Chapter 2: Agency Law

Learning Objectives

1. Analyze how agency relationships arise from consent, conduct, and control, and why the doctrinal test is not limited to formal agreements.

2. Distinguish actual, implied, and apparent authority as independent bases for principal liability in contract.

3. Evaluate the agent's duty of loyalty, including the disgorgement remedy, and how that duty survives conflicting personal interests.

4. Apply the respondeat superior doctrine to determine employer liability for employee torts within and at the margins of the scope of employment.

5. Compare the treatment of franchise relationships under vicarious liability doctrine and explain why the control test is applied contextually.

Chapter 1 established four fundamental problems that business law must solve: attribution, governance, risk, and partitioning. Agency law is where those problems appear for the first time in their most basic form. Before there is a corporation, a partnership, or an operating agreement, there is a person acting on behalf of another. Agency law governs that relationship.

The agency relationship is the building block of every business form studied in later chapters. Partners act as agents for their co-partners. Corporate officers act as agents for the board. Investment bankers, lawyers, and brokers act as agents for their clients. Understanding when that relationship exists, what authority it creates, and what duties it imposes is foundational to everything that follows.

Zeeva's firm began in the simplest possible way: a conversation with her former classmate Sammy about splitting the work and the revenue on a construction project. Before either of them retained a lawyer or filed a document, Zeeva authorized Sammy to sign contracts with suppliers on their joint account. She was already a principal. Sammy was already an agent. The legal consequences of that arrangement were set in motion by nothing more formal than mutual consent. This chapter explains what those consequences were.

The chapter proceeds through five topics: the formation of the agency relationship, the scope of an agent's authority, the agent's duties to the principal, the agent's personal liability in contract, and the principal's vicarious liability for the agent's torts. Each section is anchored by at least one case that demonstrates how the doctrinal rules operate in practice.

The Nature and Formation of Agency

The Restatement (Third) of Agency defines agency as the fiduciary relationship that results from the manifestation of consent by one person to another that the other shall act on the person's behalf and subject to the person's control, and the other's consent to act. Three elements are critical: consent by the principal, consent by the agent to act on the principal's behalf, and the principal's right to control the agent's conduct. No formal agreement is required. No consideration is required. The relationship arises from conduct.

The control element is the one that most often generates litigation. Principals frequently deny that a control relationship existed when doing so would shift liability. Courts look past contractual disclaimers to the actual pattern of conduct. The following case is the leading authority on that analysis.

At what point did Cargill's actions transform an ordinary lender-borrower arrangement into the 'de facto control' that courts have held sufficient to create an agency relationship? Which item in the court's nine-factor list do you consider most significant, and why?

A. Gay Jenson Farms Co. v. Cargill, Inc.
309 N.W.2d 285 (Minn. 1981)

1. PETERSON, Justice.

1. Plaintiffs, 86 individual, partnership or corporate farmers, brought this action against defendant Cargill, Inc. (Cargill) and defendant Warren Grain & Seed Co. (Warren) to recover losses sustained when Warren defaulted on the contracts made with plaintiffs for the sale of grain. After a trial by jury, judgment was entered in favor of plaintiffs, and Cargill brought this appeal. We affirm.

1. This case arose out of the financial collapse of defendant Warren Seed & Grain Co., and its failure to satisfy its indebtedness to plaintiffs. . . Warren operated a grain elevator and as a result was involved in the purchase of cash or market grain from local farmers. The cash grain would be resold through the Minneapolis Grain Exchange or to the terminal grain companies directly. Warren also stored grain for farmers and sold chemicals, fertilizer and steel storage bins. In addition, it operated a seed business which involved buying seed grain from farmers, processing it and reselling it for seed to farmers and local elevators.

2. Warren and Cargill thereafter entered into a security agreement which provided that Cargill would loan money for working capital to Warren on “open account” financing up to a stated limit, which was originally set as $175,000.¹ Under this contract, Warren would receive funds and pay its expenses by issuing drafts drawn on Cargill through Minneapolis banks. The drafts were imprinted with both Warren’s and Cargill’s names. Proceeds from Warren’s sales would be deposited with Cargill and credited to its account. In return for this financing, Warren appointed Cargill as its grain agent for transaction with the Commodity Credit Corporation. Cargill was also given a right of first refusal to purchase market grain sold by Warren to the terminal market.

3. In addition, the agreement provided that Warren was not to make capital improvements or repairs in excess of $5,000 without Cargill’s prior consent. Further, it was not to become liable as guarantor on another’s indebtedness, or encumber its assets except with Cargill’s permission. Consent by Cargill was required before Warren would be allowed to declare a dividend or sell and purchase stock.

4. The major issue in this case is whether Cargill, by its course of dealing with Warren, became liable as a principal on contracts made by Warren with plaintiffs. Cargill contends that no agency relationship was established with Warren. . . However, we conclude that Cargill, by its control and influence over Warren, became a principal with liability for the transactions entered into by its agent Warren.

5. Agency is the fiduciary relationship that results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act. In order to create an agency there must be an agreement, but not necessarily a contract between the parties. An agreement may result in the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequences of the relation to follow. The existence of the agency may be proved by circumstantial evidence which shows a course of dealing between the two parties. When an agency relationship is to be proven by circumstantial evidence, the principal must be shown to have consented to the agency since one cannot be the agent of another except by consent of the latter.

6. Cargill contends that the prerequisites of an agency relationship did not exist because Cargill never consented to the agency, Warren did not act on behalf of Cargill, and Cargill did not exercise control over Warren. We hold that all three elements of agency could be found in the particular circumstances of this case. By directing Warren to implement its recommendations, Cargill manifested its consent that Warren would be its agent. Warren acted on Cargill’s behalf in procuring grain for Cargill as the part of its normal operations which were totally financed by Cargill. Further, an agency relationship was established by Cargill’s interference with the internal affairs of Warren, which constituted de facto control of the elevator.

7. A creditor who assumes control of his debtor’s business may become liable as principal for the acts of the debtor in connection with the business. Restatement (Second) of Agency § 14O (1958). It is noted in comment a to section 14O that:

A security holder who merely exercises a veto power over the business acts of his debtor by preventing purchases or sales above specified amounts does not thereby become a principal. However, if he takes over the management of the debtor’s business either in person or through an agent, and directs what contracts may or may not be made, he becomes a principal, liable as a principal for the obligations incurred thereafter in the normal course of business by the debtor who has now become his general agent. The point at which the creditor becomes a principal is that at which he assumes de facto control over the conduct of his debtor, whatever the terms of the formal contract with his debtor may be.

1. A number of factors indicate Cargill’s control over Warren, including the following:

1. Cargill’s constant recommendations to Warren by telephone;

2. Cargill’s right of first refusal on grain;

3. Warren’s inability to enter into mortgages, to purchase stock or to pay dividends without Cargill’s approval;

4. Cargill’s right of entry onto Warren’s premises to carry on periodic checks and audits;

5. Cargill’s correspondence and criticism regarding Warren’s finances, officers salaries and inventory;

6. Cargill’s determination that Warren needed “strong paternal guidance”;

7. Provision of drafts and forms to Warren upon which Cargill’s name was imprinted;

8. Financing of all Warren’s purchases of grain and operating expenses; and

9. Cargill’s power to discontinue the financing of Warren’s operations.

1. We recognize that some of these elements, as Cargill contends, are found in an ordinary debtor-creditor relationship. However, these factors cannot be considered in isolation, but, rather, they must be viewed in light of all the circumstances surrounding Cargill’s aggressive financing of Warren.

