Agency & PartnershipAgency & PartnershipProfessor Donald J. KochanProfessor Donald J. Kochan

Class 13Class 13

Today’s MaterialsToday’s Materials

Pages 321-360Pages 321-360

Fraudulent Acts of AgentsFraudulent Acts of Agents

IntroductionIntroduction ““Fraud is a tort, exposing a principal to vicarious liability for Fraud is a tort, exposing a principal to vicarious liability for

misconduct of its agents.”misconduct of its agents.”

As the text states (citing Prosser and Keeton on Torts), the As the text states (citing Prosser and Keeton on Torts), the elements of fraud are:elements of fraud are:

““1. A representation made by the defendant;1. A representation made by the defendant;

2. knowledge of the defendant that the representation is false, 2. knowledge of the defendant that the representation is false, or that he has not a sufficient basis of information to make it;or that he has not a sufficient basis of information to make it;

3. intention of the defendant to induce the plaintiff to act (or 3. intention of the defendant to induce the plaintiff to act (or refrain from action) in reliance upon the misrepresentation;refrain from action) in reliance upon the misrepresentation;

4. justifiable reliance by the plaintiff upon the representation; 4. justifiable reliance by the plaintiff upon the representation; andand

5. damage to plaintiff resulting from such reliance.”5. damage to plaintiff resulting from such reliance.”

Introduction (cont.)Introduction (cont.) Liability rules are meant to encourage principals to Liability rules are meant to encourage principals to

monitor their agentsmonitor their agents

Principals are in a better position to monitor than Principals are in a better position to monitor than third partiesthird parties

Least Cost Avoider IssuesLeast Cost Avoider Issues

Law must choose who bears the burden of behaviors Law must choose who bears the burden of behaviors – here a theme is that better to hold principals liable – here a theme is that better to hold principals liable than require third parties to suffer loss – is that fair?than require third parties to suffer loss – is that fair?

Restatement (Second) of Restatement (Second) of Agency Sec. 261Agency Sec. 261

““A principal who puts a servant or A principal who puts a servant or other agent in a position which other agent in a position which

enables the agent, while apparently enables the agent, while apparently acting within his authority, to commit acting within his authority, to commit a fraud upon third persons is subject a fraud upon third persons is subject to such third persons for the fraud.”to such third persons for the fraud.”

Unscrupulous Agents:Unscrupulous Agents:Grease Monkey International, Inc. v. MontoyaGrease Monkey International, Inc. v. Montoya

Obtainment of loan caseObtainment of loan case Scope of Employment IssuesScope of Employment Issues

Authorization Issues – When is one “acting Authorization Issues – When is one “acting on behalf”on behalf”

Issue whether the act “furthers the Issue whether the act “furthers the employer’s business”employer’s business”

Right to Control IssuesRight to Control Issues Read concurrence re assignment of risk Read concurrence re assignment of risk

between principal and “innocent” third between principal and “innocent” third partiesparties

Entente Mineral Co. v. ParkerEntente Mineral Co. v. Parker

Petroleum landman and royalties casePetroleum landman and royalties case

Vicarious liability of principal for Vicarious liability of principal for actions of agent established under actions of agent established under Restatement secs. 219 and 261Restatement secs. 219 and 261

Scope AGAIN key in the employment Scope AGAIN key in the employment or Master/Servant relationshipor Master/Servant relationship

Hydrolevel Corp. v. American Society of Hydrolevel Corp. v. American Society of Mechanical Engineers, Inc.Mechanical Engineers, Inc.

““Ratification” issuesRatification” issues Antitrust case – Interference with business relations Antitrust case – Interference with business relations

issuesissues Does agent action appear “regular on its face”? Does Does agent action appear “regular on its face”? Does

it appear to be in the “ordinary course of business”? it appear to be in the “ordinary course of business”? Each go to reasonable reliance of the third party.Each go to reasonable reliance of the third party.

““Imposing liability on the principal to prevent Imposing liability on the principal to prevent misconduct by agents occupying especially sensitive misconduct by agents occupying especially sensitive or responsible positions that invite reliance . . .” – this or responsible positions that invite reliance . . .” – this is the monitoring principle we have discussedis the monitoring principle we have discussed

REMEMBER, even if the principal is found liable he REMEMBER, even if the principal is found liable he might still sue his agent.might still sue his agent.

Rothman v. FilletteRothman v. Fillette

Attorney misconduct/insurance/settlement caseAttorney misconduct/insurance/settlement case

No question of an authorized agency relationshipNo question of an authorized agency relationship

Consistent “justice” theme for principal liability: Consistent “justice” theme for principal liability: “Where one of two innocent must suffer, the loss “Where one of two innocent must suffer, the loss should be borne by him who put the wrongdoer in should be borne by him who put the wrongdoer in a position of confidence and trust and thus a position of confidence and trust and thus enabled him to perpetuate the wrong.”enabled him to perpetuate the wrong.”

