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Chapter 37
THIRD PERSONS IN AGENCY
RESTATEMENT
The rights and liabilities of the parties in an agency relationship (principal, agent and third parties) are
determined by various factors including the nature of the agency relationship and the authority of the agent.
In a disclosed principal situation, where the third party knows the agent is contracting for a principal and knows
who that principal is, the principal is fully liable for all contracts the agent enters into with authority. If the agent in
that same situation acts without authority, he or she has breached an implied warranty to a third party.
A partially disclosed principal situation is one in which the third party is aware that the agent is acting for
someone else but is unaware of the principal ’s identity. Because the third party does not know the identity of the
principal, the contract is made with the agent and the agent is liable. An undisclosed principal situation is one in
which the third party is unaware that the agent is acting for anyone else. Again, the agent is liable on the
contract. In both partially disclosed and undisclosed principal situations where the agent has authority for the
transaction, the principal is also liable on the contract. If the third party chooses to hold the agent liable, then the
agent is entitled to reimbursement from the principal. If the agent was without authority to enter into a contract in
a partially disclosed or undisclosed principal situation, then the agent is fully liable on the contract without any
right to reimbursement from the principal, and the principal is not a party to the contract.
When an agent acts with authority in a disclosed or undisclosed principal, the statements made by the agent bind
the principal. Similarly, a payment made to an agent with authority to accept such is a payment made to a
principal.
In certain circumstances, the principal may be liable for the torts and crimes of the agent. Whether the principal
is liable depends on the nature of the agency relationship, the nature of the act, and whether the act was
committed in the scope of employment. A negligent act of an agent results in the principal ’s liability under the
doctrine of respondeat superior when the act was in the scope of employment. A principal can be held liable for
the intentional torts of the agent if the intentional act advanced the principal ’s interest, constituted fraud or is the
result of the principal’s negligence in hiring or retaining employees. Crimes committed by the agent at the
principal’s direction will result in criminal liability for the principal.
Generally, the principal is not liable for the acts of an independent contractor, if there is not a great degree of
control over the independent contractor. However, if the independent contractor is engaged in inherently
dangerous activity, the principal is held liable because of the public policy interest in holding parties accountable
for these hazardous activities rather than insulating themselves through the use of independent contractors.
STUDENT LEARNING OUTCOMES
LO.1: Explain when an agent is and is not liable to a third person as a party to a contract.
LO.2: Describe how to execute a contract as an agent on behalf of a principal.
LO.3: Explain the legal effect of a payment made by a third person to an authorized agent.
LO.4: Explain the doctrine of respondeat superior.
LO.5: Distinguish between the authority of a soliciting agent and that of a contracting agent.
INSTRUCTOR’S INSIGHTS
Break the chapter down into four components – related Learning Outcomes are indicated in ( ):
1. What is the liability among and between principals, agents and third parties with respect to contracts?
Explain the difference between a disclosed and undisclosed principal
2. What is the liability of the principals, agents and third parties under varying degrees of agent ’s authority and
principal’s disclosure of identity or existence? (LO.3)
3. What is the liability of the principal for the torts and crimes of the agent?
Provide the requirements for holding a principal liable for the tortious and criminal acts of the agent
4. How do transactions with sales personnel work? (LO.5)
CHAPTER OUTLINE
I. What is the Liability Among and Between Principals, Agents and Third Parties With Respect to Contracts?
A. Action of authorized agent of disclosed principal
B. Unauthorized action
Emphasize that when an agent purports to act on behalf of a principal, but acts without authority or in
excess of the agent’s authority, the principal cannot be held liable unless the principal ratifies the
unauthorized acts of the agent. It is the agent who would be liable to the third person for breach of the
C. Disclosure of principal
1. Disclosed principal – existence and identity of principal known
2. Partially disclosed principal – existence of principal, but not identity known
3. Undisclosed principal – existence and identity of principal not known
Have the students state some reasons why the principal may wish to keep his or her identity a secret in a
transaction. Because both the agency’s and the principal’s identity are undisclosed, the general view is that the
agent is liable to the third person on the contract. The reason is that the third person should be entitled to hold
the person with whom he or she apparently contracted. If the agent has any liability to the third person as a result
of the undisclosed principal’s failure to perform, the agent will have a right against the undisclosed principal for
indemnification. Emphasize that once the principal ’s identity is made known to the third person, the principal may
also be held liable to the third person because the agent was authorized to act for the undisclosed principal. The
general view is that the third person must decide whether to hold the agent or the now -disclosed principal liable
for breach of contract. Remind the students that the true contract is between the third person and the undisclosed
principal, and accordingly, the principal is entitled to enforce the contract against the third person should the third
person breach the contract. Have your students solve the following problem:
T owns a Picasso painting, which P knows will never be sold to him, as P and T are enemies. P is aware
that T is in some financial difficulty and may have to liquidate some assets. P employs A to purchase the
Picasso as the agent for P, but P is to remain an undisclosed principal. A purchases the painting from T
with money supplied by P. Subsequently, T discovers how P acquired the Picasso and claims that T has
the right to rescind the transaction because of P’s fraud.
