CHAPTER 30 AGENCY LIABILITY FOR CONTRACTS DAVIDSON KNOWLES

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

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FRAMEWORK FOR CONTRACTUAL LIABILITY l Parties to agency relationship must be cognizant of liability of agent, principal, and third party for proper performance. l Rule of law in agency relationships uses reasonable expectation of third party standard when determining liability. l Distinction between servant and nonservant not significant. © 2004 West Legal Studies in Business A Division of Thomson Learning 2

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. FRAMEWORK FOR CONTRACTUAL LIABILITY l Prime issue is whether principal authorized agent to enter into contract. l Important factor is whether principal’s identity revealed to third party. l Principals may be disclosed, partially disclosed, or undisclosed. l Status of principal may affect parties’ legal rights and duties. © 2004 West Legal Studies in Business A Division of Thomson Learning 3

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. IMPOSING LIABILITY ON THE PRINCIPAL l Principals liable on contracts only when agents have authority to contract. l 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 4

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. IMPOSING LIABILITY ON THE PRINCIPAL l 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 5

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. IMPOSING LIABILITY ON THE PRINCIPAL l 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 6

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. DISCLOSED PRINCIPAL l Agents indicate they are acting on behalf of principal. l Agent identifies the principal. l Principal is disclosed and bound to the contract by any types of authority. © 2004 West Legal Studies in Business A Division of Thomson Learning 7

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. DISCLOSED PRINCIPAL l 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. l Agent bound if agent intends to be bound. l – Third party may sue either agent or principal if agent fails to disclose. © 2004 West Legal Studies in Business A Division of Thomson Learning 8

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. DISCLOSED PRINCIPAL l 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 9

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. DISCLOSED PRINCIPAL l 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. l Agent is agent of the principal. l Agent authorized to enter into contract for principal. l © 2004 West Legal Studies in Business A Division of Thomson Learning 10

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. DISCLOSED PRINCIPAL l 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 11

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. DISCLOSED PRINCIPAL l Liability of the Third Party. – Lawsuit by the Principal: When principal disclosed to third party, principal can sue third party. l If there is express, implied, incidental, emergency, apparent, or ratification authority. l Third party not liable if only type of authority is estoppel authority. l © 2004 West Legal Studies in Business A Division of Thomson Learning 12

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. DISCLOSED PRINCIPAL l 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. l Agent can sue if agent tends to be bound. l © 2004 West Legal Studies in Business A Division of Thomson Learning 13

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. UNDISCLOSED PRINCIPAL l Principal whose existence and identity not known to third party. l Reasons principal undisclosed: – Able to negotiate a deal. – Negotiate a better deal. – Conceal an investment in project or donation to charity. © 2004 West Legal Studies in Business A Division of Thomson Learning 14

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. UNDISCLOSED PRINCIPAL l 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 15

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. UNDISCLOSED PRINCIPAL l 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 16

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. UNDISCLOSED PRINCIPAL l 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 17

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. PARTIALLY DISCLOSED PRINCIPAL l One whose existence is known to the third party but whose identity is not. l Rules applied to partially disclosed principals are similar to those applied to undisclosed principals. l General rule is when agent works for partially disclosed principal, agent personally liable for contract. © 2004 West Legal Studies in Business A Division of Thomson Learning 18

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. ANALYSIS OF AGENT’S CONTRACTS WITH THIRD PARTIES l 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? © 2004 West Legal Studies in Business A Division of Thomson Learning 19

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. CONTRACT BETWEEN THE PRINCIPAL AND THE AGENT l 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. © 2004 West Legal Studies in Business A Division of Thomson Learning 20

BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8 th Ed. CONTRACT BETWEEN THE PRINCIPAL AND THE AGENT l 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. l Agent will not compete with principal after employment is terminated. l – Valid for reasonable time and geographical area. © 2004 West Legal Studies in Business A Division of Thomson Learning 21