113/4213 STUDY GUIDE DUTIES & LIAB OF AGENTS AND PRINCIPALS

Answer 1

4213.02-.03

Question 2

4213.01

a

Answer 2

Agent’s duties and obligations to the principal. This is a fiduciary relationship, one of trust and confidence. Some of the attributes of this fiduciary relationship are the following:

• Loyalty. Undivided loyalty to the principal with no conflict with the agent’s personal interests. The agent should not disclose confidential information to anyone except the principal. The agent should not act for two principals (dual agency) unless both principals know and agree. The agent may not make a secret profit on the subject matter of the agency. The agent cannot engage in self-dealing.
  1. An agent who breaches the fiduciary duty of loyalty loses any compensation, fee, or commission that would have been due to the agent.
  1. If the principal finds the agent has been self-dealing, the transaction is voidable at the principal’s option.

Example: The principal employs an agent to purchase a specified piece of land. If the agent instead purchases the land for herself, this is a breach of the duty of loyalty to the principal.

Question 3

4213.01

b

Answer 3

Agent’s duties and obligations to the principal. This is a fiduciary relationship, one of trust and confidence. Some of the attributes of this fiduciary relationship are the following:

Obedience. The agent should follow instructions unless they are criminal or illegal. If the agent fails to follow instructions, the agent is personally liable for any loss incurred by the disobedience. If there are no instructions, the agent is not disobedient if the agent uses judgment in discretionary or emergency situations.
Example: The principal tells the agent not to give goods to Kevin until Kevin pays. Kevin promises the agent that he will pay in three days if the agent gives him the goods now. If the agent hands over the goods and Kevin does not pay, the agent is liable to the principal for the contract price.

Question 4

4213.01

h

Answer 4

Termination. After the agency relationship is terminated, the former agent cannot continue to act as the principal’s agent. The duty not to disclose confidential information regarding the agency continues, however, even after the agency is terminated.

Question 5

4213.04

c

Answer 5

Indemnity. The principal must indemnify the agent if the agent suffers expenses from a legal action resulting from carrying out the agency.
Example: Erin, acting as agent for Jennifer, her undisclosed principal, enters into a contract with Emily. The contract is breached and Emily sues Erin, collecting a judgment of $5,000. Jennifer must indemnify Erin for the $5,000 loss.

c

Question 6

4213.04

b

Answer 6

These are the duties and obligations that the principal owes to the agent:

Reimbursement. The principal must reimburse the agent if the agent spends their own funds to carry out the agency.
Example: Erin, acting as agent for Jennifer, delivers goods to a customer of Jennifer. The customer refuses to accept the goods and Erin incurs costs to store the goods. Erin is entitled to reimbursement from Jennifer for the storage costs.

Question 7

4213.04

a

Answer 7

These are the duties and obligations that the principal owes to the agent:

Compensation. The principal generally owes to the agent the duty of compensation. If the amount is expressly mentioned in the contract, that will be the amount. If no amount is expressly mentioned, it will be the reasonable amount as determined by the court. The compensation may be on a contingent fee basis. A person may act as a gratuitous agent, but the normal assumption is that a person expects to be compensated for activities done for the benefit of some other person.

Question 8

4213.04

d and e

Answer 8

Contractual. The principal must perform all the terms of the agency contract or be legally liable for breach of contract.

Warnings. The principal must warn the agent of any dangers and unreasonable risks involved in the employment.

Question 9

4213.05

Answer 9

The third party is liable for all the duties and oblgations that arse from the contract.

Question 10

4213.06

Answer 10

Agent’s rights against the principal. The principal’s duties and obligations are the rights of the agent. The agent has the following rights:

Have the principal perform the agency contract. If the principal breaches this contract, the agent can sue the principal.
Compensation. Unless it is agreed otherwise, it is assumed that the principal should compensate the agent for the work. The amount will be the contract amount. If no amount is given in the contract, it will be the reasonable value of the services.
Reimbursement. If the agent expends their own funds in carrying out the agency, the principal must repay the agent.
Indemnity. If the agent pays damages from a legal action based on carrying out the agency, the principal must indemnify the agent.

