Principal’s Liability for Contracts

• The principal is bound by the acts of an agent if: – the agent has authority, or – the principal, for reasons of fairness, is

estopped from denying that the agent had authority, or

– the principal ratifies the acts of the agent.

Authority• A principal is bound by the acts of an

agent if the agent has authority.• A principal is also bound by the acts of

subagents – those hired by his agent.• There are three types of authority:

express, implied, and apparent.– Only express and implied are actual authority.– In apparent authority, the agent seems to be

authorized, but is not. The principal is still bound by the agent’s actions.

Actual Authority• Express Authority– Granted by words or conduct that, reasonably

interpreted, cause the agent to believe the principal desires her to act.

– In ambiguity about the principal’s intent, the courts look at the principal’s objective manifestation not his subjective intent.

• Implied Authority– Unless otherwise agreed, authority to conduct a

transaction includes authority to do acts that are reasonably necessary to accomplish it.

Apparent Authority• A principal can be liable for the acts of an

agent who is not, in fact, acting with authority if the principal’s conduct causes a third party reasonably to believe that the agent is authorized.

• An agent with actual authority may perform an act beyond the scope of that authority. If the action appears to the third party to be within the scope of the authority, the principal will be bound.

Estoppel and Ratification Defined

• Estoppel– No one may claim that a person was not his

agent, if he knew that others thought the person was acting on his behalf, and he failed to correct their belief.

• Ratification– If a person accepts the benefit of an

unauthorized transaction or fails to repudiate it, then he is as bound by the act as if he had originally authorized it.

Estoppel and Ratification Distinguished

• Estoppel and ratification are easy to confuse.– Ratification applies when the principal

accepts the benefits of the contract.– Estoppel applies when the principal does

not want the benefit of the contract, but delays in telling the innocent third party of the mistake.

Agent’s Liability: Contracts• Fully Disclosed Principal– An agent is not liable for any contracts.

• Partially Disclosed Principal– Third party can recover from either the agent

or the principal.• Undisclosed Principal– Third party can recover from either the agent

or the principal.• Unauthorized Agent– The principal is not liable and the agent is.

Exceptions to the Rule on Undisclosed Principals

• A third party is not bound to the contract with an undisclosed principal if:– The contract specifically provides that the

third party is not bound to anyone other than the agent, or

– The agent lies about the principal because she knows the third party would refuse to contract with him.

Principal’s Liability for Torts• A principal may be liable for the torts of a

servant but generally is not liable for the torts of an independent contractor.– A master (principal) is liable for physical harm

caused by the negligent conduct of servants (agent) within the scope of employment.

– The principal is liable for the physical torts of an independent contractor only if the principal has been negligent in hiring or supervising.

– Principals are only liable for torts that a servant commits within the scope of employment.

Servant and Master• Servant does not mean slave or even

“butler or maid.” It means that the principal has control over the agent’s work.– Employees are always servants.

• The master is the principal, or the one in control.

Servant vs. Independent Contractor • “Yes” responses to these questions may indicate

a servant, or employee, relationship:– Does the principal control details of the work?– Does the principal supply tools and place of work?– Does the agent work full-time for the principal?– Is the agent paid by time, rather than by job?– Is the work part of the regular business of the

principal?– Do the parties believe they have an employee-

employer relationship?

Scope of Employment • Authorization– An act is within the scope of employment, even

if expressly forbidden, if it is of the same general nature as that authorized or if it is incidental to the conduct authorized.

• Abandonment– The master is liable for the actions of the

servant that occur while the servant is at work, but not for actions that occur after the servant has abandoned the master’s business.

Negligent & Intentional Torts

• The master is liable if the servant commits a negligent tort that causes physical harm to a person or property.

• A master is not liable for the intentional torts of the servant unless the servant was motivated, at least in part, by the desire to serve the master, or the conduct was reasonably foreseeable.

Physical & Non-Physical Harm• A master is liable for negligent conduct of a

servant that causes physical harm, if it is within the scope of employment.

• With negligent conduct of a servant that causes non-physical harm (harm to reputation or finances), the principal is liable only if the servant acted with actual or apparent authority.

• Misrepresentation and defamation are treated differently from other non-physical harms. (See next slides.)

Misrepresentation

• A principal is liable if:– The agent makes misrepresentation,

– The agent has express, implied, or apparent authority,

– The third party relies on the misrepresentation; and

– The third party suffers harm.

Defamation

• A principal is liable if:– The agent makes a defamatory statement;

– The agent has express, implied, or apparent authority; and

– The third party is harmed by the statement.

Agent’s Liability For Torts• Agents are always liable for their own torts,

even if the principal is also liable.– Agents and principals are jointly and severally

liable, which means that the injured party may sue either one or both, as she chooses.

– The injured party may not recover twice, but may recover partially from both parties.

– The principal can sue the agent, if the injured party recovers from the principal.