801
Chapter 33
Agency Liability
and Termination
See Separate Lecture Outline System
INTRODUCTION
Once a principal–agent relationship has been created, attention often focuses on the rights of third persons who deal with
an agent. This chapter discusses the rights of third parties when they contract with agents. A contract will make an agent’s
principal liable to a third party only if the agent had authority to make the contract or if the principal ratified, or was estopped
from denying, the agent’s acts. In other words, liability is determined by a careful examination of all the facts surrounding an
agency relationship.
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This chapter also discusses an agent’s liability to third parties in contract and tort and a principal’s liability to third parties
because of an agent’s torts. Again, liability is determined more by an examination of all the facts rather than looking merely at
legal theory.
The chapter concludes with a discussion of how agency relationships are terminated. The material is generally self-
explanatory and not difficult. It may be helpful to emphasize, however, that unless termination is by operation of law, a
principal must give clear notice of termination to persons who dealt with the agent.
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 33.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Ask the Instructor
terms of their scope, term, and intended use.
CHAPTER OUTLINE
I. Scope of Agent’s Authority
A. EXPRESS AUTHORITY
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Express authority is embodied in what a principal engages an agent to do.
1. The Equal Dignity Rule
2. Power of Attorney
A power of attorney is a written document and is usually notarized.
1. Pattern of Conduct
CASE SYNOPSIS—
Case 33.1: Azur v. Chase Bank, USA
ATM Corp. of America, Inc. (ATM), manages settlement services for national lenders. Francis Azur was its president
and chief executive officer. Michelle Vanek, Azur’s personal assistant at ATM, reviewed his credit-card statements,
among other duties. Over a seven-year period, Vanek took unauthorized cash advances from Azur’s credit-card account
with Chase Bank. The charges appeared on at least sixty-five monthly billing statements. When Azur discovered Vanek’s
fraud, he terminated her and closed the account. Azur filed a suit in a federal district court against Chase, seeking
reimbursement. The court issued a judgment in Chase’s favor. Azur appealed.
Notes and Questions
Suppose that Vanek has made at least some of the withdrawals with Azur’s knowledge but without his express
consent. Would the court’s decision have been different? Why or why not? Probably not, because apparent authority
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exists when the principal cause a third party reasonably to believe that the agent has the authority to act. If Azur had
not expressly consented to the withdrawals, but had allowed what he might have seen as few in number to occur—
perhaps because he valued Vanek’s services—Chase might have even more reasonably believed that Vanek acted
under apparent authority.
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 33.1
The TILA is essentially a consumer-protection law. How does allowing a credit card company to avoid liability—if a
card user has apparent authority to use the card—protect consumers? Indeed, the “apparent authority” provision of
2. Apparent Authority and Estoppel
If the third party changes position in reliance on the principal’s representations, the principal may be
estopped from denying that the agent had authority.
CASE SYNOPSIS—
Case 33.2: Ermolan v. Desert Hospital
Desert Hospital in California established a comprehensive perinatal services program (CPSP) to provide obstetrical
care to women who were uninsured. The CPSP was set up in an office suite across from the hospital and named
“Desert Hospital Outpatient Maternity Services Clinic.” The hospital contracted with a corporation controlled by Dr.
Morton Gubin, which employed Dr. Masami Ogata, to provide services. Jackie Shahan was referred to the clinic by one
of the hospital’s emergency room physicians. Shahan’s baby Amanda, was born with serious brain abnormalities.
Amanda filed a suit in a California state court against the hospital, alleging “wrongful life.” She claimed that a negligent
failure to advise her mother of her condition and the possibility of an abortion. The court ruled in the defendants’
favor, holding that Drs. Gubin and Ogata were not the hospital’s employees. Amanda appealed.
thereon by a third party, and change of position or injury resulting from such reliance.” The court affirmed the lower
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to advise Shahan to have an elective abortion.
…………………………………………………………..……………………………………………………………………
Notes and Questions
ANSWER TO “THE ETHICAL DIMENSION” QUESTION IN CASE 33.2
Does a principal have an ethical responsibility to inform an unaware third party that an apparent (ostensible) agent
does not in fact have the authority to act on the principal’s behalf? 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.
