Chapter One | The Legal System

Sources of American Law

To a large part, the roots of our legal heritage can be traced to England, although the American legal system also has roots in Spanish and Dutch law. Once a British colony ruled by King George III through his appointed governors, the United States adopted the greatest share of our laws and legal traditions from the English. For all intents, English law began with the Norman invasion of England in 1066. William the Conqueror and his successors established the king’s court (Curia Regis) to help create a unified nation. Before the Norman Conquest, disputes were settled according to local tribal customs. The king’s court began to develop a common or uniform set of customs applicable to the whole population. This evolved into what became known as the common law, so named because it was intended to be common to the entire British kingdom.

As the number of courts and disputes increased, the more important rulings made each year were compiled into Year Books. Judges referred to these Year Books as a source of guidance in settling cases similar to those already decided. If a dispute was unique (called a case of first impression), judges had to create new law, but they attempted to base their decisions on previously established legal principles as much as possible. Today we still rely on this body of judge-made law developed over the centuries. It is called common law or case law in the United States.

The common law was carried to the colonies by the first English settlers and used by courts during the pre-Revolutionary War period. Common law continued to be applied after the Revolution and during the writing of the U.S. Constitution. It is still a valuable source of law, especially in tort, contract, and agency law. States have also codified some parts of the common law, such as the penal code in criminal law, the probate code in estate law, or the Uniform Commercial Code (UCC), which codifies much of the common law relating to the sale of goods.

The Doctrine of Stare Decisis

In cases governed by the common law, courts follow the doctrine of stare decisis. Stare decisis literally means, “to adhere to decided cases” and holds that similar cases should be decided in a similar manner and should yield a similar result. Precedent is the legal decision or holdings from a prior case that courts use to determine the outcome of a similar case or a similar question of law. If a court determines that the facts in the precedent case are not the same as those in the case before it and, therefore, should not control the ruling, the court may distinguish the current case from the precedent. Courts also can, but rarely do, overrule their prior decisions. Courts strive to avoid overruling earlier cases because it upsets the principle of stare decisis and the reliance people place on settled law in planning business and personal affairs.

Constitutional Law

The United States Constitution is the seminal legal document in this country. A state’s constitution holds similar importance within its borders. A constitution establishes the structure of government for the political unit (federal or state) by providing for the branches, subdivisions, and functions of government and by conferring and denying powers to each part. The U.S. Constitution created three branches of government: legislative, executive, and judicial. The Constitution provides each with unique powers that theoretically make each branch equal to the other two. The doctrine of separation of powers provides a system of checks and balances so that one branch may not trammel over the rights and prerogatives of the others. Thus, the Constitution establishes a Congress to make laws, a president to enforce the laws, and a judiciary to interpret them. It also delegates to the states certain powers and casts a basic relationship between the states and the federal government. The relationship created is by definition a federal form of government. Each state possesses a limited amount of sovereignty, but the law of the federal government is supreme and applicable to all of the states.

The U.S. Constitution

Articles I to VII

Article I — Creates in the legislature [the Congress] the authority to enact laws. Article I defines the functions, powers, and role of Congress. Section 8 relates directly to matters affecting business in the United States: the power to lay and collect taxes; to regulate commerce with foreign nations and the states; to promulgate uniform bankruptcy laws; and to establish courts inferior to the U.S. Supreme Court. Section 9 also affects business affairs, states may not impose a tax on exports to a foreign country and they may not give preference to one state over another by regulating commerce.

Article II — The subject of this article is the executive power. The President has the duty to enforce all federal laws. It establishes the President’s term of office, the requirements to become President, and sets forth the presidential election process. It identifies the President as Commander in Chief of the Armed Forces, confers in the President the power to make treaties with the advice and consent of the Senate, and permits the President to make executive agreements with other nations without the advice and consent of the Senate. At the root of this power is the President’s authority to speak and act on behalf of the country in matters of foreign relations.

Article III — Article III establishes the judicial branch of the government. Article III authorizes the establishment of the U.S. Supreme Court and other federal courts. It confers the power to interpret laws and adjudicate certain disputes to the courts. Article III also provides for trials by jury for crimes and contains a definition of treason. The power of the courts was affirmed in the precedent case of Marbury v. Madison.

Article IV — Concerns the relationships between the states. Each state is bound to recognize the public acts and proceedings of the other states through the “full faith and credit” clause. The power to extradite a criminal from one state to another is also found here.

Article V — Lays out the means by which the U.S. Constitution may be amended.

Article VI — Confers supremacy of the U.S. Constitution, federal laws, and treaties over all other laws. All officials – federal and state – are sworn under oath to uphold the U.S. Constitution.

Article VII — Includes original acceptance of the U.S. Constitution by the states.

Constitutional Amendments

The Bill of Rights is the collective name of the first ten amendments to the U.S. Constitution. The Bill of Rights contains the freedoms of speech, press, religion, and assembly; the requirement that law enforcement authorities must possess a warrant in order to perform a search and seizure; provisions for protection from self-incrimination; the establishment of a grand jury for capital offenses; requirements for just compensation in eminent domain cases; a prohibition against double jeopardy; and, important provisions for “due process of law.”

The Fourteenth Amendment — While each amendment to the U.S. Constitution is intrinsically and equally important, the Fourteenth Amendment may be considered the “first among equals” in that it makes most of the fundamental guarantees of the Bill of Rights applicable to the states.

