liability bof third parties

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19 - 130 - 1 © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Chapter 30

Liability of Principals and Agents




Agent’s Duties to the Principal

Performance Notification

LoyaltyAccountability




Agent’s Duty of Loyalty toPrincipal

An agent owes a fiduciary dutynot to act adversely to theinterests of the principal.

Common breaches include:• Self-Dealing

– Agents are generally prohibitedfrom undisclosed self-dealing withthe principal.

• Usurping an Opportunity

– An agent cannot usurp anopportunity that belongs to theprincipal.




Agent’s Duty of Loyalty toPrincipal (continued)

• Competing with the Principal

– Agents are prohibited fromcompeting with the principal.

• Misuse of Confidential Information – The agent is under a legal duty not to

disclose or misuse confidentialinformation during or after course ofthe agency.

• Dual Agency – An agent cannot meet a duty of

loyalty to two parties with conflictinginterests.




Contract Liability to Third

Parties• A principal who authorizes

an agent to enter into a

contract with a third party is

liable on the contract. – The third party can

enforce the contract and

recover damages fromthe principal .




Contract Liability to Third

Parties (continued)

• The agent can be held liable

in some circumstances.

– Fully disclosed agency

– Partially disclosed agency

– Undisclosed agency


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Fully Disclosed Agency

• When the third party entering intothe contract knows:

– That the agent is acting as anagent for a principal, and

– The actual identity of theprincipal

• The principal is liable to the thirdparty.

• The agent is not liable.



Partially Disclosed Agency

• An agency that occurs if: – The agent discloses his or her

agency status but does notreveal the principal’s identity,

and – The third party does not know

the principal’s identity fromanother source

• Both the principal and the agentare liable to the third party if theprincipal fails to perform thecontract.



Undisclosed Agency

• An agency that occurs when thethird party is unaware of either:

– The existence of an agency, or

– The principal’s identity

• Both the principal and the agentare liable to the third party if theprincipal fails to perform thecontract.



Agent Exceeding theScope of Authority

• An agent who enters into acontract on behalf of another party impliedly warrants that he or she has the authority to do so.

• If the agent exceeds the scope ofhis or her authority, the principal isnot liable on the contract unlessthe principal ratifies it.

• The agent is liable to the thirdparty for breaching the implied

warrant of authority.



Tort Liability to Third Parties

• The principal and the agent areeach personally liable for their own tortious conduct.

• The principal is liable for thetortious conduct of an agent whois acting within the scope of his or her authority.

• The agent only is liable for the

tortious conduct of the principal ifhe or she directly or indirectlyparticipates in or aids and abetsthe principal’s conduct.



Negligence

• Principals are liable for negligentconduct of agents acting withinthe scope of their employment.

• Liability is based on the common

law doctrine respondent superior. – This doctrine rests on the principle that

if anyone (principal) expects to derivecertain benefits from acting throughothers (agent), that the person should

also bear the liability for injuriescaused to the third party by thenegligent conduct of an agent who isacting within the scope of their employment.



Negligence (continued)

• Frolic and Detour – Agents sometimes do things during

the course of his or her employmentto further their own interests, rather than the principal’s.

• “Coming and Going” Rule – Principal is generally not liable for

injuries caused by its agents andemployees while they are on their way to or from work.

• Dual-Purpose Mission

– An errand or other act that principalrequests of an agent while the agentis on his or her own personal business.



Intentional Torts

• The principal is not liable for intentional torts of agentsand employees that arecommitted outside the

principal’s scope ofbusiness.

• Two tests to determine thescope of employment

boundaries:1. Motivation Test

2. Work-Related Test



Motivation Test

• If the agent’s motivation in

committing an intentionaltort is to promote the

principal’s business, theprincipal is liable for injuriescaused by the tort.

• If agent’s motivation ispersonal, principal is notliable.


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© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman

Work-Related Test

• Only applied in some jurisdictions

• If agent commits intentional

tort within a work-relatedtime or space, the principal isliable.

• Agent’s motivation

immaterial.




Misrepresentation

• A principal is liable for theintentional and innocentmisrepresentations made by anagent within the scope ofemployment.

– Intentional misrepresentationoccurs when an agent makesstatements that he or sheknows are untrue.

– Innocent misrepresentation

occurs when an agentnegligently makes amisrepresentation to a thirdparty.




Tort Liability of Principals and Agents to ThirdParties (1 of 2)

Agent’sConduct

AgentLiable

Principal Liable

Misrepre-

sentation

Yes The principal is liable for the

intentional and innocent

misrepresentations made by an

agent acting within the scope of

his or her authority.

Negligence Yes The principal is liable under thedoctrine of respondeat superior if

the agent’s negligent act was

committed within his scope of

employment.




Tort Liability of Principals and Agents to ThirdParties (2 of 2)

Agent’sConduct

AgentLiable

Principal Liable

Intentional

Tort

Yes Motivation Test: The principal is

liable if the agent’s motivation in

committing the intentional tort was

to promote the principal’sbusiness.

Intentional

Tort

Yes Work-Related Test: The principal is

liable if the agent committed the

intentional tort within work-related

time and space.




Independent Contractor

• Principals often employ outsiders(persons or businesses who are notemployees) to perform certaintasks on their behalf.

Principal

Independent

Contractor

Contract




Liability for Independent

Contractor’s Torts

• A principal is generally not liablefor the tortious conduct ofindependent contractors it hires.

• Independent contractors arepersonally liable for their own torts.

• The rationale behind this rule isthat principals do not control the

means by which the results areaccomplished.



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Liability for Independent

Contractor’s Torts (continued)

• A principal is, however, liable for the tortious conduct of an

independent contractor involving:

– Inherently dangerous activities.

– The negligent selection of theindependent contractor

• Crucial factor is degree of control

liability bof third parties

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