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1
whole or in part.
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
CHAPTER OUTLINE
I. Scope of Agent’s Authority
A. EXPRESS AUTHORITY
Express authority is embodied in what a principal engages an agent to do.
1. The Equal Dignity Rule
The equal dignity rule may determine when express authority must be in writing. Exceptions
2. Power of Attorney
A power of attorney is a written document and is usually notarized.
B. IMPLIED AUTHORITY
whole or in part.
whole or in part.
CHAPTER 9: AGENCY LIABILITY TO THIRD PARTIES AND TERMINATION 5
CASE SYNOPSIS—
Case 9.2: Williams v. Pike
Bobby Williams bought a car at Sherman Henderson’s auto repair business in Monroe, Louisiana, for
$3,000. Although the car’s owner was Joe Pike, the owner of Justice Wrecker, Henderson negotiated and
made the sale. Williams drove the car to Memphis, Tennessee, where his daughter was a student. Three
days after the sale, the car erupted in flames. Williams extinguished the blaze and contacted Henderson. The
vehicle was soon stolen. Williams filed a suit in a Louisiana state court against Pike and Henderson. The
court awarded Williams $2,000, plus costs, adding that if he had returned the car, it would have awarded him
the entire price. Pike and Henderson appealed.
A state intermediate appellate court affirmed. A state permit to sell the car had been issued to Pike and
showed that Justice Wrecker was the owner. The car was displayed for sale at Henderson’s business and he
actually sold it. This made Pike the principal and Henderson his agent. The fact that their agency relationship
was not made clear to Williams made Pike an undisclosed principal. Williams could thus choose to hold either
Pike or Henderson liable for the condition of the car, which was a breach of warranty because it did not fulfill
the purpose for which it was intended.
..................................................................................................................................................
Notes and Questions
If Henderson had disclosed the fact of his agency relationship but not the identity of the principal,
would the result in this case have been the same? Yes, most likely, if Henderson had only partially
revealed his agency with Pike to Williams, the result would have been the same. A partially disclosed principal
is liable to a third party for a contract made by the agent. In most states, the agent is also treated as a party to
the contract, and the third party can hold the agent liable for contractual nonperformance. In this case,
Williams could thus have held Henderson liable even if the fact of the agency had been revealed.
If an apparent agent does not in fact have the authority to act on the principal’s behalf, does the
principal have an ethical responsibility to inform an unaware third party? A principal’s ethical duty to
notify a third party could depend on the specific circumstances. But if a principal acts to lead a third party
reasonably to believe that an agency relationship exists, and the third party changes positions in reliance, it
seems fair to impose legal liability on the principal. It seems likewise fair to hold the principal to an ethical
responsibility to inform an unsuspecting third party in those same circumstances that no agency actually
exists.
Is Henderson entitled to be compensated by Pike for any amount of the judgment that he pays to
Williams? Explain. Yes. As stated in the text, when neither the fact of an agency relationship nor the identity
of the principal is disclosed, the undisclosed principal is bound to perform just as if he or she had been fully
disclosed at the time of the contract. When a principal’s identity is undisclosed and the agent is forced to pay
the third party, the agent is entitled to be indemnified, or compensated, by the principal.
whole or in part.
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?”
QUESTION IN CASE 9.2
Suppose that Henderson had fully disclosed the fact of his agency relationship and the identity of
his principal. Would the result have been different? Why or why not? Yes. The result would likely have
been different if Henderson had fully disclosed his agency relationship with Pike to Williams. Pike would still
have been liable, but Henderson would not. A disclosed principal is liable to a third party for a contract made
by the agent. If the principal is disclosed, the agent has no contractual liability for the nonperformance of the
principal.
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 9.2
Is Henderson entitled to be compensated by Pike for any portion of the judgment that he pays to
Williams? Explain. Yes. As stated in the text, when neither the fact of an agency relationship nor the identity
of the principal is disclosed, the undisclosed principal is bound to perform just as if he or she had been fully
disclosed at the time of the contract. When a principal’s identity is undisclosed and the agent is forced to pay
the third party, the agent is entitled to be indemnified, or compensated, by the principal.
2. Third Party’s Knowledge
If the third party knew that the agent was mistaken, or the agent indicated uncertainty, about the
extent of authority, the agent is not personally liable.
CHAPTER 9: AGENCY LIABILITY TO THIRD PARTIES AND TERMINATION 7
whole or in part.
