Agency Law
The seaman at the valve wheels
A little after midnight on March 14, 1963, a Coast Guard seaman named Lane walked back to his ship along the wall of a floating drydock in Brooklyn. He had been drinking heavily. On the way he turned each of three large wheels about twenty times. The wheels opened the valves that flood the dock’s tanks. Within the hour the ship slid off its blocks and fell against the wall.
The drydock’s owner sued the United States, and the government’s defense was the one you might expect. Lane was not doing his job when he turned those wheels, and turning them served no purpose of his employer’s. The Second Circuit accepted that and held the government liable anyway, in Ira S. Bushey & Sons, Inc. v. United States, 398 F.2d 167 (2d Cir. 1968) (opens in a new tab). The result raises the question at the center of agency law: when does what one person does become another’s responsibility? Part 1 of the activity has you build five scenarios around that question, each in a different industry.
The court set aside what Lane meant to do and asked which risks come with running a ship. Crew members crossing a drydock might do damage, the court reasoned, and a business “cannot justly disclaim responsibility” for accidents characteristic of its activities. In other words, the loss follows the enterprise that created the risk, even when the employee who caused it had no thought of serving it. That is respondeat superior at its outer edge. Many courts still ask about the employee’s purpose, Florida’s among them, and a later section shows what that test does to a Florida case.
Who acts for whom
An old Latin maxim says that whoever acts through another acts himself. Agency is the relationship that makes the maxim work. It forms when one person, the principal, agrees that another, the agent, will act on its behalf and under its control, and the agent agrees to act. No contract is required, and neither is pay. A neighbor who agrees to sell your car for you, within the price you set, is your agent for that sale. Labels do not decide it either. Courts look at what the parties agreed to and how they acted, so a business can create an agency without meaning to.
Most of the time the other side of a deal knows exactly who the principal is. When it does not, the principal is undisclosed, and the difference matters. The supplier thought it was contracting with the agent alone, so the agent who signed is a party to the contract and can be held to it personally. Once the supplier learns who the principal is, it can pursue the principal instead.
The relationship also runs inward. An agent owes the principal a fiduciary duty: to put the principal’s interest ahead of the agent’s own. The textbook’s Chapter 38 (opens in a new tab) sets out its parts. Among them are loyalty, obedience to lawful instructions, an accounting of the principal’s money and property, and passing along information the principal needs. Loyalty is the part that surprises people. A purchasing agent who takes a secret payment from a supplier has breached it, even if the supplier’s price was fair. The principal need not prove a loss to take that payment away. Duties run the other way too: the principal owes the agent the pay it promised and reimbursement for the expenses the job required.
Quick check: who acts for whom
Three questions on forming an agency and what an agent owes. Pick one answer each; the explanation appears after you choose.
A neighbor agrees, for no pay, to sell your used car for you and to stay within the price you set. Is the neighbor your agent?
A purchasing agent quietly takes $2,000 from a supplier for steering orders its way. The supplier's prices were fair, and the company lost nothing. What follows?
A company's buyer, acting within her authority, signs a supply contract in her own name and never mentions the company. The supplier later wants to be paid. Whom can it pursue?
When a promise binds the business
Most contracts a business signs, a person signs for it. Whether the business is bound turns on authority, and authority comes in two kinds.
Actual authority is the power the principal really gave. It can be express, as in “order up to $2,000 of paint a month,” spoken or written. It can also be implied from the job: a manager hired to run a store can buy light bulbs without a memo saying so. A contract inside actual authority binds the principal, and there is nothing more to argue.
Apparent authority covers the harder case, where the agent had no real power but looked as if it did. Picture a hardware store whose owner has let the manager order from the same supplier for ten years, paying every invoice. The owner privately caps the manager at $5,000 an order, and the next week the manager orders $8,000 worth. The supplier never heard of the cap. The owner is bound if the supplier reasonably believed the manager could place the order. The belief has to rest on what the owner did: the title, the decade of paid invoices. The appearance has to come from the principal. An agent cannot create apparent authority by claiming it.
Why should the owner carry that loss instead of the supplier? Because the owner chose the manager, set the limit, and could have told the supplier about it. The supplier could see only what the owner let it see. The owner is not left empty-handed, though. The manager broke an instruction, and an agent who exceeds actual authority answers to the principal for the loss.
