CHAPTER 30 AGENCY: LIABILITY FOR CONTRACTS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

CHAPTER 30CHAPTER 30AGENCY: LIABILITY FOR AGENCY: LIABILITY FOR

CONTRACTSCONTRACTS

CHAPTER 30CHAPTER 30AGENCY: LIABILITY FOR AGENCY: LIABILITY FOR

CONTRACTSCONTRACTS

DAVIDSON, KNOWLES & FORSYTHE DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles Business Law: Cases and Principles

in the Legal Environmentin the Legal Environment (8 (8thth Ed.) Ed.)

2© 2004 West Legal Studies in Business© 2004 West Legal Studies in BusinessA Division of Thomson LearningA Division of Thomson Learning

BUSINESS LAW: BUSINESS LAW: Cases & PrinciplesCases & PrinciplesDavidson Davidson • Knowles • Forsythe 8• Knowles • Forsythe 8 thth Ed. Ed.

FRAMEWORK FOR CONTRACTUAL FRAMEWORK FOR CONTRACTUAL LIABILITYLIABILITY


Parties to agency relationship must be Parties to agency relationship must be cognizant of liability of agent, principal, cognizant of liability of agent, principal, and third party for proper performance.and third party for proper performance.

Rule of law in agency relationships uses Rule of law in agency relationships uses reasonable expectation of third party reasonable expectation of third party standard when determining liability.standard when determining liability.

Distinction between servant and nonservant Distinction between servant and nonservant not significant.not significant.





Prime issue is whether principal authorized Prime issue is whether principal authorized agent to enter into contract.agent to enter into contract.

Important factor is whether principal’s Important factor is whether principal’s identity revealed to third party.identity revealed to third party.

Principals may be disclosed, partially Principals may be disclosed, partially disclosed, or undisclosed.disclosed, or undisclosed.

Status of principal may affect parties’ legal Status of principal may affect parties’ legal rights and duties.rights and duties.



IMPOSING LIABILITY ON THE IMPOSING LIABILITY ON THE PRINCIPALPRINCIPAL


Principals liable on contracts only when Principals liable on contracts only when agents have authority to contract.agents have authority to contract.

Types of authority include:Types of authority include:– Express Authority: principal tells agent to do Express Authority: principal tells agent to do

an act.an act.– Ratification Authority: agent does something Ratification Authority: agent does something

unauthorized and principal later approves either unauthorized and principal later approves either by expressed statement or implied by conduct.by expressed statement or implied by conduct.





Types of authority include:Types of authority include:– Incidental Authority: agent has authority to do acts Incidental Authority: agent has authority to do acts

reasonable and necessary to complete task.reasonable and necessary to complete task.– Implied Authority: based on agent’s position or Implied Authority: based on agent’s position or

past dealings with third party.past dealings with third party.– Emergency Authority: allows agent to respond to Emergency Authority: allows agent to respond to

emergencies if principal cannot be reached.emergencies if principal cannot be reached.– Apparent Authority: principal creates appearance Apparent Authority: principal creates appearance

agency exists or third party reasonably believes agency exists or third party reasonably believes agent has broader powers than actually exist.agent has broader powers than actually exist.





Types of authority include:Types of authority include:– Authority by Estoppel: prevents principal who Authority by Estoppel: prevents principal who

misled third party from denying agent’s misled third party from denying agent’s authority.authority.

– Imputing the Agent’s Knowledge to the Imputing the Agent’s Knowledge to the Principal: principal may be legally responsible Principal: principal may be legally responsible for information known to the agent but not for information known to the agent but not actually known by principal.actually known by principal.



DISCLOSED PRINCIPALDISCLOSED PRINCIPALDISCLOSED PRINCIPALDISCLOSED PRINCIPAL

Agents indicate they are acting on behalf of Agents indicate they are acting on behalf of principal. principal.

Agent identifies the principal.Agent identifies the principal.Principal is disclosed and bound to the Principal is disclosed and bound to the

contract by any types of authority.contract by any types of authority.




Liability of the Agent.Liability of the Agent.– Generally, agent acting on behalf of principal, Generally, agent acting on behalf of principal,

agent not liable for contracts.agent not liable for contracts.– Agent may be liable if:Agent may be liable if:

Agent fails to represent agent’s capacity. Agent fails to represent agent’s capacity. Agent bound if agent intends to be bound. Agent bound if agent intends to be bound.

– Third party may sue either agent or principal if Third party may sue either agent or principal if agent fails to disclose.agent fails to disclose.



DISCLOSED PRINCIPALDISCLOSED PRINCIPAL

Liability of the Agent.Liability of the Agent.– Can not collect twice so must make an election Can not collect twice so must make an election

to sue either agent or principal.to sue either agent or principal.– Modern approach allows third party to sue Modern approach allows third party to sue

principal and agent together.principal and agent together.– Either defendant can require third party to make Either defendant can require third party to make

an election before judgement.an election before judgement.




Warranty of Authority.Warranty of Authority.– Whenever agent of disclosed principal creates Whenever agent of disclosed principal creates

contract.contract.– Agent assumed to make the following implied Agent assumed to make the following implied

warranties to third party: warranties to third party: Disclosed principal exists and is competent.Disclosed principal exists and is competent. Agent is agent of the principal.Agent is agent of the principal. Agent authorized to enter into contract for principal. Agent authorized to enter into contract for principal.




