978-0077733711 Chapter 36 Lecture Note

Unlock access to all the studying documents.

View Full Document

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

CHAPTER 36

THIRD-PARTY RELATIONS OF THE PRINCIPAL AND

THE AGENT

I. OBJECTIVES

This chapter is intended to acquaint students with the many legal rules governing the principal’s

and the agent’s relations with third parties. After studying the material presented in this chapter,

students should understand:

A. Express, implied, and apparent authority in the contract context and how the principal’s

contract liability is based on these.

B. The requirements for and effects of the principal’s ratification of contracts made by an agent

or purported agent.

C. How the principal’s contract liability is affected by the principal’s or the agent’s incapacity

and the agent’s notification or knowledge of certain matters.

D. The agent’s liability on contracts made for the principal when the principal is fully disclosed,

unidentified (partially disclosed), and undisclosed.

E. Other rules for determining the agent’s liability to third parties, including when acting for

nonexistent principals and misrepresenting her authority to make contracts for the principal.

F. The principal’s tort liability for the agent’s actions, especially under the doctrine of

respondeat superior.

G. The rules governing the agent’s liability in tort.

II. ANSWER TO INTRODUCTORY PROBLEM

A. Bon Vivant is liable on the snack-cracker brand purchase, because the board in written and

oral instructions gave you express authority to acquire any consumer products brand for no

more than $30,000,000. Snack crackers are consumer products and the price was only

$15,000,000. Thus, this purchase is within your implied authority, because it is reasonably

necessary to accomplish the objective of the agency. You weren’t specifically authorized to

buy this brand, so this is may not be within your express authority, but it can be inferred from

the express authority that the board wanted you to buy the brand at this price. There is actual

authority of some type here.

B. Probably Bon Vivant will be liable on the cola purchase, because you have apparent authority

to make the contract, unless the board took steps to notify the seller that you had no such

authority. You have no express or implied authority to buy the cola, because your express

instructions denied you that power and implied authority may not contradict express

authority. Nonetheless, by placing you in the position of vice president of acquisitions, the

board manifests or communicates to everyone who knows your position that you have the

authority to do anything that others in your position in the industry may do. Since others in

your position in the consumer food industry have authority to buy a cola brand, you hold

apparent authority to do so, unless the board has disabused third parties of this belief.

36-1

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

C. Bon Vivant will not initially be liable on the $40,000,000 canned soup brand contract. You

had no express authority to make that contract, because the board limited your power to

making contracts for $40,000,000 or less. You have no implied authority to make the

contract, because implied authority cannot contradict express authority. You have no

apparent authority to make the contract, because by making you the vice president of

acquisitions the board represents only that you have the same authority as others in your

position in the industry, which is limited to $40,000,000. If the board, however, accepts the

contract with knowledge of all its material facts, it has ratified the contract making Bon

Vivant liable on the contract. Ratification cannot be revoked, so if the board later rejects the

contract, Bon Vivant is still liable on the contract due to ratification.

D. The law regarding undisclosed principals applies here. As an undisclosed principal, Bon

Vivant is liable on the contract even though its name is not on the contract, because in fact its

board expressly authorized you to make this contract. You are also liable on the contract,

because you acted for an undisclosed principal. A reading of Section 6.03(3) apparently

indicates that even if Eddie’s chooses to enforce the contract against the undisclosed principal

(Bon Vivant), you as the agent retain your liability to the third party (Eddie’s) as well

(although you are entitled to indemnification from the principal for any liability you have).

You cannot claim that LHIW, not you, should have liability, because LHIW is a nonexistent

principal. Eddie’s is also liable on the contract, because it intended to be bound on it.

Eddie’s does not have the option to withdraw from the contract.