2. The amici curiae assert that, if the jury verdict is upheld, firms and banks which have provided business loans to county elevators will decline to make further loans. The decision in this case should give no cause for such concern. We deal here with a business enterprise markedly different from an ordinary bank financing, since Cargill was an active participant in Warren’s operations rather than simply a financier. Cargill’s course of dealing with Warren was, by its own admission, a paternalistic relationship in which Cargill made the key economic decisions and kept Warren in existence.

3. Although considerable interest was paid by Warren on the loan, the reason for Cargill’s financing of Warren was not to make money as a lender but, rather, to establish a source of market grain for its business. As one Cargill manager noted, “We were staying in there because we wanted the grain.” For this reason, Cargill was willing to extend the credit line far beyond the amount originally allocated to Warren. It is noteworthy that Cargill was receiving significant amounts of grain and that, notwithstanding the risk that was recognized by Cargill, the operation was considered profitable.

4. On the whole, there was a unique fabric in the relationship between Cargill and Warren which varies from that found in normal debtor-creditor situations. We conclude that, on the facts of this case, there was sufficient evidence from which the jury could find that Cargill was the principal of Warren within the definitions of agency set forth in Restatement (Second) of Agency §§ 1 and 14O. . .

5. Affirmed.

________________________________________________________

Notes and Questions

1. The Restatement identifies control as the key element distinguishing agency from other service relationships. In Cargill, the court catalogued nine specific indicia of control. Which indicia are present in an ordinary secured lending relationship, and which pushed Cargill's conduct beyond that baseline? Does the court's reasoning give adequate guidance to lenders who want to protect their collateral without becoming principals?

2. Cargill's brief argued that holding a sophisticated lender liable as a principal would chill agricultural credit markets. The court rejected this concern on the facts but acknowledged its theoretical force. Is the court's response adequate? Consider what contractual provisions Cargill could have included in its security agreement to avoid this outcome.

3. The Restatement (Third) of Agency eliminates 'inherent authority' as a separate category and collapses most of its prior function into the apparent authority doctrine. What problem was inherent authority designed to solve? Does the apparent authority doctrine solve that problem as effectively?

Authority of Agents

Authority is the legal basis on which a principal becomes bound by an agent's act. Three forms matter for most purposes. Actual authority arises from the principal's express or implied communication to the agent. Apparent authority arises from the principal's communication to a third party that leads the third party reasonably to believe the agent is authorized. The distinction matters because the two forms protect different parties: actual authority protects the agent; apparent authority protects third parties who deal in good faith.

Actual and Implied Authority

Actual authority is express when the principal states it explicitly. It is implied when it is necessary or reasonable to infer from the principal's conduct and the surrounding circumstances. Implied authority fills gaps in express authorizations: an agent authorized to manage a business has implied authority to do what managers of such businesses customarily do, even without specific instruction.

What circumstances should a court consider in determining whether a party's past course of dealing with a principal created implied authority to engage in a specific act on the principal's behalf? Is the result in Mill Street consistent with a reasonable allocation of risk?

Mill St. Church of Christ v. Hogan
785 S.W.2d 263 (Ky. Ct. App. 1990)

HOWARD, Judge.

1. Mill Street Church of Christ and State Automobile Mutual Insurance Company petition for review of a decision of the New Workers’ Compensation Board [hereinafter “New Board”] which had reversed an earlier decision by the Old Workers’ Compensation Board [hereinafter “Old Board”]. The Old Board had ruled that Samuel J. Hogan was not an employee of the Mill Street Church of Christ and was not entitled to any workers’ compensation benefits. The New Board reversed and ruled that Samuel Hogan was an employee of the church.

1. Samuel Hogan filed a claim for workers’ compensation benefits for an injury he received while painting the interior of the Mill Street Church of Christ on December 15, 1986. In 1986, the Elders of the Mill Street Church of Christ decided to hire church member, Bill Hogan, to paint the church building. The Elders decided that another church member, Gary Petty, would be hired to assist if any assistance was needed. In the past, the church had hired Bill Hogan for similar jobs, and he had been allowed to hire his brother, Sam Hogan, the respondent, as a helper. Sam Hogan had earlier been a member of the church but was no longer a member. The church at the time the painting project was undertaken, had switched to an Elder form of church government. At the time Bill Hogan was employed for other projects, the church operated under a congregational form of church government.²

2.  Dr. David Waggoner, an Elder of the church, soon contacted Bill Hogan, and he accepted the job and began work. Apparently Waggoner made no mention to Bill Hogan of hiring a helper at that time. Bill Hogan painted the church by himself until he reached the baptistry portion of the church. This was a very high, difficult portion of the church to paint, and he decided that he needed help. After Bill Hogan had reached this point in his work, he discussed the matter of a helper with Dr. Waggoner at his office. According to both Dr. Waggoner and Hogan, they discussed the possibility of hiring Gary Petty to help Hogan. None of the evidence indicates that Hogan was told that he had to hire Petty. In fact, Dr. Waggoner apparently told Hogan that Petty was difficult to reach. That was basically all the discussion that these two individuals had concerning hiring a helper. None of the other Elders discussed the matter with Bill Hogan.

3.  On December 14, 1986, Bill Hogan approached his brother, Sam, about helping him complete the job. Bill Hogan told Sam the details of the job, including the pay, and Sam accepted the job. On December 15, 1986, Sam began working. A half hour after he began, he climbed the ladder to paint a ceiling corner, and a leg of the ladder broke. Sam fell to the floor and broke his left arm. Sam was taken to the Grayson County Hospital Emergency Room where he was treated. He later was under the care of Dr. James Klinert, a surgeon in Louisville. The church Elders did not know that Bill Hogan had approached Sam Hogan to work as a helper until after the accident occurred.

4.  After the accident, Bill Hogan reported the accident and resulting injury to Charles Payne, a church Elder and treasurer. Payne stated in a deposition that he told Bill Hogan that the church had insurance. At this time, Bill Hogan told Payne the total number of hours worked which included a half hour that Sam Hogan had worked prior to the accident. Payne issued Bill Hogan a check for all of these hours. Further, Bill Hogan did not have to use his own tools and materials in the project. The church supplied the tools, materials, and supplies necessary to complete the project. Bill purchased needed items from Dunn’s Hardware Store and charged them to the church’s account.

5. As part of their argument, petitioners argue the New Board also erred in finding that Bill Hogan possessed implied authority as an agent to hire Sam Hogan. Petitioners contend there was neither implied nor apparent authority in the case at bar.

6. It is important to distinguish implied and apparent authority before proceeding further. Implied authority is actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated. Apparent authority on the other hand is not actual authority but is the authority the agent is held out by the principal as possessing. It is a matter of appearances on which third parties come to rely.

7. Petitioners attack the New Board’s findings concerning implied authority. In examining whether implied authority exists, it is important to focus upon the agent’s understanding of his authority. It must be determined whether the agent reasonably believes because of present or past conduct of the principal that the principal wishes him to act in a certain way or to have certain authority. The nature of the task or job may be another factor to consider. Implied authority may be necessary in order to implement the express authority. The existence of prior similar practices is one of the most important factors. Specific conduct by the principal in the past permitting the agent to exercise similar powers is crucial.

8. . . . Bill Hogan had implied authority to hire Sam Hogan as his helper. First, in the past the church had allowed Bill Hogan to hire his brother or other persons whenever he needed assistance on a project. Even though the Board of Elders discussed a different arrangement this time, no mention of this discussion was ever made to Bill or Sam Hogan. In fact, the discussion between Bill Hogan and Church Elder Dr. Waggoner, indicated that Gary Petty would be difficult to reach and Bill Hogan could hire whomever he pleased. Further, Bill Hogan needed to hire an assistant to complete the job for which he had been hired. The interior of the church simply could not be painted by one person. Maintaining a safe and attractive place of worship clearly is part of the church’s function, and one for which it would designate an agent to ensure that the building is properly painted and maintained.