LESSON: BE CAREFUL WHO YOU HIRE LESSON: BE CAREFUL WHO YOU HIRE

Limits to Liability for Fraud:Limits to Liability for Fraud:Light v. Chandler Improvement Co.Light v. Chandler Improvement Co.

Real Estate broker/Mortgage foreclosure and fraud in Real Estate broker/Mortgage foreclosure and fraud in the inducement of purchase of farm land casethe inducement of purchase of farm land case

Proof issues re false representations by agent – were Proof issues re false representations by agent – were they ever communicated or known” to the principal? they ever communicated or known” to the principal? If not, unclear whether the principal can be liable, but If not, unclear whether the principal can be liable, but be careful because there are many precedents on the be careful because there are many precedents on the “should have known” and monitoring principles“should have known” and monitoring principles

Pay special attention to note 5 on page 345 that “The Pay special attention to note 5 on page 345 that “The agent is liable for his own fraud, of course.” But agent is liable for his own fraud, of course.” But remember we’ve talked about the principal usually remember we’ve talked about the principal usually having the deeper pocket.having the deeper pocket.

Leafgreen v. American Family Mutual Leafgreen v. American Family Mutual Insurance Co.Insurance Co.

Insurance policy case, againInsurance policy case, again Respondeat Superior and Vicarious Liability issuesRespondeat Superior and Vicarious Liability issues Focus on scope issuesFocus on scope issues Focus on the importance of “forseeability” on the part of Focus on the importance of “forseeability” on the part of

the principal for him to be held liablethe principal for him to be held liable Restatement 261 and 231 – be sure to read the Restatement 261 and 231 – be sure to read the

extensive excerptsextensive excerpts Consider Restatement 262 in dissenting opinion – there Consider Restatement 262 in dissenting opinion – there

is a defense when the third party should have known an is a defense when the third party should have known an agent is acting for his own purposes or outside his agent is acting for his own purposes or outside his authorityauthority

The Note on page 351 is very important regarding The Note on page 351 is very important regarding principal defensesprincipal defenses

The Exculpatory Clause:The Exculpatory Clause:Eamore v. Big Bear Land & Water Co.Eamore v. Big Bear Land & Water Co.

Can a land sales contract include an Can a land sales contract include an enforceable exculpatory clause that waives enforceable exculpatory clause that waives liability for reliance on any representations, liability for reliance on any representations, inducements, promises, or understandings?inducements, promises, or understandings?

Court holds it does not absolve the Court holds it does not absolve the principal of liabilityprincipal of liability

““[S]ome innocent person must be the [S]ome innocent person must be the loser” and it shouldn’t be the misled loser” and it shouldn’t be the misled purchaser, so the court says – do you purchaser, so the court says – do you agree?agree?

Dembowski v. Dembowski v. Central Construction Co.Central Construction Co.

Home improvement company caseHome improvement company case Contract stated there were “no representations, Contract stated there were “no representations,

guarantees, or warranties” except as incorporated in guarantees, or warranties” except as incorporated in the agreement, yet agent made oral representations.the agreement, yet agent made oral representations.

Facts show plaintiff knew of limitation in the contract Facts show plaintiff knew of limitation in the contract and evidenced fails to show principal had knowledge of and evidenced fails to show principal had knowledge of agent’s fraudulent conductagent’s fraudulent conduct

Consider the reliance issuesConsider the reliance issues ““A person with notice of a limitation of an agent’s A person with notice of a limitation of an agent’s

authority cannot subject the principal to liability upon a authority cannot subject the principal to liability upon a transaction with the agent if he should know that the transaction with the agent if he should know that the agent is acting improperly.” Restatement (Second) of agent is acting improperly.” Restatement (Second) of Agency, Sec. 166.Agency, Sec. 166.

King v. Horizon CorpKing v. Horizon Corp Reloading Real Estate caseReloading Real Estate case Disclaimers in contracts/obligations to read before Disclaimers in contracts/obligations to read before

signing; merger clausessigning; merger clauses General principle of law: buyer cannot maintain an General principle of law: buyer cannot maintain an

action for fraud against the seller based on action for fraud against the seller based on misrepresentations of the agent . . .”misrepresentations of the agent . . .”

But court finds apparent authority and attribution of But court finds apparent authority and attribution of agent fraud to the principal; why?agent fraud to the principal; why?

Monitoring and Duty of Care: “a principal may not turn Monitoring and Duty of Care: “a principal may not turn loose his agent on the general public, and then merely loose his agent on the general public, and then merely sit back and exercise little or no supervision.” -- Does sit back and exercise little or no supervision.” -- Does this make sense? How does such a rule change this make sense? How does such a rule change behaviors?behaviors?

Concluding ThoughtsConcluding Thoughts

Remember all the litigation Remember all the litigation possibilities:possibilities: 3 v. P3 v. P 3 v. A3 v. A P v. AP v. A A v. PA v. P