Chapter 36 – Third-Party Relations of the Principal and the Agent
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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
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
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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
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
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
impliedly authorized to do what other agents in the industry typically have authority to do.
is relevant here.
2. Review express authority and go through the simple example in the text. Recall the
3. Implied authority
a. Review the factors on which this is based and the test courts often use in assessing
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
express authority, such as giving the agent a title, such as vice president of marketing
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or human resources.
d. You might go through the text’s specific examples of implied authority (p. 971-972),
or just note them in class and assign them as reading.
4. Apparent authority:
a. Review Chapter 35’s discussion of apparent authority. Note that, as discussed in
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
an agency as well.
Perhaps agency by estoppel can explain the fact that a person may have apparent
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
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
purchases on the web.
7. Principal’s or agent’s incapacity. This topic was last included in the 12th edition, because it
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.
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known of the interest himself.
c. Additional example: Problem Case # 4.
9. Ratification
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
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
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
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
e. Discuss express ratification and the various kinds of implied ratification. Emphasize
f. Review the various formal requirements for ratification.
g. Describe the intervening events that can cut off the principal’s ability to ratify. Note
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 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
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
Chapter 36 – Third-Party Relations of the Principal and the Agent
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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
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
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
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
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,
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,
liability. Sketch the section’s organization.
2. Define the term “disclosed principal” and give the general rule that the agent is not liable
Chapter 36 – Third-Party Relations of the Principal and the Agent
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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,
or because he lacks authority.
3. Define “unidentified principal” and state the general rule that agents are bound on
4. Undisclosed Principal.
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
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.
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.
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.
is also liable on the contract.
Why was Derr liable to the Treadwells for acting for a nonexistent principal? Derr signed
Restatement (Third) section 6.04.
8. Agent’s express or implied agreement to be bound. Note the ways that the agent might be
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.
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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
found Moore liable for breaching his implied warranty of authority.
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
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
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
regard.
2. Respondeat Superior liability
a. Here, begin by saying that, absent direct liability, the principal’s liability for the agent’s
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
more sense to pin liability on XYZ here.
b. Then, lay out the doctrine of respondeat superior. Note that it applies to both
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