9. Finally, in this case, Sam Hogan believed that Bill Hogan had the authority to hire him as had been the practice in the past. To now claim that Bill Hogan could not hire Sam Hogan as an assistant, especially when Bill Hogan had never been told this fact, would be very unfair to Sam Hogan. Sam Hogan relied on Bill Hogan’s representation. The church treasurer in this case even paid Bill Hogan for the half hour of work that Sam Hogan had completed prior to the accident. Considering the above facts, we find that Sam Hogan was within the employment of the Mill Street Church of Christ at the time he was injured.

10. The decision of the New Workers’ Compensation Board is affirmed. . .

________________________________________________________

Apparent Authority and Actual Authority: The Lawyer's Settlement

Apparent authority turns on reasonable reliance. A third party who deals with an agent relies on the principal's representations about the scope of that agent's authority. When the principal's conduct would lead a reasonable person in the third party's position to believe the agent has authority, the principal is bound even if actual authority was absent or exceeded. The question is not what the agent believed but what the third party was reasonably justified in believing based on the principal's conduct.

Dweck v. Nasser illustrates all three forms of authority in a single transaction: an attorney's authority to bind his client to a litigation settlement. The case is also a useful introduction to how authority questions arise in the context of ongoing professional relationships, where the lines between express instruction, past practice, and client understanding can blur.

Which words or conduct by Nasser most strongly supported a finding of actual express authority for Shiboleth to settle? Which facts supported implied authority? What additional facts would you need to establish apparent authority if actual and implied authority were both unavailable?

Dweck v. Nasser
959 A.2d 29 (Del. Ch. 2008)

LAMB, Vice Chancellor.

1. Plaintiff Gila Dweck formerly served as president, chief executive officer, and as a member of the board of directors of Kids International, Inc; the corporation at the center of the underlying dispute between the parties. Dweck is a 30% stockholder in Kids. Defendant Alberto Nasser Missri (“Nasser”) is a Spanish citizen who resides in Geneva, Switzerland. Nasser is the chairman of the board of directors of Kids and controls 52.5% of its equity. Defendant Kids is a Delaware corporation with its principal place of business in New York, New York.

1. The dispute between the parties surfaced in January 2005, when Nasser discovered that Dweck was allegedly operating competing businesses out of Kids’ offices in New York. On March 11, 2005, Nasser removed Dweck as president of Kids and replaced her with his nephew, Itzhak Djemal. The parties discussed a settlement beginning in early 2005, but could not reach an agreement. Due to this impasse, Dweck, on May 18, 2005, filed a complaint in this court challenging Nasser’s termination of her employment at Kids. In response, Nasser promptly filed a motion to dismiss several counts of the complaint, including a claim that Nasser breached his fiduciary duties by replacing Dweck with his allegedly unqualified nephew. On November 23, 2005, this court granted Nasser’s motion, in part, upholding Nasser’s termination of Dweck.

2. Significantly, Nasser also told Heyman that he had directed Shiboleth “to get it done,” which Heyman understood to mean settle the litigation. Before this conversation, Heyman had spoken with Shiboleth who related a substantially similar conversation with Nasser and told Heyman that Nasser had directed him to settle the dispute. . .

3. Nasser also rejected Shiboleth’s authority to enter into the settlement, telling Heyman “that it was never his intention to give up the right to review and approve the agreement just as Ms. Dweck had refused to sign before, he could refuse to sign now.” Heyman informed Nasser that he believed Shiboleth had been given the authority to enter into the settlement, but Nasser disagreed.

4. [P]laintiffs claim that Nasser granted Shiboleth the authority necessary to enter into the settlement agreement on his behalf, and that Shiboleth expressly agreed to the settlement. First, even though Shiboleth was not Nasser’s attorney of record, Nasser’s long-standing relationship with Shiboleth warrants a presumption that his acceptance was binding. Alternatively, the plaintiffs claim Nasser is bound by Shiboleth’s acceptance under agency principles. The plaintiffs cite Nasser’s instructions to Shiboleth, including those made in front of Dweck’s family members, as well as Shiboleth’s history of settling disputes for Nasser. . .

5. The defendants argue that, while Nasser permitted Shiboleth to conduct the negotiations and Shiboleth agreed to the settlement, he did not have the authority to bind Nasser to an agreement. The defendants further argue that Shiboleth was unfit to conduct such negotiations or enter into a settlement because of his prior representation of Dweck, Dweck’s family members, and Kids.

A. Nasser Is Bound To The Settlement Agreement

1. ”[A]n attorney of record in a pending action who agrees to the settlement of [a] case is presumed to have lawful authority to make such an agreement.” Heyman testified that while he understood that Shiboleth was actually authorized to enter into the settlement, he understood that he was not vested with that authority. For that reason Heyman testified that he tried “very hard” not to demonstrate an acceptance of the settlement to Wachtel. While it is possible that Heyman’s words and actions amounted to a binding expression of acceptance, the court finds it unnecessary to consider that issue since both Shiboleth’s authority to settle and his manifestation of acceptance are so clear.

2. “Agency is defined as ‘the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.’” “It is well settled that questions of agency are not subject to absolute rules but, rather, turn on the facts of the individual case.”

3. In the normal course of business dealing, there are three separate sources of an agency relationship. First, actual authority is expressly granted authority either orally or in writing. Second, implied authority is a derivation of actual authority and often means “actual authority either (1) to do what is necessary, usual, and proper to accomplish or perform an agent’s express responsibilities or (2) to act in a manner in which an agent believes the principal wishes the agent to act based on the agent’s reasonable interpretation of the principal’s manifestation in light of the principal’s objectives and other facts known to the agent.” Third, apparent authority “is such power as a principal holds his [a]gent out as possessing or permits him to exercise under such circumstances as to preclude a denial of its existence.” The plaintiffs claim that there is sufficient evidence to support a finding that Shiboleth was vested with all three sources of authority to enter into the settlement.

1. Actual Authority

1. With respect to actual authority, Shiboleth and Heyman testified that Nasser granted Shiboleth authority to settle the litigation. . . Shiboleth testified that he “clearly” had the authority to agree to the settlement “[b]ased on what [he] heard many times from Albert Nasser.” According to Shiboleth, Nasser told him, with regard to signing the settlement agreement, “do what you want or what you understand.” Shiboleth, based on 20 years of representing Nasser and having settled numerous cases for him, understood this to mean that he was “authorized to settle the case.” Shiboleth also testified that he spoke with Nasser after Dweck capitulated on the cap provision and that Nasser was “ecstatic” and willing to settle upon receipt of an executed agreement. While Nasser testified that he never authorized Shiboleth to bind him to a settlement agreement, on direct examination Nasser stated that he instructed Shiboleth that “he can talk in my name” in settling the litigation. In addition, in his February 18 letter, Shiboleth reminded Nasser of his authority and identified seven different occasions when Nasser agreed to the settlement.

2. Nasser also instructed Heyman that Shiboleth had the authority to settle the litigation. As previously noted, Heyman testified that in August 2007 he spoke to Nasser concerning Shiboleth’s settlement authority and Nasser told him that Shibboleth was instructed to “get it done.” Heyman quite reasonably took this to mean Shiboleth was authorized to “settle the case.” . . .

3. . . . Heyman was aware of these purportedly “non-negotiable” terms, yet Nasser did not object to them because he told Heyman and Shiboleth that he would no longer “interpose those issues as objections.” . . .

2. Implied Authority

1. Regardless of Nasser’s purported understanding that he expressly reserved the right to sign off on the settlement agreement, his actions in connection with the settlement negotiations and his course of dealings with Shiboleth over 20 years make clear that Shiboleth had at least implied authority to settle the litigation. As previously noted, implied authority is a form of [actual] authority that can extend the scope of the agency relationship under certain circumstances. More specifically:

[I]mplied authority is authority that the agent reasonably believes he has as a result of the principal’s actions. This may be proved by evidence of acquiescence [of the principal] with knowledge of the agent’s acts, and such knowledge and acquiescence may be shown by evidence of the agent’s course of dealing for so long a period of time that acquiescence may be assumed.

