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Difficulty: HardLaw of Agency: Rights, Duties, Liabilities, and Termination

Babatunde was engaged as a general mercantile agent for a manufacturing firm. Contrary to the firm's express written instruction to sell goods solely on a cash basis, Babatunde sold a shipment of goods on credit to a third-party buyer who subsequently defaulted on payment. Under the Law of Agency, which of the following statements correctly describes the legal rights and liabilities of the parties?

  1. The firm is bound to the third party if credit sales fall within the customary authority of a general agent, but Babatunde is liable to compensate the firm for breaching his duty of obedience.Answer
  2. B
    The contract with the third party is automatically void because Babatunde breached a fundamental condition of his agency appointment.
  3. C
    Babatunde becomes personally and exclusively liable to the third party for the contractual debt, relieving the firm of all obligations.
  4. D
    The firm can repudiate the transaction without liability to the third party, and Babatunde is exempt from indemnifying the firm because he acted without malice.

Answer

The firm is bound to the third party if credit sales fall within the customary authority of a general agent, but Babatunde is liable to compensate the firm for breaching his duty of obedience.
Under the Law of Agency, a general agent possesses customary authority to bind the principal in transactions typical of that trade. Private or secret limitations imposed by the principal (such as selling for cash only) do not bind third parties who deal with the agent without knowledge of the restriction. Therefore, the contract remains valid and binding on the principal. However, as between the principal and the agent, the agent owes a primary legal duty to obey all lawful directions. By disobeying the explicit instruction to sell only for cash, the agent breaches this duty and is legally bound to indemnify the principal for any resulting financial loss.

Step-by-Step Solution

1
Analyze the relationship and authority between the principal (firm), agent (Babatunde), and third party.
Babatunde is a general agent. General agents possess customary/apparent authority to perform acts usual in that line of business.
Third parties dealing in good faith are entitled to rely on the apparent authority of a general agent unless they have notice of internal restrictions.
2
Determine the legal position between the principal and the third party.
The principal is legally bound by the contract created with the third party.
Secret or internal instructions restricting authority do not affect third parties who relied on the agent's customary authority.
3
Determine the legal position between the principal and the agent.
Babatunde is liable to indemnify the principal for the financial loss suffered from the buyer's default.
An agent owes a strict duty of obedience to carry out the principal's lawful express instructions; failure to do so constitutes a breach of duty.

Key Concept

Rights, duties, and liabilities in agency regarding apparent authority vs breach of duty of obedience
Estimated Time:2m 0s
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Topics

Law of Agency: Rights, Duties, Liabilities, and Termination

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