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CHAPTER 30

AGENCY: LIABILITY FOR

CONTRACTS

DAVIDSON, KNOWLES & FORSYTHE

Business Law: Cases and Principles

in the Legal Environment (8th Ed.)



© 2004 West Legal Studies in BusinessA Division of Thomson Learning

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.

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FRAMEWORK FOR CONTRACTUAL LIABILITY

Parties to agency relationship must becognizant of liability of agent, principal,

and third party for proper performance. Rule of law in agency relationships uses

reasonable expectation of third partystandard when determining liability.

Distinction between servant and nonservantnot significant.





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FRAMEWORK FOR CONTRACTUAL LIABILITY

Prime issue is whether principal authorizedagent to enter into contract.

Important factor is whether principal’sidentity revealed to third party.

Principals may be disclosed, partially

disclosed, or undisclosed. Status of principal may affect parties’ legal

rights and duties.





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IMPOSING LIABILITY ON THE PRINCIPAL

Principals liable on contracts only when

agents have authority to contract.

Types of authority include:

– Express Authority: principal tells agent to do

an act.

– Ratification Authority: agent does somethingunauthorized and principal later approves either

by expressed statement or implied by conduct.





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– Incidental Authority: agent has authority to do actsreasonable and necessary to complete task.

– Implied Authority: based on agent’s position or past dealings with third party.

– Emergency Authority: allows agent to respond toemergencies if principal cannot be reached.

– Apparent Authority: principal creates appearanceagency exists or third party reasonably believesagent has broader powers than actually exist.





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– Authority by Estoppel: prevents principal who

misled third party from denying agent’sauthority.

– Imputing the Agent’s Knowledge to the

Principal: principal may be legally responsible

for information known to the agent but not

actually known by principal.





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DISCLOSED PRINCIPAL

Agents indicate they are acting on behalf of

principal.

Agent identifies the principal.

Principal is disclosed and bound to the

contract by any types of authority.





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DISCLOSED PRINCIPAL

Liability of the Agent.

– Generally, agent acting on behalf of principal,

agent not liable for contracts.

– Agent may be liable if:

Agent fails to represent agent’s capacity.

Agent bound if agent intends to be bound. – Third party may sue either agent or principal if

agent fails to disclose.





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DISCLOSED PRINCIPAL


– Can not collect twice so must make an election

to sue either agent or principal.

– Modern approach allows third party to sue

principal and agent together.

– Either defendant can require third party to makean election before judgement.

BUSINESS LAW C & P i i l





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DISCLOSED PRINCIPAL

Warranty of Authority.

– Whenever agent of disclosed principal creates

contract.

– Agent assumed to make the following implied

warranties to third party:

Disclosed principal exists and is competent.

Agent is agent of the principal.

Agent authorized to enter into contract for principal.






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DISCLOSED PRINCIPAL

Warranty of Authority.

– Third party may sue agent for losses caused by

breach of warranty of authority.

– Agent liable for fraud if agent intentionally

misrepresents authority.






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DISCLOSED PRINCIPAL

Liability of the Third Party.

– Lawsuit by the Principal:

When principal disclosed to third party, principalcan sue third party.

If there is express, implied, incidental, emergency,

apparent, or ratification authority.

Third party not liable if only type of authority isestoppel authority.

BUSINESS LAW: Cases & Principles



© 2004 West Legal Studies in Business

A Division of Thomson Learning


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DISCLOSED PRINCIPAL


– Lawsuit by the Agent:

Agent may sue third party if it can be shown thatagent had interest in contract.

Agent can sue if agent tends to be bound.







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UNDISCLOSED PRINCIPAL

Principal whose existence and identity not

known to third party.

Reasons principal undisclosed: – Able to negotiate a deal.

– Negotiate a better deal.

– Conceal an investment in project or donation tocharity.







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– Third party believes contracting with agent and

agent is dealing alone.

– Third party can sue agent if default on contract.

– Third party believes only two parties to the

contract.







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Liability of the Principal.

– Principal liable for breach if third party later

discovers identity of principal if agentauthorized to make agreement.

– Third party must elect to sue agent or principal.

– If third party sues agent and loses before

discovery of principal, third party notconsidered to have made an election andpermitted to sue principal.







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– If third party breaches contract third party can

be sued by agent and undisclosed party. – Principal can sue if contract is assignable.

– Principal can arrange for agent to sue in agent’s

name if contract not assignable or principalwishes to keep identity a secret.







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PARTIALLY DISCLOSED PRINCIPAL

One whose existence is known to the thirdparty but whose identity is not.

Rules applied to partially disclosedprincipals are similar to those applied toundisclosed principals.

General rule is when agent works forpartially disclosed principal, agentpersonally liable for contract.







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ANALYSIS OF AGENT’S CONTRACTS

WITH THIRD PARTIES

Characterize contract involving principal:

– Was person acting as agent for hiring party?

– Did agent enter a contract on behalf of hiring party?

– Was agent acting within scope of contractual authority? What

type/types of authority used?

– Hiring party disclosed, undisclosed, or partially disclosed

principal?

– Did third party elect to sue agent/principal?

– Is agent liable for contractual promises?






pDavidson • Knowles • Forsythe 8th Ed.

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CONTRACT BETWEEN THE

PRINCIPAL AND THE AGENT The Need for a Writing.

– Statute of Frauds may require certain agency

contracts evidenced by a writing.

– Equal Dignities Rule requires some agency

agreements be in writing.






pDavidson • Knowles • Forsythe 8th Ed.

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CONTRACT BETWEEN THE

PRINCIPAL AND THE AGENT Covenants Not to Compete.

– Employment contracts contain promises that

agent will not work for a competing firm. – Contract may provide:

Agent will not moonlight with competition.

Agent will not compete with principal after

employment is terminated.

– Valid for reasonable time and geographicalarea.

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ch30 liabiity