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Chapter 36 – Third-Party Relations of the Principal and the Agent

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Chapter 36 – Third-Party Relations of the Principal and the Agent

  1. 1. The Agency Relationship Third-Party Relations of the Principle and Agent© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. Third-Party Relationships of the Principal and the AgentWe intend to conduct our business in away that not only meets but exceeds theexpectations of our customers, businesspartners, shareholders, and creditors, aswell as the communities in which weoperate and society at large. Akira Mori , President and CEO Mori Trust Co., Ltd. (Japan) © 2010 The McGraw-Hill Companies, Inc. All rights reserved.
  3. 3. Learning Objectivesv Contract liability of the principalv Contract liability of the agentv Contract suits against principal and agentv Tort liability of the principalv Tort liability of the agentv Tort suits against principal and agent36 - 3
  4. 4. Overviewv A principal bears tort and contract liability for their own acts or omissionsv A principal controls an agent, thus principal is liable for agent’s acts or omissions If your computer fails, would you sue the company or the inspector who missed the problem?36 - 4
  5. 5. Contract Liabilityv Generally, a principal is liable on a contract made by the agent if the agent had express, implied, or apparent authority to make the contractv Even if the agent lacks authority to contract, a principal may become bound to contract obligations by ratifying a contract made by an unauthorized agent36 - 5
  6. 6. Actual v. Apparent Authorityv An agent’s actual authority may be express (by words) or implied (by conduct)v Apparent authority arises if communications by principal to third party creates reasonable appearance of authority in the agentv See Opp v. Wheaton Van Lines, Inc.: w Plaintiffsued Wheaton for damages and the company alleged her ex-husband had actual or apparent authority to limit coverage36 - 6
  7. 7. Implied Warranty of Authorityv If agent contracts for an existing, competent principal but lacks authority, principal is not bound, but it’s unfair to third partyv Thus, agent bound on the theory of an implied warranty of authority to contractv See Reed v. National Foundation Life Insurance Co. in which plaintiff alleged an insurance agent bound the insurance company under the implied warranty of authority 36 - 7
  8. 8. Ratificationv In ratification, a principal becomes obligated for an unauthorized act done by an agent or person posing as an agent w Act in question usually is contract creationv Ratification relates back to contract creation and binds principal as if agent had authorityv May be express or impliedv Basic contract law applies36 - 8
  9. 9. The Work Connection, Inc. v. Universal Forest Products, Inc.v Facts: w Universal hired a temporary employee from Connection, a temporary employment agency w Universal routinely completed Connection’s work verification forms containing language by which employer (Universal) agrees to indemnify Connection for employee injuries w Injured employee was covered by Connection’s workers’ compensation insurance, but Universal refused to indemnify (pay) Connection36 - 9
  10. 10. The Work Connection, Inc. v. Universal Forest Products, Inc.v Legal Reasoning and Holding: w Trial court granted Universal’s motion for summary judgment and Connection appealed w Issue: whether Universal ratified the indemnity clause by accepting the benefits of employment contract for employee’s labor w Ratification does not occur if the principal – as in this case – is ignorant of material facts, such as time cards with a commitment to indemnify w Judgment for Universal affirmed36 - 10
  11. 11. Contract Liability of Agentv An agent’s liability for a contract depends on the nature of the principle: w An agent who represents a disclosed principal is not liable on contracts made for the principal w Agents are liable on contracts made for a partially disclosed principal unless parties agree otherwise w An agent is liable to third parties on contracts made for an undisclosed principal w See Treadwell v. J.D. Construction Co.36 - 11
  12. 12. Principal’s Tort Liabilityv A principal may be liable for a tort in four circumstances: w Direct liability for torts w Respondeat superior w Independent contractor activities w Misrepresentation36 - 12
  13. 13. Direct Liabilityv A principal may incur direct liability for an agent’s torts because the principal is at fault and liability need not be imputed w Example: sales agent merely applied the dealership’s deceptive sales policies36 - 13
