CHAPTER 30 AGENCY: LIABILITY FOR CONTRACTS

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

2. 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.

3. FRAMEWORK FOR CONTRACTUAL LIABILITY • Prime issue is whether principal authorized agent to enter into contract. • Important factor is whether principal’s identity revealed to third party. • Principals may be disclosed, partially disclosed, or undisclosed. • Status of principal may affect parties’ legal rights and duties.

4. 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.

5. 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 agent’s 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.

6. IMPOSING LIABILITY ON THE PRINCIPAL • Types of authority include: • Authority by Estoppel: prevents principal who misled third party from denying agent’s authority. • 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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 agent’s name if contract not assignable or principal wishes to keep identity a secret.

18. 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.

19. 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?

20. 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.

21. 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.