1. Nasser directed Shiboleth to settle the action and permitted him to speak “in his name.” Moreover, he told Shiboleth that he would execute any agreement that Shiboleth and Heyman presented to him. Given this behavior and Shiboleth’s long-standing close personal and business relationship with Nasser, it was reasonable for Shiboleth to assume he was authorized to settle the litigation. At his deposition, Shiboleth testified that he had settled many cases for Nasser in the past and that in those circumstances Nasser would instruct him to:

[D]o what you want. That means settle it in our implied terms. That’s the way we communicate for twenty years. When he tells me to do what you understand or what you want, in terms of settling a case . . . you are . . . authorized to settle the case.

3. Apparent Authority

1. Finally, while such a determination is not necessary to grant the plaintiffs’ motion, Nasser is also likely bound by Shiboleth’s actions based on apparent authority. “‘A principal is bound by an agent’s apparent authority which he knowingly permits the agent to assume of which he holds the agent out as possessing.’” As Shiboleth recounted in his letter to Nasser:

[You] should also remember that you have told not only Michael Goodman, [Dweck’s] husband, but also Isaac and Haim, her brothers and said to me and to [Heyman] at various times that you did not intend to read the Settlement Agreement. You added that when [Heyman] and I will tell you to sign the agreement you shall do so.” . . .

1. For the foregoing reasons the motion to enforce the settlement agreement is GRANTED. . .

________________________________________________________

Estoppel and Apparent Authority in Retail Contexts

The distinction between apparent authority and agency by estoppel is subtle but meaningful. Apparent authority is based on the principal's affirmative representations. Estoppel is based on the principal's failure to act when a duty to act exists. A business owner who permits someone to hold themselves out as an employee and takes no steps to correct the misrepresentation may be estopped from denying the agency relationship, even if no manifestation of authority was ever made.

What obligation does the operator of a retail business have to supervise the sales floor and prevent customers from being deceived by unauthorized persons posing as employees? Should the same rule apply to a law firm, a hospital, or a private club?

Hoddeson v. Koos Bros.
135 A.2d 702 (N.J. Super. Ct. App. Div. 1957)

JAYNE, J.A.D. . .

1. The plaintiff Mrs. Hoddeson was acquainted with the spacious furniture store conducted by the defendant, Koos Bros. . . On a previous observational visit, her eyes had fallen upon certain articles of bedroom furniture which she ardently desired to acquire for her home. . .

1. It was in the forenoon of August 22, 1956 that Mrs. Hoddeson, accompanied by her aunt and four children, happily journeyed from her home in South River to the defendant’s store to attain her objective. Upon entering, she was greeted by a tall man with dark hair frosted at the temples and clad in a light gray suit. He inquired if he could be of assistance, and she informed him specifically of her mission. Whereupon he immediately guided her, her aunt, and the flock to the mirror then on display and priced at $29 which Mrs. Hoddeson identified, and next to the location of the designated bedroom furniture which she had described.

2. Upon confirming her selections the man withdrew from his pocket a small pad or paper upon which he presumably recorded her order and calculated the total purchase price to be $168.50. Mrs. Hoddeson handed to him the $168.50 in cash. He informed her the articles other than those on display were not in stock, and that reproductions would upon notice be delivered to her in September. Alas, she omitted to request from him a receipt for her cash disbursement. The transaction consumed in time a period from 30 to 40 minutes.

3. Mrs. Hoddeson impatiently awaited the delivery of the articles of furniture, but a span of time beyond the assured date of delivery elapsed, which motivated her to inquire of the defendant the cause of the unexpected delay. Sorrowful, indeed, was she to learn from the defendant that its records failed to disclose any such sale to her and any such monetary credit in payment. . .

4. It eventuated that Mrs. Hoddeson and her aunt were subsequently unable positively to recognize among the defendant’s regularly employed salesmen the individual with whom Mrs. Hoddeson had arranged for the purchase. . .

5. As you will at this point surmise, the insistence of the defendant at the trial was that the person who served Mrs. Hoddeson was an impostor deceitfully impersonating a salesman of the defendant without the latter’s knowledge. . .

6. Where a party seeks to impose liability upon an alleged principal on a contract made by an alleged agent, as here, the party must assume the obligation of proving the agency relationship. It is not the burden of the alleged principal to disprove it.

7. Concisely stated, the liability of a principal to third parties for the acts of an agent may be shown by proof disclosing (1) express or real authority which has been definitely granted; (2) implied authority, that is, to do all that is proper, customarily incidental and reasonably appropriate to the exercise of the authority granted; and (3) apparent authority, such as where the principal by words, conduct, or other indicative manifestations has ‘held out’ the person to be his agent.

8. Let us hypothesize for the purposes of our present comments that the acting salesman was not in fact an employee of the defendant, yet he behaved and deported himself during the stated period in the business establishment of the defendant in the manner described by the evidence adduced on behalf of the plaintiffs, would the defendant be immune as a matter of law from liability for the plaintiffs’ loss? The tincture of estoppel that gives color to instances of apparent authority might in the law operate likewise to preclude a defendant’s denial of liability. It matters little whether for immediate purposes we entitle or characterize the principle of law in such cases as ‘agency by estoppel’ or ‘a tortious dereliction of duty owed to an invited customer.’ That which we have in mind are the unique occurrences where solely through the lack of the proprietor’s reasonable surveillance and supervision an impostor falsely impersonates in the place of business an agent or servant of his. Certainly the proprietor’s duty of care and precaution for the safety and security of the customer encompasses more than the diligent observance and removal of banana peels from the aisles. Broadly stated, the duty of the proprietor also encircles the exercise of reasonable care and vigilance to protect the customer from loss occasioned by the deceptions of an apparent salesman. The rule that those who bargain without inquiry with an apparent agent do so at the risk and peril of an absence of the agent’s authority has a patently impracticable application to the customers who patronize our modern department stores. 

9. Our concept of the modern law is that where a proprietor of a place of business by his dereliction of duty enables one who is not his agent conspicuously to act as such and ostensibly to transact the proprietor’s business with a patron in the establishment, the appearances being of such a character as to lead a person of ordinary prudence and circumspection to to believe that the impostor was in truth the proprietor’s agent, in such circumstances the law will not permit the proprietor defensively to avail himself of the impostor’s lack of authority and thus escape liability for the consequential loss thereby sustained by the customer. . .

10. In reversing the judgment under review, the interests of justice seem to us to recommend the allowance of a new trial with the privilege accorded the plaintiffs to reconstruct the architecture of their complaint appropriately to project for determination the justiciable issue to which, in view of the inquisitive object of the present appeal, we have alluded. We do not in the exercise of our modern processes of appellate review permit the formalities of a pleading of themselves to defeat the substantial opportunities of the parties.

11. Reversed and new trial allowed.

________________________________________________________

Notes and Questions

1. The three cases in this section present a spectrum of authority doctrines applied to different settings: workers' compensation, litigation settlement, and retail sales. Identify the distinct source of authority (actual, implied, apparent, or estoppel) in each case. What does the diversity of contexts suggest about the practical significance of these distinctions?

2. In Dweck, the court held Nasser bound on three independent grounds. Is any one of those grounds sufficient on its own? Which ground provides the most durable rule for future cases involving attorney settlement authority?

3. The court in Hoddeson reversed and remanded for a new trial rather than directing judgment for the plaintiff. What additional evidence would Mrs. Hoddeson need to present on remand to prevail on an estoppel theory? What evidence would Koos Bros. present in response?