ANSWER TO “THE E-COMMERCE DIMENSION” QUESTION IN CASE 33.2
D. EMERGENCY POWERS
When an emergency requires action to protect or preserve the property and rights of a principal, but an agent is
unable to contact the principal, the agent has emergency power to act.
E. RATIFICATION
Ratification is a principal’s affirmation of an agent’s previously unauthorized act. An entire transaction must be
ratified; a principal cannot ratify part and reject the rest. The requirements for ratification are—
• The agent acted on behalf of an identified principal who later ratified the action.
• The principal must know all of the material facts. If not, the contract can be rescinded
• The principal must affirm the agent’s act in its entirety.
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II. Liability for Contracts
A. AUTHORIZED ACTS
1. Disclosed or Partially Disclosed Principal
2. Undisclosed Principal
If the principal is undisclosed, the principal and the agent are bound to the contract. If the agent pays,
however, he or she is entitled to indemnification. The undisclosed principal may also hold the third party to
the contract unless—.
• The undisclosed principal was expressly excluded as a party in the contract.
• The contract is a negotiable instrument, and it does not show the agent signed in a representative
capacity.
• The agent’s performance is personal to the contract, allowing the third party to refuse the principal’s
performance.
B. UNAUTHORIZED ACTS
C. ACTIONS BY E-AGENTS
E-agents include semi-autonomous computer programs capable of executing specific tasks. The text asks about
the authority of e-agents. The Uniform Electronic Transactions Act states that e-agents may enter binding
agreements on behalf of their principals [UETA 15]. If an e-agent does not give an opportunity to prevent errors at
the time of a transaction, the other party can avoid it.
ENHANCING YOUR LECTURE—
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IS ONLINE ADVERTISING EFFECTIVE
IF ONLY AN E-AGENT “VIEWS” IT?
E-agents are computer programs that are used in e-commerce to perform certain tasks. For example, an e-agent
can be used to search the Web for the best price on a particular compact disc and then offer links to the appropriate
Web sites. Some e-agents can locate specific products in online catalogues and actually negotiate the acquisition and
delivery of the product. E-agents used for shopping on the Web are commonly referred to as “bots” or “shopping
bots.” The fact that numerous e-agents are out there robotically shopping for people has caused problems in the
online advertising industry.
INTERNET ADVERTISING AND “IMPRESSIONS”
actually view an ad online. Internet advertising firms frequently charge for their services based on the number of
screen; thus, these companies filter out the times the ad is found by an e-agent. Other companies include visits by
THE GO2NET CASE
In the online environment, the actions of an e-agent can at times create liability (debt) for the business that hired
an advertising firm. Consider, for example, the dispute in Go2Net, Inc. v. CI Host, Inc,a A Web hosting company (Host)
hired an Internet advertising company (Go2Net) to publish a certain number of “impressions” on the Internet. Payment
for Go2Net’s services was to be based on the number of impressions. Host and Go2Net did not specify what they
meant by “impressions” in the two contracts into which they entered, however. Host assumed that “impressions”
referred to the number of times the ad was sent to a computer screen and viewed by a human. Go2Net counted as
“impressions” all of the times that the ads were found by e-agents, such as Web crawlers or bots.
rewrite the contract so that the term meant only the number of times the ad was actually sent to a computer screen.
FOR CRITICAL ANALYSIS
What might have been the result if the parties had not agreed that the number of impressions would be based on
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Go2Net’s count? Would the court have allowed Host to reform the contract to exclude from the number of
impressions the times that e-agents found the advertisement?
a. 115 Wash.App. 73, 60 P.3d 1245 (2003).
III. Liability for Torts and Crimes
A. PRINCIPAL’S TORTIOUS CONDUCT
A principal acting through an agent may be liable for harm resulting from the principal’s negligence or
recklessness.