III. SUGGESTIONS FOR LECTURE PREPARATION

A. Contract Liability of the Principal

1. Begin by stating that the principal is generally liable on contracts made by an agent with

express, implied, or apparent authority to do so. Refer back to Chapter 35’s discussion of

these matters. You might point out that actual and apparent authority can exist at the

same time, and many times implied and apparent authority overlap exactly when an agent

is impliedly authorized to do what other agents in the industry typically have authority to

do. Also, point out that Chapter 35’s discussion of termination’s effect on the agent’s

authority is relevant here.

2. Review express authority and go through the simple example in the text. Recall the

suggestion in Chapter 35 of this manual that express authority may be a very limited

means of binding the principal.

3. Implied authority

a. Review the factors on which this is based and the test courts often use in assessing

these factors: under all the circumstances what the agent could reasonably assume or

expect that the principal wanted him to do.

b. Note how implied authority is often derived from a grant of express authority. Also,

note that the principal’s express statements generally control and limit implied

authority. Restatement (Third) 3.01 states that the manifestations of the principal to

an agent create actual authority. Note that the Restatement (Third) does not

distinguish between express and implied authority. The distinction is irrelevant,

because both have the same consequence, and under the Restatement (Third), derive

from the same source, the principal, due to his manifestations.

c. Note also that implied authority occasionally may exist without a relevant grant of

express authority, such as giving the agent a title, such as vice president of marketing

or human resources.

d. You might go through the text’s specific examples of implied authority (p. 971-972),

36-2

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

or just note them in class and assign them as reading.

e. Note that the agent’s implied (and apparent) authority is sometimes affected by

Chapter 35’s blurred distinction between general and special agents. But recall that

this distinction appears to be falling out of favor with the courts.

4. Apparent authority:

a. Review Chapter 35’s discussion of apparent authority. Note that, as discussed in

Chapter 35, apparent authority may persist after the agency is terminated. Note also

that because apparent authority is based on what the principal manifests or

communicates to the third party, the principal has to do something to create such

authority.

b. Apparent authority is sometimes explained through a concept known as agency by

estoppel. According to one formulation of this doctrine, the principal is “estopped” to

deny the agency’s existence or the agent’s authority when: 1) his actions create an

appearance of authority in a person, 2) a third party relies to his detriment on this

appearance of authority, and 3) this reliance is reasonable and in good faith. As this

statement suggests, agency by estoppel sometimes is used to explain the existence of

an agency as well.

Perhaps agency by estoppel can explain the fact that a person may have apparent

authority and bind the principal even though he has never been appointed as agent.

Suppose that Pringle is in the business of selling fresh fruit and produce and does so

from a panel truck bearing his name and occupation. Sometimes, Pringle contracts to

supply customers with foodstuffs not then in his possession. One day, Pringle lends

the truck to his friend Abbott, who is to use it for personal business. While in

possession of the truck, Abbott represents himself as Pringle’s assistant and contracts

with some of Pringle’s regular customers to deliver certain food and produce the next

day. Pringle may well be contractually liable to the buyers, even though Abbott is not

an agent.

5. Examples: Problem Cases ## 1, 2, and 5.

6. The Global Business Environment: Electronic Agents (p. 972): Here’s a good example of

new technology circling the globe. If you have technology in your classroom, you will

want to access a website like amazon.com and show how an electronic agent works.

Probably most of your students have transacted with electronic agents when making

purchases on the web.

7. Principal’s or agent’s incapacity. This topic was last included in the 12th edition, because

it rarely arises in the most common agency context: when employees are working for

corporations and other business forms. If you want to cover this it can be summarized

simply: since the agent acts for the principal, not herself, the agent’s capacity cannot

rectify the principal’s incapacity; the agent’s incapacity usually does not affect the

liability of a principal who has capacity.

8. Notifications to the agent and knowledge received by the agent.

a. The general rules of contract authority apply in this area.

b. Example: Phillips asks Anderson to purchase a tract of land on his behalf. Anderson

knows that Tarr has a valid but unrecorded interest in the land. Anderson fails to

inform Phillips of Tarr’s interest, and Phillips purchases the land through Anderson.

