Agency Law: When Is the Third Party Liable to You?

Hiring an agent has exponential benefits, including efficiency and expertise.  However, with hiring an agent comes added liability.  Courts often treat agents as an extension of the principal company that hired them, and therefore impose liability on the principal as though it were the party acting itself.  In these scenarios, however, third parties may be equally liable to the principal for contractual obligations.  Therefore, a principal may recover from a third party in certain circumstances.

When the principal is either disclosed or partially disclosed, the third party will be liable so long as two conditions are met.  The first condition is that the agent acted with authority.  The agent must have been acting within the scope of authority given to it.  The second condition is that the principal was not excluded as a party by the form or terms of the contract.  In many instances, the principal wishes to protect its assets and not expose them to any liability.  In these situations, the principal may request to be left off of the transaction altogether.  However, it may be a double-edged sword to keep the principal out of the contract, as it can then lose any claims against the third party.

When the third party is dealing with an undisclosed principal, liability becomes a bit tricky. There are several conditions that must be met.  First, the principal must not be excluded by the terms of the contract, much like when dealing with a disclosed or partially disclosed principal. Next, the existence of the principal cannot have been fraudulently concealed.  If the agent falsely represents that the agent is not acting for the principal, the third party can void the contract if the principal or agent had notice that the third party would not have dealt with the principal. Additionally, there must be no offset or similar defense against the agent that the third party can use against the principal.

There is one final consideration the court takes into account when dealing with third party liability to undisclosed principals.  Courts will consider whether the existence of the principal or the principal’s role would substantially change the third party’s rights or obligations.  The third party will not be liable to the principal where rendering performance of the contract to the principal would materially change the nature of the third party’s duty, materially increase the burden or risk imposed on the third party, or materially impair the third party’s chance of receiving return performance.

As principal, you have certain rights owed to you.  If a situation emerges whereby a third party becomes liable to an agent for contractual obligations, the third party may in turn be liable to the principal.  In such a situation, the principal company ought to know of what is owed to them. Consulting with the right legal team can help answer such a question.  Call the Trembly Law Firm at (305) 431-5678 today to schedule your consultation.