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Third-Party Relations of the Principal and the

Agent

PA ET RHC 36We intend to conduct our business in a way that not only meets but exceeds the expectations of our customers, business partners, shareholders, and creditors, as well as the communities in which we operate and society at large.

Akira Mori , President and CEOMori Trust Co., Ltd. (Japan)

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Learning Objectives

• Know when an agent has authority to bind a principal to a contract

• Understand when an agent may be liable on contracts s/he makes for the principal

• Recognize when an agent’s conduct makes a principal liable for torts committed by the agent

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

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

Overview

If your computer fails, would you sue the

company or the inspector who missed the problem?

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• 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

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

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

• See Opp v. Wheaton Van Lines, Inc.: – 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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• In ratification, a principal becomes obligated for an unauthorized act done by an agent or person posing as an agent– Act in question usually is contract creation

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

• May be express or implied• Basic contract law applies

Ratification

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• Facts: – Universal hired a temporary employee from

Connection, a temporary employment agency– Universal routinely completed Connection’s

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

– 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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• Legal Reasoning and Holding: – Trial court granted Universal’s motion for

summary judgment and Connection appealed– Issue: whether Universal ratified the indemnity

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

– 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

– Judgment for Universal affirmed

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

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• An agent’s liability for a contract depends on the nature of the principle: – Agent who represents a disclosed principal

is not liable on contracts made for the principal

– Agents are liable on contracts made for a partially disclosed principal unless parties agree otherwise

– An agent is liable to third parties on contracts made for an undisclosed principal

Contract Liability of Agent

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• Facts and Opinion: • Construction company owner (Derr)

organized his company as JCDER, Inc., but entered into contracts under several other company names

• Customer sued Derr, individually, and his company for failing to complete their home building project in a workmanlike manner

• Derr held personally liable for performance of contracts entered into as agent for the non-existent J.D. Construction, Co., Inc., or the undisclosed principal JCDER, Inc.

Treadwell v. J.D. Construction Co.

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• If agent contracts for a competent and existing principal but lacks authority, the principal is not bound

• The result is unfair to a third party, so the agent is bound on the theory of an implied warranty of authority to contract

• See In re Interbank Funding Corp. v. Chadmoore Wireless Group Inc.

Implied Warranty of Authority

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• A principal may be liable for a tort in four circumstances:– Direct liability for torts– Respondeat superior – Independent

contractor activities– Misrepresentation

Principal’s Tort Liability

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

dealership’s deceptive sales policies

Direct Liability

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• 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– Principal liable for employee’s

negligent and intentional torts

Respondeat Superior

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• 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

Respondeat Superior

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

was employed to perform– Conduct occurred substantially within the

authorized time period– Conduct occurred substantially within the

location authorized by the employer– Conduct was motivated at least in part by

the purpose of serving the employer

Scope of Employment

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• Since a principal does not control the work of an independent contractor, a principal is not liable for an independent contractor’s torts except: – 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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• A principal is liable for harm resulting from an independent contractor’s failure to perform a nondelegable duty

• Professionals and those with special artistic or technical skills tend to have nondelegable duties

Liability for Torts of Independent Contractors

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

• Example: misrepresentation about the safety of medical devices by sales personnel

Liability for Misrepresentations

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• Agents liable for their torts except when:– Agent exercises a privilege of the principal

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

person or principal’s property– Agent makes a false statement in conduct

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

– Third parties are injured by defective tools or instrumentalities furnished by the 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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• 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.

Test Your Knowledge

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• 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 employmentb) Yes, since Carl knew about Zip’s

drinking and negligently retained Zip

Test Your Knowledge

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• 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 voidb) Yes; Miller acted with implied authority

since he is general manager and Carl’s Pizza must honor Sam’s employment contract

Test Your Knowledge

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Thought Questions

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