Question 11

4213.07

Answer 11

Question 12

4213.08

Answer 12

Principal’s rights against the agent. The principal has the following rights:

• Performance of the agency contract by the agent,
• Indemnification from the agent/employee if obligated to pay damages for the torts of the agent/employee in a suit by a third party based upon the doctrine of respondeat superior.
  Example: Agent/employee negligently operates the employer’s delivery truck while working and injures a pedestrian. Under the doctrine of respondeat superior, the injured pedestrian sues the employer and collects $25,000. The employee must indemnify the employer for the amount of $25,000.
• In addition to the rights that the principal has by virtue of the agency relationship, the principal also has the right to expect the agent to act as a fiduciary. This fiduciary relationship requires the agent to place the interests of the principal above their own interests. The principal has the right to sue the agent for breach of this fiduciary duty.

Question 13

4213.09

Answer 13

The principal has the right to expect performance of contracts made with third parties regardless of whether the contract was made personally or by an agent. If the third party has committed a tort against the principal, the principal has a right to sue for damages.

Question 14

4213.10

Answer 14

The principal can enforce their rights in the following ways:

By suing for the legal remedy of damages
By seeking an equitable remedy, such as an injunction, specific performance, rescission of the contract, or an accounting
By revoking the agency. This would involve discharging the agent.

Question 15

4213.11

Answer 15

Third party’s rights against the principal

For contracts. The third party has the rights that arise from the contract. If the principal breaches the contract, the third party can sue the principal for breach of contract.
For torts of the agent/employee. The third party can sue the principal for torts of the agent if the agent/employee was acting in the scope and course of the agency when the tort happened. This is called the doctrine of respondeat superior.

Question 16

4213.12

Answer 16

Third party’s rights against the agent

For contracts. If the principal was undisclosed or partially disclosed, the agent can be sued on the contract. If the principal was disclosed at the time of making the contract, the agent cannot be sued on the contract.
For torts of the agent. The agent, like everyone else, is responsible for his/her own torts. The third party can sue the agent for the agent’s torts against the third party.

Question 17

4213.13

Answer 17

Agent’s liability on contracts

• As a general rule, the agent is not personally liable on contracts the agent makes for the principal.
• With a disclosed principal. When the third party knows that the agent is acting as an agent and also knows the identity of the principal, the agent is not liable on the contract. This is the usual and most common situation.
• With a partially disclosed principal. A partially disclosed principal exists when the third party knows the agent is acting for a principal, but the third party does not know the principal’s identity. The agent is liable on the contract. Once the identity of the principal is discovered, the third party could also sue the principal but cannot recover from both.
• With an undisclosed principal. An undisclosed principal exists when the third party, at the time of contracting, does not know the person is acting as an agent. The agent is liable on the contract. Once discovered, the third party can also sue the principal but cannot recover from both.
• With a nonexistent principal. The agent is personally liable on the contract if the agent contracts with a third person by representing that the agent acts for a fictitious or nonexistent principal. The agent would be breaching the implied warranty of authority that is made to the third party.
• The agent is personally liable to the third party on a contract in the following instances:
  1. The agent makes the contract in her own name. The principal would be either undisclosed or partially disclosed.
  2. The agent guarantees the performance of the principal, and the principal fails to perform.
  3. The agent contracts for a nonexistent principal and makes no guarantees.
  4. The agent acts without authorization from the principal in making the contract.
• The agent is not liable on a contract in the following instances:
  1. The agent contracts for a disclosed principal.
  2. The principal ratifies an unauthorized contract made by the agent for the principal. In this case, the action of the agent is treated as if it were authorized from the beginning.
  3. The third party elects to hold the newly discovered principal liable on a contract made by the agent for an undisclosed or partially disclosed principal.

Question #100165

Question 18

4213.14

Answer 18

Agent’s liability for torts. An agent/employee, like any individual, is liable for his/her own torts. This liability exists even though the agent/employee is working for the principal when the tort occurs. If the injured third party sues the principal under the doctrine of respondeat superior and collects, the agent/employee has the legal duty to indemnify the principal since this is a breach of the duty to carry out the agency using due care.