Answer: T would be unable to recover the painting, as this is an example of the use of an undisclosed
principal. On the other hand, assume that T asks A whether A represents any other person, and A states
that A acts for no one else. When T discovers that P has the painting, T has the right to rescind the
contract because of the misrepresentation.
CASE BRIEF: ICG Link, Inc. v. Steen
363 S.W. 3d 533 (Tenn. App. 2011)
FACTS: The defendant, Philip Steen, formed a company, Nashville Sports Leagues, LLC, in
2003 and served as managing member until the company was administratively dissolved in
2004. Three years later Steen formed another company, TN Sports, LLC, where he served as
managing member. However, he continued to represent himself simply as “an executive of
Nashville Sports Leagues”, including using an @nashvillesports e-mail address. As such, he
contracted with the plaintiff, ICG Link, to build a Web site for TN Sports. Problems arose with the
Web site and he did not pay past due invoices. ICG sued him for breach of contract.
ISSUE: Is Steen personally liable for the services performed?
HOLDING: Yes.
REASONING: In order for an agent to avoid personal liability on a contract, the agent must disclose the facts
of the agency, and the identity of the principal. Mr. Steen, in his transactions with ICG, failed to
disclose that TN Sports, LLC, was his principal, identifying himself as “an executive of Nashville
Sports Leagues.” Thus, he is personally liable for the judgment.
D. Assumption of liability
CASE BRIEF: Bennett v. A.T. Masterpiece Homes at Broadsprings, LLC
40 A. 3d 145 (Pa. Super. 2012)
FACTS: Grant College was the managing member of A.T. Masterpiece Homes, a limited liability
company. The trial court concluded that Colledge had assumed personal responsibility
regarding the quality of work during the construction of the Bennetts’ and the Hoefferles’ homes.
When the construction finished, the homes were in various stages of disrepair and structural
failure. Judgment was issued against Colledge personally for $173,250 for the Bennetts and
$55,250 for the Hoefferles. On appeal, Colledge contended that he should be shielded from
personal liability because he was at all times acting only as an agent on behalf of a limited
liability company, A.T. Masterpiece; and, he contends, any statements attributed to him where
he said, “I will take care of it”, or, “I guarantee it”, were simply figures of speech and did not
amount to an express assumption of personal liability.
ISSUE: Did the agent, Grant Colledge, assume personal liability on the LLC’s contracts?
REASONING: Judgment against Colledge. A person acting as an agent may assume personal liability on a
business contract where he voluntarily undertakes a personal responsibility. For example,
Colledge’s statements to the Hoefferles had the effect of personally obligating himself for the
structural integrity of the dormer because he made the statements with the goal of securing the
Hoefferles’ continuing performance on the contract. And, his statements to the Bennetts led
them to believe he would personally ensure the completed home was built properly.
E. Execution of contract
1. The contract must state the principal’s name and identify capacity (“by,” “per,” “on behalf of”)
3. Review different ways in which an agent may sign a contract, and discuss what liabilities may result
from the signatures. You may wish to use the following examples:
Signature Responsible Party
i. P Company, Art Smith, agent P Company (probably i is better)
ii. Art Smith, agent for P Company P Company
iii. Art Smith on behalf of P Company P Company
iv. P Company, per Art Smith P Company
CASE BRIEF: Walton v. Mariner Health
894 A. 2d 584 (Md. 2006)
FACTS: Audrey Walton was transferred from a hospital to Mariner Health Nursing Home on January 26,
2001. Her daughter, Patricia Walton, signed a thirty-page document entitled “Resident’s Agent
Financial Agreement.” Patricia indicated in that agreement that the only method of payment
would be Medicare or Medical assistance. Medicare assistance stopped in February 2001. On
January 10, 2003, Mariner Health sued both Audrey and Patricia for unpaid monthly bills
amounting to $86,235. From a judgment for Mariner Health against both the patient and her
daughter, Patricia appealed.
