Start Here: 5 Things You MUST Know
Agent owes 5 duties: Loyalty, Obedience, Reasonable Care, Accounting, Information (LORCA)
Respondeat superior = employer liable for employee torts within scope of employment. Does NOT apply to independent contractors (usually)
Reimbursement = paying back expenses. Indemnity = making agent whole for losses. Know the difference!
3 types of principals for liability: Disclosed, Partially disclosed, Undisclosed — each has different rules
Unpaid agents do NOT owe a lesser standard of care than paid agents
1. Agent's 5 Duties to Principal
Memory Trick: LORCA
Loyalty, Obedience, Reasonable Care, aCcounting, informAtion
1. Loyalty
Act solely in the principal's best interest. This is a fiduciary duty — the highest standard of trust in law. Must NOT compete with or interfere with the principal's business.
2. Obedience
Follow the principal's reasonable instructions. If the principal says "don't do X," the agent must not do X.
3. Reasonable Care
Act with the care, skill, and diligence a reasonable person in that position would use. Unpaid agents owe the SAME standard as paid agents.
4. Accounting
Account for all of the principal's property and money that comes into the agent's possession. Keep track of every penny.
5. Information
Keep the principal informed of all facts relating to the agency. If the agent learns something important, they must tell the principal.
Real-World Scenario: Breach of Loyalty
The Setup: Janet is a sales agent for ABC Insurance Company. She secretly starts her own insurance agency on the side, targeting the same customers.
What Happens: Janet is competing directly with her principal while still employed by them.
The Result: Janet has breached her duty of loyalty (fiduciary duty). ABC can terminate her immediately and sue for any damages caused by the competition.
2. Principal's Duties & Remedies
Principal's 4 Duties to Agent
1. Agreed-on Period of Employment
The principal must honor the agreed employment term. Cannot fire the agent before the term ends without just cause.
2. Compensation
The principal must pay the agent as agreed. Salary, commission, or whatever was negotiated.
3. Reimbursement for Expenses
Pay back expenses the agent necessarily incurred while doing agency duties. Travel costs, supplies, etc.
4. Indemnity for Losses
Make the agent whole for losses or damages suffered because of the agency, through no fault of the agent.
Key Distinction: Reimbursement vs. Indemnity (Exam Favorite)
Reimbursement
Paying back expenses the agent spent doing their job.
Example: Agent drives 200 miles to meet a client. Principal reimburses gas and mileage.
Indemnity
Making the agent whole for losses/damages suffered because of the agency.
Example: Agent is sued by a third party while doing the principal's work. Principal must indemnify the agent for legal costs and any damages awarded.
Remedies
Principal's Remedies vs. Agent
- Sue for breach of agency contract or tort
- Transfer of improperly held property
- Injunction to stop revealing trade secrets
- Injunction to enforce non-compete agreement
Agent's Remedies vs. Principal
- General lien: Hold ALL of principal's property until paid
- Special lien: Hold only specific property related to the transaction
- Sue for unpaid compensation or breach
3. Third-Party Liability
Liability depends on whether the principal is disclosed, partially disclosed, or undisclosed to the third party.
Disclosed Principal
Third party knows BOTH that the agent acts for a principal AND knows the principal's identity.
Example: "I'm buying this for General Motors." Third party can sue GM directly.
Partially Disclosed
Third party knows agent acts for a principal but does NOT know the principal's identity.
Example: "I'm buying this for my client, whose name I can't reveal." Third party can sue both agent and principal.
Undisclosed Principal
Third party has NO IDEA the agent is acting for anyone. Thinks the agent is the actual party.
Example: Agent buys as if for themselves. When principal is discovered, third party must elect to sue either agent or principal (not both).
Election Rule (Undisclosed Principal)
When a third party discovers an undisclosed principal, they must elect to hold either the agent or the principal liable. Once they make a final election, they are bound by it. If they elect to hold the agent liable, the principal is discharged.
Agent's Liability to Third Parties
Breach of Warranty of Authority
Agent acts without actual authority. Liability ends if the principal ratifies.
Incompetent Principal
Agent personally liable when acting for a minor or incompetent person if third party did not know.
Personal Liability Assumed
Agent who voluntarily assumes responsibility is liable for the principal's nonperformance.
Torts and Crimes
Agent is always liable for their own fraudulent or malicious acts, even if acting for a principal.
Real-World Scenario: Disclosed vs. Undisclosed Principal
The Setup: Annie (agent) signs a contract with Tom (supplier) to buy goods. Annie does not reveal that she is acting for Pat (principal). Goods are stolen in transit and never delivered.
What Happens: Tom sues Annie for the purchase price.
The Result: Pat was an undisclosed principal. Tom can sue Annie (he thought she was the buyer). If Annie pays, she can then go after Pat for reimbursement. Had Annie disclosed Pat upfront, Tom's primary action would be against Pat directly.
4. Respondeat Superior & Employment
Respondeat Superior
Latin for "let the master answer." Makes an employer liable for the torts of an employee committed within the scope of employment. In plain English: if your employee hurts someone while doing their job, YOU (the employer) are on the hook.
3 Requirements for Respondeat Superior
Employee Committed a Wrong
The employee must have committed a tort for which they can be held liable.
Employer Has Right to Control
The employer must have retained the right to control the employee's physical conduct.
Within Scope of Employment
The wrong must have been committed while the employee was performing job duties.
Employee vs. Independent Contractor
Employee
Employer controls HOW the work is done. Physical conduct is controlled or subject to control.