Duties of Agents

The agency relationship is fiduciary. The agent owes the principal duties of loyalty, care, and disclosure that go beyond the obligations of an arm's-length contracting party. The duty of loyalty is the most important and the most litigated. It requires the agent to act solely in the principal's interest in matters within the scope of the agency, and to subordinate any conflicting personal interest without the principal's informed consent.

The disgorgement remedy is the duty of loyalty's primary enforcement mechanism. An agent who profits from a breach of loyalty must turn over those profits to the principal, regardless of whether the principal suffered any direct loss. The rule is strict because it is designed to deter, not merely to compensate.

Duty of Loyalty: Disgorgement of Secret Profits

What principle requires an agent to surrender profits earned by exploiting a position of trust, even when the principal has suffered no identifiable financial loss? Is this rule too harsh, or does its strictness serve an important deterrent function?

Reading v. Regem
2 KB 268 (1948)

DENNING J.

1. The suppliant joined the army in 1936, and at the beginning of 1944 he was a sergeant in the Royal Army Medical Corps stationed at the general hospital in Cairo, where he was in charge of the medical stores.

1. The suppliant³ had not had any opportunities, in his life as a soldier, of making money, but in March, 1944, there were found standing to his credit at banks in Egypt, several thousands of pounds, and he had more thousands of pounds in notes in his flat. He had also acquired a motor car worth £1,500. The Special Investigation Branch of the army looked into the matter, and he was asked how he came by these moneys. He made a statement, from which it appears that they were paid to him by a man by the name of Manole in these circumstances. A lorry used to arrive loaded with cases, the contents of which were unknown. Then the suppliant, in full uniform, boarded the lorry, and escorted it through Cairo, so that it was able to pass the civilian police without being inspected.[]

2. When it arrived at its destination, it was unloaded, or the contents were transferred to another lorry. After the first occasion when this happened, the suppliant saw Manole in a restaurant in Cairo. Manole handed him an envelope which he put in his pocket. On examining it when he arrived home, he found that it contained £2,000. Two or three weeks later, another load arrived, and another £2,000 was paid. £3,000 was paid after the third load, and so it went on until eventually some £20,000 had gone into the pocket of the suppliant. The services which he rendered for that money were that he accompanied this lorry from one part of Cairo to another, and it is plain that he got it because he was a sergeant in the British army, and, while in uniform, escorted these lorries through Cairo. It is also plain that he was clearly violating his duty in so doing. The military authorities took possession of the money. The money in the bank was taken under a military proclamation then in force, the military governor of the Cairo area ordering the banks to place the money at the disposal of the headquarters of the British Middle East Forces. The money in the suppliant’s flat was taken possession of by the special investigation branch.

3. In this petition of right, the suppliant alleges that these moneys are his and should be returned to him by the Crown. In answer, the Crown say: “These were bribes received by you by reason of your military employment, and you hold the money for the Crown. Even if we were wrong in the way in which we seized them, we are entitled to recover the amount of them, and to set off that amount against any claim you may have.” In these circumstances, it is not necessary to dwell on the form of the claim. The question is whether or not the Crown is entitled to the money. It is not entitled to it simply because it is the Crown—moneys which are unlawfully obtained are not ipso facto forfeited to the Crown. The claim of the Crown rests on the fact that at the material time it was the suppliant’s employer. . .

4. In my judgment, it is a principle of law that, if a servant takes advantage of his service and violates his duty of honestly and good faith to make a profit for himself, in the sense that the assets of which he has control, the facilities which he enjoys, or the position which he occupies, are the real cause of his obtaining the money as distinct from merely affording the opportunity for getting it, that is to say, if they play the predominant part in his obtaining the money, then he is accountable for it to his master. It matters not that the master has not lost any profit nor suffered any damage, nor does it matter that the master could not have done the act himself. If the servant has unjustly enriched himself by virtue of his service without his master’s sanction, the law says that he ought not to be allowed to keep the money, but it shall be taken from him and given to his master, because he got it solely by reason of the position which he occupied as a servant of his master. Instances readily occur to mind. Take the case of the master who tells his servant to exercise his horses, and while the master is away, the servant lets them out and makes a profit by so doing. There is no loss to the master, the horses have been exercised, but the servant must account for the profits he makes.[]

5. The Attorney-General put in argument the case of a uniformed policeman who, at the request of thieves and in return for a bribe, directs traffic away from the site of the crime. Is he to be allowed to keep the money? So, also, here, the use of the facilities provided by the Crown in the shape of the uniform and the use of his position in the army were the only reason why the suppliant was able to get this money. It was solely on that account that he was able to sit in the front of these lorries and give them a safe conduct through Cairo. There was no loss of profit to the Crown. The Crown would have been violating its duty if it had undertaken the task, but the suppliant was certainly violating his duty, and it is money which must be paid over to his master—in this case, the Crown. . .

6. The uniform of the Crown and the position of the suppliant as a servant of the Crown were the only reasons why he was able to get this money, and that is sufficient to make him liable to hand it over to the Crown. The case is to be distinguished from cases where the service merely gives the opportunity of making money. A servant may, during his master’s time, in breach of his contract, do other things to make money for himself, such as gambling, but he is entitled to keep that money himself. The master has a claim for damages for breach of contract, but he has no claim to the money. So, also, the fact that a soldier is stationed in a certain place may give him the opportunity, contrary to the King’s Regulations, of engaging in trade and making money in that way. In such a case, the mere fact that his service gave the opportunity for getting the money would not entitle the Crown to it, but if, as here, the wearing of the King’s uniform and his position as a soldier is the sole cause of his getting the money and he gets it dishonestly, that is an advantage which he is not allowed to keep. Although the Crown, has suffered no loss, the court orders the money to be handed over to the Crown, because the Crown is the only person to whom it can properly be paid. . . He got the money by virtue of his employment, and must hand it over.

7. Petition dismissed with costs.

________________________________________________________

Singer redirected business opportunities away from his employer to himself, collecting commissions that should have gone to General Automotive. How does the court's disgorgement remedy compare to a damages remedy? Is the result fair to Singer given that his employer lacked the capacity to handle the work he redirected?

General Automotive Mfg. Co. v. Singer
120 N.W.2d 659 (Wis. 1963)

1. BROWN, Chief Justice.

1. Action commenced by General Automotive Manufacturing Company, hereinafter referred to as ‘Automotive’, against John Singer, a former employee, to account for secret profits received while in its employ. Trial was to the court without a jury, which found defendant liable to plaintiff for $64,088.08 and costs. Appeal is from that judgment.

1. Automotive, plaintiff-respondent, is a Wisconsin corporation engaged in the machine shop jobbing business and has about five employees. Louis Glavin controlled Automotive and was its secretary.

2. John Singer, defendant-appellant, is a machinist-consultant and manufacturer’s representative. Singer has worked in the machine shop field for over thirty years. He is adept at machine work and had ability not only as a machinist but also as to metal treatment, grinding techniques and special techniques. He enjoys this reputation in machine shop circles. None of Automotive’s employees has defendant’s ability to handle these machines. He is also known to be qualified in estimating the costs of machine-shop products and the competitive prices for which such products can be sold. . .

3. We have carefully reviewed the evidence and have ourselves reached conclusions as stated by the trial court and set forth in its Findings of Fact, as follows:

“8. That in and by said contract, in consideration of compensation to be paid by the plaintiff to the defendant, the defendant promised and agreed:

“A. To devote his entire time, skill, labor and attention to said employment, during the term of this employment, and not to engage in any other business or vocation of a permanent nature during the term of this employment, and to observe working hours for 5 ½ days.

