PowerPoint Slides to Accompany
BUSINESS LAW
E-Commerce and Digital Law
International Law and Ethics
5th Edition
by Henry R. Cheeseman
Chapter 30
Liability of Principals and
Agents
Slides developed by
Les Wiletzky
Wiletzky and Associates, Puyallup, WA
Copyright © 2004 by Prentice-Hall. All rights reserved.
Agent’s Duties to the Principal
Performance
Accountability
Copyright © 2004 by Prentice-Hall. All rights reserved.
Notification
Loyalty
30 - 2
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.
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30 - 3
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.
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30 - 4
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.

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30 - 5
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.

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30 - 6
Duty of Loyalty (continued)

The most common types of breaches of
loyalty by an agent are:
Self-dealing
 Usurping an opportunity
 Competing with the principal
 Misuse of confidential information
 Dual agency

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30 - 7
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
 Use the principal’s property in an authorized
manner.

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30 - 8
Principal’s Duties to the Agent
Duty of
Compensation
Duty of Cooperation
Duties of Reimbursement
and Indemnification
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30 - 9
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.

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30 - 10
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 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.
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30 - 11
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.
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30 - 12
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.

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30 - 13
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
 Partially disclosed
 Undisclosed

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30 - 14
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
 The actual identity of the principal

The principal is liable to the third party.
 The agent is not liable.

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30 - 15
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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30 - 16
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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30 - 17
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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30 - 18
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.
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30 - 19
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.
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30 - 20
Summary: Tort Liability of Principals and
Agents to Third Parties (1 of 2)
Agent’s Conduct
Agent
Liable
Principal Liable
Misrepresentation
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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30 - 21
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 workrelated time and space.
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30 - 22
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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30 - 23
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 special risk, or
 The negligent selection of the independent
contractor

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30 - 24