Supremacy of the U.S. Constitution

Since the 1930s and the presidency of Franklin D. Roosevelt, the U.S. Constitution has been interpreted to allow the federal government to become involved in the conduct of many areas of our daily lives. The regulation of some activities may also be relegated or delegated to the states. In this situation, any federal law that conflicts with a state law on the same subject matter takes precedence over and preempts the state law, unless, of course the federal action is ruled unconstitutional. Should Congress determine that federal law takes priority, its decision generally will be accepted. If Congress is silent on the matter, a court of competent jurisdiction would apply the following analysis to the federal law to determine whether it takes precedence over a state enactment:

Does the U.S. Constitution permit the federal government to regulate the area of law in which this particular law resides? If yes, the federal law will likely prevail.
Does the federal law violate a right guaranteed by the U.S. Constitution, for example, the right to a speedy trial? If yes, the federal law is preempted by the U.S. Constitution.
If not, does a state law address the same subject mater? If so, is there an inconsistency between the two laws? If one exists, the federal law prevails.

If both the federal and state laws are not contradictory, and Congress has not specifically preempted state action, the state law is said to be concurrent with federal law and may be applied.

State Constitutions

Powers not delegated to the federal government are retained by the states unless prohibited in the states’ own constitutions. Therefore, laws on the same subject matter can differ from one state to another in many ways. Businesses need to be aware of these distinctions, including differences between federal and state authority. Conflicting perceptions may appear with respect to the point at which federal power ends and so-called “state rights” begin.

Statutory Law

Statutes are written laws enacted by Congress or a state legislature for the purpose of declaring, ordering, or prohibiting something. Counties, cities, and towns may enact laws, as well. These “local laws” are generally called ordinances. Neither statutes nor ordinances can violate the U.S. Constitution or the applicable state constitution.

State statutory law varies throughout the country, partly because of cultural and geographical differences, and partly because of diverging needs. For example, eight western states enacted marital property statutes, called community property laws, originally derived from the Spanish legal system that originated in Mexico. Louisiana has laws that originated under the Napoleonic Code, because the French initially settled that area and brought with them their system of law. New York has adopted aspects of Dutch property law as it relates to condominium and co-op ownership.

Throughout the text, you will encounter various state and federal statutes. As you read these statutes, you will begin to understand the difficulty in interpreting and applying them. A large portion of the work that modern courts do consists of interpreting what the legislators meant when they passed a law and applying that understanding or meaning to the current circumstances. In this task, a court may be guided by consulting the legislative history of any law, in order to ascertain the intention of the writers of any statute.

Equity

Equity is that body of law that carries out justice when the law itself fails to provide a fair or adequate remedy or no remedy at all. Equity originated in medieval England. During this period, the existing common law rules were highly technical and rigid. The remedies available in the common law courts were scarce. As a result, a prevailing party might not be able to obtain adequate relief in many courts. To rectify this problem, the chancellor, the king’s highest-ranking advisor, heard cases that could not be settled satisfactorily. The Court of Chancery, an offshoot of the Curia Regis, was the court of the king’s chancellor. The most famous chancellor in British history was perhaps Sir Thomas More.

The American colonies adopted the principles of equity along with the common law. Eventually, law and equity became merged, so that today, the majority of states have eliminated separate equity (chancery) and law courts. The same court handles both types of claims. Further, courts may award both monetary damages (“a remedy in law”) and an equitable remedy in specific cases.

Actions at law and suits in equity resolve issues using different procedures. In actions at law, disputes are generally resolved by the application of statutes and previously decided cases. Suits in equity are decided by principles of fairness and equity.

Examples of equitable principles include the doctrines of laches and the “Clean Hands” doctrine. Laches is the product of the maxim that “equity aids the vigilant and not those that slumber on their rights.” This means that if one neglects or omits to do what one should do in a timely fashion it is presumed that he has abandoned his right or claim. The “Clean Hands” doctrine means that the court will not provide an equitable remedy to one who has violated conscience or good faith or other equitable principles. Simply stated, it means that “he who seeks equity must do equity.”

Equitable decisions are called decrees. Unlike legal relief, which involves awards of money or something else of value, equity decrees order a party to do or refrain from doing something. For example, the remedy may come in the form of an injunction—either temporary or permanent—prohibiting one party from doing an act or commanding a party to perform an act. Another type of equitable relief is that of specific performance, where the losing party is ordered to perform the contractual promise he or she made. It is imposed when monetary damages are inadequate. For example, Ross offers to buy Joan’s building for his motorcycle shop and Joan accepts. Joan later changes her mind and decides to keep the property. Since real estate is considered to be unique, and there is no other piece of property or building exactly like Joan’s, a court may order specific performance on the contract. Joan would be compelled to go through with the sale.

Additional equitable remedies include rescission (canceling a contract, thereby putting the parties to the contract in the same position they were in before the contract was formed), restitution (returning property or money to a party), and reformation (where the court of equity will rewrite all or part of a contract to reflect the parties’ actual intentions).

Administrative Law

Congress or a state legislature will oftentimes enact a statute using general language leaving it up to the appropriate administrative agency to create more detailed rules. Federal and state regulatory agencies (for example, the Environmental Protection Agency and the Federal Trade Commission) promulgate their own “rules and regulations” to implement the statutes enacted by the legislatures. These regulations generally have the same impact as a statute, and therefore are often termed administrative laws.

Administrative Agencies

As the United States became industrialized in the latter half of the 19th century, the need arose to create divisions of government that could handle the ever-complex situations that evolved. Congress and state legislatures began to establish administrative agencies. The duties that Congress could not perform in regulating certain activities because of the lack of time and specialized knowledge were delegated to these agencies.

To date, Congress and the executive branch have created over 100 administrative agencies to make, interpret, and enforce laws. These agencies provide a forum where complex issues and disputes can be adjudicated with efficiency, expertise, and fairness. Administrative agencies are authorities in their particular areas of law. Their expertise is critical given the complexities of the law and the complexities of the areas of business the laws seek to regulate.