Question 19

4213.15

Answer 19

Agent’s liability for crimes. The agent/employee, like any individual, is liable for his/her crimes. The fact that the agent/employee is working for a principal when the crime is committed is no defense for committing the crime.

Question 20

4213.16

Answer 20

Agent’s liability on negotiable instruments. An agent will be liable on a negotiable instrument if the agent signs his/her own name without indicating the existence and the identity of the principal.

• If the act is authorized, the agent can expect reimbursement from the principal for the amount paid on the negotiable instrument.
• To avoid liability on the instrument, the agent must indicate that the signing is in a representative capacity (as an agent for another party).
  Example: The agent is not liable on the instrument if agent Ann Addley signs for SAS Corporation like this:
  SAS Corporation
  by Ann Addley, Agent
• The agent will also be liable on a negotiable instrument if the agent signs the principal’s name without authority. This is forgery.

Question 21

4213.17

Answer 21

Principal’s liability for contracts

• When the agent had actual (express or implied) authority, the principal is liable on the contract.
• When the agent did not have authority but the act was later ratified by the principal, the principal is liable on the contract.
• When the purported agent had apparent authority to make the contract, the principal is liable on the contract.
  The principal is not liable even if the purported agent represents that she acts for the principal if the act is unauthorized.
• Settlement before discovery. If an undisclosed principal settles with the agent after the contract is made, after the goods are delivered, and before discovery by the third party, the principal is not liable on the contract. The agent would be liable.
• Settlement after discovery. If an undisclosed principal settles with the agent after the contract is made, after the goods are delivered, and after discovery by the third party, the principal is liable on the contract.
• Notice to agent. Notice to the agent or knowledge obtained by the agent within the scope of the agency binds the principal. The principal need not have actual knowledge to be held liable.
• The principal is directly liable on all contracts he makes with other persons.
• The principal is vicariously liable on contracts made by authorized acts of agents.
• The principal can use the usual defenses to deny liability on a contract. The principal cannot use the defenses that are personal to the agent.

Question 22

4213.18

Answer 22

Principal’s liability for torts of the agent/employee. The principal is liable for torts of the agent if the agent was acting in the scope of and in the course of the agency when the tort happened. This vicarious liability is called the doctrine of respondeat superior. The term “vicarious” means a substitute. The principal is liable as a substitute for the agent. The principal is liable whether the tort was authorized or unauthorized. The principal is liable whether the tort was defined as intentional, negligence, or liability without fault.

• The trend is to expand the doctrine of respondeat superior to make the principal legally liable in more circumstances.
• If the agent/employee is not acting for the principal, the agent is on a detour or on a “frolic of their own” and is the only person liable for the tort.

Question 23

4213.19-.22

Answer 23

Question 24

4213.01

c

Answer 24

Accounting. The agent must keep records for examination by the principal. The agent must not commingle the principal’s property with his own. The agent is legally liable if commingling causes a loss.

If the agent uses the principal’s funds for their own purpose, the principal can sue the agent for the return of the funds. If the agent has purchased property with the funds, the principal can generally elect to take the property even if it is of greater value.

Example: An agent uses the principal’s funds ($500) to purchase a painting. The principal can recover either the $500 or the painting, even if the painting has appreciated in value.

Question 25

4213.01

d

Answer 25

Due care. The agent must use reasonable care and not be negligent in carrying out the agency. Reasonable care is that care a reasonably prudent person would use in like or similar circumstances. The agent may be liable to the principal if the agent is negligent in carrying out the agency.

Question 26

4213.01

e

Answer 26

Give notice of information. The agent must transmit important information to the principal. Failure to do this could be costly to the principal because notice to the agent is legally equivalent to notice to the principal. The agent can be held liable for any damages that result from the failure to give notice.

Question 27

4213.01

f

Answer 27

Indemnification. The agent must indemnify the principal if the principal pays damages in a legal action for the wrongful acts of the agent.

Question 28

4213.01

g

Answer 28

Competition. The agent must not compete with the business activity of the principal.