Principal Resources Corporation contracts with Quality Construction to build an addition to Principal's corporate office building. Quality contracts with Rite Supply Company for materials for the addition but refuses to pick up the materials. Meanwhile,
Principal hires Skye, a certified public accountant, to work in its cost-accounting division as an employee, with no authority to hire or supervise others. Skye asks Theo, an outside experienced accountant, to advise her on certain accounting procedures but fails to pay Theo for the service. Principal also contracts with Uma, a salesperson, to solicit orders for its products in a designated territory. Uma obtains an order from Verity Industries, Inc, which is assured the order will be filled soon. But Uma does not follow through with the paperwork and fails to submit the order to Principal. Verity suffers a loss. Rite Supply, Theo, and Verity Industries claim Principal is liable under agency law. Discuss fully whether an agency relationship was created by Principal with Quality Construction, Skye, or Uma.
Whether Principal can be held liable by Rite Supply, Theo, and Verity Industries depends on the relationship created by Principal in its contracts with Quality Construction, Skye, and Uma. If the relationship is one of principal-agent, the parties agree that the agent will act on behalf of the principal, and any proper contracts made by an agent with a third person are binding on the principal. In analyzing the agency relationship in this problem, it is important to distinguish the principal-agent relationship from that of employer employee (master servant) or employer–independent contractor. Contracts made with third parties by employees or independent contractors who are not also agents are not binding and are not enforceable against the employer.
Quality Construction is employed as an independent contractor. It is neither an agent for Principal nor an employee. Because Quality Construction has no authority to make contracts on behalf of Principal, Quality is not an agent. In addition, because Principal has no control over the details of Quality's conduct, Quality is not an employee. Therefore, only Quality, not Principal, can be liable to Rite Supply for nonperformance of contract.
Skye is hired strictly as an employee and has no authority to contract with third persons. Consequently, Skye is not authorized to hire a consultant on Principal's behalf. Therefore, Theo must look to Skye, not to Principal, for payment for services.
Uma is both an employee and an agent. As an agent she is hired specifically to solicit orders for Principal's products from third persons. If she has authority to so contract, Principal is bound by her contract.
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