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Chapter 30Liability of Principals and Agents

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Agent’s Duties to the Principal

PerformancePerformance NotificationNotification

LoyaltyLoyaltyAccountabilityAccountability

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Agent’s Duty of Loyalty to Principal

An agent owes a fiduciary duty not to act adversely to the interests of the principal. Common breaches include:

• Self-Dealing– Agents are generally prohibited

from undisclosed self-dealing with the principal.

• Usurping an Opportunity– An agent cannot usurp an

opportunity that belongs to the principal.

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Agent’s Duty of Loyalty to Principal (continued)

• Competing with the Principal– Agents are prohibited from

competing with the principal.

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

disclose or misuse confidential information during or after course of the agency.

• Dual Agency– An agent cannot meet a duty of

loyalty to two parties with conflicting interests.

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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 from the principal .

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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

into the contract knows:– That the agent is acting as an

agent for a principal, and– The actual identity of the

principal• The principal is liable to the third

party.• The agent is not liable.

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Partially Disclosed Agency• An agency that occurs if:

– The agent discloses his or her agency status but does not reveal the principal’s identity, and

– The third party does not know the principal’s identity from another source

• Both the principal and the agent are liable to the third party if the principal fails to perform the contract.

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Undisclosed Agency• An agency that occurs when the

third party is unaware of either:– The existence of an agency, or– The principal’s identity

• Both the principal and the agent are liable to the third party if the principal fails to perform the contract.

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Agent Exceeding the Scope of Authority

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

• If the agent exceeds the scope of his or her authority, the principal is not liable on the contract unless the principal ratifies it.

• The agent is liable to the third party for breaching the implied warrant of authority.

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Tort Liability to Third Parties

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

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

• The agent only is liable for the tortious conduct of the principal if he or she directly or indirectly participates in or aids and abets the principal’s conduct.

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Negligence• Principals are liable for negligent

conduct of agents acting within the 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 derive certain benefits from acting through others (agent), that the person should also bear the liability for injuries caused to the third party by the negligent conduct of an agent who is acting within the scope of their employment.

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Negligence (continued)

• Frolic and Detour– Agents sometimes do things during

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

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

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

• Dual-Purpose Mission– An errand or other act that principal

requests of an agent while the agent is on his or her own personal business.

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Intentional Torts• The principal is not liable

for intentional torts of agents and employees that are committed outside the principal’s scope of business.

• Two tests to determine the scope of employment boundaries:1. Motivation Test2. Work-Related Test

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Motivation Test

• If the agent’s motivation in committing an intentional tort is to promote the principal’s business, the principal is liable for injuries caused by the tort.

• If agent’s motivation is personal, principal is not liable.

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Work-Related Test

• Only applied in some jurisdictions

• If agent commits intentional tort within a work-related time or space, the principal is liable.

• Agent’s motivation immaterial.

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Misrepresentation• A principal is liable for the

intentional and innocent misrepresentations made by an agent within the scope of employment.– Intentional misrepresentation

occurs when an agent makes statements that he or she knows are untrue.

– Innocent misrepresentation occurs when an agent negligently makes a misrepresentation to a third party.

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Tort Liability of Principals and Agents to Third Parties (1 of 2)

Agent’s Conduct

Agent Liable

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 the doctrine of respondeat superior if the agent’s negligent act was committed within his scope of employment.

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Tort Liability of Principals and Agents to Third Parties (2 of 2)

Agent’s Conduct

Agent Liable

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’s business.

Intentional Tort

Yes Work-Related Test: The principal is liable if the agent committed the intentional tort within work-related time and space.

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Independent Contractor• Principals often employ outsiders

(persons or businesses who are not employees) to perform certain tasks on their behalf.

Principal

Independent

Contractor

Contract

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Liability for Independent Contractor’s Torts

• A principal is generally not liable for the tortious conduct of independent contractors it hires.

• Independent contractors are personally liable for their own torts.

• The rationale behind this rule is that principals do not control the means by which the results are accomplished.

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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 the

independent contractor• Crucial factor is degree of control