1. Copyright © 2004 by Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany BUSINESS LAW E-Commerce and Digital Law International Law and Ethics 5 th Edition by Henry R. Cheeseman Slides developed by Les Wiletzky Wiletzky and Associates, Puyallup, WA Chapter 30 Liability of Principals and Agents Chapter 30 Liability of Principals and Agents

2. 30 - 2Copyright © 2004 by Prentice-Hall. All rights reserved. Agent’s Duties to the Principal Performance Notification LoyaltyAccountability

3. 30 - 3Copyright © 2004 by Prentice-Hall. All rights reserved. Duty of Performance An agent’s duty to a principal that includes: 1. Performing the lawful duties expressed in the contract, and 2. Meeting the standards of reasonable care, skill, and diligence implicit in all contracts.

4. 30 - 4Copyright © 2004 by Prentice-Hall. All rights reserved. Duty of Performance (continued)  An agent who does not perform his or her express duties or fails to use the standard degree of care, skill, or diligence is liable to the principal for breach of contract.  An agent who has negligently (or intentionally) failed to perform properly is also liable in tort.

5. 30 - 5Copyright © 2004 by Prentice-Hall. All rights reserved. Duty of Notification  An agent’s duty to notify the principal of information he or she learns from a third party or other source that is important to the principal.  The agent is liable to the principal for any injuries resulting from a breach of this duty.

6. 30 - 6Copyright © 2004 by Prentice-Hall. All rights reserved. Duty of Loyalty  The agency relationship is based on trust and confidence.  An agent owes a fiduciary duty not to act adversely to the interests of the principal.  If this duty is breached, the agent is liable to the principal.

7. 30 - 7Copyright © 2004 by Prentice-Hall. All rights reserved. Duty of Loyalty (continued)  The most common types of breaches of loyalty by an agent are: Self-dealing Self-dealing Usurping an opportunity Usurping an opportunity Competing with the principal Competing with the principal Misuse of confidential information Misuse of confidential information Dual agency Dual agency

8. 30 - 8Copyright © 2004 by Prentice-Hall. All rights reserved. Duty of Accountability  A duty that an agent owes to maintain an accurate accounting of all transactions undertaken on the principal’s behalf.  This duty also requires the agent to: Maintain a separate account for the principal, and Maintain a separate account for the principal, and Use the principal’s property in an authorized manner. Use the principal’s property in an authorized manner.

9. 30 - 9Copyright © 2004 by Prentice-Hall. All rights reserved. Principal’s Duties to the Agent Duty of Compensation Duties of Reimbursement and Indemnification Duty of Cooperation

10. 30 - 10Copyright © 2004 by Prentice-Hall. All rights reserved. Duty of Compensation  A duty that a principal owes to pay an agreed-upon amount to the agent either upon completion of the agency or at some other mutually agreeable time.  If there is no agreement as to the amount of compensation, the law implies a promise that the principal will pay the agent the customary fee paid in the industry.

11. 30 - 11Copyright © 2004 by Prentice-Hall. All rights reserved. Duties of Reimbursement and Indemnification Duty to Reimburse  A duty that a principal owes to repay money to the agent if the agent spent his or her own money during the agency on the principal’s behalf. Duty to Reimburse  A duty that a principal owes to repay money to the agent if the agent spent his or her own money during the agency on the principal’s behalf. Duty to Indemnify  A duty that a principal owes to protect the agent for losses the agent suffered during the agency because of the principal’s misconduct. Duty to Indemnify  A duty that a principal owes to protect the agent for losses the agent suffered during the agency because of the principal’s misconduct.

12. 30 - 12Copyright © 2004 by Prentice-Hall. All rights reserved. Duty of Cooperation  A duty that a principal owes to cooperate with and assist the agent in the performance of the agent’s duties and the accomplishment of the agency.

13. 30 - 13Copyright © 2004 by Prentice-Hall. All rights reserved. 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 if the principal fails to perform it.

14. 30 - 14Copyright © 2004 by Prentice-Hall. All rights reserved. Contract Liability to Third Parties (continued)  The agent can also be held liable on the contract in certain circumstances.  Liability depends on whether the agency is classified as: Fully disclosed Fully disclosed Partially disclosed Partially disclosed Undisclosed Undisclosed

15. 30 - 15Copyright © 2004 by Prentice-Hall. All rights reserved. Fully Disclosed Agency  An agency that results if the third party entering into the contract knows: That the agent is acting as an agent for a principal, and That the agent is acting as an agent for a principal, and The actual identity of the principal The actual identity of the principal  The principal is liable to the third party.  The agent is not liable.

16. 30 - 16Copyright © 2004 by Prentice-Hall. All rights reserved. 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 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 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.

17. 30 - 17Copyright © 2004 by Prentice-Hall. All rights reserved. Undisclosed Agency  An agency that occurs when the third party is unaware of either: The existence of an agency, or The existence of an agency, or The principal’s identity The principal’s identity  Both the principal and the agent are liable to the third party if the principal fails to perform the contract.

18. 30 - 18Copyright © 2004 by Prentice-Hall. All rights reserved. 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.

19. 30 - 19Copyright © 2004 by Prentice-Hall. All rights reserved. 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.

20. 30 - 20Copyright © 2004 by Prentice-Hall. All rights reserved. Tort Liability to Third Parties (continued)  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.

21. 30 - 21Copyright © 2004 by Prentice-Hall. All rights reserved. Summary: Tort Liability of Principals and Agents to Third Parties (1 of 2) Agent’s Conduct Agent Liable Principal Liable MisrepresentationYes The principal is liable for the intentional and innocent misrepresentations made by an agent acting within the scope of his or her authority. NegligenceYes The principal is liable under the doctrine of respondeat superior if the agent’s negligent act was committed within his scope of employment.

22. 30 - 22Copyright © 2004 by Prentice-Hall. All rights reserved. Summary: 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. Yes Work-Related Test: The principal is liable if the agent committed the intentional tort within work- related time and space.

23. 30 - 23Copyright © 2004 by Prentice-Hall. All rights reserved. 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.

24. 30 - 24Copyright © 2004 by Prentice-Hall. All rights reserved. Liability for Independent Contractor’s Torts (continued)  A principal is, however, liable for the tortious conduct of an independent contractor involving: A nondelegable duty, A nondelegable duty, A special risk, or A special risk, or The negligent selection of the independent contractor The negligent selection of the independent contractor