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Law of Agency : what is Principal- Agent relationship?

This article is written by Wardah Beg , student, Faculty of Law, Aligarh Muslim University.

Introduction: What is Agency?

When one party delegates some authority to another party whereby the latter performs his actions in a more or less independent fashion, on behalf of the first party, the relationship between them is called an agency. Agency can be express or implied. Chapter X of the Indian Contract Act, 1872 deals with the laws relating to Agency. It is important to know the law relating to agency because nearly all business transactions worldwide are carried out through agency. All corporations, big or small, carry their work out through agency. Therefore, laws relating to the agency are an important area of Business Law. Relationships relating to principal and agent involve three main parties: The Principal, the Agent, and a Third Party.

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Who is an Agent?

The Indian Contract Act, 1872 defines an ‘Agent’ in Section 182 as a person employed to do any act for another or to represent another in dealing with third persons.

Who is a Principal?

According to Section 182 , The person for whom such act is done, or who is so represented, is called the “principal”. Therefore, the person who has delegated his authority will be the principal.

Illustrations

A, a businessman, delegates B to buy some goods on his behalf. Here, A is the principal and B is the agent, and the person from whom the goods are bought is the ‘Third Person’.
Joe appoints Mary to deal with his bank transactions. In this case, Joe is the Principal, Mary is the Agent and the Bank is the Third Party.
Lavanya lives in Mumbai, but owns a shop in Delhi. She appoints a person Susan to take care of the dealings of the shop. In this case, Lavanya has delegated her authority to Susan, and she becomes a Principal while Susan becomes an agent.

Who can appoint an Agent?

According to Section 183 , any person who has attained the age of majority and has a sound mind can appoint an agent. In other words, any person capable of contracting can legally appoint an agent. Minors and persons of unsound mind cannot appoint an agent.

Who may be an Agent?

In the same fashion, according to Section 184 , the person who has attained the age of majority and has a sound mind can become an agent. A sound mind and a mature age is a necessity because an agent has to be answerable to the Principal.

Creation of Agency

An agency can be created by:

Direct (express) appointment – The standard form of creating an agency is by direct appointment. When a person, in writing or speech appoints another person as his agent, an agency is created between the two.

Implication – When an agent is not directly appointed but his appointment can be inferred from the circumstances, an agency by implication is created.

Necessity – In a situation of necessity, one person can act on behalf of another to save the person from any loss or damage, without expressly being appointed as an agent. This creates an agency out of necessity.

Estoppel – An agency can also be created by estoppel. In a situation where one person behaves in such a manner in front of a third person, as to make someone believe he is an authorized agent on behalf of someone, an agency by estoppel is created.

Ratification – When an act of a person, who acted as another person’s agent (on his behalf) without his knowledge is later ratified by that person, this creates an agency by ratification between the two.

Types of Agents

Special Agent- Agent appointed to do a singular specific act.
General Agent- Agent appointed to do all acts relating to a specific job.
Sub-Agent-An agent appointed by an agent.
Co-Agent- Agents together appointed to do an act jointly.
Factor- An agent who is remunerated by a commission (one who looks like the apparent owner of the things concerned)
Broker- An agent whose job is to create a contractual relationship between two parties.
Auctioneer- An agent who acts a seller for the Principal in an auction.
Commission Agent- An appointed to buy and sell goods (make the best purchase) for his Principal
Del Credere- An agent who acts as a salesperson, broker and guarantor for the Principal. He guarantees the credit extended to the buyer.

Authority of an Agent

Authority of an agent can be both express or implied.

Express authority

According to Section 187, the authority is said to be express when it is given by words spoken or written.

Implied authority

According to Section 187 , authority is said to be implied when it is to be inferred from the facts and circumstances of the case. In carrying out the work of the Principal, the agent can take any legal action. That is, the agent can do any lawful thing necessary to carry out the work of the Principal.

Implied authority is of four main types

Incidental authority- doing something that is incidental to the due performance of express authority
Usual authority- doing that which is usually done by persons occupying the same position
Customary authority- doing something according to the pre-established customs of a place where the agent acts
Circumstantial authority- doing something according to the circumstances of the case

Illustration

Ali owns a shop in Bihar but lives in Mumbai. His shop is managed by a person named John. John takes care of the deals regarding the shop and buys goods from a person named Ram, with Ali’s knowledge. In this case, John has implied authority from Ali to buy these goods.
Soham employed Abhay, who is a shipbuilder to build ships for him. In doing so, Abhay may legally buy all the material necessary to build the ships.

Chairman L.I.C v. Rajiv Kumar Bhaskar

In this case, as per the salary saving scheme of L.I.C, the employer was supposed to deduct the premium from the employee’s salary and deposit it with L.I.C. Upon the death of the employee, it was found by his heirs that the employer has defaulted in doing so, causing the policy to lapse. A clause in the acceptance letter was referred to, in which the employer had said that he would act as the agent of the employee and not as that of L.I.C. It was held that the employer was acting as the agent of the company, thereby making the company (L.I.C) responsible as a Principal due to the fault of the Agent (the employer).

Agency between Husband and Wife

Generally, there exists no agency between a husband and wife, except in cases where it has expressly or impliedly been sanctioned that either of them would do certain acts or transactions as the agent of the other. That is, a relationship of agency can come into existence between the two through contract, appointment, or ratification. A husband is responsible for necessaries to his wife when they are living apart due to the husband’s fault. This results in an agency of necessity where the wife can use her husband’s credit for what is necessary for her to live. But in cases where they are separated because of the wife’s own whims or faults, for no just reason, the husband is not liable for the wife’s necessaries.

Who is a sub-agent?

An agent may sometimes delegate the duty that has been delegated to him by the Principal to somebody else. Ordinarily, an agent cannot delegate the duty he is supposed to perform himself to another person (delegatus non potest delegare- discussed below), except in particular circumstances where he must, out of necessity, do so. Section 191 of the Indian Contract Act, 1872 defines a sub-agent to be a person employed by and acting under the control of the original agent in the business of the agency.