Administrative agencies exist at every level of the government and they derive their power from the particular branch of the government that created them. For example, Congress creates federal agencies, state legislatures create state agencies, and city councils create their cities’ administrative agencies. An example of a federal agency is the Securities and Exchange Commission (SEC), which is authorized to enforce the federal securities laws that apply to issuers and persons who trade in securities. The New Jersey Department of Environmental Protection is an example of a state agency. It regulates air and water quality, wetlands, solid and hazardous waste management, parks and forestry, fish and wildlife. An example of local agency is the Business Integrity Commission of New York City. This agency regulates the trade waste industry, shipboard gambling industry, Fulton Fish Market distribution area and other seafood distribution areas, and public wholesale markets.

Legislative supervision over agencies may be minimal; however, administrative agencies are subject to the Administrative Procedure Act (APA) which requires agencies to follow uniform procedures in making rules and establishes basic notice and hearing requirements, which are collectively known as “due process” rights.

While the vast majority of administrative actions are processed informally, certain administrative agencies have been assigned quasi-judicial authority to adjudicate cases through an administrative proceeding. These proceedings are not identical to court trials; however, the agency must comply with the Due Process Clause of the U.S. Constitution. In other words, the individual or business must be given adequate notice and a meaningful opportunity to be heard, and fair trial procedures must be utilized in making administrative determinations. Administrative actions may also be challenged by claiming that an agency has acted ultra vires, that is, beyond the scope of their own power and authority.

Administrative law judges (ALJs) preside over administrative proceedings. There is no jury. Counsel may represent the administrative agency and the respondent and may call witnesses and introduce evidence. Upon hearing the case, the ALJ will render a decision in the form of an order that will state “the findings of fact and the conclusions of law” upon which the decision is based. The order becomes final if it is not appealed. If either party is dissatisfied with the decision, it may seek an appeal that consists of a review by the agency or perhaps by a court. In some cases, a successful appeal will result in a completely new or “de novo” hearing on the merits of the case. In other cases, the scope of appellate review is limited. A court will defer to the findings of the ALJ and only decide whether those findings could reasonably have been reached on sufficient or substantial credible evidence present in the record.

Treaties

According to the U.S. Constitution, a treaty is made by the President with the head of a foreign country. It must be ratified by two-thirds of the Senate. It then becomes “the supreme law of the land.” A conflict of law between a treaty and a state or federal law causes that law to become invalid.

Basis of Commercial Law

The area of law pertaining to commercial dealings is called commercial or business law. It includes aspects of contract law, sales, corporations, agency, partnerships, and other subjects included in this text.

Uniform Laws

Since each state is a sovereign, with a different set of laws, the differences created issues for commerce between the states. Beginning in the late 18th century, a group of legal scholars formed the National Conference of Commissioners on Uniform State Laws (NCCUSL) and began meeting to draft uniform statutes. State legislatures were encouraged to adopt the uniform law. In addition to the NCCUSL the American Law Institute [ALI], founded in 1923, has also developed a number of comprehensive codes of law. Each state may adopt all or part (or none, for that matter) of a uniform law. Therefore, the law on any particular subject is not “uniform” throughout the country.

Examples of uniform laws include the Model Business Corporation Act, the Uniform Gifts to Minors Act, the Uniform Arbitration Act, and the Uniform Federal Lien Registration Act. A number of other uniform laws have been written as well. Students of business law become familiar with the Uniform Commercial Code or “UCC,” one of the most important legal codes.

The Uniform Commercial Code

The UCC is a unified body of statutes governing nearly all commercial transactions. Nevertheless, the interpretations of the UCC are found in case law, or the reported decisions of the courts. By providing uniformity and stability among the states, the UCC encourages the advancement of business and assures businesspeople that their legal contracts will be carried out and enforced by the courts.

The UCC did not result in drastic changes in the basic principles of commercial law. There are, however, important differences from the common law. While the common law was guided, to a large extent, by the principle of caveat emptor or “let the buyer beware,” the UCC envisions a different role of a merchant in commercial transactions. Merchants are held to a very high standard of performance and must act to act in good faith within the commercial sphere. UCC § 2-103 defines good faith as “honesty in fact” and the “observance of reasonable commercial standards of fair dealing in the trade.” This is a far cry from caveat emptor!

The UCC defines and explains important and sometimes commonly misunderstood legal and business terms, thus assisting parties in the drafting of contracts and aiding courts in their interpretation and enforcement. For example, courts may rule that certain contracts or terms within a contract are unconscionable and therefore unenforceable. The case law governing contracts in one state has persuasive value in courts of other states because adoption of the UCC results in “uniformity.”

All fifty states have adopted the UCC, as well as, the District of Columbia, the Virgin Islands, and Guam. Louisiana was the last state to adopt the UCC. Why do you think Louisiana was so late in adopting the UCC?

Classification of Law

Laws may be classified into three different groupings. They are: (1) criminal law and civil law; (2) substantive law and procedural law; and (3) public law and private law.

Criminal and Civil Law

Philosophically, a crime may be considered a wrong committed against society. Federal and state prosecutors who bring the case against the defendant, or the person committing the wrongdoing, represent society. The respective criminal law applies in these cases. In certain instances, a city or municipality may initiate a criminal action, such as charging a person with theft, assault, public disorderliness, or some other criminal offense. The formal charge is made in the name of the state in which the alleged violation took place. In some cases, “persons” may include corporations and other types of business entities. Crimes are punishable by imprisonment and/or fines, and in some cases, the making of restitution to the victim of a crime.

