Agency Relationship: Understanding who is an Agent and the Liability that Arises from the Relationship

Understanding Agency

Every business employs or assigns certain people to perform tasks on their behalf. An agent is the waitress you hired to work at your new restaurant or the person you hired to promote your restaurant. The principle, or the business owner, is the person who appoints another person to act on his behalf. This agent relationship usually begins by some sort of agreement. This agreement can be oral or written, it does not have to be a contract.—

In some instances, determining agency is not as simple. When you hire a contractor to repair the floors in your new restaurant that contractor is an agent under certain circumstances. The attorney you retained, and your investment advisor are also agents. In those circumstances, each agent is performing work for the you, the principle.

This agency relationship involves a great deal of trust. The principle is seeking a service from an agent and the agent is required to carry out the tasks assigned and carry them out to the best of their ability. The agent also has a duty of loyalty. This duty means that the agent is required to put the principle’s interest above all and refrain from putting himself in a position that creates or encourages a conflict between his interest and the interest of the principal.

Liability for Agent’s Actions: So why is understanding this relationship important? Liability. The principle is liable for the agent’s actions. In the event there is a tort (1) or a contractual issue with a third party, the principle is liable and the agent is indemnified (2).

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(1) A tort is an act or omission that gives rise to injury or harm to another and amounts to a civil wrong for which courts impose liability.

(2) They are not liable for any cost or penalty. The liability shifts to the principle.

Contractual Liability:

It is very common for a principle to give legal authority to an agent to act on his behalf when dealing with a third party. An agent may enter into a contract with a third party and the principle will be obligated or bound by those contracts to the third party. For example, the manager you hired for your restaurant often enters into contracts with a third party that delivers fresh produce to your restaurant. That manager is acting as an agent and entering into these contracts on your behalf. If for any reason, the manager decides to not pay the required amount to the third party, you are the one that will be served for a breach of contract and your manager is not liable for the lawsuit.

There are certain situations where the principle will not be liable, and the liability stays on the agent:

1) when the agent does not inform the third party of who the principle is and the agent enters into an agreement without the knowledge of the principle. (there are certain circumstances where the principle will still be liable if there are additional actions by the principle)

2) When the third party is aware who the principle is and the agent, without the authority to do so, enters into an agreement with the third party. (the agent may not be liable but they can be liable to the principle for the damages caused by their improper actions)

Tortious Liability:

The principle is also liable for the agent’s torts or wrongful acts that result in a lawsuit. Torts are incredibly common and happen frequently, especially in large businesses and corporations. Since an agent is a representation of the principle, it is as if the principle had committed the tort or wrongdoing.

A principle can be held directly liable for an agent when the principle has acted in a certain manner. This liability occurs when the principle’s actions led to the negligence or wrongdoing.

The principle is directly liability in the following situations:

1. The principle failed to adequately instructor inform the agent.
   1. For example, if the principle does not give the agent the instructions to operate the industrial ovens and subsequently there is a fire where a customer is injured.
2. The principle negligently hired an agent.
   1. For example, if the principle hires an electrician but failed to properly check on his credentials and licenses. If the person is actually not a licensed electrician but still does an installation that leads to a shortage and a customer is injured, the principle is liable.
3. The principle did not properly supervise the agent.
   1. For example, the waitress the principle hired is stealing from the restaurant’s customers. It turns out the waitress had previously been arrested for theft in her previous job. Because the principle failed to properly supervise the waitress and failed to properly investigate her, he is liable.

A principle can also be held indirectly liable. This liability occurs when an agent commits an act during the scope of his or her employment.  This liability is the doctrine of Respondeat Superior which directly translates to “let the superior respond”.

An agent is within the scope of employment when they are acting under ordinary course of their job. This can be their day to day assignments or if they are directed by the principle to do a certain task, even if it is not a task usually done by them. For example, a waitress that is waiting on tables and has to run back and forth between the kitchen and the tables. During this process, the waitress drops a plate on a customer and injures them. Because the tort happened during her normal job assignment, the principle is liable. An additional example is if the same waitress is sent by the manager or principle to deposit money for the restaurant in a nearby bank. If the waitress gets into a collision with another vehicle while on the way to the bank, the principle is responsible.

There are four factors that need to be met for the principle to be held indirectly liable:

1. The agent was employed to perform the particular act
2. The act occurred in the place and during the time of the agent’s employment
3. The agent’s act was done to help or assist the principle
4. The agent’s act could have been anticipated or stopped by the principle

No Liability:

Not every act the agent commits will result in the principle’s liability. If the act occurs under the following situations, the agent holds liability:

Intentional Torts: The electrician you hired is outside your restaurant gathering his materials to continue working. During this time, he gets into a physical altercation with someone on the sidewalk. Any liability from his fight with that man is solely his.

1. Frolic: When an employment leaves his/her employment for a personal reason. The electrician leaves in the middle of installing your chandelier because he wanted to go to the bank. During this process he hits a pedestrian. Any liability from this is solely his.
2. Detour: When an employee is still engaged in employment but strays only slightly from the direct assignment. The electrician realizes he needs a bulb for the chandelier and leaves to home depot, on the way to home depot he remembers he has to go the bank and so he makes an impromptu U-turn, colliding with a vehicle. Although he was in the scope of employment, the bank was considered a detour and so his is liable.

Independent Contractors:

If the tort occurs in an area over which the principal exercises some control, the principle might be liable. If the tort occurs in an area over which the principal does not exercise control, then there is no liability. Unless the activity falls within the exception of control (the principle had control of the particular actions of the independent contractor)