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

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CHAPTER 30AGENCY: LIABILITY FOR CONTRACTS

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


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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.


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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.


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


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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.


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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.


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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

  • 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.


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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, 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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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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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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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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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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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.


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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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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?


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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.


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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 geographical area.


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