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Agents and Principle: Liability in Real Life Scenario

Updated on March 11, 2013

An owner of a paper mill sent several of his employees out to find a new supplier of wood pulp for his company. Out of the three that were sent, only Delilah came back with any contracts. She came back with three, with each third party knowing less and less than the next about her employer and her capacity as an agent. So out of the three signed contracts, which one is the business legally bound by?

In the scenario listed, Delilah has brought back three different contracts. Each contract was created with Delilah’s authority as an agent of the paper mill. Depending on the circumstances and information given to the customers, the paper mill or even Delilah could be liable for the contract.

The first contract is with a customer who knows that Delilah is an agent for the paper company, making contract is with a third party that knew Delilah was an agent, but not who is it for. This makes the principal a partially disclosed principal. In this second scenario the principal and the agent could both be liable for the contract. The last contract was made to a third party that did not know that Delilah was an agent. In this contract the principal is a disclosed principal, making him liable unless certain criteria were met.

For the contract to not be valid, the principle will have to prove that he or she was excluded as a party to the contract. If the contract was a negotiable instrument like a check signed by the agent without reference to the paper mill could exclude the principle his liability. As well as if the contract is dependent upon the agent in a personal way.

Another way that the principal would not be liable is if the agent went beyond the scope of authority and in which case the agent would be liable. If the third party knew of the agent’s lack of authority, then nether the principle or the agent would be liable for the contract.


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