Delegatus non potest delegare

An agent cannot in ordinary circumstances delegate the duty that was delegated to him. The principle is based upon the idea that when a Principal appoints an agent, he does so by placing his confidence and trust in the agent and might not have similar trust in the work of another person.

Difference between sub-agent and substituted agent

The difference between sub-agent and the substituted agent is very fundamental. When a person, in the capacity of an agent, is asked to name someone for a certain task, the person who is named does not become a sub-agent to the Principal, but a substituted agent.

Sarah asks her solicitor to appoint an auctioneer to sell her antique merchandise. Her solicitor appoints Naaz as an auctioneer. In this case, Naaz is not a sub-agent but is, in fact, a substituted agent for this sale.

Agency by Ratification

A principal may subsequently ratify an act done by a person who acted on his behalf without his permission or knowledge. If the act is ratified, a relationship of the agency will come into existence and it will be as if he had previously authorized the person to act his agent. Ratification may be express (by speech or writing) or implied (by act or conduct).

Steve bought apples on behalf of Mark, without his permission or knowledge. Mark later sold those apples to another person. This act of mark impliedly ratifies the purchase made by Steve.

Ratification is not allowed in the following cases

When the person’s knowledge of the facts of the case is defective. That is, he only half knows things that he is ratifying to.
An act done on behalf of another person which would have the effect of injuring or harming the person or violating any of his rights if the act was done with his authority.

Termination of Agency

An agency can be terminated or is terminated in 5 different ways:

When the agent’s authority is revoked by the Principal
When the agent renounces the business of the agency
When the business of the agency is completed
When either of the parties dies or becomes mentally disabled
When the Principal is adjudicated an insolvent

Revocation of Agent’s authority

There are certain rules regarding the revocation of an agent’s authority.

It can be revoked any time before the authority has been exercised.
If according to the terms of the contract between the two, the agency has to continue upto a certain time, any prior revocation by the Principal shall be compensated for, to the agent.
The termination does not take effect before it has been communicated to the agent.
Termination of the authority of an agent terminates the authority of all the sub-agents under him.

Agent’s duties to Principal

An agent has 6 duties towards his Principal:

He has to conduct the business of the Principal according to the directions of the Principal.
An agent is bound to conduct the business he is supposed to conduct with as much skill as a person on his position ordinarily holds.
An agent is supposed to show the relevant accounts to the Principal as and when the Principal demands.
An agent has the duty to communicate any difficulty whatsoever he may come across while doing the Principal’s business. He is supposed to perform due diligence in this regard.
If any material fact has been concealed or the business is not carried out in the manner that the Principal directed, the Principal can repudiate the contract between them.
If the agent carries out the business in the manner he wanted to perform it, rather than on the directions of the Principal, the Principal may claim from the agent any benefit he may have achieved through doing so.

Hala directs her agent Saima to buy a certain house for her. Saima does not buy the house, and tells Hala that it cannot be bought due to certain reasons, but ends up buying the house herself. In this case, Hala has the right to claim the house from Saima at the price which Saima bought it for herself.

Principal’s duties to Agent

The Principal has 4 duties towards the Agent:

The Principal is bound to indemnify the agent against any lawful acts done by him in the exercise of his authority as an agent.
The Principal is bound to indemnify the agent against any act done by him in good faith, even if it ended up violating the rights of third parties.
The Principal is not liable to the agent if the act that is delegated is criminal in nature. The agent will also in no circumstances be indemnified against criminal acts.
The Principal must make compensation to his agent if he causes any injury to him because of his own competence or lack of skill.

Liability of Principal for Agent’s Fraud or Misrepresentation

According to Section 238 , The Principal is liable for any fraud or misrepresentation made by his agent during the course of his business, as if the fraud or misrepresentation was done by the Principal himself.

Rights of an Agent

An agent has the following 5 rights:

Right of retainer – An agent has the right to retain any remuneration or expenses incurred by him while conducting the Principal’s business.
Right to remuneration – An agent, when he has wholly carried out the business of the agency has the right to be remunerated of any expenses suffered by him while conducting the business.
Right of Lien on Principal’s property- The agent has the right to hold (keep with himself) any movable or immovable property of the Principal until his due remuneration is paid to him by the Principal.
Right to be Indemnified – The agent has the right to be indemnified against all the lawful acts done by him during the course of conducting the Principal’s business.
Right to Compensation – The Agent has the right to be compensated for any injury or loss suffered by him due to the lack of skill and competency of the Principal.

Contracts establishing a relationship of the agency are very common in business law. These can be express or implied. An agency is created when a person delegates his authority to another person, that is, appoints them to do some specific job or a number of them in specified areas of work. Establishment of a Principal-Agent relationship confers rights and duties upon both the parties. There are various examples of such a relationship: Insurance agency, advertising agency, travel agency, factors, brokers, del credere agents, etc.

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Introduction to Business Law (5th edn)

New to this Edition
Guide to the Online Resources
Table of Cases
Table of Legislation
1. The Nature of English Law
2. The Court System and Alternative Dispute Resolution
3. Sources of English Law
4. The Nature of the Agreement: Offer and Acceptance
5. Intention, Capacity, Consideration, and Privity
6. The Terms of a Contract
7. Vitiating Factors
8. Discharge of Contract and Contractual Remedies
9. The Sale of Goods and Supply of Services
10. The Law of Agency
11. The Tort of Negligence
12. Product Liability, Defective Premises, Interference with Land, and Defences
13. The Contract of Employment and its Termination
14. Discrimination and Health and Safety
15. Business Organizations
16. Company Law I: Formation and Finance
17. Company Law II: Company Officers and Liabilities
18. Company Law III: Company Meetings, Shareholder Protection, and Liquidation of Companies
19. Intellectual Property Law
20. Study Skills
Appendix A Self-test questions
Appendix B Essay questions
Appendix C Problem questions

p. 275 10. The Law of Agency

Lucy Jones Lucy Jones Deputy Head, Brighton Business School, University of Brighton, University of Brighton
Published in print: 05 August 2019
Published online: September 2019

This chapter begins by defining agency—the relationship which exists between the agent and the principal—and considers the legal relationships created between an agent, his principal, and a third party. It then discusses the different methods by which an agency relationship may be created. The chapter explains the extent of an agent’s authority, the power of an agent to bind his principal, and the rights and duties of an agent. The relationship between agent, principal, and third party is explored and the different rules relating to disclosed and undisclosed agencies. Finally, the termination of an agency relationship is considered and examples of different types of agencies highlighted.

agency relationship
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Why Is Agency Law Important, and What Is an Agent?