1. Although stated as a Finding of Fact, Finding No. 10 is mainly a conclusion of law. It produces the principal issue in the case and deserves further discussion. It reads:

“10. That the defendant breached his contract of employment with the plaintiff and violated the duty of loyalty which he owed to the plaintiff and his fiduciary duty of general manager thereof during the existence of such employment by engaging in business activities directly competitive with the plaintiff, to-wit by obtaining orders from a customer for his own account.’

1. Study of the record discloses that Singer was engaged as general manager of Automotive’s operations. Among his duties was solicitation and procurement of machine shop work for Automotive. Because of Singer’s high reputation in the trade he was highly successful in attracting orders.

2. As time went on a large volume of business attracted by Singer was offered to Automotive but which Singer decided could not be done by Automotive at all, for lack of suitable equipment, or which Automotive could not do at a competitive price. When Singer determined that such orders were unsuitable for Automotive he neither informed Automotive of these facts nor sent the orders back to the customer. Instead, he made the customer a price, then dealt with another machine shop to do the work at a less price, and retained the difference between the price quoted to the customer and the price for which the work was done. Singer was actually behaving as a broker for his own profit in a field where by contract he had engaged to work only for Automotive. We concur in the decision of the trial court that this was inconsistent with the obligations of a faithful agent or employee.

3. If Singer violated his duty to Automotive by engaging in certain business activities in which he received a secret profit he must account to Automotive for the amounts he illegally received. 

4. The trial court found that Singer’s side line business, the profits of which were $64,088.08, was in direct competition with Automotive. However, Singer argues that in this business he was a manufacturer’s agent or consultant, whereas Automotive was a small manufacturer of automotive parts. The title of an activity does not determine the question whether it was competitive but an examination of the nature of the business must be made. In the present case the conflict of interest between Singer’s business and his position with Automotive arises from the fact that Singer received orders, principally from a third-party called Husco, for the manufacture of parts. As a manufacturer’s consultant he had to see that these orders were filled as inexpensively as possible, but as Automotive’s general manager he could not act adversely to the corporation and serve his own interests. On this issue Singer argues that when Automotive had the shop capacity to fill an order he would award Automotive the job, but he contends that it was in the exercise of his duty as general manager of Automotive to refuse orders which in his opinion Automotive could not or should not fill and in that case he was free to treat the order as his own property. However, this argument ignores, as the trial court said, ‘defendant’s agency with plaintiff and the fiduciary duties of good faith and loyalty arising therefrom.’

5. Rather than to resolve the conflict of interest between his side line business and Automotive’s business in favor of serving and advancing his own personal interests, Singer had the duty to exercise good faith by disclosing to Automotive all the facts regarding this matter. Upon disclosure to Automotive it was in the latter’s discretion to refuse to accept the orders from Husco or to fill them if possible or to sub-job them to other concerns with the consent of Husco if necessary, and the profit, if any, would belong to Automotive. Automotive would then be able also to decide whether to expand its operations, install suitable equipment, or to make further arrangements with Singer or Husco. By failing to disclose all the facts relating to the orders from Husco and by receiving secret profits from these orders, Singer violated his fiduciary duty to act solely for the benefit of Automotive. Therefore he is liable for the amount of the profits he earned in his side line business. . .

6. We conclude that Singer’s independent activities were in competition with Automotive and were in violation of his obligation of fidelity to that corporation, as stated in Finding of Fact No. 10 and Singer must account for his profits so obtained.

7. Judgment modified as stated in the opinion, and as so modified, affirmed.

________________________________________________________

Post-Agency Duties

The duty of loyalty does not end at the moment of termination. An agent who learns of business opportunities or client information while employed may not exploit that information for personal benefit while still an agent, even if the agent is preparing to compete after termination. The line between permissible preparation for future competition and a breach of the ongoing duty of loyalty is frequently litigated.

In Community Counselling Service, Inc. v. Reilly, 317 F.2d 239 (4th Cir. 1963), a professional fundraising firm's regional sales representative cultivated relationships with prospective clients using his employer's resources, then resigned and took those clients with him. The Fourth Circuit held that Reilly had breached his duty of loyalty by soliciting business for himself before his termination, even though the clients' actual campaigns began after he left. The court emphasized that the employment relationship 'demands of the employee the highest duty of loyalty' and that it was 'quite irrelevant that the three parishes may not have been in position to actually commence their campaigns before the effective date of [his] termination.' The breach occurred when Reilly redirected his employer's opportunities to his own future benefit, not when the revenue was ultimately collected.

The rule has practical limits. After termination, a former agent is generally free to compete, to solicit former clients, and to use general skills and knowledge acquired during employment. What the agent may not do is use confidential information, divert ongoing transactions, or exploit relationships cultivated at the principal's expense before the agency ends. Drawing that line in a specific case requires careful analysis of what the agent actually knew and when, and how specifically that knowledge derived from the employment relationship rather than from general professional competence.

Notes and Questions

1. Reading v. Regem presents an unusual set of facts: a military sergeant profiting from a position rather than from any business opportunity. Justice Denning's holding does not require the agent to have competed with the principal or to have diverted any specific business opportunity. What is the principle that underlies the disgorgement remedy in cases where the principal suffered no identifiable loss?

2. In Singer, the Wisconsin Supreme Court ordered disgorgement of Singer's entire side-line profit of $64,088 despite evidence that General Automotive could not have handled much of the redirected business. Is this result justified by the deterrence rationale for the disgorgement remedy? Would a damages remedy limited to the business General Automotive could actually have performed produce a better outcome?

3. The Restatement (Third) of Agency provides that an agent may not act for a competitor without the principal's informed consent. How should a court determine whether consent was 'informed'? What disclosure obligations would Singer have needed to satisfy in order to make his side-line business permissible?

Agent Liability in Contract

As a general rule, an agent who acts within the scope of actual authority and discloses both the existence of the agency and the identity of the principal incurs no personal liability on the resulting contract. The principal is bound; the agent is not. But when the agent fails to disclose the principal's identity, or when the agent acts for an undisclosed principal, the agent becomes personally liable along with the principal.

The disclosure rule imposes on agents a practical obligation: identify the principal clearly before signing. This is not merely a formality. A third party who knows it is dealing with a disclosed agent can evaluate the principal's creditworthiness, seek recourse against the principal if performance fails, and make an informed decision about whether to contract. An undisclosed principal denies the third party that opportunity.

In Treadwell v. J.D. Construction Co., 938 A.2d 794 (Me. 2007), a contractor operated his construction business through a corporation but signed homebuilding contracts using a trade name that did not reflect the corporation's actual name. The Treadwells hired the contractor, the work was abandoned, and they lost over $100,000. The trial court found that the individual contractor was not personally liable because the contract 'specifically provided that Jesse Derr is signing in his capacity as president and agent of the corporation.' The Maine Supreme Court reversed. It held that 'an agent who makes a contract for an undisclosed principal or a partially disclosed principal will be liable as a party to the contract.' The contractor had used a trade name that gave the Treadwells no reason to know that a separate legal entity was involved. His failure to disclose the existence of the corporation made him personally liable alongside it.

The Treadwell rule serves the same function as the apparent authority doctrine operates in reverse: just as principals are bound when their conduct misleads third parties about an agent's authority, agents are bound when their conduct misleads third parties about the existence of a principal. Both rules protect the reasonable expectations of persons who deal in good faith.

Notes and Questions

1. The Treadwell court emphasized that the Treadwells had no way of knowing that JCDER, Inc. was a distinct legal entity. If the contractor had signed the contract 'Jesse Derr, as agent for J.D. Construction Co., Inc.' would the result be the same? What level of disclosure is sufficient to protect the agent from personal liability?

2. The undisclosed-principal rule can produce harsh results for agents who act in good faith on behalf of principals that third parties would have found financially unattractive. Is this an argument for modifying the rule, or does it explain why disclosure is in the agent's interest? How would you advise a newly incorporated small business owner about the risks addressed in Treadwell?

