University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

122

Pages:

2
Author:

bratrochanter

Summary: Third-Party Relations of the Principal and Agent Key Concepts: 1. Undisclosed Principal: o A third party who deals with an agent for an undisclosed principal believes the agent is the sole contracting party. o Both the agent and the undisclosed principal are liable on the contract. o The third party may not refuse to perform the contract due to the principal's undisclosed status unless explicitly prohibited in the agreement. 2. Nonexistent or Incompetent Principal: o If an agent knowingly acts on behalf of a nonexistent or legally incompetent principal (e.g., unincorporated associations), the agent is personally liable. o This liability holds even if the third party is aware of the principal’s nonexistence or incapacity. 3. Unidentified (Partially Disclosed) Principal: o Occurs when the third party knows the agent is acting on behalf of a principal but does not know the principal’s identity. o The agent is personally liable unless the third party and agent agree otherwise. o This provides added security to third parties, as they cannot assess the principal's creditworthiness or reliability. 4. Disclosed Principal: o If the principal’s identity is disclosed, the principal is liable for authorized contracts, and the agent is not personally liable unless they expressly agree to be bound. Case Analyses: 1. Treadwell v. J.D. Construction Co.: o Jesse Derr operated under the trade name J.D. Construction Co., while the official corporation was JCDER, Inc. o The Treadwells were unaware of JCDER, Inc.’s existence and contracted with J.D. Construction Co. o When the project failed, Derr was found personally liable as he did not properly disclose his agency relationship, making JCDER, Inc. an unidentified principal. 2. Interbank Funding Corp. v. Chadmoore Wireless Group Inc.: o Robert Moore signed a contract on behalf of a dissolved corporation without board authorization. o He was held personally liable for breaching the implied warranty of authority since he falsely represented that he had the authority to bind the corporation. Agent’s Liability:   Express Liability: o Agents may bind themselves by expressly agreeing to be liable in a contract. o Proper contract language and signature form are critical to avoid unintended personal liability. Implied Warranty of Authority: o An agent who lacks authority to bind a principal but contracts anyway may be liable for damages based on an implied warranty of authority unless: 1. The third party knows the agent lacks authority. 2. The principal ratifies the contract. 3. The agent disclaims their authority to contract. Liability Matrix:     Disclosed Principal: Principal liable; agent not liable unless agreed. Unidentified Principal: Both principal and agent liable. Undisclosed Principal: Both principal and agent liable. Nonexistent Principal: Agent personally liable. Respondeat Superior:  Employers (principals) may also be liable for torts committed by their employees (agents) within the scope of employment.