PART

PART

Agency Law

The Agency Relationship

Third-Party Relations of thePrincipal and the Agent

8

McGraw-Hill/Irwin Business Law, 13/e

© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Third-Party Relations of thePrincipal and the Agent

PA ET RHC 36“We cannot all be masters.”

William Shakespeare, Othello, Act 1, Scene 1

Learning Objectives

Contract liability of the principal Contract liability of the agent Contract suits against principal and

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

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

Agent’s liability to third parties for a contract made on behalf of a principal depends on whether principal was disclosed (not liable) or undisclosed (liable)

Contract Liability

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

Thus, agent bound on theory of an implied warranty of authority to contract See Reed v. National Foundation Life Insurance

Co. If agent lacks authority, principal may bind

to the contract by ratification

Implied Warranty of Authority

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A principal may incur direct liability for an agent’s torts because principal is at fault

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

and intentional torts

Principal’s Tort Liability

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Employee’s conduct is within the scope of employment if conduct: Was what employee was employed to

perform Occurred within authorized time period Occurred within authorized location Motivated by purpose of serving employer

Scope of Employment

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Principal does not control independent contractor’s work, thus principal not liable for an independent contractor’s torts Principal may be directly liable for

negligent hiring or contractor’s negligent performance of nondelegable duty or dangerous activity

Principal may be liable, vicariously or directly, for agent’s misrepresentations

Principal’s Tort Liability

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Agents are liable for their torts except when: Agent exercises a privilege of the principal Agent takes privileged action to defend his or

her person or principal’s property Agent unknowingly makes a false statement

in conduct of principal’s business Third parties are injured by defective tools or

instrumentalities furnished by principal

Tort Liability of Agent

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Test Your Knowledge

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

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

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 True=A, False = B

A principal is never liable for an independent contractor’s torts.

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

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 Multiple Choice

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 Zip36 - 13

Test Your Knowledge Multiple Choice

Carl’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

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

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