The relationship of principal and agent occurs when one person (the principal) empowers another person (the agent) to act on behalf of the principal in such a way as to affect the principal’s legal relationship with others (third parties). This is called the law of agency. An example is when an agent is authorized to make contracts on behalf of the principal with third parties.
A principal is legally vulnerable in such a relationship. The general rule is that the principal is vicariously liable for the wrongful acts of the agent committed within the scope of the agent’s apparent authority. A company, which buys and sells cars and pays a person a commission on cars sold by that person, will be liable for that person’s fraudulent misrepresentation in the sale of the car. The social policy behind vicarious liability is that the agent is often not in a financial position to compensate a person who is injured by the wrongful act. Who should bear the loss, the employer or the innocent victim? The answer is the principal because the principal can and should secure protection from the risk of the agent by insurance, the cost of which forms part of the general cost of carrying on business and is ultimately borne by the general public.
There are many factors in the complex law of agency. One factor is in the lawsuit itself. Let us assume that a victim sues both the agent and the principal. The victim must choose between them when it comes time to sign judgment. There cannot be a judgment against both. If the victim only sues the agent and obtains judgment against the agent, the victim cannot later sue the principal when it is discovered that the agent has no money or other assets and that collecting on the judgment is impossible against the agent. The reason for this is that, where a judgment has been obtained against the agent, the factual and legal basis for the lawsuit has been exhausted and the victim cannot sue again, on the same basis, against the principal. In legal terms, this is called the doctrine of alternative liability. One or the other may ultimately be liable but not both.