An agent is a person who acts in the name of and on behalf of another, having been given and assumed some degree of authority to do so. Most organized human activity—and virtually all commercial activity—is carried on through agency. No corporation would be possible, even in theory, without such a concept. We might say “General Motors is building cars in China,” for example, but we can’t shake hands with General Motors. “The General,” as people say, exists and works through agents. Likewise, partnerships and other business organizations rely extensively on agents to conduct their business. Indeed, it is not an exaggeration to say that agency is the cornerstone of enterprise organization. In a partnership each partner is a general agent, while under corporation law the officers and all employees are agents of the corporation.

The existence of agents does not, however, require a whole new law of torts or contracts. A tort is no less harmful when committed by an agent; a contract is no less binding when negotiated by an agent. What does need to be taken into account, though, is the manner in which an agent acts on behalf of his principal and toward a third party.

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Impracticability
Common-Law Impracticability
Commercial Impracticability
Frustration of Purpose KEY TAKEAWAY EXERCISES
Cancellation, Destruction, or Surrender
Power of Avoidance
Statute of Limitations
Bankruptcy KEY TAKEAWAY
Substantial Performance; Conditions Precedent CASE QUESTIONS
Waiver of Contract Rights; Nonwaiver Provisions CASE QUESTIONS
Impossibility as a Defense CASE QUESTIONS
Purpose of Remedies
Parties Have the Power—but Not the Right—to Breach KEY TAKEAWAY EXERCISES
Promisee’s Interests Protected by Contract LEARNING OBJECTIVE KEY TAKEAWAY EXERCISE
Compensatory Damages
Incidental Damages
Consequential Damages
Nominal Damages
Liquidated Damages
Punitive Damages KEY TAKEAWAY EXERCISES
Specific Performance
Restitution
Total Nonperformance by Breaching Party
Part Performance and Then Breach
Restitution in Other Cases KEY TAKEAWAY EXERCISES
Foreseeability
Mitigation of Damages
Certaintymages
Affirmation
Rights of Third Parties
Agreement of the Parties Limiting Remedies
Tort versus Contract
Legal versus Extralegal Remedies KEY TAKEAWAY EXERCISES
Consequential Damages CASE QUESTIONS
Liquidated Damages CASE QUESTIONS
Injunctions and Negative Covenants CASE QUESTIONS
Limitation on Damages: Mitigation of Damages CASE QUESTIONS
Summary and Exercises Summary EXERCISES SELF-TEST QUESTIONS SELF-TEST ANSWERS
History of Products-Liability Law
Current State of the Law KEY TAKEAWAY EXERCISES
Express Warranties
Implied Warranties
Implied Warranty of Merchantability
Fitness for a Particular Purpose
Other Warranties
Exclusion or Modification of Warranties
Exclusion of Express Warranties
Exclusion of Implied Warranties in General
Implied Warranty of Fitness
Conflict between Express and Implied Warranties
The Magnuson-Moss Act and Phantom Warranties
Horizontal Privity
Vertical Privity
Contributory Negligence, Comparative Negligence, and Assumption of Risk KEY TAKEAWAY EXERCISES
Design Defects
Warning Defects
Common-Law Defenses against Negligence
Preemption KEY TAKEAWAY EXERCISES
Strict Liability Defined
Product in a Defective Condition
Unreasonably Dangerous
Engaged in the Business of Selling
Reaches the User without Change in Condition
Liability Despite Exercise of All Due Care
Liability without Contractual Relation
Disclaimers
Plaintiff’s Conduct
Misuse or Abuse of the Product
Limited Remedy
The Third Restatement KEY TAKEAWAY EXERCISES
The Cry for Reform
Statutes of Repose
State-of-the-Art Defense
Failure to Warn
Comparative Fault for Consumer Misuse
Criminal Penalties
Federal Reform KEY TAKEAWAY EXERCISES
Implied Warranty of Merchantability and the Requirement of a “Sale” CASE QUESTIONS
Strict Liability and Bystanders
Failure to Warn CASE QUESTIONS
Patents LEARNING OBJECTIVES
What May Be Patented
What May Not Be Patented
Tests for Patentability
Procedures for Obtaining a Patent
Patent Ownership
Infringement and Invalidity Suits
Patent Misuse KEY TAKEAWAY EXERCISES
Definition of Trade Secrets
Originality
Economic Espionage Act
Right of Employees to Use Trade Secrets KEY TAKEAWAY EXERCISES
Definition and Duration
Protected Expression
Preventing Copying
Infringement
Copyrightability Standards
Who May Obtain a Copyright?
Obtaining a Copyright
Computer Downloads and the Digital Millennium Copyright Act KEY TAKEAWAY EXERCISES
Definitions of Trademarks
Kinds of Marks
Limitations on Marks
Dilution, Tarnishment, and Blurring
Acquiring Trademark Rights
Loss of Rights KEY TAKEAWAY EXERCISES
Fair Use in Copyright CASE QUESTIONS
Trademark Infringement and Dilution CASE QUESTIONS
Public and Private Insurance
Life Insurance
Health Insurance
Disability Insurance
Homeowner’s Insurance
Automobile Insurance
Other Liability Insurance
Workers’ Compensation
Property Insurance
Malpractice Insurance
Business Interruption Insurance
Liability Insurance KEY TAKEAWAY EXERCISES
Insurable Interest in Property
Subrogation
Intentional Losses
Coinsurance Clause
Liability Insurance
No-Fault Trends
Insurable Interest
Change of Beneficiary and Assignment
Murder KEY TAKEAWAY EXERCISES
Representation
Incontestable Clause
Requirement of Insurer’s Good Faith KEY TAKEAWAY EXERCISES
Misrepresentation to Insurer CASE QUESTIONS
