Business Law and the Regulation of Business Chapter 30: Relationship with Third Parties By Richard A. Mann & Barry S. Roberts

Topics Covered in this Chapter I. Relationship of Principal and Third Persons A. Contract Liability of the Principal A. Contract Liability of the Principal B. Tort Liability of the Principal B. Tort Liability of the Principal C. Criminal Liability of the Principal C. Criminal Liability of the Principal II. Relationship of Agent and Third Persons A. Contract Liability of Agent A. Contract Liability of Agent B. Tort Liability of Agent C. Rights of Agent Against Third Person C. Rights of Agent Against Third Person

Types of Principals n Disclosed Principal – principal whose existence and identity are known. n Partially Disclosed Principal – principal whose existence is known but whose identity is not known. n Undisclosed Principal – principal whose existence and identity are not known.

Types of Authority n Actual Authority – power conferred upon the agent by actual consent given by the principal. –Actual Express Authority – derived from written or spoken words of the principal. –Actual Implied Authority – inferred from words or conduct manifested to the agent by the principal. n Apparent Authority – power conferred upon the agent by acts or conduct of the principal that reasonably lead a third party to believe that the agent has such power.

Authority n Delegation of Authority – is usually not permitted unless expressly or impliedly authorized by the principal; if the agent is authorized to appoint other subagents, the acts of these subagents are as binding on the principal as those of the agent. n Ratification – affirmation by one person of a prior unauthorized act that another has done as her agent or as her purported agent.

Termination of Agency n Termination of agency ends actual authority. –Termination by Operation of Law – apparent authority also ends without notice to third parties. –Termination by Act of Parties – apparent authority ends when third parties have actual knowledge or have been given appropriate notice. Actual notice must be given to third parties with whom the agent has previously dealt on credit, has been specially accredited, or has begun to deal; all other third parties need be given only constructive notice.

Termination of Apparent Authority Actual Notice Constructive Notice No Notice Necessary Actual Knowledge No Knowledge Necessary Third Parties with whom agent previously dealt on credit with whom agent has begun to deal to whom agent has been especially accredited Third Parties with whom agent previously dealt on cash to whom there was apparent authority All Other Third Parties

Rules of Contractual Liability n Disclosed Principal – is contractually bound with the third party if the agent acts within her actual or apparent authority in making the contract. n Partially Disclosed Principal – is contractually bound with the third party if the agent acts within her actual or apparent authority in making the contract. n Undisclosed Principal – is contractually bound with third party if the agent acts within her actual authority in making the contract.

Contract Liability of Disclosed Principal Agent Has Actual Authority Principal Third Party Agent Agent Has Apparent Authority But Not Actual Authority Agent Has No Actual or Apparent Authority liable indemnity bound Principal Third Party Agent Principal Third Party Agent

Contract Liability of Partially Disclosed Principal reimbursement bound Agent Has Actual Authority Principal Third Party Agent Agent Has Apparent Authority But Not Actual Authority Agent Has No Actual or Apparent Authority indemnity bound Principal Third Party Agent Principal Third Party Agent bound

Contract Liability of Undisclosed Principal reimbursement bound Agent Has Actual Authority Principal Third Party Agent Agent Has No Actual or Apparent Authority bound Principal Third Party Agent bound

Tort Liability of Principal n Direct Liability of Principal – a principal is liable for his own tortious conduct involving the use of agents. n Authorized Acts of Agent – a principal is liable for torts she authorizes another to commit. n Unauthorized Acts of Agent – a principal is liable for failing to exercise care in employing agents whose unauthorized acts cause harm.

Vicarious Liability of Principal for Unauthorized Acts of Agent n Respondeat Superior – an employer is liable for unauthorized torts committed by an employee in the course of his employment. n Independent Contractor – a principal is usually not liable for the unauthorized torts of an independent contractor.

Criminal Liability of Principal n Authorized Acts – the principal is liable if he directed, participated in, or approved the criminal acts of his agents. n Unauthorized Acts – the principal may be liable either for a criminal act of a managerial person or under liability without fault statutes.

Contract Liability of Agent n Disclosed Principals – the agent is not normally a party to the contract she makes with a third person if she is authorized or if the principal ratifies an unauthorized contract. –Unauthorized Contracts – if an agent exceeds her actual and apparent authority, the principal is not bound but the agent may be liable for breach of warranty or for misrepresentation. –Agent Assumes Liability – an agent may agree to become liable on a contract between the principal and the third party.

Contract Liability of Agent n Partially Disclosed Principal – an agent for a partially disclosed principal is a party to the contract unless otherwise agreed. n Undisclosed Principal – an agent who acts for an undisclosed principal is personally liable on the contract to the third party. n Nonexistent or Incompetent Principal – a person who purports to act as an agent for a principal whom both the agent and the third party know to be nonexistent or wholly incompetent is personally liable on a contract.

Tort Liability of Agent n Authorized Acts – the agent is liable to the third party for his own torts. n Unauthorized Acts – the agent is liable to the third party for his own torts.

Tort Liability Agent’s Tort Authorized Employee’s Tort Unauthorized But Within Scope of Employment Employee’s Tort Outside Authority and Scope of Employment or Independent Contractor’s Tort Unauthorized indemnity liable indemnity* liable * If not illegal or known by A to be wrongful. Principal Third Party Agent Principal Third Party Agent Principal Third Party Agent

Rights of Agent n Disclosed Principal – the agent usually has no rights against the third party. n Partially Disclosed Principal – the agent may enforce the contract against the third party. n Undisclosed Principal – the agent may enforce the contract against the third party.

Types of Agency and Authority