Introduction
In the world of commerce, most individuals and organizations act on the basis of delegation. And delegation of authority leads to the formulation of an agency relationship. The agency theory is based on the view that a principal vests power in an agent to represent the principal in certain situations specified in the agreement. This creates a fiduciary relationship and the agent will have to act in the best interest of the principal. Fiduciary relationships mean an agent must act in the best interest of the principal. This include the provision of some parameters within which the agent can have independence to act responsively and appropriately to attain the best interest of the principal. This is a general convention that guides agent-principal relationships.
In the case of Romanelli v. Citibank, the central argument was about the treatment of a dishonest agent. The issue was whether a third party was liable to the actions of a dishonest agent or the obligation was with the principal. The main issue had to do with who held the greater responsibility for a dishonest and misleading agent.
According to the facts of the case, Schor was an authorized agent of Romanelli. He had the legal right to represent Romanelli in commercial and legal transactions. In this process, Schor had an obligation to work within the interests and tenets of agency agreements and arrangements. However, the relevant issue occurred when Schor convinced Romanelli to open an account at Citibank to reduce his spending costs and gain some benefits. Initially, Romanelli gave his consent and signed the forms for the creation of the bank account. However, Romanelli changed his mind about the account and instructed Schor not to open the bank account.
In spite of the caution Romanelli gave to Schor as a principal, Schor fraudulently and maliciously opened the bank account with the signed forms and documents. Secretly, Schor embezzled funds into the account and stole money from Romanelli. Romanelli sought to sue Citibank for opening an account for a fraudulent person who mispresented him.
As the proceedings of the court commenced, the main issue of contention was whether Schor opened the account as an agent or as an independent fraudulent person. Romanelli argued that he did not authorize the account opening and as such, the bank was responsible for negligently granting Schor an accessory through which he could commit a crime. On the other hand, Citibank argued that they acted in good faith because Schor was an authorized agent of Romanelli. As such, there was no way they could foresee that Schor was fraudulent or dishonest. Therefore, they acted within the tenets of agent-principal relationships.
The main rules are that an agent has a fiduciary relationship with the principal because such a relationship is necessary to enable agents to meet their obligations and the best interest of principals . This is because there is the need for some kind of easy method to be put in place to allow agents to work efficiently. Commercially, it is just not practical for every action of an agent to be verified before an action would be done. This is because most transactions are done by agents in America. It is just not logical to check every account opening authorization back to the principal on every single occasion.
In terms of ethics, there is the need for agents to act in good faith. In cases where an agent chooses to act in bad faith, there is a lot of negative possibilities that could occur. Thus, in American civil law procedures, an entity dealing with an agent has to understand the kind of relationship that existed, and do things within the reasonable framework in ways that promotes fairness.
Therefore, the court held that Citibank acted within a reasonable limit. This is because Schor was legitimately an agent of Romanelli. He was authorized by Romanelli in the past and there was no way the bank could have foreseen Schor’s plans to fraudulently and dishonestly set up a bank account to embezzle money. Therefore, they had to open the account. Furthermore, it is going to be unfair to impose a duty of care on Citibank to check whether an instruction was given by Romanelli to stop him or not. It was reasonable for them to authorize the account and accept the account opening documents as authentic. On the other hand, Romanelli should have sent information to the bank if he had foreseen some traces of distrust with his agent. This was therefore not what happened so it will be unfair to hold Citibank accountable for the fraudulent act of Schor.
In conclusion, this case showed that unauthorized endorsements by agents must be checked by the principal. Thus, principals have to check to ensure their agents are not acting in bad faith.
References
Ashcroft, J., & Ashcroft, J. (2013). Cengage Advantage Books: Law for Business. Mason, OH: Cengage.
Clarkson, K. W., LeRoy Miller, R., & Cross, F. B. (2015). Business Law: Text and Cases: Legal, Ethical, Global, and Corporate Environment. Mason, OH: Cengage.