Recurring Issues in Agency Law
Recurring Issues in Agency
General Agent
Special Agent
Agency Coupled with an Interest
Independent Contractor
Agency Created by Agreement
Consideration
Formalities
Agency Created by Operation of Law
Implied Agency
Apparent Agency KEY TAKEAWAY EXERCISES
Fiduciary Duty
Duty to Avoid Self-Dealing
Duty to Preserve Confidential Information
Other Duties
Duty of Skill and Care
Duty of Good Conduct
Duty to Keep and Render Accounts
Duty to Act Only as Authorized
Duty Not to Attempt the Impossible or Impracticable
Duty to Obey
Duty to Give Information
“Shop Rights” Doctrine
Contract Duties
General Contract Duties
Employment at Will
Duty to Indemnify
Tort and Workers’ Compensation Duties
Background to Workers’ Compensation
The System in General Kansas Workers’ Compensation Benefits for Specific Injuries
Paying for Workers’ Compensation
Recurring Legal Issues KEY TAKEAWAY EXERCISES
Creation of Agency: Liability of Parent for Contracts Made by “Agent” Child CASE QUESTIONS
Employee versus Independent Contractor CASE QUESTIONS
Breach of Fiduciary Duty CASE QUESTIONS
Workers’ Compensation: What “Injuries” Are Compensable? CASE QUESTIONS
Principal’s Contract Liability Requires That Agent Had Authority
Express Authority
Implied Authority
Apparent Authority
Ratification KEY TAKEAWAY EXERCISES
The Distinction between Direct and Vicarious Liability
Direct Liability
Vicarious Liability
Agents for Whom Principals Are Vicariously Liable
Liability for Agent’s Intentional Torts
Deviations from Employment
The “Scope of Employment” Problem
The Zone of Risk Test
Special Cases of Vicarious Liability
Use of Automobiles
Torts of Family Members
Other Torts Governed by Statute or Regulation
Principal’s Criminal Liability KEY TAKEAWAY EXERCISES
Tort Liability
Contract Liability
Agent for Undisclosed or Partially Disclosed Principal
Lack of Authority in Agent
Agent Acting on Own Account
By Act of the Parties
Express Termination
Implied Termination
By Operation of Law KEY TAKEAWAY EXERCISES
Implied Authority CASE QUESTIONS
Employer’s Liability for Employee’s Intentional Torts: Scope of Employment CASE QUESTIONS
Facts and Proceedings in the Trial Court
Importance of Partnership Law
Through the Twentieth Century
The Current State of Partnership Law
Meaning of “Legal Entity”
Entity Characteristics of a Partnership
For Accounting Purposes
For Purposes of Taxation
For Purposes of Litigation
For Purposes of Owning Real Estate
For Purposes of Bankruptcy KEY TAKEAWAY EXERCISES
Creation in General
Specific Issues of Concern
Who Can Be a Partner?
Written versus Oral Agreements
Validity of the Partnership Name
Creation of Implied Partnership
Association of Persons
Co-owners of a Business
Sharing of Profits
Business for Profit
Sharing the Profit
Other Factors
Creation of Partnership by Estoppel KEY TAKEAWAY EXERCISES
Tests of Partnership Existence CASE QUESTIONS
Background Facts
Suit against Whitehead
The Faxed Credit References
The Fax Cover Sheet
The Epsco Personnel Credit Application
The Checks to Epsco
The Business Card
The Dealership Application CASE QUESTIONS
Duty to Serve
Duty of Loyalty
Application of the Fiduciary Standard to Partnership Law
Limits on the Reach of the Fiduciary Duty
Activities Affected by the Duty of Loyalty
Duty of Care
Duty of Obedience
Duty to Inform Copartners
Duty to Account
Rights to Distributions
Right to Profits (and Losses)
Right to Indemnification
Right to Return of Capital Contribution
Right to Compensation
Right to Management
Right to Choose Partners
Right to Property of the Partnership
Rights in Specific Partnership Property: UPA Approach
Rights in Specific Property: RUPA Approach
Right to Assign Partnership Interest
Voluntary Assignment
Involuntary Assignment
Right to Enforce Partnership Rights
Right to Information and Inspection of Books KEY TAKEAWAY EXERCISES
Liability of the Partnership
Partnership “Statements”
Personal Liability of Partners, in General
Liability of Existing Partners
Liability of Incoming Partners
Partnership Liability for Torts
Partners’ Personal Liability for Torts
Liability for Crimes
Liability for Taxes KEY TAKEAWAY EXERCISES
Meaning of Dissolution under UPA
Causes of Dissolution
In Accordance with the Agreement
In Violation of the Agreement
By Operation of Law
By Court Order
Effect of Dissolution on Authority
After Dissolution
Forming a New Partnership
Winding Up and Termination
Dissociation
Causes of Dissociation
Effect of Dissociation
Dissolution
Effect of Dissolution
Continuing after Dissociation
Who Can Participate in Winding Up
Settlement of Accounts among Partners KEY TAKEAWAY EXERCISES
Breach of Partnership Fiduciary Duty CASE QUESTIONS
Partnership Authority, Express or Apparent CASE QUESTIONS
Winding Up the Partnership
Lopez’s Liability for the IKON Debt
Attorneys’ Fees
Conclusion CASE QUESTIONS
Dissolution under RUPA CASE QUESTIONS
Governing Law
Capitalization
General Partners
Limited Partners
Assignment of Partnership Rights
Inspection of Books
Addition of New Partners
Compensation
Winding Up KEY TAKEAWAY EXERCISES
History of the Limited Liability Company
Creation of the LLC
Liability to Outsiders
Internal Liabilities
Continuity of Life
Dissolution and Winding Up
Free Transferability of Interest KEY TAKEAWAY EXERCISES
Creation and Capitalization
Transferability of Ownership
Limited Liability Limited Partnerships
Ethical Concerns KEY TAKEAWAY EXERCISES
