Agent's and Principal's Liability Quiz

Agent's Liability

• An agent acts as the face of the transaction with a third party and is the focus of expectations.
• If an agent makes a contract for an unidentified principal, then the principal and third party are in a contract with each other, and the agent is also a party to the contract, unless they agree otherwise.
• If an agent makes a contract for a non-existent principal, they become a party to the contract unless the third party agrees otherwise.
• An agent who makes a contract on behalf of another person without the power to bind that person gives an implied warranty of authority and is liable to the third party for damages.

Principal Liability to Third Parties for Torts of an Agent

• A principal is responsible to a third party injured by the agent's tort if the agent acted within their authority, or the principal ratifies the act.
• A principal is liable to a third party if the agent's conduct is tortious.

Principal Liability to Third Parties for Torts of an Agent with Apparent Authority

• An undisclosed principal is liable for the actions of an agent who has apparent authority.

Liability of Undisclosed Principal

• Principals, whether disclosed or undisclosed, are liable on contracts made by their agents acting with actual authority.
• The actual authority of the agent is what matters.
• In Watteau v. Fenwick, The undisclosed principal was held liable for a contract to buy cigars, even though the manager had no authorization to purchase them. The court applied the doctrine of "usual authority," stating the principal is liable for acts of the agent typically entrusted to someone in that position.

Control over a Business and Agency Relationships

• Case law implies that the test for an agency relationship is whether the principal retains the right to control the details of the day-to-day operations of the business.
• Influence over results is insufficient.
• There is a distinction between the power to control and the right to control details.
• In Sun Oil Co. v. Wortman, the oil company was found not to be the principal of a service station owner because there was no day-to-day operational control.

Franchises and Agency Law

• Franchisor/Franchisee agreements define control over operation of the business through varying degrees of control.
• Control must be meaningful day-to-day operational control and authority to establish an agency relationship.
• In Holiday Inns, Inc. v. Murphy, a franchisee was not deemed to be an agent of the franchisor because the franchisor only had oversight of the "system," and did not exercise control over daily operations and maintenance.
• Common control provisions in franchise agreements include operating standards and guidelines, training, compliance with laws, franchisor inspections, the right to terminate, and insurance requirements.

Control and McDonalds

• Franchisors need to exercise control concerning food handling and preparation because of the risk of foodborne illnesses.
• In Miller v. McDonalds Corp., the court determined that the franchisee, who was responsible for food handling, was subject to the control of the franchisor due to the franchise agreement, leading to apparent agency and the application of vicarious liability.
• The franchisor's branding and reputation can create the perception that the franchisee is acting as its agent.

Fiduciary Duties of An Agent

• The duty of loyalty, requiring the agent to act in the best interest of the principal.
• The duty to refrain from acquiring a material benefit from a third party in connection with transactions on behalf of the principal.
• The duty not to deal with the principal as or on behalf of an adverse party.
• The duty not to use the principal's property for the agent's own purposes or those of a third party.
• The duty not to use or communicate confidential information for the agent's own purposes or those of a third party.
• The duty to act within the scope of the agent's actual authority.
• The duty to comply with all lawful instructions of the principal.
• The duty to act with care, competence, and diligence, and to demonstrate good conduct.
• The duty to provide the principal with information they would want to know.

Reading v. Regem

• An agent who receives secret profits through their position violates the fiduciary duty of loyalty.
• The court declared that "the servant being unjustly enriched by virtue of his service without his master’s sanction."

Test your knowledge on the legal liabilities of agents and principals in contractual agreements. This quiz covers the responsibilities of agents when acting on behalf of principals and the implications of tortious actions. Determine your understanding of agency law and its practical applications.