Chapter 36 – Third-Party Relations of the Principal and the Agent

The Agency Relationship

Third-Party Relations of the

Principle and Agent

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Third-Party Relationships of the Principal and the Agent

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Learning Objectives

v Contract liability of the principalv Contract liability of the agentv Contract suits against principal and

agentv Tort liability of the principalv Tort liability of the agentv Tort suits against principal and agent

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v A principal bears tort and contract liability for their own acts or omissions

v A principal controls an agent, thus principal is liable for agent’s acts or omissions

Overview

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If your computer fails, would you sue the company or the inspector

who missed the problem?

v Generally, a principal is liable on a contract made by the agent if the agent had express, implied, or apparent authority to make the contract

v Even if the agent lacks authority to contract, a principal may become bound to contract obligations by ratifying a contract made by an unauthorized agent

Contract Liability

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v An agent’s actual authority may be express (by words) or implied (by conduct)

v Apparent authority arises if communications by principal to third party creates reasonable appearance of authority in the agent

v See Opp v. Wheaton Van Lines, Inc.: w Plaintiff sued Wheaton for damages and the

company alleged her ex-husband had actual or apparent authority to limit coverage

Actual v. Apparent Authority

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v If agent contracts for an existing, competent principal but lacks authority, principal is not bound, but it’s unfair to third party

v Thus, agent bound on the theory of an implied warranty of authority to contract

v See Reed v. National Foundation Life Insurance Co. in which plaintiff alleged an insurance agent bound the insurance company under the implied warranty of authority

Implied Warranty of Authority

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v In ratification, a principal becomes obligated for an unauthorized act done by an agent or person posing as an agentw Act in question usually is contract creation

v Ratification relates back to contract creation and binds principal as if agent had authority

v May be express or impliedv Basic contract law applies

Ratification

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v Facts: w Universal hired a temporary employee from

Connection, a temporary employment agencyw Universal routinely completed Connection’s work

verification forms containing language by which employer (Universal) agrees to indemnify Connection for employee injuries

w Injured employee was covered by Connection’s workers’ compensation insurance, but Universal refused to indemnify (pay) Connection

The Work Connection, Inc. v. Universal Forest Products, Inc.

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v Legal Reasoning and Holding: w Trial court granted Universal’s motion for

summary judgment and Connection appealedw Issue: whether Universal ratified the indemnity

clause by accepting the benefits of employment contract for employee’s labor

w Ratification does not occur if the principal – as in this case – is ignorant of material facts, such as time cards with a commitment to indemnify

w Judgment for Universal affirmed

The Work Connection, Inc. v. Universal Forest Products, Inc.

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v An agent’s liability for a contract depends on the nature of the principle: w An agent who represents a disclosed principal is

not liable on contracts made for the principalw Agents are liable on contracts made for a partially

disclosed principal unless parties agree otherwisew An agent is liable to third parties on contracts

made for an undisclosed principalw See Treadwell v. J.D. Construction Co.

Contract Liability of Agent

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v A principal may be liable for a tort in four circumstances:wDirect liability for tortswRespondeat superior w Independent contractor

activitieswMisrepresentation

Principal’s Tort Liability

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v A principal may incur direct liability for an agent’s torts because the principal is at fault and liability need not be imputedw Example: sales agent merely applied the

dealership’s deceptive sales policies

Direct Liability

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v Under the doctrine of respondeat superior (let the master answer), a principal who is an employer is liable for torts committed by agents (1) who are employees and (2) who commit the tort while acting within the scope of their employmentwPrincipal liable for employee’s negligent

and intentional torts

Respondeat Superior

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v Respondeat superior is a rule of imputed or vicarious liability because it bases an employer’s liability on the relationship with the employee

Respondeat Superior

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Millan v. Dean Witter Reynolds, Inc.

discusses direct liability and respondeat

superior in a brokerage house.

v Generally an employee’s conduct is within the scope of employment if the conduct meets each of four tests:w Conduct was of the kind that the employee was

employed to performw Conduct occurred substantially within the

authorized time periodw Conduct occurred substantially within the

location authorized by the employerw Conduct was motivated at least in part by the

purpose of serving the employer

Scope of Employment

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v Since a principal does not control the work of an independent contractor, a principal is not liable for an independent contractor’s torts except: w A principal may be directly liable for

negligent retention of an independent contractor (e.g., hiring a dangerously incompetent independent contractor)

Liability for Torts of Independent Contractors

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v A principal is liable for harm resulting from an independent contractor’s failure to perform a nondelegable duty

Liability for Torts of Independent Contractors

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v A principal is liable for an independent contractor’s negligent failure to take special precautions to conduct highly dangerous or inherently dangerous activities

Liability for Torts of Independent Contractors

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v Principal may be liable for agent’s false statements directly (intentionally or negligently) or vicariously (agent authorized to make true statements on the subject)

v An exculpatory clause may negate tort liability of principal w Reed case example: “I further understand that

the agent has no authority to make any representations about the conditions …[of] the policy.”

Liability for Misrepresentations

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v Agents are liable for their torts except when:w Agent exercises a privilege of the principal

(e.g., uses an easement)w Agent takes privileged action to defend his

person or principal’s propertyw Agent makes a false statement in conduct of

principal’s business but doesn’t know the falsity of the statements

w Third parties are injured by defective tools or instrumentalities furnished by the principal

Tort Liability of Agent

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Test Your Knowledge

v True=A, False = Bw An agent is always liable for his own torts.w The doctrine of respondeat superior means

that a principal is liable for torts committed by employees acting within the course and scope of employment.

w If an agent contracts for a legally existing and competent principal but lacks authority to enter contracts, the principal is not bound.

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Test Your Knowledge

v True=A, False = Bw A principal is never liable for an independent

contractor’s torts. w Apparent authority arises if communications

by principal to third party creates reasonable appearance of authority in the agent.

w If a principal fails to inform the agent about a defect in the product, the principal will be directly liable for an agent’s torts.

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Test Your Knowledge

v Multiple Choicew Carl owned a a pizza business and employed

Zip to deliver pizzas. Carl knew that Zip occasionally drank beer while driving, but didn’t fire Zip. Zip injured Dan while delivering pizzas and driving drunk. Is Carl liable to Dan for Zip’s conduct?

(a) No, only Zip is liable. Drunk driving was not within the scope of employment

(b) Yes, since Carl knew about Zip’s drinking and negligently retained Zip

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Test Your Knowledge

v Multiple ChoicewCarl’s Pizza hired Miller to be general

manager. Miller hired Sam for pizza prep work. In general, would Carl’s Pizza be obligated to honor the contract with Sam?

(a) No; only the owner of Carl’s Pizza can hire Sam, thus Sam’s contract is void

(b) Yes; Miller acted with implied authority since he is general manager and Carl’s Pizza must honor Sam’s employment contract

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Thought Questions

v Do you think the doctrine of respondeat superior is good policy? Why or why not?

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