Limited Partnerships: Limited Partners’ Liability for Managing Limited Partnership CASE QUESTIONS
Liability Issues in LLCs CASE QUESTIONS
Defective Registration as a Limited Liability Partnership CASE QUESTIONS
A Fixture of Every Major Legal System
US Corporation Formation
Corporate Law Today KEY TAKEAWAY EXERCISES
Ease of Formation
Ownership and Control
Transferability of Interests
Taxation KEY TAKEAWAY EXERCISES
The Basic Rights of the Corporate “Person”
Absence of Rights
Failure to Act as a Corporation
Other Types of Personal Liability KEY TAKEAWAY EXERCISES
Nonprofit Corporations
Public Corporations
Professional Corporations
The Two Types KEY TAKEAWAY EXERCISES
Function of the Charter
Charter as a Contract
Where to Charter
Why Choose Delaware?
Preincorporation Stock Subscriptions
Execution and Filing of the Articles of Incorporation
Organizational Meeting of Directors KEY TAKEAWAY EXERCISES
De Jure and De Facto Corporations
Corporation by Estoppel KEY TAKEAWAY EXERCISES
Limiting a Corporation’s First Amendment Rights CASE QUESTIONS
Piercing the Corporate Veil CASE QUESTIONS
Corporate Promoter CASE QUESTIONS
De Jure and De Facto Corporations CASE QUESTIONS
Learning Objectives LEARNING FAKE OBJECTIVES
Debt Securities
Equity Securities
Other Forms of Finance KEY TAKEAWAY EXERCISES
Basics of Corporate Bonds
Advantages and Disadvantages of Bonds KEY TAKEAWAY EXERCISES
Authorized, Issued, and Outstanding Stock
Par Value and No-Par Stock
Preference to Dividends
Liquidation Preference
Convertible Shares
Redeemable Shares
Voting Rights
Common Stock
Stocks and Bonds and Bears, Oh My! KEY TAKEAWAY EXERCISES
Nature of the Consideration
Evaluating the Consideration: Watered Stock KEY TAKEAWAY EXERCISES
Cash Dividend
Stock Dividend
Property Dividend
Stock Split
Distribution from Capital Surplus
Record Date, Payment Date, Rights of Stockholders
When Directors Are Too Stingy
When Directors Are Too Generous KEY TAKEAWAY EXERCISES
Changes in the Revised Model Business Corporation Act
Introduction to Article 8 of the Uniform Commercial Code
The UCC and the 1933 and 1934 Securities Acts KEY TAKEAWAY EXERCISES
Consideration in Exchange for Stock CASE QUESTIONS
Payment of Dividends CASE QUESTIONS
Express Powers
Implied Powers
The Ultra Vires Doctrine
Criminal, Tortious, and Other Illegal Acts KEY TAKEAWAY EXERCISES
General Management Functions
Who Has the Right to Vote?
Cumulative Voting
Voting Arrangements to Concentrate Power
Voting Agreements
Voting Trusts
Inspection of Books and Records
Preemptive Rights
Derivative Actions KEY TAKEAWAY EXERCISES
Delegation to Committees
Delegation to Officers
Number and Election of Directors
Directors’ Qualifications and Characteristics
Removal of Directors and Officers
Compensation KEY TAKEAWAY EXERCISES
Nature of the Problem
Contracts with the Corporation
Corporate Opportunity
Constituency Statutes and Corporate Social Responsibility
Sarbanes-Oxley and Other Modern Trends
Liability Prevention and Insurance KEY TAKEAWAY EXERCISES
Ultra Vires Acts CASE QUESTIONS
Business Judgment Rule CASE QUESTIONS
What Is a Security?
Fundamental Mission
Registration
Companies Covered
Reporting Proxy Solicitation
Blue Sky Laws
Dodd-Frank Wall Street Reform and Consumer Protection Act KEY TAKEAWAY EXERCISES
The Foreign Corrupt Practices Act
Recapture of Short-Swing Profits: Section 16(b)
Insider Trading: Section 10(b) and Rule 10b-5
Secondary Actor
Sarbanes-Oxley Act KEY TAKEAWAYAWAY EXERCISES
What Is a Security? CASE QUESTIONS
Tippee Liability CASE QUESTIONS
Duty to Disclose Material Information CASE QUESTIONS
Successor Liability
Consolidation
Tender Offers
Leveraged Buyouts
State versus Federal Regulation of Takeovers
Short-Form Mergers
Appraisal Rights KEY TAKEAWAY EXERCISES
Typical Requirements for Foreign Corporations
Penalties for Failure to Comply with a Statute
Jurisdiction over Foreign Corporations
Taxing Authority KEY TAKEAWAY EXERCISES
Voluntary Dissolution
Involuntary Dissolution
Action by Shareholder
Claims against a Dissolved Corporation
Bankruptcy KEY TAKEAWAY EXERCISES
Successor Liability CASE QUESTIONS
Constitutional Issues Surrounding Taxation of a Foreign Corporation CASE QUESTIONS
Discrimination Based on Religion
Sex Discrimination
Discrimination Based on Race, Color, and National Origin
Bona Fide Occupational Qualification (BFOQ)
Defenses in Sexual Harassment Cases
Affirmative Action
The Age Discrimination in Employment Act
Disabilities: Discrimination against the Handicapped
Equal Pay Act KEY TAKEAWAY EXERCISES
Discharging an Employee for Refusing to Violate a Law
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Discharging an Employee for Performing a Legal Duty
Discharging an Employee in a Way That Violates Public Policy
Contract Modification of Employment at Will
Good Faith and Fair Dealing Standard KEY TAKEAWAY EXERCISES
The Federal Plant-Closing Act
The Employee Polygraph Protection Act
Occupational Safety and Health Act
Employee Retirement Income Security Act
Fair Labor Standards Act
Workers’ Compensation Laws
Other State Laws KEY TAKEAWAY EXERCISES
Factual Background
From the Opinion of FEINBERG, CIRCUIT JUDGE CASE QUESTIONS
Title VII and Hostile Work Environment CASE QUESTIONS
Age Discrimination: Burden of Persuasion CASE QUESTIONS
Factual Background CASE QUESTIONS
Labor and the Common Law in the Nineteenth Century
Labor under the Antitrust Laws
The Norris–La Guardia Act