The same logic reaches past the end of a job. When an agency ends, the agent’s actual authority ends with it, but the appearance can linger with anyone who dealt with the agent and was never told. The textbook’s Chapter 39 (opens in a new tab) calls this lingering authority. A company that fires a sales representative and says nothing to her customers may still be bound by the orders she takes next week. The cure is notice to the people who dealt with her.
Quick check: when a promise binds the business
Four questions on actual and apparent authority. Pick one answer each; the explanation appears after you choose.
A store owner tells her manager, "Order whatever seasonal stock we need." The manager orders the store's holiday stock. What authority did the manager use?
For years a dental practice has let its office manager sign equipment leases with one leasing company. The dentist secretly revokes that power, and the manager signs one more lease. Is the practice bound?
Why does apparent authority put the loss on the principal rather than on the third party who relied?
A landlord ends its contract with the property manager who has hired the same plumber for years, and tells no one. The manager calls the plumber for one more job. What would have protected the landlord?
When the business pays for harm
A contract is something a business agrees to. A tort is not, and this is where agency law reaches furthest. Under respondeat superior, an employer answers for torts its employee commits within the scope of employment, even when the employer did nothing wrong itself. A court asks two questions to get there.
The first is who the worker is. The doctrine reaches employees, not independent contractors, and the line turns on control: the right to direct how the work gets done, not only what result is wanted. A restaurant that hires a cleaning company, and lets that company choose its crews, hours, and methods, has hired a contractor. The dishwasher the restaurant trains and schedules is its employee. The paperwork does not settle which is which. As the textbook puts it, neither the company nor the worker can fix the worker’s status by agreement.
The second question is whether the tort fell within the scope of employment. Florida courts generally answer it with three smaller questions. Is the conduct the kind the employee was hired to perform? Did it happen substantially within the time and place of the work? Was it driven, at least in part, by a purpose to serve the employer?
Whetzel v. Metropolitan Life Insurance Co., 266 So. 2d 89 (Fla. 4th DCA 1972) (opens in a new tab) applied that test to a trip the employer paid for. A Louisiana insurance agent won a three-day trip to Miami for his sales, with a company cocktail party on Sunday evening and the first meeting on Monday morning. After the party, he and two other agents set out in his car and drank at four or five bars. At 3:30 a.m., while they were looking for another club, his car collided with a motorcycle. A jury found the insurer liable, but the trial judge set the verdict aside, and the appeals court agreed. Two of the agents had testified that they were out for fun, not business. The court said it would be “asking a lot of any court” to find that the night served the insurer.
Both cases began with a night of drinking, and they came out opposite ways. Lane’s act served no one, and the Second Circuit still charged it to his employer because the risk came with the ship. The agents’ night out followed a party their employer threw, and the Florida court still would not charge it to the insurer, because nothing about it served the business. The doctrine is the same in both; the test a court uses can decide the case.
Quick check: when the business pays for harm
Three questions on respondeat superior and the scope of employment. Pick one answer each; the explanation appears after you choose.
A restaurant hires a cleaning company that picks its own crews, hours, and methods. One of its cleaners damages a customer's car in the lot. Is the restaurant liable under respondeat superior?
In Whetzel, the insurer paid for the Miami trip and hosted the cocktail party. Why was the 3:30 a.m. crash still outside the scope of the agent's employment?
What did the Bushey court decide about Lane's purpose when he turned the valve wheels?
Testing a fix two ways
Part 3 asks you to choose the strongest of five business fixes and test it against economic measures such as liability exposure and transaction cost efficiency. Why Law & Economics? (opens in a new tab) is a short introduction to the approach. The economist’s first question about a legal rule is who can prevent the loss most cheaply. Agency law often gives the answer the hardware store did. The principal chose the agent and set the limits, and it can train, supervise, and insure, so it is usually best placed to act.
The Bushey court took that question seriously and still did not rest on it. Judge Henry Friendly noted that putting the loss on drydock owners might push them, prodded by their insurers, to lock their valves. Charging the ship’s owner was much less likely to prevent the next accident. He doubted that the economics alone could justify the result and rested it on fairness instead: the risk came with the ship.
Hold both answers in view. A signing limit or a training program might score well on cost and still leave a customer holding a contract the business says it never made. Your five scenarios come first, on the activity page, and the economics comes when you have a business in trouble to fix. An efficient fix can still miss what the law protects.