Phillips will take the land subject to Tarr’s interest to the same extent as if he had

known of the interest himself.

c. Additional example: Problem Case # 4.

9. Ratification

36-3

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

a. First define the term and state that its effect is to bind the principal to a person’s

unauthorized acts (here, mainly unauthorized contracts). Ratification is authority that

the principal confers on a person after the contract was made. Most often, this person

whose acts are ratified is an existing agent principal who exceeds his express and

implied, but the principal probably can ratify the acts of nonagents as well. Courts

occasionally say that the agency was created by ratification.

b. Restatement (Third) sections 4.01 to 4.08 cover ratification. Its express requirements

for ratification are essentially the same as in the Restatement (Second). Section 4.05

gives a third party grounds to void the effectiveness of ratification if it has an adverse

and inequitable effect on the third party.

c. Usually before a principal ratifies a contract, the agent has no express, implied, or

apparent authority to make the contract. Thus, without ratification, the principal is

not liable on the contract. If the principal had given the agent authority already,

ratification would not be necessary to make the principal liable. By ratifying, the

principal becomes liable on the contract.

d. Sometimes the agent will have only apparent authority to make a contract. That is,

the principal does not want the agent to make the contract (there is no express or

implied authority), but the agent makes the contract and binds the principal because

of apparent authority. In such a situation, the principal can “ratify” the agent’s

exercise of apparent authority. The effect of this “ratification” is not to make the

principal liable on the contract, but instead to release the agent from liability to the

principal for disobeying his instructions.

e. Discuss express ratification and the various kinds of implied ratification. Emphasize

that the principal’s silence, acquiescence, or failure to repudiate can constitute

ratification.

f. Review the various formal requirements for ratification.

g. Describe the intervening events that can cut off the principal’s ability to ratify. Note

that, depending on circumstances that are difficult to specify in advance, the

principal’s silence may work to ratify or may eventually cut off the principal’s ability

to ratify by other means.

h. Additional Example: Problem Cases ## 4 and 5.

10. Estoppel. This is a new section added in the 16th edition. You will want to show how

estoppel is like and unlike apparent authority and ratification, addressing that it is based

on the contract concept of promissory estoppel. Restatement (Third) section 4.08 covers

estoppel to deny ratification.

11. Frontier Leasing Corp. v. Links Engineering, LLC (p. 974): This case reviews express,

implied, and apparent authority and also ratification and estoppel. The way we like to go

through an agent’s authority issues works in this case. First we ask, “Is there express

authority for the agent to act for the principal?” If not, “Is there implied authority?” If

not, “Is there express authority?” If not, “Has the principal ratified the contract or is the

principal estopped to deny it?”

Note that the court was reviewing only a trial court’s grant of summary judgment to the

third party, Frontier Leasing. The court of appeals reversed the trial court’s decision. In

this case, the Iowa Supreme Court agreed with the court of appeals and found that it was

inappropriate for the trial court to grant summary judgment for Frontier Leasing, because

the facts could support a conclusion that the golf pro had no authority to lease the

beverage cart and that no ratification or estoppel had occurred.

Point for Discussion: Is there express authority for Fleming, the golf pro, on behalf of

36-4

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

Bluff Creek, the golf course, to lease a beverage cart from Frontier Leasing? The court

cited the affidavit of Bluff Creek’s managing owner, Clute, which established that an

agency existed for Fleming to manage the day-to-day operations for the golf course, yet

included statements by Clute that Fleming was not authorized to enter into any financing

agreements or the lease of capital assets like beverage carts, especially a lease for such a

substantial amount, $19,000.

Additional Point for Discussion: Is there implied authority? The court doesn’t clearly

address this, although it can be inferred from Clute’s affidavit that there is evidence that

no such authority exists. Clute stated that golf pros manage day-to-day operations, and

vendors are aware that those management duties do not comprise this type of lease

transaction. While that directly refutes implied authority, it also implies that a golf pro

knows that his authority does not include making such leases.