The National Labor Relations Act (the Wagner Act)
The Taft-Hartley Act (Labor-Management Relations Act)
The Landrum-Griffin Act KEY TAKEAWAY EXERCISES
Unfair Labor Practice Cases
Representation Cases KEY TAKEAWAY EXERCISES
Determining the Appropriate Union
Interfering with Employee Communication
Regulating Campaign Statements
Exclusivity
The Duty to Bargain in Good Faith
Mandatory Subjects of Bargaining
The Board’s Power to Compel an Agreement
Union Activity on Company Property
“Runaway Shop”
Other Types of Interference
Discrimination against Union Members
The Right to Strike
Secondary Boycotts
Hot Cargo Agreement
Discrimination by Unions
Jurisdictional Disputes
Bankruptcy and the Collective Bargaining Agreement KEY TAKEAWAY EXERCISES
Exclusivity CASE QUESTIONS
The Cost of Credit
The Truth in Lending Act
Consumer Leasing Act of 1988
Fair Credit and Charge Card Disclosure
Credit Card Accountability, Responsibility, and Disclosure Act of 2009
State Credit Disclosure Laws
Equal Credit Opportunity Act
Fair Credit Reporting Act of 1970: Checking the Applicant’s Credit Record KEY TAKEAWAY EXERCISES
Cancellation Rights
Billing Mistakes
Disputes about the Quality of Goods or Services Purchased
Garnishment
Wage Assignment
Confession of Judgment
Fair Debt Collection Practices Act of 1977 KEY TAKEAWAY EXERCISES
Usury CASE QUESTIONS
Discrimination under the ECOA CASE QUESTIONS
A. Permissible Purpose under the FCRA
B. Willful Failure to Comply with the FCRA
C. Obtaining a Consumer Report under False Pretenses or Knowingly without a Permissible Purpose CASE QUESTIONS
By Agreement with the Debtor
Basics of Secured Transactions
Source of Law
Definitions
Consumer Goods
Farm Products
Intangible Property
General Intangibles
Indispensable Paper
Chattel Paper
Instruments
Investment Property
Other Types of Collateral
Requirements for Attachment
Creditor Gives Value
Debtor’s Rights in Collateral
Security Agreement (Contract) or Possession of Collateral by Creditor
Perfection by Filing
The Financing Statement
Contents of the Financing Statement
Duration of the Financing Statement
Debtor Moves out of State
Where to File the Financing Statement
Temporary Perfection
Perfection by Possession
Perfection by Control
Automatic Perfection KEY TAKEAWAY EXERCISES
Application of the Rule
Exceptions to the General Rule
Immediate Exceptions
Other Exceptions
Lien Creditors
Bankruptcy Trustee KEY TAKEAWAY EXERCISES
Resort to Judicial Process
Repossession
Strict Foreclosure
Foreclosure on Intangible Collateral KEY TAKEAWAY EXERCISES
Types of Suretyship
Creation of the Suretyship
Duties of the Surety
Rights of the Surety
Exoneration
Reimbursement
Contribution
Defenses of the Parties
Defenses of the Principal
Defenses of the Surety KEY TAKEAWAY EXERCISES
Preliminary Statement and Issues
Findings of Fact
Conclusion of Law, Decision, and Order CASE QUESTIONS
Uniform Commercial Code Section 2A-525(3)
Uniform Commercial Code Section 2A-108 CASE QUESTIONS
Per Curium*: CASE QUESTIONS
The Uses of Mortgages
Short History of Mortgage Law
Statutory Regulation
Consumer Credit Statutes Apply
Real Estate Settlement Procedures Act
The Note and the Mortgage Documents
The Mortgage KEY TAKEAWAY EXERCISES
Priorities in Real Property Security
The General Rule of Priorities
Fixture Filing
Future Advances
Foreclosure
Deed of Trust
Installment or Land Contract KEY TAKEAWAY EXERCISES
Attachment Lien
Judgment Lien
Procedure for Obtaining a Mechanic’s Lien
Mechanic’s Liens Priorities
Possessory Lien
Tax Lien KEY TAKEAWAY EXERCISES
Denial of Mortgagee’s Right to Foreclose; Erroneous Filings; Lost Instruments CASE QUESTIONS
Law/Analysis
A. Who Must Receive the Consent.
B. What Kind of Consent Is Necessary.
C. Evidence There Was No Consent
D. Evidence There Was Consent
Duty to Re-Open Sale
Chilled Bidding
Adequacy of the Sale Price
Duty to a Junior Lienholder
Attorney Fees CASE QUESTIONS
The Purpose of Bankruptcy Law
Constitutional Basis
Bankruptcy Statutes
Bankruptcy Courts, Judges, and Costs
Overview of Bankruptcy Provisions KEY TAKEAWAY EXERCISES
Commencement
Voluntary and Involuntary Petitions
The Automatic Stay
First Meeting of Creditors
Trustee’s Powers and Duties
Claims and Creditors
Proof of Claims
Claims with Priority
Debtor's Duties and Exemptions
Debtor’s Duties
Debtor’s Exemptions
Secured Property
Dischargeable and Nondischargeable Debts
Dischargeable Debts
Nondischargeable Debts
Reaffirmation
Property Included in the Estate KEY TAKEAWAY EXERCISES
Trustee’s Duties
Distribution of the Estate
Discharge KEY TAKEAWAY EXERCISES
How It Works
Eligibility
Operation of Business
Creditors’ Committee
The Reorganization Plan
Acceptance of the Plan
Confirmation of the Plan
Discharge, Conversion
Confirmation
Alternatives to Bankruptcy: Overview
Assignment for Benefit of Creditors
Composition
Receivership KEY TAKEAWAY EXERCISES
Dischargeability of Student Loans under Chapter 7 CASE QUESTIONS
Chapter 11 Bankruptcy CASE QUESTIONS
Chapter 13: What Debts Are Dischargeable? CASE QUESTIONS
Definition of Property
The Economist’s View
Classification of Property
Importance of the Distinction between Real and Personal Property KEY TAKEAWAY EXERCISES
Lost or Misplaced Property
Requirements
Gifts Causa Mortis
Gifts to Minors
Confusion KEY TAKEAWAY EXERCISES
Transfer of Real Estate
Tenant’s Fixtures KEY TAKEAWAY EXERCISES
Lost or Misplaced Property CASE QUESTIONS
Back Matter

