyle’s office, where
Boyle tells him all about the job. When they get to the discussion of
commissions, Boyle tells Alphonse that in one region, Zambuco has had
trouble penetrating the market, and that while the standard
commission is 6 percent, Alphonse will get 7.5 percent commission on all
sales within that region.
Time goes by, and Alphonse is successful selling, but Zambuco
pays him only 6 percent on all his sales, including those in the region
that Boyle mentioned. Alphonse later quits and sues for the extra
commission he claims he should have been paid.
What result? Outline each and every theory on which Alphones
may be able to recover from Zambuco.

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