Additional Point for Discussion: Is there apparent authority? That was directly

addressed by Clute in his affidavit when he stated that vendors are aware that golf pros

have no authority to enter this type of lease transaction.

Additional Point for Discussion: Did Bluff Creek ratify or was it estopped from denying

liability on the lease? The court found evidence that no ratification or estoppel existed.

Clute stated that he was not aware of the lease when he first saw the beverage cart,

believing that an advertiser provided the cart to Bluff Creek for free. When Clute first

became aware of the lease payments, his inquiries led him to disavow the lease and

demand the cart’s removal from Bluff Creek’s premises. The court believed these actions

provided support for the arguments that no ratification or estoppel occurred.

Additional Point for Discussion: Ask your students whether they thought the court gave

too much weight to Clute’s affidavit, considering it is a self-serving document. The

answer is no. Because the case is a review of a summary judgment, the facts are to be

viewed most favorably to the party against whom summary judgment is sought, that is,

Bluff Creek. Moreover, it appears that Frontier Leasing provided little contradictory

evidence, as the Iowa Supreme Court stated that the trial court based its grant of summary

judgment on Clute’s affidavit. Perhaps during the trial, Frontier will call the golf pro as a

witness and ask him what authority was granted to him or what authority he believed he

possessed.

13. Example: Introductory Chapter Problem (p. 970): This problem covers express, implied,

and apparent authority and ratification. The best way to cover this problem is to work

through each part by first asking whether the agent has express authority. If so, there is

no need to go further. The principal is liable. If not, is there implied authority? If not, is

there apparent authority? If not, is there ratification?

14. Log On: European Union Agency Law (p. 975): Student interested in the EU’s agency

law should visit this website.

B. Contract Liability of the Agent

1. Open by emphasizing that an agent can also be liable on contracts made for a principal,

and that the agent’s contract liability usually is controlled by a set of factors (mainly the

nature of the principal) different from those determining the principal’s contractual

liability. Sketch the section’s organization.

2. Define the term “disclosed principal” and give the general rule that the agent is not liable

when he contracts for such a principal. This makes sense because the agent is acting for

someone else, the third person knows that fact, and the third person relies on the

principal’s, not the agent’s, ability to perform the contract. In effect, the agent is a

conduit of liability. Liability flows from the third party through agent to the principal.

Note, however, that where the principal is disclosed, the agent still may be liable by

36-5

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

agreement or because he lacks authority.

3. Define “unidentified principal” and state the general rule that agents are bound on

contracts made for an unidentified principal. The Restatement (Third) section 1.04(2)(c)

definition of unidentified principal is stated in the textbook. Restatement (Third) section

6.02 covers liability agents of unidentified principals.

4. Undisclosed Principal.

a. Define “undisclosed principal” and state the general rule that agents are liable on

contracts made for an undisclosed principal. The textbook states the Restatement

(Third) section 104(2)(b) definition. Section 6.03 states the liability rule for agents

and principals. Also, state the reason for the liability rules.

b. Note also that the third party is liable on the contract and cannot escape liability on

the contract merely because the principal was undisclosed. This is a hard concept for

some students to grasp, because they think it is unfair to the third party. In reality, by

allowing undisclosed principals to enforce contracts against third parties, fairness is

promoted, for the rule prevents a third party from discriminating against the principal

merely because of his identity.

c. Example: Chapter Introductory Problem (p. 970): The last part of this problem deals

with an agent acting for an undisclosed principal.

5. State the general rule that the agent is bound on contracts made for a legally nonexistent

principal. See Restatement (Third) section 6.04.

6. Go through the rules governing the agent’s liability when the principal lacks capacity,

especially for a nonexistent principal.

a. Example: Problem Case # 6.

b. Additional Example: Chapter Introductory Problem (p. 934): The last part of this

problem deals with an agent acting for a nonexistent principal.