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Legal Fundaments
Jurisprudence

LAW OF AGENCY

November 2020

Benue State University, Makurdi

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assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

Founded in 1939, our law firm combines the ability to represent clients in domestic or international matters with the personal interaction with clients that is traditional to a long established law firm.

45 What is the law of “agency”, and why does it matter?

We begin analysis of stakeholders in perhaps an unusual place: a brief foray into the law of agency . This is because stakeholder theory contrasts strongly with popular economic views that build on the law of agency (covered here), and fiduciary duties (which we considered in Part 2). To understand stakeholder theory, we need to have a background in agency law. You will recognize many of these principles from our discussion of fiduciary duties, but with expanded discussion here. This discussion will also help set up our consideration of employees, as a special category of stakeholder, later in the text.

Consider John Alden (1599–1687), one of the most famous agents in American literature. He is said to have been the first person from the Mayflower to set foot on Plymouth Rock in 1620; he was a carpenter, a cooper (barrel maker), and a diplomat. His agency task—of interest here—was celebrated in Henry Wadsworth Longfellow’s “The Courtship of Miles Standish.” He was to woo Priscilla Mullins (d. 1680), “the loveliest maiden of Plymouth,” on behalf of Captain Miles Standish, a valiant soldier who was too shy to propose marriage. Standish turned to John Alden, his young and eloquent protégé, and beseeched Alden to speak on his behalf, unaware that Alden himself was in love with Priscilla. Alden accepted his captain’s assignment, despite the knowledge that he would thus lose Priscilla for himself, and sought out the lady. But Alden was so tongue-tied that his vaunted eloquence fell short, turned Priscilla cold toward the object of Alden’s mission, and eventually led her to turn the tables in one of the most famous lines in American literature and poetry: “Why don’t you speak for yourself, John?” John eventually did: the two were married in 1623 in Plymouth.

Let’s analyze this sequence of events in legal terms—recognizing, of course, that this example is an analogy and that the law, even today, would not impose consequences on Alden for his failure to carry out Captain Standish’s wishes. Alden was the captain’s agent: he was specifically authorized to speak in his name in a manner agreed on, toward a specified end, and he accepted the assignment in consideration of the captain’s friendship. He had, however, a conflict of interest. He attempted to carry out the assignment, but he did not perform according to expectations. Eventually, he wound up with the prize himself. Here are some questions to consider, the same questions that will recur throughout the discussion of agency:

How extensive was John’s authority? Could he have made promises to Priscilla on the captain’s behalf—for example, that Standish would have built her a fine house?
Could he, if he committed a tort, have imposed liability on his principal? Suppose, for example, that he had ridden at breakneck speed to reach Priscilla’s side and while en route ran into and injured a pedestrian on the road. Could the pedestrian have sued Standish?
Suppose Alden had injured himself on the journey. Would Standish be liable to Alden?
Is Alden liable to Standish for stealing the heart of Priscilla—that is, for taking the “profits” of the enterprise for himself?

As these questions suggest, agency law often involves three parties—the principal, the agent, and a third party. It therefore deals with three different relationships: between principal and agent, between principal and third party, and between agent and third party. These relationships can be summed up in a simple diagram:

The agent owes the principal duties in two categories: the fiduciary duty and a set of general duties imposed by agency law. But these general duties are not unique to agency law; they are duties owed by any employee to the employer.

In a nonagency contractual situation, the parties’ responsibilities terminate at the border of the contract. There is no relationship beyond the agreement. This literalist approach is justified by the more general principle that we each should be free to act unless we commit ourselves to a particular course.

Duties of an Agent

But the agency relationship is more than a contractual one, and the agent’s responsibilities go beyond the border of the contract. Agency imposes a higher duty than simply to abide by the contract terms. It imposes a fiduciary duty. The law infiltrates the contract creating the agency relationship and reverses the general principle that the parties are free to act in the absence of agreement. As a fiduciary of the principal, the agent stands in a position of special trust. Their responsibility is to subordinate their self-interest to that of the principal. The fiduciary responsibility is imposed by law. The absence of any clause in the contract detailing the agent’s fiduciary duty does not relieve them of it. The duty contains several aspects.

Duty to Avoid Self-Dealing

A fiduciary may not lawfully profit from a conflict between his personal interest in a transaction and his principal’s interest in that same transaction. A broker hired as a purchasing agent, for instance, may not sell to his principal through a company in which he or his family has a financial interest. The penalty for breach of fiduciary duty is loss of compensation and profit and possible damages for breach of trust.