Respondeat superior APPLIES
Independent Contractor
The worker controls HOW they do the job. Employer only specifies the result wanted.
Respondeat superior usually does NOT apply
7 Tests for Employee vs. Independent Contractor
1. Extent of control in the agreement
2. Whether worker has a distinct occupation
3. Skill level required (specialized = more likely IC)
4. Who supplies tools and workplace
5. Length of time employed
6. Payment method (hourly = employee; by job = IC)
7. Whether work is part of employer's regular business
Real-World Scenario: Employee or Independent Contractor?
The Setup: Smith has a distribution agreement with XYZ Baking Company. Smith owns his own truck (with XYZ's name and "Owned and Operated by Smith"). He sets his own schedule, builds his own customer base, and receives commissions (not salary).
What Happens: Smith negligently strikes and injures a pedestrian while delivering.
The Result: Despite wearing XYZ's uniform and having XYZ's name on the truck, Smith is most likely an independent contractor. He owns his truck, controls his routes, builds his own customers, and is paid by commission. XYZ has little physical control over Smith. Therefore, XYZ is probably NOT vicariously liable under respondeat superior. The pedestrian can sue Smith directly but likely cannot hold XYZ liable.
3 Exceptions: When Employers ARE Liable for Independent Contractor Torts
Employer's Negligence
Employer was negligent in selecting, instructing, or supervising the contractor.
Nondelegable Duty
Employer had a legal duty that cannot be delegated (e.g., keeping premises safe for customers).
Inherently Dangerous Activities
The work itself is inherently dangerous (demolition, blasting, handling hazardous materials).
5. Agency Termination (7 Ways)
1. Just Cause
Either party terminates because the other breached the agreement.
2. Lapse of Time
The specified time period expires. A 1-year agency ends after 1 year.
3. Accomplishment of Purpose
Mission accomplished. "Sell my house" — once sold, the agency ends.
4. Revocation
The principal cancels the agent's authority.
5. Renunciation
The agent quits the agency relationship.
6. Death or Incapacity
Either party dies or becomes incapacitated. Generally terminates automatically.
7. Changed Circumstances
Significant changes like bankruptcy can terminate the agency.
Key Exceptions for Death/Incapacity
- Banking exception: A bank can pay checks drawn on a depositor's account until it receives actual notice of death
- Government bonds: Notice of principal's death must be given to third parties
- Agent's bankruptcy usually terminates the agency relationship
Real-World Scenario: Banking Exception
The Setup: A business owner dies on Monday morning. The owner had written several checks over the weekend that have not yet cleared.
What Happens: The checks are presented to the bank on Tuesday.
The Result: The bank can still honor (pay) those checks because it has not yet received actual notice of the owner's death. The general rule says agency terminates at death, but this banking exception allows the bank to continue paying until it knows.
Cheat Sheet
Print this page for quick referenceAgent's 5 Duties (LORCA)
- Loyalty (fiduciary; no competing)
- Obedience (follow instructions)
- Reasonable Care (same paid/unpaid)
- Accounting (track all property/money)
- Information (keep principal informed)
Principal's 4 Duties
- Honor employment period
- Compensation
- Reimburse expenses
- Indemnify for losses (not agent's fault)
Respondeat Superior (3 Reqs)
- Employee committed a wrong
- Employer has right to control
- Within scope of employment
3 Principal Types
- Disclosed = identity known
- Partially = exists but unknown
- Undisclosed = totally hidden (elect!)
IC Exceptions (3)
- Employer negligence in hiring
- Nondelegable duty
- Inherently dangerous activities
Termination (7 Ways)
- Just cause, Lapse of time
- Purpose accomplished
- Revocation, Renunciation
- Death/incapacity, Changed circumstances
Exam Trap Alerts
1. "Unpaid Agents Owe Less Care"
WRONG. Unpaid agents owe the SAME standard of care as paid agents. The difference is that unpaid agents cannot be compelled to perform duties — but once they do perform, they must meet the same standard.
2. "Independent Contractors Always Shield the Employer"
WRONG. Three exceptions exist: employer negligence (in hiring/supervising), nondelegable duty, and inherently dangerous activities. The exam loves testing these exceptions.
3. "An Agent Who Follows Instructions Can't Be Liable"
WRONG. An agent is always personally liable for their own torts and crimes, even if instructed by the principal. Following orders is not a defense for committing a wrong.
4. Employee vs. Independent Contractor: The Key Test
The critical question is physical control. Who controls HOW the work is done? Employer controls the method = employee. Worker controls the method = independent contractor. Do not be fooled by uniforms, company names on trucks, or other surface-level factors.
5. Reimbursement vs. Indemnity
Reimbursement = paying back expenses (travel, supplies). Indemnity = covering losses and damages (lawsuits, harm suffered). The exam loves mixing these up.
6. Undisclosed Principal and Election
When a third party discovers an undisclosed principal, they must choose (elect) to sue either the agent or the principal. Once elected, they cannot switch. If they elect the agent, the principal is discharged.
Quick Reference Summary
Agent's 5 Duties (LORCA)
Loyalty, Obedience, Reasonable Care, Accounting, Information.
Reimbursement vs. Indemnity
Reimburse = expenses. Indemnify = losses/damages.
Respondeat Superior
Employer liable for employee torts within scope of employment.
Employee vs. IC
Key test: who controls HOW the work is done?
3 Principal Types
Disclosed, Partially disclosed, Undisclosed. Different liability rules.
Termination
7 ways: cause, time, purpose, revocation, renunciation, death, changed circumstances.