7. Treadwell v. J.D. Construction Co., (p. 976): The court found the agent, Derr, personally

liable on the contract he signed in the name of J.D. Construction Co., Inc.

Points for Discussion: Why was Derr liable as an agent of an unidentified principal?

Derr signed the contract with the wrong name of the principal. The real name of the

construction company that was to do and did all the work for the Treadwells was JCDER,

Inc. Because the Treadwell’s did not know the real name of the principal, Derr, the agent,

is also liable on the contract.

Why was Derr liable to the Treadwells for acting for a nonexistent principal? Derr signed

the contract in the name of a principal, J.D. Construction Co., Inc., that did not exist. An

agent is liable when he signs a contract in the name of a nonexistent principal. See

Restatement (Third) section 6.04.

8. Agent’s express or implied agreement to be bound. Note the ways that the agent might be

expressly bound, such as a co-promisor or guarantor. Then, shift to the practical ways–

the wording of the agreement and the signature form–that the agent can avoid liability on

this basis.

9. Implied warranty of authority. The agent’s liability for breach of the implied warranty of

authority is based on the agent’s misrepresentation of her authority to bind the principal.

Presumably, the agent’s liability exists to protect the third party. Note that the three

exceptions on page 978 involve situations where the third party doesn’t or shouldn’t need

protection. These are the exceptions of both the Restatement (Second) and Restatement

(Third) section 6.10.

10. In re Interbank Funding Corp. v. Chadmoore Wireless Group, Inc., (p. 978): The court

36-6

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

found Moore liable for breaching his implied warranty of authority.

Points for Discussion: Why were none of the three exceptions listed in the text on page

978 applied here. First, Fund LLC did not know that Moore lacked authority, because the

contract stated that Moore had authority to bind Chadmoore to the put. Second,

Chadmoore did not ratify the contact, because the two directors whose consent was

required to bind Chadmoore specifically repudiated the contract. Third, Moore did not

notify Fund LLC that he had no authority, because to the contrary he represented he did

have authority.

11. Additional Example: Problem Case # 7. Note that this case is the polar opposite of the

Interbank Funding case. In this case, the documents stated that the agent had no

authority. Taken together, these two cases show the importance of the principal writing

contracts that state correctly the agent’s authority and the third party’s need to read

contracts to determine the agent’s power. See Restatement (Third) section 6.11(1) for the

rule regarding the principal’s liability.

C. Contract suits against the principal and agent

The Concept Review on page 979 ties together the most important aspects of the principal’s

and the agent’s contract liability from the third party’s point of view. Review this carefully in

a slide or on the board. You might note why there can be no apparent authority to represent

an undisclosed principal.

D. Tort Liability of the Principal

1. Introduce the area by listing the four fairly distinct ways that the principal may be liable

where the agent commits a tort. The Concept Review on page 983 may be helpful in this

regard.

2. Respondeat Superior liability

a. Here, begin by saying that, absent direct liability, the principal’s liability for the

agent’s torts is heavily dependent on the employee-nonemployee agent (independent

contractor) distinction discussed in Chapter 35. Review the distinction and the

factors on which it is based.

Then say that, as a general rule, principals are far more likely to be liable for the torts

of employees than for the torts of nonemployee agents or nonagents. Then, launch

into the text’s policy justifications for this. One more thing to add is that in the

nonagent context the principal is less likely to be the kind of party who can insure

and pass on the costs of insurance. Suppose that you hire the XYZ van line to move

your possessions from Boston to Seattle. From a socialization-of-risk perspective, it

makes more sense to pin liability on XYZ here.

b. Then, lay out the doctrine of respondeat superior. Note that it applies to both

employee negligence and, although rare, the intentional torts of employees.

c. After this, go through the text’s discussion of the scope-of-employment requirement.

