Question

LAW OF ACCOUNTANTS
A QUESTION OF ETHICS-- Agency Formation and Duties: Emergency One, Inc. (EO), makes fi re and rescue vehicles. Western Fire Truck, Inc., contracted with EO to be its exclusive dealer in Colorado and Wyoming through December 2003. James Costello, a Western salesperson, was authorized to order EO vehicles for his customers. Without informing Western, Costello e-mailed EO about Western’s diffi culties in obtaining cash to fund its operations. He asked about the viability of Western’s contract and his possible employment with EO. On EO’s request, and in disregard of Western’s instructions, Costello sent some payments for EO vehicles directly to EO. In addition, Costello, with EO’s help, sent a competing bid to a potential Western customer. EO’s representative e-mailed Costello, “You have my permission to kick [Western’s] ass.” In April 2002, EO terminated its contract with Western, which, after reviewing Costello’s e-mail, fi red Costello. Western fi led a suit in a Colorado state court against Costello and EO, alleging, among other things, that Costello breached his duty as an agent and that EO aided and abetted the breach. [ Western Fire Truck, Inc. v. Emergency One, Inc., 134 P.3d 570 (Colo.App. 2006)]

(a) Was there an agency relationship between Western and Costello? Western required monthly reports from its sales staff, but Costello did not report regularly. Does this indicate that Costello was not Western’s agent? In determining whether an agency relationship exists, is the right to control or the fact of control more important? Explain.
(b) Did Costello owe Western a duty? If so, what was the duty? Did Costello breach it? If so, how?
(c) A Colorado state statute allows a court to award punitive damages in “circumstances of fraud, malice, or willful and wanton conduct.” Did any of these circumstances exist in this case? Should punitive damages be assessed against either defendant? Why or why not?

Answer 1

1. Agency Relationship arises through Arrangement/Ratification/Estoppel/Operation of Law.

Further, Agencies duties includes following:

• Performance: agent must skills represented to the principal or must use due diligence and skill in performing duties,
• Loyalty: an agent has the duty to follow all clearly stated instruction of the principal and lawful instructions,
• Notification: the principal must be notified of all matters relating to subject matter of the agency by the agent
• Obedience: all clearly stated instruction of the principal and lawful instructions must be followed by the agent

Accounting: an agent has the duly to provide all properly and funds received records as well as funds paid out on behalf of the principal to the principal

Duties of the Principal include the following:

• Compensation: principal must pay the agent for services at a rate agreed upon or reasonable value unless the relationship is gratuitious
• Reimbursement and Indemnification: principal must reimburse the agent for directed disbursements and other expenditures pertaining to job
• Safe working conditions: principal must provide safe working conditions for the agent/employee
• Cooperation: principal must cooperate with and assist the agent in performing the duties as per contract

Looking at above, it seems that agency relationship exists since principal exercises a right to control the agent's work performance.

Answer-2

There was sufficient evidence as per court that Costello was acting as an agent for Western and hence, he owed a fiduciary duty to Western.

Costello acted as an agent of Western with respect to his employment as a salesman of fire trucks, therefore he was acting as a fiduciary of Western with respect to his employment by Western.

Answer-3

The court stated that beyond a reasonable doubt E-one was aware that its interactions with Costello which caused substantial harm to Western

The court levied punitive damages $50k against E-one and $1 against Cestello.