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Chapter 20
RELATIONSHIP WITH THIRD PARTIES
I. Relationship of Principal and Third Persons
A. Contract Liability of the Principal
1. Types of Authority
a. Actual Express Authority
b. Actual Implied Authority
c. Apparent Authority
2. Delegation of Authority
3. Effect of Termination of Agency on Authority
a. Second Restatement
b. Third Restatement
4. Ratification
a. Requirements of Ratification
b. Effect of Ratification
5. Fundamental Rules of Contractual Liability
B. Tort Liability of the Principal
1. Direct Liability of Principal
a. Authorized Acts of Agent
b. Unauthorized Acts of Agent
2. Vicarious Liability for Unauthorized
Acts of Agent
a. Respondeat Superior
b. Agent Acts with Apparent Authority
c. Torts of Independent Contractor
C. Criminal Liability of the Principal
II. Relationship of Agent and Third Persons
A. Contract Liability of Agent
1. Disclosed Principal
a. Authorized Contracts
b. Unauthorized Contracts
c. Agent Assumes Liability
2. Unidentified Principal
3. Undisclosed Principal
4. Nonexistent or Incompetent Principal
B. Tort Liability of Agent
C. Rights of Agent Against Third Person
Cases in This Chapter
Schoenberger v. Chicago Transit Authority.
Parlato v. Equitable Life Assurance Society
of the United States
Connes v. Molalla Transport System, Inc.
Plain Dealer Publishing Co. v Worrell
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Distinguish among actual express authority, actual implied authority, and apparent authority.
Explain the contractual liability of the principal, agent, and third party when the principal is (a)
disclosed, (b) partially disclosed, and (c) undisclosed.
Explain how apparent authority is terminated and distinguish between actual and constructive notice.
Describe the tort liability of a principal for the (a) authorized acts of agents, (b) authorized acts of
employees, and (c) unauthorized acts of independent contractors.
Explain the criminal liability of a principal for the acts of agents.
TEACHING NOTES
I. RELATIONSHIP OF PRINCIPAL & THIRD PERSONS
A. CONTRACT LIABILITY OF THE PRINCIPAL
*** Question to Discuss ***
Distinguish among actual express authority, actual implied authority, and apparent
authority.
Types of Authority
Authority is of two basic types: actual and apparent. Actual authority exists
when the principal gives actual consent to the agent.
Actual Express Authority — The principal’s spoken or written words directing
the agent to do something speci!c.
Actual Implied Authority — The implied authority of an agent does not come
from the principal’s express words but is inferred by the agent from the words or
conduct of the principal. Implied authority may arise from customs and usages of
the principal’s business. Furthermore, the authority granted to an agent to
accomplish a particular purpose necessarily includes the authority to employ the
CASE 20-1
SCHOENBERGER v. CHICAGO TRANSIT AUTHORITY
Appellate Court of Illinois, First District, First Division, 1980
84 Ill.App.3d 1132, 39 Ill.Dec. 941, 405 N.E.2d 1076
http://scholar.google.com/scholar_case?case=2870525977617933992&q=405+N.E.2d+1076&hl=en&as_sclt=2,34
Campbell, J.
The plaintiff, James Schoenberger, brought a small claims action * * * in the * * * circuit court
of Cook County against the defendant, Chicago Transit Authority (herein-after C.TA.) to recover
contract damages. The trial court ruled in favor of the defendant and against the plaintiff. The
plaintiff appeals from this judgment. At issue is whether the C.T.A. may be held liable under
agency principles of a promise allegedly made by an employee of the C.T.A. to the plaintiff at
the time that he was hired to the effect that he would receive a $500 increase in salary within a
specified period of time. We affirm.
Schoenberger was employed by the C.T.A. from August 16, 1976, to October, 1976, at a
salary of $19,300. The facts surrounding his employment with the C.T.A. are controverted. The
plaintiff’s position at the trial was that he took the job with the C.T.A. at a salary of $19,300
that he desired to employ him at $19,800 and that he was making a recommendation to this
effect. Schoenberger told ZuChristian that he would accept the offer. ZuChristian informed him
that a formal offer would come from the Placement Department within a few days. However,
when the offer was made, the salary was stated at $19,300. Schoenberger did not accept the offer
immediately. Rather, he called ZuChristian for an explanation of the salary difference. After
making inquiries, ZuChristian informed Schoenberger that a clerical error had been made and
that it would take a number of weeks to have the necessary paperwork reapproved because
several people were on vacation. To expedite matters, ZuChristian suggested Schoenberger take
the job at the $19,300 figure and that he would see that the $500 would be made up to him at the
* * *
The trial court, after hearing the evidence and reviewing the exhibits, ruled in favor of the
defendant. The trial court ruled: (1) that it was inconceivable that the plaintiff thought
ZuChristian had final authority in regard to employment contracts; and (2) that it was not shown
that a commitment or promise was made to the plaintiff by an authorized agent of the C.T.A.
