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Chapter 33
Agency Liability and Termination
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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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
This rule may determine when express authority must be in writing. Exceptions include—
• A corporate executive doing ordinary business does not need written authority from the
2. Power of Attorney
A power of attorney is a written document and is usually notarized.
B. IMPLIED AUTHORITY
Implied authority is conferred by custom, inferred from an agent’s position, or implied by virtue of being
reasonably necessary to carry out express authority.
ENHANCING YOUR LECTURE—
COMPANY POLICY ON THE USE OF E-DATA
Suppose that an employee-agent who is authorized to access company trade secrets contained in
computer files takes those secrets to a competitor for whom the employee is about to begin working. Clearly,
the agent has violated the ethical—and legal—duty of loyalty to the principal. Does this breach of loyalty
mean that the employee’s act of accessing the trade secrets was unauthorized?
ACCESS TO THE DATA
David Nosal once worked for Korn/Ferry and had access to the company’s confidential database. When
he left, he encouraged several former colleagues who still worked there to join him in starting a competing
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things.
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RESTRICTIONS ON USE
The U.S. Court of Appeals for the Ninth Circuit refused to find that the defendants had violated the CFAA.
The court ruled that the phrase “exceed authorized access” in the CFAA refers to restrictions on access, not
restrictions on use. The court reasoned that Congress’s intent in enacting the CFAA was to prohibit people
from hacking into computers without authorization.
The court also stated that the CFAA should not be used to criminally prosecute persons who use data in
CRITICAL THINKING
stated policies is almost always a civil action.
If an employee accesses Facebook at work even though personal use of a workplace computer is
against the employer’s stated policies, can the employee be criminally prosecuted? Why or why not?
C. APPARENT AUTHORITY
1. A Pattern of Conduct
Apparent authority exists when a principal causes a third party reasonably to believe that an agent
has authority. This can occur through a pattern of conduct.
CASE SYNOPSIS—
Case 33.1: Lundberg v. Church Farm, Inc.
awarded the Lundbergs $147,000 in damages. Church appealed.
Gilbert Church owned a horse-breeding farm in Illinois. Ads for the breeding rights to the stallion Imperial
Guard directed all inquiries to “Herb Bagley, Manager.” Vern and Gail Lundberg signed a preprinted contract
with Bagley for those rights. Bagley added a handwritten statement that guaranteed the Lundbergs “six live
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that Bagley had the authority to modify the preprinted contract.
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Notes and Questions
Would it have affected the outcome of this case if Bagley were construed as an independent
contractor? Explain. Probably not. From the facts as stated, Bagley may have been Church’s employee or
an independent contractor. An employee or an independent contractor can be a principal’s agent. Thus,
What duties to Church might Bagley have violated in this situation? Bagley may have violated his
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.
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.
II. Liability for Contracts
A. AUTHORIZED ACTS
1. Disclosed or Partially Disclosed Principal
A disclosed or partially disclosed principal is liable to a third party for a contract made by an agent
2. Undisclosed Principal
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If the principal is undisclosed, the principal and the agent are bound to the contract.
a. Indemnification
If the agent pays, however, he or she is entitled to indemnification.
b. Performance
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.
B. UNAUTHORIZED ACTS
1. Implied Warranty
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.
C. ACTIONS BY E-AGENTS
E-agents include semi-autonomous computer programs capable of executing specific tasks. 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—
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
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INTERNET ADVERTISING AND “IMPRESSIONS”
The effectiveness of Internet advertising is dependent, of course, on how many people—that is, human
beings—actually view an ad online. Internet advertising firms frequently charge for their services based on
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.
FOR CRITICAL ANALYSIS
What might have been the result if the parties had not agreed that the number of impressions
would be based on 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?
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.
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B. PRINCIPAL’S AUTHORIZATION OF AGENT’S TORTIOUS CONDUCT
A principal who authorizes an agent to commit a tort may be liable to persons or property injured.
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
1. The Doctrine of Respondeat Superior
a. Underlying Rationale
The basis is the social duty that requires every person to manage his or her affairs, whether
accomplished by the person or through agents, so as not to injure another.
b. Public Policy
Liability is imposed on employers in part because they are deemed to be in a better financial
c. Application Today
The doctrine applies today to agency relations among all sizes and types of organizations.
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
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The control theory is clearly recognized in the Restatement (Second) of Agency, which defines a master as “a
principal who employs an agent to perform service in his [or her] affairs and who controls, or has the right to
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
APPLICATION TO TODAY’S WORLD
The courts have accepted the doctrine of respondeat superior for nearly two centuries. This theory of
vicarious liability is laden with practical implications in all situations in which a principal-agent (master-servant,
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, including employees. Middle Eastern countries, in contrast, do not follow this practice.
Islamic law holds to a strict belief that responsibility for human actions lies with the individual and cannot be
vicariously extended to others. This belief and other concepts of Islamic law are based on the sayings of
Muhammad, the seventh-century prophet and founder of Islam.
FOR CRITICAL ANALYSIS
How would U.S. society be affected if employers could not be held vicariously liable for their
employees’ torts?
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—
• Whether the employer authorized the act.
• The time, place, and purpose of the act.
• Whether the act is commonly performed by employees on behalf of their employers.
CASE SYNOPSIS—
Case 33.2: Asphalt & Concrete Services, Inc. v. Perry
Moran Perry was walking in an intersection with the right of way when he was struck and injured by a
dump truck driven by William Johnson. Perry filed a suit in a Maryland state court against Asphalt & Concrete
Services, Inc. (ACS) to recover for the injuries, alleging that Johnson was ACS’s employee. The defendant
claimed that Johnson was an independent contractor. A jury agreed with Perry and awarded damages.
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Notes and Questions
Why would Asphalt & Concrete want to avoid liability for Perry’s injuries? Asphalt & Concrete would
3. The Distinction between a “Detour” and a “Frolic”
If a servant takes a detour from his master’s business, the master is liable for any ensuing tort. If
the servant is on a frolic of his or her own, however, the master is not responsible.
4. Employee Travel Time
5. Notice of Dangerous Conditions
Knowledge of a dangerous condition discovered by an employee and pertinent to the employment
situation is imputed to the employer.
ADDITIONAL BACKGROUND—
Scope of Employment
The phrase scope of employment is used for determining the liability of an employer for employees’
acts. Acts within the scope of employment include only acts of a kind authorized by an employer, done within
the time and at the place of employment. An employee is authorized to do anything that is reasonably
regarded as incidental to the work or that is ordinarily done with the work. Not all acts of the kind authorized
and done within the time and at the place of employment are within the scope of employment—only those
which an employee does in some part for the purpose of giving service to the employer are included—but the
scope of employment includes acts that, as between employer and employee, an employee is not privileged
to do.
Illustrations:
2. P employs A as a general farm hand, B as a milker of cows. He directs A not to do any mowing until
instructed to do so. In the absence of P and thinking that the grass should be cut immediately, A and B cut
3. A has been employed by P as a general assistant in a machine shop to do odd jobs around the place. As
4. P operates a small store employing two clerks and a delivery boy. One of the clerks, during the absence of
5. Same facts as in Illustration 4, except that P has no delivery boy, makes no deliveries, and A uses his own
bicycle. The act was not within the scope of employment.