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8/3/2019 ch30 liabiity
http://slidepdf.com/reader/full/ch30-liabiity 1/21
CHAPTER 30
AGENCY: LIABILITY FOR
CONTRACTS
DAVIDSON, KNOWLES & FORSYTHE
Business Law: Cases and Principles
in the Legal Environment (8th Ed.)
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© 2004 West Legal Studies in BusinessA Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
2
FRAMEWORK FOR CONTRACTUAL LIABILITY
Parties to agency relationship must becognizant of liability of agent, principal,
and third party for proper performance. Rule of law in agency relationships uses
reasonable expectation of third partystandard when determining liability.
Distinction between servant and nonservantnot significant.
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© 2004 West Legal Studies in BusinessA Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
3
FRAMEWORK FOR CONTRACTUAL LIABILITY
Prime issue is whether principal authorizedagent to enter into contract.
Important factor is whether principal’sidentity 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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© 2004 West Legal Studies in BusinessA Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
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 somethingunauthorized and principal later approves either
by expressed statement or implied by conduct.
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© 2004 West Legal Studies in BusinessA Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
5
IMPOSING LIABILITY ON THE PRINCIPAL
Types of authority include:
– Incidental Authority: agent has authority to do actsreasonable and necessary to complete task.
– Implied Authority: based on agent’s position or past dealings with third party.
– Emergency Authority: allows agent to respond toemergencies if principal cannot be reached.
– Apparent Authority: principal creates appearanceagency exists or third party reasonably believesagent has broader powers than actually exist.
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© 2004 West Legal Studies in BusinessA Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
6
IMPOSING LIABILITY ON THE PRINCIPAL
Types of authority include:
– Authority by Estoppel: prevents principal who
misled third party from denying agent’sauthority.
– 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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© 2004 West Legal Studies in BusinessA Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
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.
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© 2004 West Legal Studies in BusinessA Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
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.
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© 2004 West Legal Studies in BusinessA Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
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 makean election before judgement.
BUSINESS LAW C & P i i l
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© 2004 West Legal Studies in BusinessA Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
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.
BUSINESS LAW C & P i i l
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© 2004 West Legal Studies in BusinessA Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
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.
BUSINESS LAW C & P i i l
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© 2004 West Legal Studies in BusinessA Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
12
DISCLOSED PRINCIPAL
Liability of the Third Party.
– Lawsuit by the Principal:
When principal disclosed to third party, principalcan sue third party.
If there is express, implied, incidental, emergency,
apparent, or ratification authority.
Third party not liable if only type of authority isestoppel authority.
BUSINESS LAW: Cases & Principles
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© 2004 West Legal Studies in Business
A Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
13
DISCLOSED PRINCIPAL
Liability of the Third Party.
– Lawsuit by the Agent:
Agent may sue third party if it can be shown thatagent had interest in contract.
Agent can sue if agent tends to be bound.
BUSINESS LAW: Cases & Principles
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© 2004 West Legal Studies in Business
A Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
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 tocharity.
BUSINESS LAW: Cases & Principles
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© 2004 West Legal Studies in Business
A Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
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.
BUSINESS LAW: Cases & Principles
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© 2004 West Legal Studies in Business
A Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
16
UNDISCLOSED PRINCIPAL
Liability of the Principal.
– Principal liable for breach if third party later
discovers identity of principal if agentauthorized 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 notconsidered to have made an election andpermitted to sue principal.
BUSINESS LAW: Cases & Principles
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© 2004 West Legal Studies in Business
A Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
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 principalwishes to keep identity a secret.
BUSINESS LAW: Cases & Principles
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© 2004 West Legal Studies in Business
A Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
18
PARTIALLY DISCLOSED PRINCIPAL
One whose existence is known to the thirdparty but whose identity is not.
Rules applied to partially disclosedprincipals are similar to those applied toundisclosed principals.
General rule is when agent works forpartially disclosed principal, agentpersonally liable for contract.
BUSINESS LAW: Cases & Principles
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© 2004 West Legal Studies in Business
A Division of Thomson Learning
BUSINESS LAW: Cases & Principles Davidson • Knowles • Forsythe 8th Ed.
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?
BUSINESS LAW: Cases & Principles
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© 2004 West Legal Studies in Business
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pDavidson • Knowles • Forsythe 8th Ed.
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.
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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 geographicalarea.