ISSUE: Did Patricia’s status as an agent make her financially liable for the unpaid bills?
REASONING: As an agent, Patricia entered into the contract only for the benefit of Audrey and is personally
insulated from liability by virtue of her status as an agent. NOTE: A state Nursing Home Bill of
Rights did not authorize a nursing home to bring a private cause of action against a patient’s
agent for breach of contract unless the agent voluntarily and knowingly agreed to pay for the
care with her own funds.
F. Torts and crimes
CASE BRIEF: Ralls v. Mittlesteadt
596 S.W. 2d 349 (Ark. 1980)
FACTS: Ralls was an employee of the Arkansas State Highway Department. While repairing a state
highway, he negligently backed a state truck onto the highway, causing a collision with
Mittlesteadt’s car. Mittlesteadt sued Ralls, who raised the defense that, because he was acting
on behalf of the state, he was not liable for his negligence.
ISSUE: Is the principal liable for the agent’s accident?
REASONING: The fact that an employee or agent is acting on behalf of someone else does not excuse or
exonerate the agent or employee from liability for torts committed by the agent or employee.
Ralls was therefore liable for his negligence even though it occurred within the scope of his
employment by the state.
DISCUSSION POINTS: Ethics & the Law
The Farmers and the Unknown Developer
It is deceitful to not disclose the information. But the law protects the undisclosed principal. Ask the students why
the law permits this lack of disclosure. Discuss the impact on market value of potential development.
II. What is the Liability of the Principals, Agents and Third Parties Under Varying Degrees of Agent’s Authority
and Principal’s Disclosure of Identity or Existence?
A. Agent’s contracts
1. Simple contract with principal disclosed – principal liable if authorized or notified
2. Simple contract with principal partially disclosed – principal liable
B. Payment to agent is payment to principal
CASE BRIEF: Liberty Mutual Insurance Co. v. Enjay Chemical Co.
316 A. 2d 219 (Del. Super. 1974)
FACTS: E.I. duPont de Nemours & Co. licensed Enjay Chemical Company (now Exxon) and Johnson &
Johnson to use certain chemical processes, in return for which royalty payments by check were
to be made to duPont. By agreement between the companies, the royalty payments to be
made to duPont were to be made by check sent to a specified duPont employee, C.H.D., in its
Control Division. These checks were sent during the next nine years. C.H.D. altered some of
them so that he was named thereon as the payee. He then cashed them and used the money
for his own purposes. Liberty Mutual Insurance Company, which insured the fidelity of duPont ’s
employees, and duPont sued Enjay and Johnson & Johnson on the basis that they still owed
the amounts embezzled by C.H.D.
ISSUE: Was payment made?
REASONING: Payment to an authorized agent has the legal effect of payment to the principal regardless of
whether the agent remits the payment to the principal or embezzles it. C.H.D. was the agent
authorized to receive the royalty checks. Therefore, the defendants had effectively paid the
royalties when they sent C.H.D. the checks. His misconduct did not revive the debts that were
paid by sending him the checks.
CASE BRIEF: Basic Research v. Rainbow Media Holdings, Inc.
2011 WL 2636833 (D. Utah 2011)
FACTS: Basic Research, LLC, ran advertisements on Rainbow Media Holdings’ cable television
networks from January to March 2008. Basic used an advertising agency named Icebox to place
advertisements for its products. It paid Icebox up front for all of this advertising. Icebox went
into bankruptcy, and it was discovered Icebox had not paid Rainbow Networks for three months
of advertising, worth $590,000. Rainbow Networks obtained a $132,000 payment from the
Icebox bankruptcy estate. Rainbow, now seeks payment from Basic for the remaining $406,000.
Basic contends that Rainbow’s only remedy was through the bankruptcy estate.
ISSUE: Did Basic Research discharge its debt to Rainbow Media when it paid its agent Icebox
up front for all of its advertising on Rainbow Media?
REASONING: Basic Research was a disclosed principal with whom Rainbow Networks had a credit
agreement. Basic chose Icebox as its agent to place its advertisements and to make payments.
Icebox didn’t pay. It is Basic who is liable for the actions of its agent, and Basic is responsible
for the $406,000 owed Rainbow Networks.
