Principal and Agent Liability Quiz

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Questions and Answers

What is the primary rule when an agent acts for a disclosed and named principal?

The third party can hold the agent liable in all cases.

The contract entered into is deemed to be between the principal and the third party, absolving the agent from liability. (correct)

The agent must personally guarantee the contract if the principal is disclosed.

The agent is liable for breaches of contract regardless of authority.

In which of the following situations can an agent become liable for a contract made on behalf of a disclosed principal?

The agent clearly states they are acting on behalf of the principal.

The contract is made in the agent's personal name. (correct)

The principal is fully competent and known to the third party.

The agent has full authority according to the principal's explicit instructions.

What happens when an agent acts outside their authority?

The agent breaches their warranty of authority and may become liable unless the principal can counterclaim. (correct)

The agent is automatically relieved of all potential liabilities.

The third party can only bring a claim against the agent if the principal is undisclosed.

The principal becomes liable for the agent's actions regardless of the authority exercised.

What situation could indicate that an agent is liable due to customary practices?

Industry customs dictate that agents regularly incur liability in contracts. Signup and view all the answers

Which scenario does NOT allow an agent to be held liable when acting on behalf of a disclosed principal?

The agent clearly communicates they are acting for the principal. Signup and view all the answers

What is a condition for the undisclosed principal to enforce a contract made on their behalf by an agent?

The agent must have intended to act on behalf of the principal. Signup and view all the answers

What must a third party do if they wish to hold the agent liable after an agent's authority is exceeded?

They must prove the principal ratified the agent's acts. Signup and view all the answers

In which scenario can a third party enforce a contract against an undisclosed principal after initially contracting with an agent?

The principal reveals their existence after the contract is concluded. Signup and view all the answers

What implication arises when a third party contracts with an agent and later discovers an undisclosed principal?

The third party must choose to enforce against either the agent or the principal, but not both. Signup and view all the answers

What challenge does a third party face when trying to assert a claim against an undisclosed principal under apparent authority?

It is difficult to prove that a representative with authority made a representation. Signup and view all the answers

What is the agent's responsibility if the third party knows that an agent is acting on behalf of a principal but does not know who the principal is?

The agent must clarify that the principal will be liable. Signup and view all the answers

In a written contract, what is the default presumption regarding the signer’s liability?

The signer accepts personal liability under the contract. Signup and view all the answers

Which of the following statements about the liability of agents is accurate according to the discussed legal principles?

An unnamed but disclosed principal can lead to the agent's personal liability if they fail to clarify who is liable. Signup and view all the answers

When a sales manager signs a letter of appointment for a sub-agent with their personal signature without qualifying their position, what is the consequence?

The sales manager is personally liable for the contract due to lack of qualification. Signup and view all the answers

How does the credit relied upon by the third party affect liabilities in the context of agency?

Liability depends on which party’s credit the third party relied on when making the contract. Signup and view all the answers

Study Notes

Principal and Agent Liability to Third Parties

Agent acts within authority: Principal and third party are liable, agent has no liability.
Agent acts outside authority: Agent is liable for breach of warranty of authority, unless principal can claim against agent or third party can claim for apparent authority from principal. Complexity increases with disclosed vs. undisclosed principal.
Disclosed and Named Principal: Agent has no liability in a contract between the principal and third party. Exceptions include: agent acting outside authority, agent agreeing to be liable, customary liability in the trade, agent contracting in their own name, or a non-existent principal. A written contract with the agent signing in their own name creates a rebuttable presumption of personal liability, needing to be refuted by the agent
Stockbrokers and solicitors are examples where custom creates agent liability.
Unincorporated associations lack legal capacity and cannot employ agents.
Unnamed but Disclosed Principal: Third party knows of agent, but not principal. Agent liability depends on explicitly stating no personal liability. Option for third parties to sue either principal or agent (agent typically indemnified by principal).

Undisclosed Principal

Third party does not know agent or principal. Third party can sue either. Rationale is that in most transactions, individuals don't strongly care if they deal with agent/principal, just perform the contract
Principal can enforce contract against third party after disclosure.
Third party can enforce contract against either agent or principal, with agent indemnified if acted within authority. Undisclosed principal only liable if agent was authorized.