According to the Restatement (Second), at least, all four tests must be met. The

Restatement (Third) section 7.07(2) states that an employee acts within the scope of

employment when performing work assigned by the employer or engaging in a

course of conduct subject to the employer’s control. That section also states that an

employee’s act is outside the scope of employment when it occurs within an

independent course of conduct not intended by the employee to serve any purpose of

the employer. This test is not appreciably different from the Restatement (Second)

test.

Examples: Problem Cases ## 8, 9, and 10.

With regard to the kind-of-act-authorized question, you might note the following

36-7

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

possibility. Why can’t employers just insulate themselves from respondeat superior

liability by giving their employees a blanket command not to commit torts? It would

be too easy for employers to evade their responsibility to protect victims of their

agents’ act. Similar reasoning explains why courts generally take the position that an

act is not outside the scope of employment simply because an employer might have

expressly forbidden it in such a fashion.

On the kind-of-act-authorized question, you might also consider the possibility that

even criminal conduct occasionally may be within the scope of employment. Here,

the test seems to be whether the employer could reasonably expect the criminal

behavior in question. Thus, a delivery driver who exceeds the speed limit while on a

rush job probably is covered, but a driver who shoots another driver after a traffic

altercation almost certainly is not.

d. You might add that additional problems sometimes arise when the tort was

committed after the employer ordered the employee to work for a second employer.

Which employer is liable in this “loaned employee” situation? The presumption is

that the employee remains under the control of the first employer and that this

employer will be liable. But if primary control over the employee has shifted to the

second employer, that employer will be responsible for the employee’s wrongdoing.

This is most likely to be true where the employee is unskilled, is paid by the hour,

gets needed tools from the second employer, and/or serves that employer for a

substantial period of time.

3. Direct Liability

a. Be sure the class understands that it is the principal’s culpability that is the basis of

liability here. Also note that the agent need not be an employee and that there is no

scope-of-employment requirement in direct liability cases, although the foreseeability

of the risk may raise similar considerations in some direct liability cases involving

negligence. See Restatement (Third) section 7.05.

b. Where the principal directed the agent’s conduct and intended that it occur, note that

the agent’s culpability may involve intent, recklessness, or negligence. In fact, it may

even involve strict liability. One example is when the principal intentionally directs

the agent to engage in an ultrahazardous activity.

c. Discuss the various ways that the principal can be directly liable for his negligence

regarding the agent. Another possibility is failure to warn.

d. Note that direct liability and respondeat superior liability can arise at the same time.

Almost any case where a negligently-hired employee commits a tort within the scope

of his employment will suffice to make the point.

e. Millan v. Dean Witter Reynolds, Inc. (p. 981). Here both direct liability and

respondeat superior are at issue. The case excerpt focuses on the latter.

Points for Discussion: Why did the court find that respondeat superior did not

impose liability on Dean Witter? Justice Angelini wrote that Miguel greatly

exceeded his scope of authority by stealing checks from his mother’s bathroom

drawer, writing checks on his mother’s account, depositing his mother’s checks into

his own account, forging his mother’s signature on numerous occasions, stealing

statements from his mother’s mailbox, creating and sending bogus statements to his

mother, and opening a post office box so he could receive his mother’s actual

statements. The court found that these acts were not related to his duties and not

within his general scope of authority as a broker.

In the dissent (which is not included in the text), Justice Stone noted that Miguel was

36-8

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

entrusted by Dean Witter with the power to open brokerage accounts for clients,

receive deposits, make purchases of securities as directed by clients, and sell them as

directed. His general scope of authority comprised these acts. His misuse of

authority, she wrote, was not utterly unrelated to his duties. Giving a broker’s

customary duties, it was not unforeseeable that Miguel could have used his position

to defraud a customer.