* * *
The main question before us is whether ZuChristian, acting as an agent of the C.T.A., orally
contracted with Schoenberger for $500 in compensation in addition to his $19,300 salary. The
authority of an agent may only come from the principal and it is therefore necessary to trace the
source of an agent’s authority to some word or act of the alleged principal. [Citations.] The
Apparent authority in an agent is such authority as the principal knowingly permits the agent
to assume or which he holds his agent out as possessing—it is such authority as a reasonably
prudent man, exercising diligence and discretion, in view of the principal’s conduct, would
naturally suppose the agent to possess.
* * *
Here, Schoenberger’s initial contact with the C.T.A. was with the Placement Department
where he filled out an application and had his first interview. There is no evidence that the C.T.A.
did anything to permit ZuChristian to assume authority nor did they do anything to hold him out
as having the authority to hire and set salaries. ZuChristian was not at a management level in the
C.T.A. nor did his job title of Principal Communications Analyst suggest otherwise. The mere
fact that he was allowed to interview prospective employees does not establish that the C.T.A.
held him out as possessing the authority to hire employees or set salaries. Moreover, ZuChristian
did inform Schoenberger that the formal offer of employment would be made by the Placement
Department.
* * *
Delegation of Authority
The general rule is that an agent may not delegate his authority to another or
appoint a sub-agent.
To determine if acts or duties may be delegable consideration is given to the
principal's expectation as to which person should perform the task and how
much of the agent’s unique expertise is required.
Effect of Termination of Agency on Authority
When an agency terminates, the agent’s actual authority ceases. The Second
and Third Restatements differ, however, regarding when an agent’s apparent
authority ceases.
*** Question to Discuss ***
Explain how apparent authority is terminated and distinguish between actual and
constructive notice.
Second Restatement – Where the performance of an authorized transaction
becomes impossible, such as when the subject matter of the transaction is
destroyed or the transaction is made illegal, the agent’s apparent authority also
expires and notice of such termination to third persons is not required. The
bankruptcy of the principal terminates without notice the power of an agent to
affect the principal’s property, which has passed to the bankruptcy trustee.
When the termination is by the death or incapacity of the principal or agent, the
Second Restatement provides that the agent’s apparent authority also expires
and notice of such termination to third persons is not required. However, with
respect to the death or incapacity of the principal, this rule has been legislatively
changed the great majority of States by the adoption of the Uniform Durable
Power of Attorney Act or the UPOAA. Each Act provides that the death of a
Apparent authority continues until the third party has actual knowledge or
receives actual notice, if that third party is one (1) with whom the agent had
previously dealt on credit, (2) to whom the agent has been specially accredited,
or (3) with whom the agent has begun to deal, as the principal should know.
Actual notice requires a communication to the third party, either oral or
written. If notice is given by mail, it is effective as actual notice upon delivery,
not upon dispatch. All other third parties as to whom there was apparent
authority must have actual knowledge or be given constructive notice
through, for example, publication in a newspaper of general circulation in the
area where the agency is regularly carried on or in a trade bulletin.
a third party has notice of circumstances that make it unreasonable to continue
that assumption.
CASE 20-2
PARLATO v. EQUITABLE LIFE ASSURANCE SOCIETY OF
THE UNITED STATES
Supreme Court of New York, Appellate Division, First Department, 2002
299 A.D.2d 108, 749 N.Y.S.2d 216
http://scholar.google.com/scholar_case?case=7183003785471009812&q=749+N.Y.S.2d+216&hl=en&as_sdt=2,34
Friedman, J.
Plaintiffs [Parlato and Perry], who are sisters, were defrauded by Kenneth Soule, an agent of
defendant Equitable Life Assurance Society of the United States (Equitable), beginning while
Soule was employed by Equitable and continuing after Equitable terminated him in July 1992.
Soule actually opened an Equitable account for one plaintiff, but he did not do so for the other,
instead stealing all the funds that plaintiff entrusted to him. * * *
* * * Equitable hired Soule on or about April 1, 1990, as an agent authorized to sell Equitable
financial products, such as insurance policies and annuities, to the public. Before becoming an
Equitable agent, Soule from 1986 onward had been plaintiff Parlato’s accountant and financial
Equitable terminated Soule’s employment in July 1992. Although Parlato allegedly still had
an account with Equitable at that time, Equitable did not notify her of the termination. For
approximately four years after his termination, Soule allegedly continued to represent himself to
plaintiffs as an Equitable agent and to solicit their further investment in purported Equitable
financial products. Plaintiffs do not allege, however, that they were exposed to any
manifestations by Equitable of a continuing connection between Soule and Equitable after July
1992.