In general terms, civil law is applied when an injured party, or a plaintiff, brings an action against another party, a defendant, because the defendant did not meet or breached a legal duty owed to the plaintiff. Anyone may be a party to a civil suit—individuals, business entities, and government entities. If the defendant loses a civil case, the plaintiff is usually awarded some form of damages (money, property) or some form of equitable relief.

At times, the same behavior may violate both criminal and civil laws. For example, a car thief may be charged for violating a criminal statute and may also be sued in a civil court by the owner of the car for money damages.

Substantive and Procedural Law

Laws that prescribe the rights and obligations of people in their everyday lives are called substantive laws. A statute that makes theft illegal is a substantive law.

Procedural laws establish the means and rules by which substantive laws are applied. For example, in federal civil suits all individuals involved (judge, defendant, jury, plaintiff, etc.) act in compliance with the rules set down in the Federal Rules of Civil Procedure. By way of example, one such rule sets forth time limits for the filing of law suits in federal courts.

Public and Private Law

Public law is law enacted by an authorized government body. Examples include the U.S. Constitution, state constitutions, federal aviation laws, state laws of incorporation, municipal parking ordinances, and zoning laws.

Private law develops from a relationship between parties and creates a framework of rules to establish rights and obligations of the parties. For example, an employment contract creates a legal relationship between the employer and employee. The terms of the contract are a type of private law to be obeyed by the parties. The requirements for executing the contract and the means for enforcing the contract are a matter of public law; however, the terms for performance are private law created by the parties to the employment contract.

Primary and Secondary Sources of Law

Primary sources of law, or binding authority, are those sources of law a court must follow when deciding cases. Primary sources include, constitutions, statutes, regulations, and case law. Secondary sources of law, or persuasive authority, include case law from other jurisdictions, legal dictionaries, law review articles, and treatises. Secondary sources of law are not binding on the court but may help guide the court in deciding a case.

Schools of Jurisprudential Thought

The Natural Law School

The natural law school is one of the oldest legal philosophies, at least dating back the days of Aristotle. He noted the natural law applies to all humankind. There is a higher and universal law transcending all creation, and the human law, or civil law, aspires to embody these general, universal principles. Every human being has an inclination to discern good from bad, right from wrong. The notion of “natural rights” comes from the natural law.

The Positivist School

The adherents to the legal positivist school do not believe natural rights come from a higher form of law. Instead, laws are created by societies. Whether there are good laws or bad laws does not matter. Under their philosophy, all laws must be obeyed until they are changed.

The Historical School

Followers of the historical school look to history, tradition, or customs. They look to what legal doctrines have withstood the passage of time—what works and what does not work. Adherents to the historical school will look to past cases for guidance and follow those decisions.

Legal Realism

Legal realists will look outside the statutory framework, as they believe the law cannot always be applied with total uniformity. Judges are permitted to bring in their own psychological, economic, and political predispositions into their decisions. They believe that law is not a scientific enterprise in which deductive reasoning can be applied consistently to reach an outcome in every case. Instead, judges must resolve cases by balancing the interests of the parties with that of society.

Questions

1. How did the common law develop?
2. What is a “case of first impression”?
3. Explain the principle of “stare decisis.”
4. Why is the U.S. Constitution so important in this country?
5. What are the various rights protected in the Bill of Rights?
6. Explain the federal powers conferred in Articles I, II, and III. What is the doctrine of separation of powers?
7. Differentiate between courts of equity and law. Why are each needed?
8. What is preemption and when is a state law preempted by a federal law?
9. What role do administrative agencies play in government? Name a federal agency and a state agency.
10. What is the difference between a state constitution and the federal constitution?
11. How would a secondary source of law guide a court?
12. Explain what a treaty is and when the courts have to follow it.
13. What is the difference between statutory law and constitutional law?
14. What is the difference between public and private law? Give examples.
15. Give an example of substantive law. How does the procedural law compliment the substantive law?
16. Who brings the charges against the accused in a criminal matter?
17. Why are uniform laws important? What is the UCC?
18. What is the definition of “good faith” under the UCC?
19. What is the difference between civil law and criminal law?
20. What are the differences between the various schools of jurisprudential thought? Which is more convincing?

Chapter Fourteen | Agency

Introduction

Agency is an important area of the law that involves a special relationship between two parties: a principal and the person, who represents the principal, termed the agent. In the Restatement (Third) of Agency, agency is defined as a “fiduciary relationship that arises when one person (a “principal”) manifests assent to another person (an “agent”) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” In essence, the agent “steps into the shoes” of the principal in a business transaction.

The principal hires an agent to act on his or her behalf who is subject to the principal’s instructions and control. The agent is the individual authorized to act for and on behalf of a principal. This legal arrangement creates a fiduciary relationship (a relationship of trust and confidence) in which the agent has the duty to act primarily for the principal’s benefit. For example, a fiduciary relationship exists between the client (the principal) and an attorney (the agent); or the owner of a piece of property (the principal) and a rental or sales agent (the agent).

Each state enacts its own laws concerning agency, many of which are similar in scope and import. However, some differences do exist. The application of agency law is especially important for U.S. interests doing business in other countries. Numerous American businesses are entering international markets through joint ventures or foreign direct investment activities. To avoid problems that arise from language differences and unfamiliarity with foreign laws and customs, many U.S. companies hire agents who are knowledgeable in these matters resulting in smoother operation of the business in the foreign market.