Vicarious Liability in Tort

The doctrine of respondeat superior holds an employer vicariously liable for torts committed by an employee acting within the scope of employment. The employer need not have been negligent. The liability is imposed because the employer sets the conditions under which the employee works, profits from the employee's services, and is better positioned than the injured third party to purchase insurance and to control employee behavior through selection, training, and supervision.

The critical limitation is scope of employment. Not every employee tort occurs within the scope of employment. Courts have developed competing tests for drawing this line. The foreseeability test, adopted in New York and many other jurisdictions, asks whether the employer could reasonably have anticipated that an employee in the relevant position might commit the type of harm that occurred, in the course of the general kind of conduct the employment authorized. The motive test asks whether the employee was acting at least in part to serve the employer's interests at the time of the tort.

Respondeat Superior: The Foreseeability Test

Waldron was a cook who used a pocket knife to injure a bar patron during a personal altercation. In what sense was this tort 'foreseeable' from the employer's perspective? Does the foreseeability standard give employers adequate notice of the scope of their liability?

Riviello v. Waldron
391 N.E.2d 1278 (N.Y. 1979)

FUCHSBERG, Judge.

1. Plaintiff Donald Riviello, a patron of the Pot Belly Pub, a Bronx bar and grill operated by the defendant Raybele Tavern, Inc., lost the use of an eye because of what was found to be negligence on the part of Joseph Waldron, a Raybele employee. The jury having decided for the plaintiff, in due course the trial court entered a judgment in his favor for $200,000 plus costs and interest from the date of the verdict. . . 

1. As was customary, on the Friday evening on which Riviello sustained his injuries, only two employees manned the Pot Belly. One was the bartender. The other was Waldron, who, in this modest-sized tavern, wore several hats, primarily that of short-order cook but also the ones that went with waiting on tables and spelling the bartender. Though his services had been engaged by Raybele’s corporate president in the main to improve business by introducing the sale of food, his testimony showed that the fact that, as a local resident, he was known to most of the customers in this neighborhood bar figured in his hiring as well. There was also proof that, in the time he had been there, when not preparing or serving food or relieving the bartender, he would follow the practice of mingling with the patrons.

2. Applying the pertinent legal precepts to this factual framework, we first note what is hornbook law: the doctrine of Respondeat superior renders a master vicariously liable for a tort committed by his servant while acting within the scope of his employment. . . The definition of “scope of employment”, however, has not been an unchanging one.

3. Originally defined narrowly on the theory that the employer could exercise close control over his employees during the period of their service, as in other tort law contexts, social policy has wrought a measure of relaxation of the traditional confines of the doctrine. . . Among motivating considerations are the escalation of employee-produced injury, concern that the average innocent victim, when relegated to the pursuit of his claim against the employee, most often will face a defendant too impecunious to meet the claim, and that modern economic devices, such as cost accounting and insurance coverage, permit most employers to spread the impact of such costs. . .

4. So no longer is an employer necessarily excused merely because his employees, acting in furtherance of his interests, exhibit human failings and perform negligently or otherwise than in an authorized manner. Instead, the test has come to be “‘whether the act was done while the servant was doing his master’s work, no matter how irregularly, or with what disregard of instructions’”

5. Thus formulated, the rule may appear deceptively simple but, because it depends largely on the facts and circumstances peculiar to each case, it is more simply said than applied. . . For, while clearly intended to cover an act undertaken at the explicit direction of the employer, hardly a debatable proposition, it also encompasses the far more elastic idea of liability for “any act which can fairly and reasonably be deemed to be an ordinary and natural incident or attribute of that act”. . . And, because the determination of whether a particular act was within the scope of the servant’s employment is so heavily dependent on factual considerations, the question is ordinarily one for the jury. . .

6. That is not to say there are no useful guidelines for assessing whether the conduct of a particular employee, overall, falls within the permissible ambit of the employment. Among the factors to be weighed are: the connection between the time, place and occasion for the act; the history of the relationship between employer and employee as spelled out in actual practice; whether the act is one commonly done by such an employee; the extent of departure from normal methods of performance; and whether the specific act was one that the employer could reasonably have anticipated. . .

7. The first of these criteria need not detain us. The Pot Belly was the arena in which Waldron worked, and the evening was the time when he did so. The route from the kitchen where he would hold forth as chef to the patrons in the public room in which he performed his other functions could hardly be claimed to be a physical deviation. As to past employment practices, there was evidence that the friendly relations which Waldron enjoyed with the majority of the pub’s patrons and the expectation that these would be exploited to enhance the popularity of the pub entered into the hiring itself. The implementation of this plan, pursued continuously until the day Riviello was injured, almost of necessity had to depend largely on Waldron’s own personality and his judgment of how different patrons were to be handled. Pertinently, we suggest that, even if the jury had found no express understanding that Waldron would socialize, it could have drawn the inference from the nature of his job that his interaction with those visiting the premises would be a concomitant of the employment.

8. Surely, the fact that Waldron, at the precise instant of the occurrence, was not plying his skills as a cook, waiter or bartender did not take him beyond the range of things commonly done by such an employee. The intermittent demands of his work meant that there would be intervals in which his function was only to stand by awaiting a customer’s order. Indeed, . . . the busiest of employees may be expected to take pauses and, when they do, engage in casual conversation, even punctuated, as here, by the exhibition to others of objects they wear or carry on their persons.

9. We turn to the extent of Waldron’s departure, if it may be so characterized, from the normal methods of his performance, and to whether the specific act of carrying the pocketknife in his hand was one that the employer could reasonably have anticipated. Initially, it bears noting that for an employee to be regarded as acting within the scope of his employment, the employer need not have foreseen the precise act or the exact manner of the injury as long as the general type of conduct may have been reasonably expected . . . As indicated earlier, it suffices that the tortious conduct be a natural incident of the employment. Hence, general rather than specific foreseeability has carried the day even in some cases where employees deviated from their assigned tasks. . . 

10. Indeed, where the element of general foreseeability exists, even intentional tort situations have been found to fall within the scope of employment. . .

11. Given all this, it was permissible to find as a fact that Raybele could have anticipated that in the course of Waldron’s varied activities in the pursuit of his job, he might, through carelessness, do some injury. The specifics of the act, though it was not essential that they be envisaged, could be, as here, the product of an inattentive handling of the pocketknife he had described to Riviello and Bannon, or a similar mishandling of a paring knife he could have had in his hand as he left the kitchen, or perhaps a steak knife with which he was on his way to set a table. Or, perchance, instead of a knife, with equal nonmalevolence it could in similar fashion have been a pen, a comb, a nail file, a pencil, a scissors, a letter opener, a screwdriver or some other everyday object that he was displaying. In any of these cases, an instant of inattention could render each an instrument of injury.

________________________________________________________

Franchise Relationships and the Control Test

Franchise relationships present a recurring challenge for respondeat superior doctrine. A franchisor imposes detailed operational standards on franchisees to protect brand uniformity and quality. A customer injured at a franchise location may argue that those standards are evidence of the control necessary to establish vicarious liability. Courts have generally rejected this argument by distinguishing between standards that control the result of a franchisee's work and standards that control the manner of performance. The former create no vicarious liability; the latter may.

What distinction allows a franchisor to impose detailed standards governing delivery vehicles, driver age limits, and safety procedures without incurring vicarious liability for the franchisee's employee? Where is the line between standardizing a product and controlling the means by which it is delivered?

Rainey v. Langen
998 A.2d 342 (Me. 2010)

JABAR, J. . .

