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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.