Creating The Agency Relationship

The extent of the authority in an agency relationship may be governed by an express agreement between the parties or may be implied from the circumstances of the agency. Like any contractual relationship, an agency relationship can only be created for a legal purpose. Further, the formation of an agency must meet two requirements: The principal must not be a minor or be incompetent; likewise, the agent cannot be a minor or be incompetent. If these basic requirements are met, an agency relationship may be created in any of four ways: 1) by agreement; 2) by implied authority; 3) by estoppel (called apparent agency) or 4) by ratification. The agency contract is not required to be found in writing, unless a provision of the Statute of Frauds stipulates that the contract must be written—for example, a real estate broker’s contract to sell real property. The contract need not follow any special format, or even involve payment to the agent.

Agency By Agreement

The relationship that is created pursuant to a written or oral contract is termed an agency by agreement or an express agency, under which the principal gives the agent the authority to act on his or her behalf. If the principal does not hire an additional party to carry out the same or similar duties, the principal and agent have formed an exclusive agency contract.

A specific legal document, called a power of attorney, gives an agent the power to sign legal documents on behalf of the principal. A power of attorney creates an agency relationship. A power of attorney may be general or special. A general power of attorney is very broad in the authority it gives to the agent. A special power of attorney gives an agent limited powers to act in specific ways for specific purposes or for a specified period of time as enumerated in the document creating the agency relationship. The agent is called an attorney-in-fact, although the agent does not have to be an attorney.

A special type of a power of attorney, called a “medical power of attorney” or “advance directive,” is commonly used in relation to health care matters. If the principal is unable to make health-related decisions, the agent will have the legal power to act on his or her behalf.

Agency By Implied Authority

An agency relationship can also be created by the conduct of the parties, similar to the creation of an implied-in-fact contract. The specific circumstances surrounding the relationship determine the extent to which an agent may conduct business on behalf of the principal. In general, an agency by implied authority may not conflict with an agency by agreement. Courts will permit an agent to receive payments owed to the principal, hire and discharge employees, buy equipment and supplies, and enter into contracts. Case law demonstrates how far various courts will allow implied authority to stretch. If the express agency does not provide sufficient details to cover the many contingencies that might arise during the course of the agency relationship, the agent is said to possess certain implied authority to act on behalf of the principal. This implied authority is referred to as incidental authority. In addition, under certain circumstances where the agent is unable to contact the principal for specific instructions, the agent has implied emergency authority to take “all reasonable actions to protect the principal’s property and rights.”

Case Study

Helene A. Gordon Et Al, v. Andrew Tobias

Supreme Court Of Connecticut, 262 CONN. 844; 817 A.2D 683 (2003)

Overview:

Plaintiff landowners filed an action to quiet title on the subject property in their favor. The Superior Court in the Judicial District of New Haven (Connecticut) entered judgment for the landowners after finding that payments made to the original mortgagee on the property constituted payment to defendant assignee, and consequently discharged the landowners’ obligation under the mortgage. The assignee appealed.

The landowners purchased a condominium subject to a mortgage in favor of the original mortgagee. The mortgage was later assigned, but the landowners continued to make payments to the original mortgagee. The original mortgagee received full payment from the landowners but continued to make periodic payments to the assignee until the original mortgagee’s president died, after which the assignee refused to release the mortgage. On appeal, the assignee claimed that there was insufficient evidence in the record to support the trial court’s finding that the original mortgagee was an agent of the assignee for the purposes of collecting payments on the mortgage that he held on the subject property. The supreme court held that the trial court properly found that the mortgagee had apparent authority to collect the mortgage payment due on the mortgage held by the assignee. The assignee collected payments for more than two years knowing that the loan had matured, yet he neither objected to nor demanded full payment on the amount due. Rather, the assignee requested invocation of a higher interest rate to provide the landowners incentive to pay off the loan. 

Outcome:

The trial court’s judgment was affirmed.

Regarding whether the agency relationship that was created was an implied agency, the court stated, “Implied authority is actual authority circumstantially proved. It is the authority which the principal intended his agent to possess. . . Implied authority is a fact to be proven by deductions or inferences from the manifestations of consent of the principal and from the acts of the principal and [the] agent.” Connecticut National Bank v. Giacomi, 242 Conn. 17, 70, 699 A.2d 101 (1997). The court found that the defendant had authorized Mutual to collect monthly payments on the note secured by the mortgage on the plaintiffs’ property and remit those payments to him. The court stated, “Apparent authority is that semblance of authority which a principal, through his own acts or inadvertences, causes or allows third persons to believe his agent possesses. . . Consequently, apparent authority is to be determined, not by the agent’s own acts, but by the acts of the agent’s principal. . . The issue of apparent authority is one of fact to be determined based on two criteria. . . First, it must appear from the principal’s conduct that the principal held the agent out as possessing sufficient authority to embrace the act in question, or knowingly permitted [the agent] to act as having such authority. . . Second, the party dealing with the agent must have, acting in good faith, reasonably believed, under all the circumstances, that the agent had the necessary authority to bind the principal to the agent’s action” Tomlinson v. Board of Education, 226 Conn. 704, 734-35, 629 A.2d 333 (1993).

Agency By Estoppel (Apparent Agency)

Agency by estoppel or apparent agency arises when the principal creates the “appearance of an agency” that in actuality does not exist in fact. When an apparent agency is created, the principal will be estopped from denying the existence of the agency relationship and will be bound to any contracts entered by the apparent agent while acting within the scope of the apparent agency.

Case Study

Robert M. Bailey v. Richard Worton D/B/A Worton Asphalt & Paving

752 SO.2D 470 (2000)

Procedural Posture:

Appellant developer appealed from ruling of the DeSoto County (Mississippi) Chancery Court deeming appellee’s construction lien enforceable against appellant on grounds appellant’s agent had the apparent authority to act for appellant in dealings with appellee.