C. LIABILITY FOR AGENT’S MISREPRESENTATION
1. Apparent Implied Authority
2. Innocent Misrepresentation
A principal is always responsible for an agent’s misrepresentation—innocent or otherwise—made within the
scope of authority.
D. LIABILITY FOR AGENT’S NEGLIGENCE
Under the doctrine of respondeat superior, a principal is vicariously liable for any harm caused to a third party by
an agent acting in the scope of employment.
CASE SYNOPSIS—
Case 33.3: Warner v. Southwest Desert Images, LLC
Aegis Communications hired Southwest Desert Images, LLC (SDI) to provide landscaping services. SDI employee
David Hoggatt sprayed an herbicide around the Aegis building that was sucked into its air conditioning system, making
people sick. Among injuries to other Aegis employees, Catherine Wagner suffered a heart attack. Continuing health
complications led her to file a suit in an Arizona state court against SDI and Hoggatt for negligence. The court dismissed
Hoggatt as a party. A jury found SDI liable and awarded $3,825 in damages to Warner. She appealed.
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Notes and Questions
Was Hoggatt acting within the scope of employment so as to support SDI’s liability as a principal? Yes. Hoggatt’s
activity satisfies nearly every item on the Restatement list of relevant factors.
ANSWERS TO QUESTIONS AT THE END OF CASE 33.3
1. Why should Hoggatt be personally liable if he merely followed the instructions of his employer, SDI, given that the
employer is better able financially to pay the judgment and may have insurance that covers the matter? Like any
that employees assume some of the burden of negligent acts rather than just passing the blame upstairs.
2. How could SDI reduce the likelihood of similar lawsuits occurring in the future? SDI, like any employer, cannot
so safety must be stressed continually.
1. Rationale Underlying the Doctrine of Respondeat Superior
The basis is the social duty that requires every person to manage his or her affairs, whether accomplished by
2. Determining the Scope of Employment
Factors from the Restatement (Second) of Agency, Section 229, for determining whether or not an act
occurred within the scope of employment, are—
3. The Distinction between a “Detour” and a “Frolic”
4. Employee Travel Time
5. Notice of Dangerous Conditions
6. Borrowed Servants
When an employer lends an employee’s services to another employer, the employer who is liable for in–
juries caused by the employee’s negligence is the employer who had the primary right to control the
employee.
ENHANCING YOUR LECTURE—
THE DOCTRINE OF RESPONDEAT SUPERIOR
The idea that a master (employer) must respond to third persons for losses negligently caused by the master’s
servant (employee) first appeared in Lord Holt’s opinion in Jones v. Hart (1698).a By the early nineteenth century, this
maxim had been adopted by most courts and was referred to as the doctrine of respondeat superior.
THEORIES OF LIABILITY
The vicarious (indirect) liability of the master for the acts of the servant has been supported primarily by two
theories. The first theory rests on the issue of control, or fault: the master has control over the acts of the servant and
is thus responsible for injuries arising out of such service. The second theory is economic in nature: because the
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LIMITATIONS ON THE EMPLOYER’S LIABILITY
There are limitations on the master’s liability for the acts of the servant, however. An employer (master) is only
responsible for the wrongful conduct of an employee (servant) that occurs in “the scope of employment.” The criteria
used by the courts in determining whether an employee is acting within the scope of employment are set forth in the
Restatement (Second) of Agency and will be discussed shortly. Generally, the act must be of a kind the servant was
employed to do; must have occurred within “authorized time and space limits”; and must have been “activated, at
least in part, by a purpose to serve the master.”
APPLICATION TO TODAY’S WORLD
a. K.B. 642, 90 Eng. Reprint 1255 (1698).
ENHANCING YOUR LECTURE—
ISLAMIC LAW AND RESPONDEAT SUPERIOR
The doctrine of respondeat superior is well established in the legal systems of the United States and most Western
countries. As you have already read, under this doctrine employers can be held liable for the acts of their agents,
belief that responsibility for human actions lies with the individual and cannot be vicariously extended to others. This
FOR CRITICAL ANALYSIS
How would U.S. society be affected if employers could not be held vicariously liable for their employees’ torts?