This morning Barbri sent Professor Michael Closen to lecture about Agency and Partnership. Closen was an effective teacher, having written Bar exam questions in several states, with an effective outline for both learning the material and for studying it later.
Closen stressed certain areas of Agency and Partnership law as particularly important, one of which was fiduciary duties. He explained the importance of our learning fiduciary duties because of the subject's prevalence on the bar. He also explained that this subject regularly appears on bar exams because the subject matter is actually important to attorney's in real life.
What is a fiduciary?
A fiduciary duty is a duty owed by an agent to his principal. According to my outline, the law holds fiduciary interests in high regard and rigorously enforces fiduciary duties.
An agent is someone who is an employee or independent contractor for a principal. The principal pays the agent to do some kind of work, whether salaried, in the case of employees, or by piecework, hourly or some other means in the case of independent contractors. Independent contractors are not necessarily agents, but if independent contractors are held to be/considered agents, then they owe the same fiduciary duties to principal whether as a general employee.
If Owner of Market hires Manager to run Market then Owner is the principal and Manager is the agent. This case refers to an employment relationship. If X hires hires Y to clean re-roof his home and only to re-roof his home, then X is the principal and Y is the agent. This case refers to an independent contractor situation.
Fiduciary Duties
Duty of LOYALTY, duty of OBEDIENCE, duty of CARE, duty to ACCOUNT, Duty NOT TO COMPETE with principal & NOT TO BE A DUAL AGENT.
DUTY OF LOYALTY
The agent must place the principal's interests first, foremost and exclusive to all other interests (including the agent's own interest, such as in self-dealing). The agent cannot benefit in a conflict of interest fashion while in service of the principal.
Example: A is hired to purchase a plot of land for P but instead purchases the land for himself. A then sells the land to X for a profit. This act breaches the duty of loyalty because A took from P the investment opportunity that P had hired A to perform. However, A could have prevented his breach of duty by making full disclosure that he was going to buy the land himself and if he offered P the chance to buy the lot for a reasonable time.
(I'm not sure what reasonable means. The term "reasonable" comes up all the time in many types of law. The objective standard presented by "reasonable" is a legal fiction with no specific definition so it is something for the jury to decide in any given situation.)
DUTY OF OBEDIENCE
This one is easy. The agent must obey the reasonable instructions of the principal. The agent has a responsibility to do the job he was hired to do.
Example of a breach: P hires A to run Shop. P orders A to deal with X to purchase widgets. A purchases equal-quality widgets from Y at a substantially higher price even though X had plenty of widgets available. A's act of disobedience was unreasonable under the circumstances because he could have contracted with X to save money as he was told.
Example of not-a-breach: P hires A to run the same shop. P orders A to murder X and steal the widgets. This request is not reasonable because, not only is it out of the scope of A's duties, but the act is illegal. Illegal acts are presumptively unreasonable so no breach has occurred.
DUTY OF CARE
The agent must exercise reasonable care in performing functions for the principal.
Example of a breach: P hires A to run Shop. P tells A to contract to purchase widgets at the best price he can find. X calls to solicit widgets right after A gets off the phone with P. X's widgets cost $100/widget more than Y's widgets cost even though the widgets are comparable. A did not do any research or shopping around, but immediately contracted to purchase widgets from X.
A has exercised his duty of care because he did not even try to find cheaper widgets.
Example of not-a-breach: P gives A the same instructions as above. X calls to solicit widgets and A tells him he will call back to confirm the purchase later. A calls Y, Z, L, F and M, none of which can provide him with a cheaper price for comparable widgets than X. Because, he needs to order the widgets that day to fill an order to C, A contracts with X to purchase widgets. R calls the next day to solicit widgets at a substantially cheaper price than X.
Here, A has performed the duty of care because he made a reasonable effort to find less expensive widgets in the time he was allotted to perform the task.
DUTY TO ACCOUNT
The agent must account to the principal for money and property received by the agent in the course of agency functioning.
Example: A is regularly required to fly for his work under P. P pays for the flight but A is rewarded the frequent flier miles.
If A does not report his frequent flier miles to P, then he has breached his duty to account.
If A reports his frequent flier miles to P, then he has not breached his duty to account.
DUTY NOT TO COMPETE WITH PRINCIPAL & NOT TO BE A DUAL AGENT
The agent must NOT compete with the principal, and the agent cannot serve as a dual agent for two principals (unless the agent has disclosed the proposed dual representation to both principals and has obtained their consent to such dual representation).
Example: A is hired by P to contract for the purchase of land in Constantinople. X hires A to sell land in Constantinople.
Here, A would be a dual agent to contracting parties, and would violate his duty not to be a dual agent to both parties, unless he made full disclosure to each party. He would have to explain to each party that he was simultaneously representing the other party in the transaction, and both parties would have to give consent.
Example: A is hired to purchase a plot of land for P but instead purchase the land for himself. A then sells the land to X for a profit. This act breached the duty of loyalty because A took from P the investment opportunity that P had hired A to perform. However, A could have prevented his breach of duty by making full disclosure that he was going to buy the land himself and if he offered P the chance to buy the lot for a reasonable time.
Here, A has breached his duty not to compete with P by buying the land for himself that he was hired to buy for P.
But Alex, isn't that the same hypothetical from duty of obedience? Why yes it is. I'm glad you asked.
The duty of obedience is an umbrella duty that will tack on to or encompass any other duty. Closen explained that if on the Bar Exam there is one breach of duty then there will be two breaches, one for the initial/specific breach, in this case the breach of the duty not to compete, and the second for breach of obedience.
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