1. On July 25, 2004, while riding his motorcycle, Paul was seriously injured in a collision with a car driven by Edward A. Langen, who was delivering pizza for his employer, TDBO, Inc.⁴ TDBO is a Domino’s Pizza franchisee that operates a Domino’s Pizza franchise store in Gorham.

1. At the time of the accident, the relationship between TDBO and Domino’s Pizza was governed pursuant to a “Standard Franchise Agreement” (Agreement) and “Manager’s Reference Guide” (Guide). The following details of this contractual relationship are undisputed: (1) other than Domino’s Pizza’s right to receive royalties (5.5% of TDBO sales), there is no profit-sharing or loss-sharing and Domino’s Pizza owns no interest in TDBO; (2) the entities share no common officers, directors, employees, or owners; (3) TDBO owns or leases its own equipment, and may “purchase items meeting [Domino’s Pizza’s] specifications from any source”; (4) TDBO maintains its own bank account, possesses its own tax identification number, business license, and operating permit, files separate tax returns, and pays the taxes it incurs as a result of its business operations; (5) TDBO establishes the prices for the products it sells and the wages it pays its employees; (6) Domino’s Pizza does not specify or control the scheduling of TDBO’s employees, except that it requires at least one qualified delivery driver to be present during store hours; and (7) other than mandating certain standards pursuant to the Agreement and Guide, Domino’s Pizza does not hire, fire, train, pay, supervise, or discipline TDBO’s employees. . .

2. The Agreement creates a uniform system of standards to ensure that each franchisee offers products and services that meet minimum criteria. Among the topics covered by the Agreement are food preparation, store location, royalty fees, training, advertising, recordkeeping, and insurance.

3. Regarding the franchise relationship, the Agreement disavows the existence of any agency relationship, and states that “[t]he parties to this Agreement are independent contractors and no training, assistance or supervision which [Domino’s Pizza] may give or offer to [TDBO] shall be deemed to negate such independence or create a legal duty on [Domino’s Pizza’s] part.”

4. Section 12 of the Guide sets forth rules applicable to delivery drivers and delivery vehicles, including: (1) age limits for hiring drivers; (2) minimum motor vehicle record requirements; (3) seat belt usage requirements; (4) radar detector and cell phone usage limitations; and (5) delivery vehicle inspection and maintenance standards. Domino’s Pizza also retains the right to “prescribe from time to time the boundaries beyond which the [franchisee] may not offer delivery service,” and requires that franchisees “strictly comply with all laws, regulations and rules of the road and due care and caution in the operation of delivery vehicles.” As part of its hiring process, TDBO required Langen to complete a “Safe Delivery Program—Review Exam A” and a “Safe Delivery Pledge,” forms that were provided by Domino’s Pizza to TDBO for informational purposes.

5. We are called upon in this case to determine the circumstances in which a franchisor may be held vicariously liable for the negligent acts of an employee of its franchisee. . .

6. Stated generally, vicarious liability is “liability that a supervisory party (such as an employer) bears for the actionable conduct of a subordinate or associate (such as an employee) because of the relationship between the two parties.” Because an employer may be held vicariously liable for the negligence of its employees, but is not usually responsible for the negligence of independent contractors, a prerequisite to imposing vicarious liability is the existence of an employer-employee relationship.

7. In distinguishing between employees and independent contractors, we consider several factors,⁵ the most important of which is the “right to control.” The right to control “includes the rights both to employ and to discharge subordinates and the power to control and direct the details of the work.” On this point, we have emphasized that the right to control the “details of the performance,” which is indicative of an employer-employee relationship, “must be distinguished from the right to control the result to be obtained, usually found in independent contractor relationships.”

8. These principles apply with equal force in the franchisor-franchisee context. With near uniformity, courts apply some version of the “right to control” test in determining whether the imposition of vicarious liability on a franchisor is appropriate. See Miller v. McDonald’s Corp., 945 P.2d 1107, 1110 (Or. Ct. App. 1997) (“The relationship between two business entities is not precisely an employment relationship, but . . . most if not all other courts that have considered the issue . . . [apply] the right to control test for vicarious liability in that context as well.”); In evaluating the requisite level of control, courts commonly distinguish between control over a franchisee’s day-to-day operations and “controls designed primarily to insure ‘uniformity and the standardization of products and services.’” This distinction is consistent with our emphasis on the “power to control and direct the details of the work,” rather than the “result to be obtained.”

9. . . . The traditional test allows a franchisor to regulate the uniformity and the standardization of products and services without risking the imposition of vicarious liability. If a franchisor takes further measures to reserve control over a franchisee’s performance of its day-to-day operations, however, the franchisor is no longer merely protecting its mark, and imposing vicarious liability may be appropriate.

10. Based on our review of the Agreement and Guide, we conclude that, although the quality control requirements and minimum operational standards are numerous, these controls fall short of reserving control over the performance of TDBO’s day-to-day operations. We recognize that the Agreement itself states that Domino’s Pizza and TDBO are “independent contractors.” This declaration is relevant, although the label used by the parties to characterize their relationship is not controlling. . .

11. The Agreement specifies that the supervision and operation of the Gorham franchise store is TDBO’s “sole responsibility” and that “it is not [Domino’s Pizza’s] responsibility or duty” to implement employee training programs. Moreover, though bound by certain mandated minimum requirements, TDBO: (1) determines the wages it pays its employees; (2) determines the scheduling of its employees; and (3) makes all day-to-day decisions concerning hiring, firing, training, supervising, and disciplining its employees. Although Domino’s Pizza retains the right to conduct inspections and terminate the franchise relationship, such conditions do not constitute sufficient control to impose vicarious liability. With respect to the Guide, although the Raineys repeatedly reference sections 6 and 7, these sections specifically state that they are for “informational purposes only.” In deciding whether the terms of a franchise agreement give rise to vicarious liability, “courts typically draw distinctions between recommendations and requirements “ and are reluctant to impose liability based on mere suggestions. The remaining mandatory sections of the Guide, while comprehensive and detailed, do not dictate the precise methods by which TDBO is required to carry out its daily responsibilities.

12. Several other factors are inconsistent with an employer-employee relationship: (1) franchising, by its nature, typically involves the licensing of “independent businessmen to sell the franchisor’s product or service,” 1 Gladys Glickman, Franchising § 2.01; (2) TDBO is responsible for purchasing or leasing its own equipment and supplies; and (3) Domino’s Pizza does not compensate TDBO as its employee; rather, TDBO is paid by its customers and provides Domino’s Pizza with a royalty fee.

13. In the end, the quality, marketing, and operational standards present in the Agreement and Guide do not establish the supervisory control or right of control necessary to impose vicarious liability. Because we conclude that, as a matter of law, Domino’s Pizza did not retain sufficient control over TDBO so as to subject itself to vicarious liability, the court did not err in granting Domino’s Pizza’s motion for partial summary judgment. . .

________________________________________________________

Notes and Questions

1. The New York Court of Appeals in Riviello applied the foreseeability test rather than a strict going-and-coming rule or a motivation test. The concurring judge expressed concern about the 'overbreadth' of the majority opinion. What is the limit of foreseeability-based liability? Could an employer be held liable for any employee tort that occurs on the employer's premises during working hours?

2. Rainey arose from a motorcycle accident caused by a Domino's delivery driver who was an employee of the local franchise owner, not Domino's Pizza LLC. The franchise agreement expressly disclaimed any agency relationship between Domino's and the franchisee. What weight should courts give to such contractual disclaimers? Compare the court's treatment of the disclaimer in Rainey with the Cargill court's treatment of similar contract language.

3. Zeeva's construction firm uses both employees and independent subcontractors. After reading Cargill and Rainey, what level of oversight can she exercise over subcontractors without risking vicarious liability for their employees' torts? Draft two or three provisions for a subcontract agreement that would reduce that risk while preserving ConstructEdge's quality standards.