Warranty of Authority.Warranty of Authority.– Third party may sue agent for losses caused by Third party may sue agent for losses caused by

breach of warranty of authority.breach of warranty of authority.– Agent liable for fraud if agent intentionally Agent liable for fraud if agent intentionally

misrepresents authority.misrepresents authority.




Liability of the Third Party.Liability of the Third Party.– Lawsuit by the Principal:Lawsuit by the Principal:

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

If there is express, implied, incidental, emergency, If there is express, implied, incidental, emergency, apparent, or ratification authority.apparent, or ratification authority.

Third party not liable if only type of authority is Third party not liable if only type of authority is estoppel authority.estoppel authority.




Liability of the Third Party.Liability of the Third Party.– Lawsuit by the Agent:Lawsuit by the Agent:

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

Agent can sue if agent tends to be bound.Agent can sue if agent tends to be bound.



UNDISCLOSED PRINCIPALUNDISCLOSED PRINCIPALUNDISCLOSED PRINCIPALUNDISCLOSED PRINCIPALPrincipal whose existence and identity not Principal whose existence and identity not

known to third party.known to third party.Reasons principal undisclosed:Reasons principal undisclosed:

– Able to negotiate a deal.Able to negotiate a deal.– Negotiate a better deal.Negotiate a better deal.– Conceal an investment in project or donation to Conceal an investment in project or donation to

charity.charity.



UNDISCLOSED PRINCIPALUNDISCLOSED PRINCIPAL

Liability of the Agent.Liability of the Agent.– Third party believes contracting with agent and Third party believes contracting with agent and

agent is dealing alone.agent is dealing alone.– Third party can sue agent if default on contract.Third party can sue agent if default on contract.– Third party believes only two parties to the Third party believes only two parties to the

contract.contract.



UNDISCLOSED PRINCIPALUNDISCLOSED PRINCIPALUNDISCLOSED PRINCIPALUNDISCLOSED PRINCIPAL

Liability of the Principal.Liability of the Principal.– Principal liable for breach if third party later Principal liable for breach if third party later

discovers identity of principal if agent discovers identity of principal if agent authorized to make agreement.authorized to make agreement.

– Third party must elect to sue agent or principal.Third party must elect to sue agent or principal.– If third party sues agent and loses before If third party sues agent and loses before

discovery of principal, third party not discovery of principal, third party not considered to have made an election and considered to have made an election and permitted to sue principal.permitted to sue principal.



UNDISCLOSED PRINCIPALUNDISCLOSED PRINCIPAL

Liability of the Third Party.Liability of the Third Party.– If third party breaches contract third party can If third party breaches contract third party can

be sued by agent and undisclosed party.be sued by agent and undisclosed party.– Principal can sue if contract is assignable.Principal can sue if contract is assignable.– Principal can arrange for agent to sue in agent’s Principal can arrange for agent to sue in agent’s

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



PARTIALLY DISCLOSED PARTIALLY DISCLOSED PRINCIPALPRINCIPAL

PARTIALLY DISCLOSED PARTIALLY DISCLOSED PRINCIPALPRINCIPAL

One whose existence is known to the third One whose existence is known to the third party but whose identity is not.party but whose identity is not.

Rules applied to partially disclosed Rules applied to partially disclosed principals are similar to those applied to principals are similar to those applied to undisclosed principals.undisclosed principals.

General rule is when agent works for General rule is when agent works for partially disclosed principal, agent partially disclosed principal, agent personally liable for contract.personally liable for contract.



ANALYSIS OF AGENT’S ANALYSIS OF AGENT’S CONTRACTS CONTRACTS

WITH THIRD PARTIESWITH THIRD PARTIES Characterize contract involving principal: Characterize contract involving principal:

– Was person acting as agent for hiring party?Was person acting as agent for hiring party?– Did agent enter a contract on behalf of hiring party? Did agent enter a contract on behalf of hiring party? – Was agent acting within scope of contractual authority? What Was agent acting within scope of contractual authority? What

type/types of authority used?type/types of authority used?– Hiring party disclosed, undisclosed, or partially disclosed Hiring party disclosed, undisclosed, or partially disclosed

principal?principal?– Did third party elect to sue agent/principal?Did third party elect to sue agent/principal?– Is agent liable for contractual promises?Is agent liable for contractual promises?



CONTRACT BETWEEN THE CONTRACT BETWEEN THE PRINCIPAL AND THE AGENTPRINCIPAL AND THE AGENTCONTRACT BETWEEN THE CONTRACT BETWEEN THE PRINCIPAL AND THE AGENTPRINCIPAL AND THE AGENT

The Need for a Writing.The Need for a Writing.– Statute of Frauds may require certain agency Statute of Frauds may require certain agency

contracts evidenced by a writing.contracts evidenced by a writing.– Equal Dignities Rule requires some agency Equal Dignities Rule requires some agency

agreements be in writing. agreements be in writing.



CONTRACT BETWEEN THE CONTRACT BETWEEN THE PRINCIPAL AND THE AGENTPRINCIPAL AND THE AGENT

Covenants Not to Compete.Covenants Not to Compete.– Employment contracts contain promises that Employment contracts contain promises that

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

Agent will not moonlight with competition.Agent will not moonlight with competition. Agent will not compete with principal after Agent will not compete with principal after

employment is terminated.employment is terminated.

– Valid for reasonable time and geographical Valid for reasonable time and geographical area.area.

Documents

CHAPTER 30 AGENCY: LIABILITY FOR CONTRACTS DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)