Duty to Preserve Confidential Information

To further his objectives, a principal will usually need to reveal a number of secrets to his agent—how much he is willing to sell or pay for property, marketing strategies, and the like. Such information could easily be turned to the disadvantage of the principal if the agent were to compete with the principal or were to sell the information to those who do. The law therefore prohibits an agent from using for their own purposes or in ways that would injure the interests of the principal, information confidentially given or acquired. This prohibition extends to information gleaned from the principal though unrelated to the agent’s assignment: “[A]n agent who is told by the principal of his plans, or who secretly examines books or memoranda of the employer, is not privileged to use such information at his principal’s expense.” [1] Nor may the agent use confidential information after resigning their agency. Though they are free, in the absence of contract, to compete with the former principal, they may not use information learned in the course of the agency, such as trade secrets and customer lists.

Other Duties

In addition to fiduciary responsibility (and whatever special duties may be contained in the specific contract) the law of agency imposes other duties on an agent. These duties are not necessarily unique to agents: a nonfiduciary employee could also be bound to these duties on the right facts.

Duty of Skill and Care

An agent is usually taken on because they have special knowledge or skills that the principal wishes to tap. The agent is under a legal duty to perform the work with the care and skill that is “standard in the locality for the kind of work which he is employed to perform” and to exercise any special skills, if these are greater or more refined than those prevalent among those normally employed in the community. In short, the agent may not lawfully do a sloppy job.

Duty of Good Conduct

In the absence of an agreement, a principal may not ordinarily dictate how an agent must live their private life. An overly fastidious florist may not instruct their truck driver to steer clear of the local bar on the way home from delivering flowers at the end of the day. But there are some jobs on which the personal habits of the agent may have an effect. The agent is not at liberty to act with impropriety or notoriety, so as to bring disrepute on the business in which the principal is engaged. A lecturer at an anti-alcohol clinic may be directed to refrain from frequenting bars. A bank cashier who becomes known as a gambler may be fired.

Duty to Keep and Render Accounts

The agent must keep accurate financial records, take receipts, and otherwise act in conformity to standard business practices.

Duty to Act Only as Authorized

This duty states a truism but is one for which there are limits. A principal’s wishes may have been stated ambiguously or may be broad enough to confer discretion on the agent. As long as the agent acts reasonably under the circumstances, he will not be liable for damages later if the principal ultimately repudiates what the agent has done: “Only conduct which is contrary to the principal’s manifestations to him, interpreted in light of what he has reason to know at the time when he acts,…subjects the agent to liability to the principal.” [2]

Duty Not to Attempt the Impossible or Impracticable

The principal says to the agent, “Keep working until the job is done.” The agent is not obligated to go without food or sleep because the principal misapprehended how long it would take to complete the job. Nor should the agent continue to expend the principal’s funds in a quixotic attempt to gain business, sign up customers, or produce inventory when it is reasonably clear that such efforts would be in vain.

Duty to Obey

As a general rule, the agent must obey reasonable directions concerning the manner of performance. What is reasonable depends on the customs of the industry or trade, prior dealings between agent and principal, and the nature of the agreement creating the agency. A principal may prescribe uniforms for various classes of employees, for instance, and a manufacturing company may tell its sales force what sales pitch to use on customers. On the other hand, certain tasks entrusted to agents are not subject to the principal’s control; for example, a lawyer may refuse to permit a client to dictate courtroom tactics.

Duty to Give Information

Because the principal cannot be every place at once—that is why agents are hired, after all—much that is vital to the principal’s business first comes to the attention of agents. If the agent has actual notice or reason to know of information that is relevant to matters entrusted to him, they have a duty to inform the principal. This duty is especially critical because information in the hands of an agent is, under most circumstances, imputed to the principal, whose legal liabilities to third persons may hinge on receiving information in timely fashion. Service of process, for example, requires a defendant to answer within a certain number of days; an agent’s failure to communicate to the principal that a summons has been served may bar the principal’s right to defend a lawsuit. The imputation to the principal of knowledge possessed by the agent is strict: even where the agent is acting adversely to the principal’s interests—for example, by trying to defraud their employer—a third party may still rely on notification to the agent, unless the third party knows the agent is acting adversely.

Principal’s Duty to Agent

In this category, we may note that the principal owes the agent duties in contract and tort.

Contract Duties

The fiduciary relationship of agent to principal does not run in reverse —that is, the principal is not the agent’s fiduciary. Nevertheless, the principal has a number of contractually related obligations toward his agent.

General Contract Duties

These duties are analogues of many of the agent’s duties that we have just examined. In brief, a principal has a duty “to refrain from unreasonably interfering with [an agent’s] work.” [3] The principal is allowed, however, to compete with the agent unless the agreement specifically prohibits it. The principal has a duty to inform his agent of risks of physical harm or pecuniary loss that inhere in the agent’s performance of assigned tasks. Failure to warn an agent that travel in a particular neighborhood required by the job may be dangerous (a fact unknown to the agent but known to the principal) could under common law subject the principal to a suit for damages if the agent is injured while in the neighborhood performing her job. A principal is obliged to render accounts of monies due to agents; a principal’s obligation to do so depends on a variety of factors, including the degree of independence of the agent, the method of compensation, and the customs of the particular business. An agent’s reputation is no less valuable than a principal’s, and so an agent is under no obligation to continue working for one who sullies it.

Employment at Will

Under the traditional “employment-at-will” doctrine, an employee who is not hired for a specific period can be fired at any time, for any reason (except bad reasons: an employee cannot be fired, for example, for reporting that his employer’s paper mill is illegally polluting groundwater).

Duty to Indemnify

Describe, in your own words, the difference between a principal and an agent.
Describe, in your own words, the differences between the duties of a principal and an agent.
Restatement (Second) of Agency, Section 395. ↵
Restatement (Second) of Agency, Section 383. ↵
Restatement (Second) of Agency, Section 434. ↵

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Bus Law Assignment on law Of Agency

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