CHAPTER 30

AGENCY: LIABILITY FOR CONTRACTS

DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

FRAMEWORK FOR CONTRACTUAL LIABILITY

Parties to agency relationship must be cognizant of liability of agent, principal, and third party for proper performance. Rule of law in agency relationships uses reasonable expectation of third party standard when determining liability. Distinction between servant and nonservant not significant.
2004 West Legal Studies in Business A Division of Thomson Learning

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

FRAMEWORK FOR CONTRACTUAL LIABILITY

Prime issue is whether principal authorized agent to enter into contract. Important factor is whether principals identity revealed to third party. Principals may be disclosed, partially disclosed, or undisclosed. Status of principal may affect parties legal rights and duties.
2004 West Legal Studies in Business A Division of Thomson Learning

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

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 something unauthorized and principal later approves either by expressed statement or implied by conduct.
2004 West Legal Studies in Business A Division of Thomson Learning

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

IMPOSING LIABILITY ON THE PRINCIPAL

Types of authority include:

Incidental Authority: agent has authority to do acts

reasonable and necessary to complete task. Implied Authority: based on agents position or past dealings with third party. Emergency Authority: allows agent to respond to emergencies if principal cannot be reached. Apparent Authority: principal creates appearance agency exists or third party reasonably believes agent has broader powers than actually exist.
2004 West Legal Studies in Business A Division of Thomson Learning

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

IMPOSING LIABILITY ON THE PRINCIPAL

Types of authority include:

Authority by Estoppel: prevents principal who

misled third party from denying agents authority. Imputing the Agents Knowledge to the Principal: principal may be legally responsible for information known to the agent but not actually known by principal.
2004 West Legal Studies in Business A Division of Thomson Learning

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

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.

2004 West Legal Studies in Business A Division of Thomson Learning

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

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 agents capacity. Agent bound if agent intends to be bound.

Third party may sue either agent or principal if

agent fails to disclose.

2004 West Legal Studies in Business A Division of Thomson Learning

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

DISCLOSED PRINCIPAL

Liability of the Agent.

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 make an election before judgement.

2004 West Legal Studies in Business A Division of Thomson Learning

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

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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2004 West Legal Studies in Business A Division of Thomson Learning

BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

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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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

DISCLOSED PRINCIPAL

Liability of the Third Party.

Lawsuit by the Principal: When principal disclosed to third party, principal can sue third party. If there is express, implied, incidental, emergency, apparent, or ratification authority. Third party not liable if only type of authority is estoppel authority.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

DISCLOSED PRINCIPAL

Liability of the Third Party.

Lawsuit by the Agent: Agent may sue third party if it can be shown that agent had interest in contract. Agent can sue if agent tends to be bound.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

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 to

charity.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

UNDISCLOSED PRINCIPAL

Liability of the Agent.

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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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

UNDISCLOSED PRINCIPAL

Liability of the Principal.

Principal liable for breach if third party later

discovers identity of principal if agent authorized 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 not considered to have made an election and permitted to sue principal.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

UNDISCLOSED PRINCIPAL

Liability of the Third Party.

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

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

PARTIALLY DISCLOSED PRINCIPAL

One whose existence is known to the third party but whose identity is not. Rules applied to partially disclosed principals are similar to those applied to undisclosed principals. General rule is when agent works for partially disclosed principal, agent personally liable for contract.
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

ANALYSIS OF AGENTS 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?
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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

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.

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BUSINESS LAW: Cases & Principles

Davidson Knowles Forsythe 8th Ed.

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 geographical

area.
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