Click your mouse anywhere on the screen to advance the
text in each slide. After the starburst appears, click a
blue triangle to move to the next slide or previous slide.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
Quote of the Day
“There are three ways to get
something done: do it yourself,
pay someone else to do it, or tell
a teenager not to do it.”
-- Anonymous
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
Authority
 A principal is bound by the acts of an
agent if the agent has authority.
 There are three types of authority:
express, implied, and apparent.
• Only express and implied are actual
authority, because the agent is truly
authorized.
• In apparent authority, the agent seems to
be authorized, but is actually not. The
principal is still bound by the agent’s
actions.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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?
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
Negligent and 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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.)
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
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.
29
Business Law and the Legal Environment for a New Century
Alternate Edition
“It is virtually impossible to run a
business without using agents.
But using an agent dramatically
increases the risk of liability.”
29
Business Law and the Legal Environment for a New Century
Alternate Edition