C. Agent’s statements – principal bound if transacting business within its scope of authority
D. Agent’s knowledge
1. Principal bound by the agent’s knowledge
2. Exceptions
III. What is the Liability of the Principal for the Torts and Crimes of the Agent? (See Figure 37-1)
A. Vicarious liability for torts and crimes
1. With regard to the concept of respondeat superior, emphasize that for the injured party to recover
against the principal (employer), the outsider must show
2. Nature of act
a. Negligent act – principal has liability if within scope of employment
b. Intentional act – principal has liability if furthering the employer ’s business
3. Course of employment
CASE BRIEF: Walgreen v. Hinchy
2014 WL6130795 (Ind. App. 2014)
FACTS: Walgreen pharmacist, Audra Withers, accessed a customer's, Abigail Hinchy,
prescription profile because her boyfriend, Peterson, told her that Hinchy was pregnant with his
child and he may have exposed Withers to herpes. Withers divulged information about Hinchey
to Peterson, who confronted Hinchy telling her that a printout showed she did not refill her birth
control pills. Walgreen contended that Withers actions were not within the scope of her
employment for purposes of respondent superior. The jury found Withers liable for
negligence/malpractice and Walgreen jointly responsible for $1.4 million in damages. Walgreen
appealed.
ISSUE: Is Walgreen jointly liable for damages under the doctrine of respondent superior?
REASONING: Walgreen, the employer, was jointly liable for the tort of employee, Withers, even though the
employer was not at fault, because the employer, by employing Withers, gave her access to the
computer, printer, and customer records, empowering her to commit the tort.
[It seemed inappropriate to use the plaintiff’s full name in the textbook, thus her initials were
used.]
DISCUSSION POINTS: Thinking Things Through
Rule No. 1: Take the Safe Course
Discuss with the students whether cell phone usage while driving should be banned.
4. Employee of the United States – Federal Tort Claims Act
B. Negligent hiring and retention of employees
1. The employer may be liable where the employee acts outside of the course and scope of his or her
employment if employer knew or should have known of tendencies
CASE BRIEF: Bryant v. Livigni
619 N.E. 2d 550 (Ill. App. 1993)
FACTS: Mark Livigni was manager of the National Super Markets, Inc., store in Cahokia, Illinois. After
drinking alcoholic beverages one evening, he stopped by the store to check the premises when
he observed a ten-year-old boy’s unacceptable behavior outside the store. Livigni chased the
boy to a car, where he pulled another child, a four-year-old named Farris Bryant, from the car
and threw him through the air. A multicount lawsuit was brought against National and Livigni. A
verdict was rendered against National for $20,000 under a respondeat superior theory of the
battery of Farris Bryant. A verdict was also rendered against National for $15,000 in negligent
retention of Livigni and for $115,000 punitive damages for willful and wanton retention. National
appealed the trial court’s denial of its motions for directed verdicts on these counts.
ISSUE: 1. Is there a cause of action against an employer for negligent retention of an employee?
2. Is there a cause of action against an employer under respondeat superior for the actions of
an off-duty employee?
HOLDING: 1. Yes. In Illinois, a cause of action exists for the negligent hiring of an employee. If the
defendant’s conduct is willful and wanton, then punitive damages are recoverable. By
extension, there is conceptually little difference between a negligent hiring and the
negligent retention of an unfit employee. Furthermore, punitive damages can be awarded
2. Yes. In order to impose liability on National, it is not necessary that Livigni be motivated
solely by a desire to further National’s interests. In his capacity as store manager, Livigni
REASONING: If there is a policy basis for the negligent hiring/retention doctrine it is probably that the
employer is in the best position to prevent harm to its customers by using ordinary care in the
selection and retention of its employees. While the dissent points out the practical difficulties of
performing a background investigation on each employee, what Livigni suggests that if the
information about an employee’s dangerous proclivities are is within the “corporate knowledge,”
the employer has a duty to protect its customers from a known hazard. When cast in this light,
the potentially violent employee is stripped of his humanity and becomes a safety risk in the
same way unmarked, wet floor would be in a supermarket. However, for all its civil rights
implications, the negligent hiring/retention doctrine does protect the customer who could come
into violent contact with the known offender, especially since the consumer has no information
whatsoever as to the violent employee’s tendencies. This knowledge, however, does reside
with the employer.
C. Negligent supervision and training
D. Agent’s crimes
CASE BRIEF: McLaurin v. Noble Drilling, Inc.
