2. P A R T P A R T Agency Law The Agency Relationship Third-Party Relations of the Principal and the Agent 8 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. Third-Party Relations of the Principal and the Agent PA E TR HC 36 “We cannot all be masters.” William Shakespeare, Othello, Act 1, Scene 1

4. Learning Objectives  Contract liability of the principal  Contract liability of the agent  Contract suits against principal and agent  Tort liability of the principal  Tort liability of the agent  Tort suits against principal and agent 36 - 4

5.  Generally, a principal is liable on a contract made by agent if agent had express, implied, or apparent authority to make the contract  Agent’s liability to third parties for a contract made on behalf of a principal depends on whether principal was disclosed (not liable) or undisclosed (liable) Contract Liability 36 - 5

6.  If agent contracts for an existing, competent principal but lacks authority, principal is not bound, but it’s unfair to third party  Thus, agent bound on theory of an implied warranty of authority to contract  See Reed v. National Foundation Life Insurance Co.  If agent lacks authority, principal may bind to the contract by ratification Implied Warranty of Authority 36 - 6

7.  A principal may incur direct liability for an agent’s torts because principal is at fault  Under doctrine of respondeat superior (let the master answer), a principal is liable for torts committed by agents (1) who are principal’s employees and (2) who commit the tort while acting within the scope of their employment  Principal liable for employee’s negligent and intentional torts Principal’s Tort Liability 36 - 7

8.  Employee’s conduct is within the scope of employment if conduct:  Was what employee was employed to perform  Occurred within authorized time period  Occurred within authorized location  Motivated by purpose of serving employer Scope of Employment 36 - 8

9.  Principal does not control independent contractor’s work, thus principal not liable for an independent contractor’s torts  Principal may be directly liable for negligent hiring or contractor’s negligent performance of nondelegable duty or dangerous activity  Principal may be liable, vicariously or directly, for agent’s misrepresentations Principal’s Tort Liability 36 - 9

10.  Agents are liable for their torts except when:  Agent exercises a privilege of the principal  Agent takes privileged action to defend his or her person or principal’s property  Agent unknowingly makes a false statement in conduct of principal’s business  Third parties are injured by defective tools or instrumentalities furnished by principal Tort Liability of Agent 36 - 10

11. Test Your Knowledge  True=A, False = B  An agent is always liable for his own torts.  The doctrine of respondeat superior means that a principal is liable for torts committed by employees acting within the course and scope of employment.  If an agent contracts for a legally existing and competent principal but lacks authority to enter contracts, the principal is not bound. 36 - 11

12. Test Your Knowledge  True=A, False = B  A principal is never liable for an independent contractor’s torts.  Apparent authority arises if communications by principal to third party creates reasonable appearance of authority in the agent.  If a principal fails to inform the agent about a defect in the product, the principal will be directly liable for an agent’s torts. 36 - 12

13. Test Your Knowledge  Multiple Choice  Carl owned a a pizza business and employed Zip to deliver pizzas. Carl knew that Zip occasionally drank beer while driving, but didn’t fire Zip. Zip injured Dan while delivering pizzas and driving drunk. Is Carl liable to Dan for Zip’s conduct?  (a) No, only Zip is liable. Drunk driving was not within the scope of employment  (b) Yes, since Carl knew about Zip’s drinking and negligently retained Zip 36 - 13

14. Test Your Knowledge  Multiple Choice  Carl’s Pizza hired Miller to be general manager. Miller hired Sam for pizza prep work. In general, would Carl’s Pizza be obligated to honor the contract with Sam?  (a) No; only the owner of Carl’s Pizza can hire Sam, thus Sam’s contract is void  (b) Yes; Miller acted with implied authority since he is general manager and Carl’s Pizza must honor Sam’s employment contract 36 - 14

15. Thought Questions  Do you think the doctrine of respondeat superior is good policy? Why or why not? 36 - 15