Overview:

Appellant developer, Bailey, hired general contractor Ray and Associates to build and sell a house on appellant’s property (with the proceeds divided between them); in the course of building the house, the contractor hired appellee, Worton – an asphalt company – to pave the driveway. When financial problems resulted in the contractor being unable to pay appellee for services rendered, appellee (Worton) sought and was granted a construction lien on appellant’s property. Appellant objected, arguing he had not entered into any agreement with appellee, but to no avail in trial court. On appeal, the state intermediate appellate court affirmed; the court reasoned that application of three-prong test for an agent’s apparent authority – acts or conduct of the principal indicating the agent’s authority, reliance thereon by a third person, and a change of position by the third person to his detriment – showed that contractor, Ray Associates, appeared to be acting on appellant’s behalf, and thus his (Ray’s) contract with appellee bound appellant. 

Outcome:

Judgment affirmed; application of three-prong test governing apparent authority by an agent established that appellant was bound by agent’s agreement with appellee, and thus was liable for payment.

The court noted, looking at the facts in a light most favorable to the decision of the court below, it is not unreasonable to conclude that Worton relied on Ray and no one else because of her apparent authority. So far as third persons are concerned, the apparent powers of an agent are his real powers. The power of an agent to bind his principal is not limited to the authority actually conferred upon the agent, but the principal is bound if the conduct of the principal is such that persons of reasonable prudence, ordinarily familiar with business practices, dealing with the agent might rightfully believe the agent to have the power he assumes to have. The agent’s authority as to those with whom he deals is what it reasonably appears to be. Where the relationship of principal and agent exists, if the principal places his agent in a position where he appears, with reasonable certainty, to be acting for the principal, and his acts are within the apparent scope of his authority, such acts bind the principal. On principles of estoppel, a principal, having clothed an agent with semblance of authority, will not be permitted, after others have been led to act in reliance on appearances thus produce, to deny, to the prejudice of such others, what he has theretofore tacitly affirmed as to the agent’s powers. Where an agent, with the knowledge and consent of his principal, holds himself out as having certain powers and transacts business with a third person, the principal is estopped from denying the authority of the agent. Under Mississippi agency law, a principal is bound by the actions of its agent within the scope of that agent’s real or apparent authority. Finding no error, we affirm the judgment of the chancellor.

Agency By Ratification

In a case where a person misrepresents him or herself to be an agent when in fact he or she is not, and the purported principal later accepts the benefits of or ratifies the unauthorized acts, the principal is said to have ratified the agency relationship. The ratification is tantamount to the principal authorizing the agent’s acts on the principal’s behalf in the first instance. In order for ratification to occur, the principal must have complete knowledge of the agent’s action. In addition, at the time the agent’s unauthorized acts occur, the third party with whom the agent dealt must know of the existence of the principal.

Duties Created by the Agency Relationship

Extensive case law on the subject and the Restatement 3rd of Agency recognize that an agency relationship creates duties, or legal obligations, on the part of both the principal and the agent. If either the principal or the agent breaches the agency agreement, the non-breaching party can sue to enforce these duties, seek monetary damages for breach of the agreement, or seek suitable remedies in a Court of Equity.

Duties Of An Agent To A Principal

An agent owes certain duties to the principal. The duties of the agent to the principal may be set forth in the agency agreement itself or may be implied by law. On the most basic level, the agent has a duty to notify the principal of information that the agent learns from a third party or from another source that will help effect the purposes of the relationship. This is known as the duty of notification.

An agent owes the principal certain duties of performance in which the agent must meet the standards of “reasonable care, skill, competence, and diligence.” An agent who does not perform his or her express duties, or who fails to exercise the standard of care, diligence, and skill, or who acts in a negligent or intentional manner will be liable to the principal for breach of the agency contract.

The primary duty the agent owes the principal arises from the agent’s fiduciary duty to act loyally for the principal’s benefit in all matters connected to the agency relationship and not to act adversely to the interests of the principal.

An agent might breach this duty of loyalty by acting in the following ways:

Undisclosed self-dealing;
Usurping an obligation that belongs to the principal;
Competing with the principal without the consent of the principal during the course of the agency relationship;
Improperly disclosing or misusing confidential information;
Engaging in a dual agency relationship without consent of all parties.

In normal circumstances, the agent owes a duty to the principal to maintain a complete and accurate record of all transactions undertaken on behalf of the principal. This is referred to as the duty of accountability, which encompasses the following:

Keeping records of all property and money received and expended during the course of the agency relationship;
Maintaining a separate account (no commingling) for the principal; and
Using the property of the principal is a manner authorized by the agency contract.

If an agent breaches the agency agreement, the principal may seek monetary damages, including asking a court to impose a constructive trust on any profits the agent earned as a breach of the duty of loyalty. A principal may also seek to rescind a transaction entered into with third parties because of the breach of loyalty by an agent.

Case Summary

Carl Shen v. Leo A. Daly Company

222 F.3D 472 (2000)

Carl Shen, was a former employee and designated agent of Leo A. Daly Company’s (Daly) Republic of China (Taiwan) office. When Daly refused to pay taxes assessed by the Taiwanese government, the government restricted Shen’s travel, forbidding him from leaving the country. Shen then sued Daly on multiple theories of liability for damages and injunctive relief. Shen prevailed in part in the district court. Both he and Daly appeal the judgment. We affirm in part and reverse in part.

BACKGROUND

Shen, a United States citizen with dual Taiwanese citizenship moved to Taiwan in 1989 to become managing director of Daly’s operation there. To conduct business in Taiwan, Daly was required to designate a “responsible person,” or legal representative in the country, and Shen was so designated. In November 1992, Daly decided to withdraw from Taiwan because of business setbacks. As a result, Daly terminated Shen, but Shen chose to remain in Taiwan. Daly, however, failed to remove Shen as its responsible person and failed to inform Shen that he was still registered as the company agent.