* * *
* * * [I]t is well established that a principal may be held liable in tort for the misuse by its
agent of his apparent authority to defraud a third party who reasonably relies on the appearance
of authority, even if the agent commits the fraud solely for his personal benefit, and to the
detriment of the principal [citations]; Restatement [Second] of Agency §§261, 262, 265 [1];
[citations]. The reason for this rule is that the principal, by virtue of its ability to select its agents
and to exercise control over them (see Restatement [Second] of Agency §1 [1]), is in a better
position than third parties to prevent the perpetration of fraud by such agents through the misuse
of their positions. Thus, the principal should not escape liability when an innocent third person
suffers a loss as the result of an agent’s abuse, for his own fraudulent purposes, of the third
person’s reasonable reliance on the apparent authority with which the principal has invested the
agent. * * *
* * *
who, like Parlato, is known by a principal to have previously dealt with the principal through the
principal’s authorized agent, is entitled to assume that the agent’s authority continues until the
third party receives notice the principal has revoked the agent’s authority [citations]. The law of
other states appears to be similar (see Restatement [Second] of Agency §§124A, 125, 127, 135,
136 [1], [2]; [citations]). In recognizing this duty of a principal to give notice of the revocation of
an agent’s authority, we are simply applying established principles.
In this case, Parlato alleges that Soule opened actual Equitable investment accounts for her
while he was still an authorized agent of Equitable. If this is proven to be so, Parlato will be
entitled to the benefit of the above-described rule permitting her, as a person known to have done
business with Equitable through Soule in the past, to presume that Soule remained authorized to
act for Equitable in the absence of either (1) notice that his authority had been revoked or (2)
other circumstances that would have rendered it unreasonable to believe that Soule had authority
to act for Equitable in the transactions he proposed [citation]; Restatement [Second] of Agency
Considerations of fairness, practicality and sound public policy lead us to this conclusion.
Even in the case of a third party unknown to the principal, it seems fair to hold the principal
responsible for the agent’s misuse of his apparent authority while the principal-agent relationship
continues to exist, bringing benefits to the principal and giving the principal a measure of control
over the agent’s conduct (see Restatement [Second] of Agency §1 [1] [an agent acts on behalf of
the principal subject to the principal’s control]). It seems unfair, however, to hold the principal
responsible for torts its former agent commits after termination against an unknown third party,
even if the former agent facilitates his wrongdoing by misrepresenting to the victim that the
agency relationship is still in existence. Once the agent’s employment has been terminated, the
* * *
Finally, the amended complaint alleges that Equitable “made no effort to alert the public in
general that Soule was no longer its agent…” It is true that section 136 (3) of the Restatement
(Second) of Agency (published in 1958) takes the position that, absent public notice (as by
advertisement in a newspaper of general circulation) of revocation of an agent’s authority in the
area in which he formerly acted for the principal, apparent authority continues to exist after such
revocation as to persons who previously knew of the agency and do not receive actual notice of
the revocation, even if such persons never previously did business with the agent and thus are
unknown to the principal. While this rule (hereinafter, the “public notice rule”) finds support in a
number of very old New York cases [citation], we do not regard the public notice rule as binding
at this late date, at least under the particular facts alleged by plaintiffs. There is no statutory or
regulatory mandate for public notice in this context * * * and the most recent New York cases
giving support to the rule appear to be from the era when the telephone was a relatively new and
Ratification
Rati!cation is the con!rmation or a>rmance by one person of a prior
unauthorized act performed by another who is his agent or who purports to be
his agent. The rati!cation of such act or contract binds the principal and the third
party as if the agent or purported agent had been acting initially with actual
authority. The principal's intent, either express or implied, will be determined by
his actions or in some cases, by a failure to act.
Requirements of Rati1cation —
Knowledge. A principal must have knowledge of all material facts concerning
the transaction at the time rati!cation occurs.
Disclosure. Under the Second Restatement, he agent must have disclosed to
the third person that the act was being done on behalf of the purported
principal. Under the Third Restatement and a number of relatively recent cases, an
undisclosed principal may ratify an agent’s unauthorized act.
effect of Rati1cation — The principal becomes bound by the actions of the
agent as if the agent had been originally authorized to act. Assuming no tortious
or criminal conduct on the part of the agent, the agent will be released from
liability for the transaction. The principal can sue a third person who refuses to
perform for breach of contract. The agent has a right to receive appropriate
compensation from the principal.
*** Question to Discuss ***
Explain the contractual liability of the principal and third party when the principal is
(a) disclosed, (b) partially disclosed, and (c) undisclosed.
(NOTE: Contract liability of agent is discussed later in this chapter.)
Fundamental Rules of Contractual Liability
A disclosed principal and third party are bound if the agent acts within her actual
or apparent authority in making a contract. The same is true of a partially
disclosed principal. (Some courts refer to the partially disclosed principal as an
“unidenti!ed principal.”) An undisclosed principal and third party are bound if
*** Question to Discuss ***
Describe the tort liability of a principal for the (a) authorized acts of agents,
(b) unauthorized acts of employees and (c) unauthorized acts of independent contractors.
B. TORT LIABILITY OF THE PRINCIPAL
Direct Liability of Principal
A principal is liable for his own tortious conduct involving the use of agents.
Such liability primarily arises in one of two ways.
Authorized Acts of Agent — First, a principal is directly liable in damages for
harm resulting from his directing an agent to commit a tort.