Choosing Between Principal and Agent

Choice is implied by conduct (e.g., pursuing a claim to judgment) and is final.
Agent is liable to third party if chosen, with principal indemnification if within authority.
Agent liability for exceeding authority if not ratified.

Principal Liability

From agent contracting on principal behalf & third party election.
Principal indemnifies agent if agent acted within authority during third party's action.

Third Party Limitations

Can stipulate dealing only with agent personally, rebutting indifference to who performs the contract.
Personal contracts (e.g., painting a picture) often prevent undisclosed principal enforcement.
Breach of deceit by agent bars principal contract enforcement.

Apparent Authority and Principal Disclosure

Difficult to establish apparent authority when principal is undisclosed.
Freeman & Lockyear v Buckhurts Park Properties Ltd. Establishes four-part test for establishing apparent authority: Representation, authority, reliance, and action within authority
Key challenges lie in proving representation, especially when the principal is concealed or unclear.

Agent Duties to Principal

Fiduciary duties of trust and loyalty—principal's best interest is paramount.
Authority limits extent of duties. All agents have fiduciary duties, but very limited agents may have very limited duties.
Commercial Agents Regulations 1993 mirror common law duties. Key duty is to act in good faith and properly negotiate and conclude transactions (reg 3(1) and (2) ). Communication of information and compliance with reasonable instructions are also critical.

Duty to Follow Instructions

Agent must follow principal's instructions unless clear limitations and boundaries of contract exist. Agent not responsible for lack of clarity made by the principal. Agent is liable for losses in non-compliance with instructions
Principal has obligation for clear instructions.
Absence of instructions: Agent must follow trade custom when instructions don't exist.

Conflicts of Interest

Avoidance of conflicts between agent and principal. Agent prioritizes principal's interest. Examples include self-dealing and secret profits.

Secret Profits & Disclosure

Agent must not profit at principal's expense, and account for benefits.
Applies to commissions, bribes, undisclosed self-dealing, and excessive remuneration.
Working for multiple principals, especially principals with competing interests, may trigger conflicts. Disclosing this to all involved parties is crucial for avoidance of conflicts.

Full Disclosure

Agent must fully disclose facts to the principal (past, present and future).
Burden is high and anything short of this counts as a breach. Principal can allow agent to benefit without contract invalidation, if they consent and agree in the interest of the agent's profit.
Transaction is voidable, not void when a breach occurs

Confidentiality

Agent must maintain confidentiality of principal's information.

Duty or Account

Agent informs principal of benefits received during agency.
Agent is accountable for keeping accurate accounts and making statements/proofs of said accounts, which are also available to the principal during the term or at the end of the contract.

Agency Termination

Performance / Contract expiry / Impossibility / Agreement / Revocation / Death/ Insanity/ Bankruptcy.
Agent's authority doesn't always terminate immediately upon the principal's demise.
How much notice is needed to end agency depends on the length of the relationship and a material breach will likely lead to quicker termination.

Agent Rights

Remuneration, indemnity, reimbursement, and lien.
Remuneration usually based on contract, but can be custom-based otherwise
Agent may claim if contract falls through on their side. If the contract is terminated for material breach ,the agent is not entitled to payment of further remuneration.

Principal Duties

Principal must act dutifully and in good faith (Reg 4).
Provide agent with necessary documentation (reg 4(2)(a)). Inform the agent of any significant drop in transaction volume (reg 4(2)(b))

Differences between Commercial Agents, Common Law

Commercial Agents Regulations 1993 vs. Common Law Agency.
Regulations apply to agent-principal relationships, not agent third party interactions. Regulations protect the agent and prevent the principal from excluding the agents’ basic rights through the use of contract laws.
Self-employed vs. Employee Agent. Only self employed agents can be covered by the regulations.

Problem Solving Example (Sporting Dreams)

Agent: Mandy Flurry, Daniel Slamdevey
Principal: Sporting Dreams Ltd, Riverside Lawn Tennis Club Ltd
Third Party: Selina Villans (Spin & Slice Coaching)
Potential for multiple principal/agent/third party interactions

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Description

Test your understanding of how agents and principals interact with third parties in terms of liability. This quiz covers key concepts such as authority, breach of warranty, and the complexities of disclosed versus undisclosed principals. Challenge yourself with scenarios about agent actions and their implications!