  14. 14. Respondeat Superiorv Under the doctrine of respondeat superior (let the master answer), a principal who is an employer is liable for torts committed by agents (1) who are employees and (2) who commit the tort while acting within the scope of their employment w Principal liable for employee’s negligent and intentional torts36 - 14
  15. 15. Respondeat Superiorv Respondeat superior is a rule of imputed or vicarious liability because it bases an employer’s liability on the relationship with the employee Millan v. Dean Witter Reynolds, Inc. discusses direct liability and respondeat superior in a brokerage house.36 - 15
  16. 16. Scope of Employmentv Generally an employee’s conduct is within the scope of employment if the conduct meets each of four tests: w Conduct was of the kind that the employee was employed to perform w Conduct occurred substantially within the authorized time period w Conduct occurred substantially within the location authorized by the employer w Conduct was motivated at least in part by the purpose of serving the employer36 - 16
  17. 17. Liability for Torts of Independent Contractorsv Since a principal does not control the work of an independent contractor, a principal is not liable for an independent contractor’s torts except: w A principal may be directly liable for negligent retention of an independent contractor (e.g., hiring a dangerously incompetent independent contractor)36 - 17
  18. 18. Liability for Torts of Independent Contractorsv A principal is liable for harm resulting from an independent contractor’s failure to perform a nondelegable duty36 - 18
  19. 19. Liability for Torts of Independent Contractorsv A principal is liable for an independent contractor’s negligent failure to take special precautions to conduct highly dangerous or inherently dangerous activities36 - 19
  20. 20. Liability for Misrepresentationsv Principal may be liable for agent’s false statements directly (intentionally or negligently) or vicariously (agent authorized to make true statements on the subject)v An exculpatory clause may negate tort liability of principal w Reed case example: “I further understand that the agent has no authority to make any representations about the conditions …[of] the policy.”36 - 20
  21. 21. Tort Liability of Agentv Agents are liable for their torts except when: w Agent exercises a privilege of the principal (e.g., uses an easement) w Agent takes privileged action to defend his person or principal’s property w Agent makes a false statement in conduct of principal’s business but doesn’t know the falsity of the statements w Third parties are injured by defective tools or instrumentalities furnished by the principal36 - 21
  22. 22. Test Your Knowledgev True=A, False = B w An agent is always liable for his own torts. w The doctrine of respondeat superior means that a principal is liable for torts committed by employees acting within the course and scope of employment. w If an agent contracts for a legally existing and competent principal but lacks authority to enter contracts, the principal is not bound.36 - 22
  23. 23. Test Your Knowledgev True=A, False = B wA principal is never liable for an independent contractor’s torts. w Apparent authority arises if communications by principal to third party creates reasonable appearance of authority in the agent. w If a principal fails to inform the agent about a defect in the product, the principal will be directly liable for an agent’s torts.36 - 23
  24. 24. Test Your Knowledgev Multiple Choice w Carl owned a a pizza business and employed Zip to deliver pizzas. Carl knew that Zip occasionally drank beer while driving, but didn’t fire Zip. Zip injured Dan while delivering pizzas and driving drunk. Is Carl liable to Dan for Zip’s conduct? (a) No, only Zip is liable. Drunk driving was not within the scope of employment (b) Yes, since Carl knew about Zip’s drinking and negligently retained Zip36 - 24
  25. 25. Test Your Knowledgev Multiple Choice w Carl’s Pizza hired Miller to be general manager. Miller hired Sam for pizza prep work. In general, would Carl’s Pizza be obligated to honor the contract with Sam? (a) No; only the owner of Carl’s Pizza can hire Sam, thus Sam’s contract is void (b) Yes; Miller acted with implied authority since he is general manager and Carl’s Pizza must honor Sam’s employment contract36 - 25
  26. 26. Thought Questionsv Do you think the doctrine of respondeat superior is good policy? Why or why not?36 - 26

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