2009 WL 367401 (S.D. Miss. 2009)
FACTS: Mark McLaurin was employed as a carpenter by Friede Goldman Offshore, Inc. (FG).
He was assigned by FG to work on a project for Noble Drilling, Inc. A crane, operated by FG
employees, was in the process of lowering a roof structure for final placement and McLaurin
was injured. McLaurin suffered a severely crushed left hand and arm. McLaurin sued Noble
Drilling for negligence. Noble Drilling sought the dismissal of the case asserting that it was not
responsible for the negligence of the employees of an independent contractor.
ISSUE: Is Noble Drilling liable for workplace injuries that an employee of an independent
contractor suffered?
REASONING: McLaurin was in actual control of the crew and no one from Noble instructed McLaurin how to
do his work. Only FG employees were working on the fitting at the time of his injury. There is
no evidence that a Noble employee was present to observe the unsafe placement of McLaurin’s
hand. The mere fact that Noble could observe, inspect, and make recommendations does not
establish that it had substantial control over the operation.
3. Undisclosed independent contractor – ostensible owner liable
F. Enforcement of claim by third person
IV. How Do Transactions With Sales Personnel Work?
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. Undisclosed principal. Judgment for Rothschild. The contracts were made between April and June. Pawlus
did not inform Rothschild until October that he was an agent acting on behalf of Dutch City Wood Products.
2. Respondeat superior. Judgment for Studebaker. Applying a “right to control” test, it is clear that Nettie’s
controlled or had the right to control Ferry at the time of the collision. He was going back to Nettie’s business
3. Undisclosed; partially disclosed principal. It is the agent’s duty to inform the third party at the time of the
It is not the third person's duty to seek out the identity of the principal, rather, the duty to disclose the identity
of the principal is on the agent. The disclosure of an agency relationship is not complete for the purpose of
relieving the agent from personal liability unless it embraces the name of the principal. Otherwise, the third
4. Effect of an agent’s signature when acting for a disclosed principal. Judgment for Baumann. She acted as an
agent for a disclosed principal, her mother. Unless the contract clearly states otherwise, an agent has no
5. Unauthorized action by the agent. The president was personally liable. An agent who purports to contract in
the name of a principal without, or in excess of, authority to do so is personally liable to the other contracting
6. Owner’s liability for the acts of an independent contractor. Generally, the employer of an independent
contractor is not liable for physical harm caused to another by the acts or omissions of the independent
contractor or its employees. However, an exception exists if the employer retains control over the
7. Vicarious liability course of employment. Judgment for Ramos. Padilla believed that he was obligated to
remove all company equipment if a customer refused to sell Frito-Lay merchandise. He acted within the
8. Vicarious liability. Judgment for Post 38. It is the right to control the actions of the employee that subjects an
employer to liability for tortious acts of an employee acting within the course and scope of employment. In
9. Vicarious liability of employer for intentional tort of employee. No. The hotel was not vicariously liable for the
act of the employee outside of the scope of employment. “The assault was a sudden, inexplicable act without
10. Employer’s liability for negligent hiring. Diezel had a negative employment history and Island City had
sufficient notice that Diezel could create problems for them. The failure on the part of an employer to take
Authors’ Comment: Note that Island City faces an interesting dilemma with respect to the rights Diezel has
under the Americans with Disabilities Act (ADA) and its liability for Diezel ’s conduct. If Diezel has a substance
abuse problem, it can be classified as a disability. So long as Diezel is able to perform his job with
11. Owner’s liability for acts of independent contract. Judgment for Famous Music. The fact that the violations
were committed by an independent contractor did not shield the association from liability. A contrary rule
12. Employer’s vicarious liability for intentional torts; negligent hiring. The attack by Trujillo on Medina was not
Liability for negligent hiring flows from the duty of the employer to its patrons not to endanger the patrons by
negligently hiring violent persons. The fact that Trujillo was on call on the premises at Cowboys ’s request is a
13. Respondeat superior; course of employment. Judgment for Yellow Cab Company. The employee, Ball, did not
act within the course of his employment when he got out of his cab and beat Rubin over the head with a
Authors’ Comment: You may compare the situation in this case to that of a bartender or bouncer who beats
14. Liability of agent when principal is undisclosed. Judgment for MGA. The buyer, B & C, was liable on the
purchase contract because it did not disclose (a) the fact that it was acting as an agent or (b) the identity of
management system for classroom use.
