1. The Agency Relationship
Third-Party Relations of the
Principle and Agent
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

2. Third-Party Relationships of
the Principal and the Agent
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way that not only meets but exceeds the
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Akira Mori , President and CEO
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© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

3. Learning Objectives
v Contract liability of the principal
v Contract liability of the agent
v Contract suits against principal and
agent
v Tort liability of the principal
v Tort liability of the agent
v Tort suits against principal and agent
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4. Overview
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
If your computer fails, would you
sue the company or the inspector
who missed the problem?
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5. Contract Liability
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
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6. Actual v. Apparent Authority
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 Plaintiffsued Wheaton for damages and the
company alleged her ex-husband had actual
or apparent authority to limit coverage
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7. Implied Warranty of Authority
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
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8. Ratification
v In ratification, a principal becomes obligated
for an unauthorized act done by an agent or
person posing as an agent
w 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 implied
v Basic contract law applies
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9. The Work Connection, Inc. v.
Universal Forest Products, Inc.
v Facts:
w Universal hired a temporary employee from
Connection, a temporary employment agency
w 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
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10. The Work Connection, Inc. v.
Universal Forest Products, Inc.
v Legal Reasoning and Holding:
w Trial court granted Universal’s motion for
summary judgment and Connection appealed
w 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
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11. Contract Liability of Agent
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 principal
w Agents are liable on contracts made for a partially
disclosed principal unless parties agree otherwise
w An agent is liable to third parties on contracts
made for an undisclosed principal
w See Treadwell v. J.D. Construction Co.
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12. Principal’s Tort Liability
v A principal may be liable for
a tort in four circumstances:
w Direct liability for torts
w Respondeat superior
w Independent contractor
activities
w Misrepresentation
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13. Direct Liability
v A principal may incur direct liability for an
agent’s torts because the principal is at fault
and liability need not be imputed
w Example: sales agent merely applied the
dealership’s deceptive sales policies
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14. Respondeat Superior
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 employment
w Principal liable for employee’s negligent
and intentional torts
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15. Respondeat Superior
v Respondeat superior is a rule of imputed or
vicarious liability because it bases an
employer’s liability on the relationship with
the employee
Millan v. Dean Witter
Reynolds, Inc.
discusses direct liability
and respondeat
superior in a brokerage
house.
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16. Scope of Employment
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 perform
w Conduct occurred substantially within the
authorized time period
w Conduct occurred substantially within the
location authorized by the employer
w Conduct was motivated at least in part by the
purpose of serving the employer
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17. Liability for Torts of
Independent Contractors
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)
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18. Liability for Torts of
Independent Contractors
v A principal is liable for
harm resulting from an
independent
contractor’s failure to
perform a nondelegable
duty
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19. Liability for Torts of
Independent Contractors
v A principal is liable for an independent
contractor’s negligent failure to take special
precautions to conduct highly dangerous or
inherently dangerous activities
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20. Liability for Misrepresentations
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.”
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21. Tort Liability of Agent
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 property
w 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
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22. Test Your Knowledge
v True=A, False = B
w 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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23. Test Your Knowledge
v True=A, False = B
wA 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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24. Test Your Knowledge
v Multiple Choice
w 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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25. Test Your Knowledge
v Multiple Choice
w 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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26. Thought Questions
v Do you think the doctrine of respondeat
superior is good policy? Why or why not?
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