In December 1993, Shen received a notice from the Taiwan Tax Authority that it wanted to audit Daly’s 1992 Taiwan tax returns. Shen, in turn, notified Daly’s accounting firm in Taiwan and informed them he was concerned he could be held responsible for any deficiency because his “chop,” the Taiwanese equivalent of a signature, was affixed to the returns. Daly responded that it was “inconceivable” any tax could be owed because Daly had suffered large losses in Taiwan. In January 1994 through mid-October 1995, Shen requested Daly to indemnify him should the Taiwan Tax Authority impose the tax liability on him directly, to resolve the tax dispute and remove him as the responsible person. In May 1994, the Taiwan Tax Authority assessed a tax liability of approximately $80,000 against Daly for 1991 and 1992. Daly did not appeal the assessment, and it became final in June 1995. In October 1995, the Taiwan Ministry of Finance and the Bureau of Entry and Exit forbid Shen from leaving the country until resolution of the Daly tax issue. Daly’s attempt to extricate Shen through diplomatic channels failed. Shen sued for a declaratory judgment in Taiwan to remove himself as Daly’s responsible person. Although the court recognized Shen was no longer an employee of Daly, it denied relief because Daly had not replaced him as the responsible person. The Ministry of Finance also denied an appeal by Shen.

In 1997, Shen sued Daly in the United States District Court for the District of Nebraska. He requested a preliminary injunction to force Daly to pay the taxes. The district court entered such an injunction on December 31, 1997. We assume Daly then paid the taxes because Taiwan lifted the travel restriction. The district court held a bench trial in February 1999 on the issue of a permanent injunction and damages. The district court found a violation of the implied covenant of good faith and fair dealing and granted a permanent injunction. Shen was also awarded attorney’s fees and $4,760 in damages on his contractual claims. Both sides now appeal and we affirm in part and reverse in part.

The district court held that Daly breached the implied covenant of good faith and fair dealing based on the agency relationship between Daly and Shen. We agree. Under Nebraska law, whether a person is an agent is a question of fact. The existence of an agency relationship does not depend on the terminology the parties use to characterize their relationship, but depends on the facts underlying the relationship. An agency relationship can be implied from words, conduct or circumstances that evidence an intent to create on. For example, under agency principles, an agent can be given apparent or ostensible authority to act if the “alleged principal affirmatively, intentionally, or by lack of ordinary care causes third persons to act upon the apparent authority.” That is what happened in this case. After Daly terminated Shen in December 1992, Daly did not remove Shen as its responsible person.

A principal and an agent are in a fiduciary relationship. Because of the fiduciary relationship, the principal owes the agent a duty of good faith and fair dealing in the incidents of their relationship. Moreover, “‘[c]orrelative with the duties of the agent to serve loyally and obediently are the principal’s duties of compensation, indemnity, and protection.’ ” Daly breached its duty as a fiduciary in the following ways: (1) Daly did not pay the tax when it was assessed; (2) it chose not to appeal the assessment through proper channels; and (3) Daly did not find a replacement for Shen as responsible person.

Duties Of A Principal To An Agent

The principal likewise owes duties to an agent arising either from the agency contract or which are implied by law. These duties include:

A duty to cooperate and to deal with the agent fairly and in good faith;
A duty to provide the agent with information about risks of physical harm or pecuniary loss that the principal knows, has reason to know, or should know are present in the agent’s work, but which are unknown to the agent.
A duty to compensate the agent for services provided either according to the terms of the agency contract or, in the absence of an express agreement, a customary fee ordinarily paid, reflecting the reasonable value of the agent’s services based on a theory of quantum meruit;
A duty to reimburse the agent for all expenses, provided they were authorized by the principal, were incurred “within the scope of the agency relationship,” and were necessary to carry out the purpose of the agency relationship;
A duty to indemnify the agent for any losses the agent might suffer because of the actions of the principal.

Principal And Agent – Liability To Third Parties

Liability For Contracts

A major purpose of the agency relationship is to provide a principal with the means to conduct or perhaps expand their business dealings. An agent is authorized to contact third parties on behalf of their principal, enter into contracts on behalf of the principal with third parties, and figuratively put the principal in several places at one time.

While generally a principal who authorizes an agent to enter into a contract with a third party is liable on the contract, the agent may be held liable on the contract under certain circumstances, depending upon whether the agency is classified as fully disclosed, partially disclosed, or undisclosed. The status of the principal will determine the extent of any liability.

A disclosed principal is one whose identity a third party knows at the time he or she enters into an agreement; i.e., the third party knows the agent with whom he or she is dealing is acting on behalf of a known principal. A disclosed principal operates in a fully disclosed agency. In a fully disclosed agency, the contract is between the principal and the third party; thus, the fully disclosed principal and not the agent is liable on the contract unless the agent has guaranteed that the principal will perform on the contract in what is sometimes known as a suretyship.

A partially disclosed principal is an individual whose identity is unknown to the third party at the time an agreement is reached; however, the third party does know the agent is representing some principal. A partially disclosed principal operates in a partially disclosed agency. Under Section 321 of the Restatement (Second) of Agency, in a partially disclosed agency, both the principal and the agent are liable on third-party contracts. In this case, the third party is relying on the reputation, integrity and credit of the agent because the principal is unidentified. If an agent is required to “pay on the contract,” the agent can seek indemnification from the principal.

