CHAPTER 29: RELATIONSHIP
WITH THIRD PARTIES
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TOPICS COVERED CHAPTER 30:
RELATIONSHIPS WITH THIRD PARTIES
I. Relationship of Principal and Third
Persons.
A. Contract Liability of the Principal.
B. Tort Liability of the Principal.
C. Criminal Liability of the Principal.
II. Relationship of Agent and Third Persons.
A. Contract Liability of Agent.
B. Tort Liability of Agent.
C. Rights of Agent Against Third Person.
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Types of Principals.
• Disclosed Principal – principal whose
existence and identity are known.
• Unidentified Principal – principal whose
existence is known but whose identity is
not known.
• Undisclosed Principal – principal whose
existence and identity are not known.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Types of Authority.
• Actual Express Authority – derived from
written or spoken words of the principal.
• Actual Implied Authority – inferred from
words or conduct of the principal.
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Types of Authority.
• Apparent Authority –conduct of the
principal that reasonably leads a third
party to believe that the agent has
power.
• SCHOENBERGER V CHICAGO TRANSIT AUTHORITY
(1980).
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Delegation of Authority.
• Usually not permitted unless actually
authorized by the principal; if the agent
is authorized to appoint other
subagents, the acts of these subagents
are as binding on the principal as those
of the agent.
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Effect of Termination of Agency on
Authority.
• Termination of authority ends actual
authority, but not apparent authority.
• Second Restatement.
• If the termination is by operation of law,
apparent authority also ends without
notice to third parties; 
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Effect of Termination of Agency on
Authority.
• Second Restatement.
• Apparent authority ends when third
parties have actual knowledge or when
appropriate notice is given to third parties;

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CONTRACT LIABILITY
OF THE PRINCIPAL
 Effect of Termination of Agency on
Authority.
• Second Restatement.
• Actual notice must be given to third
parties with whom the agent had
previously dealt on credit, has been
specially accredited, or has begun to
deal;
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Effect of Termination of Agency on
Authority.
• Second Restatement.
• Apparent authority ends when it is no
longer reasonable for the third party with
whom an agent deals to believe that the
agent continues to act with actual
authority
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Effect of Termination of Agency on
Authority.
• Second Restatement.
• All other third parties as to whom there
was apparent authority need only be given
constructive notice .
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Effect of Termination of Agency on
Authority.
• Third Restatement.
• Termination of actual authority does not
by itself end any apparent authority held
by an agent; 
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Effect of Termination of Agency on
Authority.
• Third Restatement.
• Apparent authority ends when it is no
longer reasonable for the third party to
believe the agent has actual authority.
• PARLATO V. EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES (2002).
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Ratification.
• Affirmation by one person of a prior
unauthorized act that another has done
as her agent or purported agent.
• Effect: retroactively creates the effect of
actual authority, which essentially
approves agent’s previous conduct.
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Fundamental Rules of Contract
Liability.
• Disclosed Principal – is contractually bound
with the third party if the agent acts within
her actual or apparent authority in making
the contract. 
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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CONTRACT LIABILITY
OF THE PRINCIPAL
 Fundamental Rules of Contract
Liability.
• Unidentified Principal – is contractually bound
with the third party if the agent acts within her
actual or apparent authority in making the
contract.
• Undisclosed Principal – is contractually bound
with third party if the agent acts within her
actual authority in making the contract.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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CONTRACT LIABILITY OF
DISCLOSED PRINCIPAL
Agent Has Actual Authority
Agent
Principal
Third
Party
Agent Has Apparent Authority But Not Actual Authority
Agent
Principal
Agent Has No Actual or
Apparent Authority
Agent
Third
Party
Principal
liable
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Third
Party
CONTRACT LIABILITY OF
UNIDENTIFIED PRINCIPAL
Agent Has Actual Authority
Agent
Principal
bound
Third
Party
Agent Has Apparent Authority But Not Actual Authority
Principal
Agent
Third
Party
bound
Agent Has No Actual or
Apparent Authority
Agent
Principal
bound
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Third
Party
CONTRACT LIABILITY OF
UNDISCLOSED PRINCIPAL
Agent Has Actual Authority
Agent
Principal
bound
Agent Has No Actual or
Apparent Authority
Agent
Third
Party
Principal
bound
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Third
Party
TORT LIABILITY OF PRINCIPAL
 Direct Liability of Principal – a
principal is liable for his own tortious
conduct involving the use of agents.
• Authorized Acts of Agent – a principal is
liable for torts she authorizes another
to commit or that she ratifies.
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TORT LIABILITY OF PRINCIPAL
 Direct Liability of Principal.
• Unuthorized Acts of Agent – a principal
is liable for failing to exercise
reasonable care in employing agents
whose unauthorized acts cause harm.
• CONNES V. MOLALLA TRANSPORT SYSTEM,
INC. (1992).
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TORT LIABILITY OF PRINCIPAL
 Vicarious Liability of Principal for
Unauthorized Acts of Agent.
• Respondeat Superior – an employer is
liable for unauthorized torts committed
by an employee in the scope of his
employment.
• RUBIN V. YELLOW CAB COMPANY (1987).
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TORT LIABILITY OF PRINCIPAL
 Vicarious Liability of Principal for
Unauthorized Acts of Agent.
• Agent Acts with Apparent Authority – a
principal is liable for torts committed by
an agent in dealing with third parties
while acting within the agent’s
apparent authority. 
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TORT LIABILITY OF PRINCIPAL
 Vicarious Liability of Principal for
Unauthorized Acts of Agent.
• Independent Contractor – a principal is
usually not liable for the unauthorized
torts of an independent contractor.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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CRIMINAL LIABILITY OF
PRINCIPAL
 Authorized Acts – the principal is liable
if he directed, participated in, or
approved the criminal acts of his agents.
 Unauthorized Acts – the principal may
be liable either for a criminal act of a
managerial person or under liability
without fault statutes.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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CONTRACT LIABILITY OF AGENT
 Disclosed Principal.
• Authorized Contracts. Agent is not
normally a party to the contract she
makes with a third party if she is
authorized or if the principal ratifies the
contract.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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CONTRACT LIABILITY OF AGENT
 Disclosed Principal.
• Unauthorized Contracts – if agent exceeds
actual and apparent authority, principal is
not bound, but agent may be liable for
breach of warranty or for misrepresentation.
• Agent Assumes Liability – agent may agree to
become liable on a contract between the
principal and the third party.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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CONTRACT LIABILITY OF AGENT
 Unidentified Principal – an agent for
a partially disclosed principal is a
party to the contract unless otherwise
agreed. 
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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CONTRACT LIABILITY OF AGENT
 Undisclosed Principal.
• Agent is personally liable on the
contract to the third party. 
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CONTRACT LIABILITY OF AGENT
 Nonexistent or Incompetent Principal.
• Person who purports to act as an agent
for a principal whom both the agent and
the third party know to be nonexistent or
wholly incompetent is personally liable on
a contract.
• PLAIN DEALER PUBLISHING V. WORRELL
(2008).
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TORT LIABILITY OF AGENT
 Authorized Acts – the agent is liable
to the third party for his own torts.
 Unauthorized Acts – the agent is
liable to the third party for his own
torts.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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RIGHTS OF AGENT AGAINST
THIRD PERSONS
 Disclosed Principal – the agent
usually has no rights against the third
party.
 Unidentified Principal – the agent
may enforce the contract against the
third party. 
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RIGHTS OF AGENT AGAINST
THIRD PERSONS
 Undisclosed Principal – the agent
may enforce the contract against the
third party.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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