Additional Point for Discussion: Ask your students whether and why they agree with

Justice Angelini or Justice Stone. It is relevant that both justices were willing to find

Dean Witter 15% liable for direct liability? Isn’t that the right grounds to make Dean

Witter responsible, for its failure to supervise Miguel to discover and prevent his

fraud? Why should Dean Witter be also liable for an intentional act, especially when

it involved a family member who trusted him not because he was a broker but

because he was her son? Justice Stone thought that the fraud was foreseeable by

Dean Witter and therefore it was reasonable to make Dean Witter responsible for the

fraud. Justice Angelini disagreed.

f. Ethics in Action (p. 981): There is no question that the doctrine of respondeat

superior encourages employers to do a better job selecting, training, and supervising

employees. That is one of purpose of tort law: deterrence. Respondeat superior in

its present form probably discourages some businesses from using some employees,

at least those that are tort-prone. It the doctrine were extended to provide for

absolute liability, one would expect a more greatly reduced use of employees, if for

no other reason than that a business may find it hard to obtain insurance coverage for

all the acts of employees, including intentional torts not reasonably foreseeable by the

employer. That argument fails for large corporations that are self-insured. A

utilitarian would probably argue against an absolute liability rule on the grounds that

the cost to society of imposing liability on innocent businesses outweighs the benefits

to tort victims, especially if the effect is to drive innocent businesses from the field.

The categorical imperative would suggest that we would not want a universal rule of

absolute employer liability for employees’ torts. A believer in justice theory may

come to the same conclusion if she focuses on the innocence of the business, but not

if she finds the victim more deserving of compensation than the business is deserving

of protection from liability.

g. Log On (p. 981): This website provides good advice to help employers avoid direct

and vicarious liability for acts of an employee.

4. Liability for Torts of Nonemployee Agents (Independent Contractors). Principals are

generally not liable for the torts of nonemployee agents, because they don’t control the

nonemployee agent’s acts. Discuss the two major exceptions: nondelegable duties and

inherently dangerous activities. Also, make sure to note that a principal may be directly

liable for the torts of a nonemployee agent. In addition, a principal may ratify a

nonemployee agent’s torts. See Restatement (Third) section 7.04.

Example: Problem Case # 8.

5. Liability for Agent’s Misrepresentations

a. Begin by noting that this is a problem that straddles contract and tort, and that its

resolution depends in part on the agent’s authority.

b. In this context, the principal may be subject to direct liability (based on his own

culpability) or imputed liability (based on the agent’s culpability and the principal-

agent relation). In the former context, the principal’s liability may be based on intent

or on negligence. The latter context is where the agent’s authority assumes

importance.

36-9

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

c. When discussing the principal’s imputed liability for the agent’s misrepresentations,

you might change the example on page 983 by having the agent make a

misrepresentation about a subject on which he lacked the actual or apparent authority

to make true statements, such as existing markets for farm products. The principal

would not be responsible for such erroneous statements.

d. Emphasize why both honest and dishonest principals may desire to put exculpatory

clauses in form contracts the agent completes. Also, stress that the principal’s

interests have to be balanced against those of the third party. Note the compromise

the law achieves here: innocent principals will not be liable in tort, but the third party

may rescind. Rescission arguably does no great harm to the principal’s interests, and

it protects the third party.

E. Tort Liability of the Agent: After stating the general rule that agents are liable for their own

torts, discuss the fairly simple exceptions in the text and the relevant examples. Note that the

agent’s liability for torts of subagents generally is determined by the rules stated in the

previous section, and that subagents are generally liable for their own torts (subject to the

exceptions just noted).

Example: Problem Cases ## 11 and 12.

F. Note that in many cases both principal and agent will be liable. In the battle between the

principal and agent, the text provides some guidance on who will ultimately bear

responsibility.

G. Log On (p. 984): Students may be surprised how extensively sports agents are regulated.

You might want to ask students whether it is fair that a college athlete cannot sign a contract

with an agent, even if the agent pays nothing of value to the athlete. Note that college

students seeking jobs in other areas, however, are permitted to retain agents (such as

employment agencies) who help them assess their job prospects and find jobs.

IV. RECOMMENDED REFERENCES

See the references for Chapter 35.

36-10

manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.