An undisclosed principal operates in an agency relationship when a third party is unaware of either the existence of the agency or the identity of the principal. An undisclosed principal operates in an undisclosed agency. In an undisclosed agency, both the principal and the agent are liable on the contract with a third party. In essence, by not divulging that he or she is acting as an agent, the agent has become a principal to the contract. The third party is essentially relying exclusively on the reputation and credit of the agent in entering into the contract. However, should an agent be held liable and be required to “pay on the contract,” the agent can seek indemnification from the principal.

Tort Liability

In general, the principal and the agent are each personally liable for their own tortuous conduct. However, a principal may be held liable for the negligent or intentional acts their agent if the actions of the agent are committed within the scope of the agent’s employment under a doctrine known as Respondeat Superior, providing for what is termed as vicarious liability.

The following are factors a court will employ in order to determine whether an agent’s conduct occurred “within the scope of employment”:

Was the act specifically requested or authorized by the principal?
Was the act the kind of act that the agent was employed to perform?
Did the act occur substantially within the time period of employment authorized by the principal?
Did the act take place substantially within the location of employment authorized by the principal?
Was the agent “advancing the principal’s purpose” when the act took place?

In analyzing these factors, Restatement Third of Agency Sec. 7.07 provides the following practical guidelines:

“the extent of control that the agent and the principal have agreed the principal may exercise over details of the work; whether the agent is engaged in a distinct occupation or business; whether the type of work done by the agent is customarily done under a principal’s direction or without supervision; the skill required in the agent’s occupation; whether the agent or the principal supplies the tools and other instrumentalities required for the work and the place in which to perform it; the length of time during which the agent is engaged by a principal; whether the agent is paid by the job or by the time worked; whether the agent’s work is part of the principal’s regular business; whether the principal and the agent believe that they are creating an employment relationship; and whether the principal is or is not in business. Also relevant is the extent of control that the principal has exercised in practice over the details of the agent’s work.”

Example

Joe, a mechanic for ABC Transmissions, owned by Mr. Carville, goes to Bob’s house on behalf of Mr. Carville to pick up Bob’s car and return it to the shop. On the way back to the shop, Joe stops at a bar, has two drinks and then hits another car parked legally in the bar’s parking lot. Bob sues ABC Transmissions and Joe for damages to his car. Are either or both ABC Transmissions and Bob liable?

Example

Joe, while on a sales trip to South Dakota for his employer, ABC Transmission, gets into a car accident when he stops at Mount Rushmore to sightsee. Might either or both ABC Transmissions liable under these circumstances? Might a court apply what is known as the “frolic and detour” doctrine to determine liability?

Criminal Liability

A principal is not generally liable for the criminal conduct of an agent for such crimes as murder, robbery, bribery, etc. It may be too difficult or even impossible to prove the requisite intent (“mens rea”) on the part of a principal. Several exceptions exist. If a principal participates directly in an agent’s crime, or if a principal knows or has reason to know his agent or employee is violating a law, the principal may incur criminal liability as an abettor to the criminal activity. Several environmental statutes or actions under the Foreign Corrupt Practices Act have provided for the criminal responsibility of “responsible parties” under limited circumstances as a matter of public policy.

Termination Of An Agency Relationship

The agency relationship may end in two ways, by agreement or by operation of law.

Termination by Agreement

Either a principal or an agent may terminate the agency relationship. Termination may occur mutually by agreement; upon notice by either the principal or the agent to the other party; upon expiration (lapse) of the time period stated in the agency agreement time; or upon completion of the purpose of the agency relationship. When the relationship is terminated, the principal should provide actual notice to all third parties who dealt with the agent that the termination has occurred. Constructive notice may be provided to other parties by placing appropriate advertisements in publications located where the agency relationship operated; or otherwise providing notice to “the world” that the agency relationship was terminated by appropriate means.

Termination By Operation Of Law

An agency relationship may also be terminated by operation of law. Circumstances include the death of either the principal or agent; insanity of either the principal or the agent; bankruptcy of the principal; impossibility of performance of the agency relationship (such as through a change in the law; absence of qualification through a failure to obtain a regulatory-type license required to perform duties or the revocation of a required regulatory license; or the loss or destruction of the subject matter of the relationship); and the outbreak of war, where the principal or agent is located in a nation at war and where the agent’s country terminates the agency relationship between the parties.

Certain types of agency relationships created for the benefit of an agent are termed “an agency coupled with an interest.” An “agency coupled with an interest” typically occurs in a security interest to secure a loan. The principal may not legally terminate the agency relationship during the term of the agency relationship without the consent of the agent if the agent has provided the security (funding) to effectuate the loan. Should the principal terminate the agency unlawfully, the principal may be required to pay damages to an agent that has been wrongfully terminated.

Ethical Considerations

Limiting Compensation

In the arena of sports, agents are often limited in their compensation to an amount determined by the League’s collective bargaining agreement. At the same time, a lawyer’s compensation may be four to five times higher. Should a collective bargaining agreement between players and their sports league have the ability to limit the compensation of a sports agent who is not a party to that agreement?

Dancing

Maria Aripova runs a dance studio and frequently acts as an agent for booking recitals in the field of modern dance. She has two “up-and-coming” dancers in her studio. Should Maria be permitted to represent both dancers at the same time even though their interest may be quite different and even adverse on occasion? Upon what showing?

Questions

How is an agency relationship created?
Explain the legal principle of agency by estoppel.
What are the duties of a principal to an agent? An agent to a principal?
Under what circumstances might an agent be liable to a third party?
What is the difference between a disclosed and undisclosed principal?
Describe how an agency relationship may terminate or be terminated?
Give an example of an “agency coupled with an interest.”
Research Questions
What is an independent contractor?
What is CERCLA?
What are the two most important aspects of the Foreign Corrupt Practices Act?