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
CHAPTER OUTLINE
I. Scope of Agent’s Authority
A. EXPRESS AUTHORITY
Express authority is embodied in what a principal engages an agent to do.
1. The Equal Dignity Rule
The equal dignity rule may determine when express authority must be in writing. Exceptions
2. Power of Attorney
A power of attorney is a written document and is usually notarized.
B. IMPLIED AUTHORITY
whole or in part.
whole or in part.
CHAPTER 9: AGENCY LIABILITY TO THIRD PARTIES AND TERMINATION 5
CASE SYNOPSIS—
Case 9.2: Williams v. Pike
Bobby Williams bought a car at Sherman Henderson’s auto repair business in Monroe, Louisiana, for
$3,000. Although the car’s owner was Joe Pike, the owner of Justice Wrecker, Henderson negotiated and
made the sale. Williams drove the car to Memphis, Tennessee, where his daughter was a student. Three
days after the sale, the car erupted in flames. Williams extinguished the blaze and contacted Henderson. The
vehicle was soon stolen. Williams filed a suit in a Louisiana state court against Pike and Henderson. The
court awarded Williams $2,000, plus costs, adding that if he had returned the car, it would have awarded him
the entire price. Pike and Henderson appealed.
A state intermediate appellate court affirmed. A state permit to sell the car had been issued to Pike and
showed that Justice Wrecker was the owner. The car was displayed for sale at Henderson’s business and he
actually sold it. This made Pike the principal and Henderson his agent. The fact that their agency relationship
was not made clear to Williams made Pike an undisclosed principal. Williams could thus choose to hold either
Pike or Henderson liable for the condition of the car, which was a breach of warranty because it did not fulfill
the purpose for which it was intended.
..................................................................................................................................................
Notes and Questions
If Henderson had disclosed the fact of his agency relationship but not the identity of the principal,
would the result in this case have been the same? Yes, most likely, if Henderson had only partially
revealed his agency with Pike to Williams, the result would have been the same. A partially disclosed principal
is liable to a third party for a contract made by the agent. In most states, the agent is also treated as a party to
the contract, and the third party can hold the agent liable for contractual nonperformance. In this case,
Williams could thus have held Henderson liable even if the fact of the agency had been revealed.
If an apparent agent does not in fact have the authority to act on the principal’s behalf, does the
principal have an ethical responsibility to inform an unaware third party? A principal’s ethical duty to
notify a third party could depend on the specific circumstances. But if a principal acts to lead a third party
reasonably to believe that an agency relationship exists, and the third party changes positions in reliance, it
seems fair to impose legal liability on the principal. It seems likewise fair to hold the principal to an ethical
responsibility to inform an unsuspecting third party in those same circumstances that no agency actually
exists.
Is Henderson entitled to be compensated by Pike for any amount of the judgment that he pays to
Williams? Explain. Yes. As stated in the text, when neither the fact of an agency relationship nor the identity
of the principal is disclosed, the undisclosed principal is bound to perform just as if he or she had been fully
disclosed at the time of the contract. When a principal’s identity is undisclosed and the agent is forced to pay
the third party, the agent is entitled to be indemnified, or compensated, by the principal.
whole or in part.
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?”
QUESTION IN CASE 9.2
Suppose that Henderson had fully disclosed the fact of his agency relationship and the identity of
his principal. Would the result have been different? Why or why not? Yes. The result would likely have
been different if Henderson had fully disclosed his agency relationship with Pike to Williams. Pike would still
have been liable, but Henderson would not. A disclosed principal is liable to a third party for a contract made
by the agent. If the principal is disclosed, the agent has no contractual liability for the nonperformance of the
principal.
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 9.2
Is Henderson entitled to be compensated by Pike for any portion of the judgment that he pays to
Williams? Explain. Yes. As stated in the text, when neither the fact of an agency relationship nor the identity
of the principal is disclosed, the undisclosed principal is bound to perform just as if he or she had been fully
disclosed at the time of the contract. When a principal’s identity is undisclosed and the agent is forced to pay
the third party, the agent is entitled to be indemnified, or compensated, by the principal.
2. Third Party’s Knowledge
If the third party knew that the agent was mistaken, or the agent indicated uncertainty, about the
extent of authority, the agent is not personally liable.
CHAPTER 9: AGENCY LIABILITY TO THIRD PARTIES AND TERMINATION 7
whole or in part.
