ACCT 352

Chapter 33

Agency Liability
and Termination

Acct352 Sections 012, 015, 017

SPRING 2021
Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§1: LEARNING OBJECTIVES

• Describe how agency relationship is terminated

• Describe the duty of loyalty agents owe to principals

• Describe the principal’s liability to third parties for tortious conduct of agent
and independent contractors

• Describe the agent’s liability to third parties stemming from breach of
contract

• Describe how independent contractor status is created

• Describe the principal’s liability for the tortious conduct of an independent
contractor

• Describe the principal’s liability for the contracts created by an independent
contractor

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§2: Liability of Agent to Principal

Agents owe to their principals a duty of loyalty. This is a fiduciary duty to not act
adversely to the interests of the principal

• An agent acts adversely to the interests of her principal when she does any of the
following
• Self-dealing
• Usurps an opportunity of the principal
• Competes with the principal
• Misuses the principal’s confidential information
• Dual agency

• A breach of the duty of loyalty results in the agent’s liability to the principal for any
resulting damages

Copyright © 2016 Pearson Education, Inc. Publishing as Prentice Hall.

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§2: Liability of Agent to Principal –
Agent’s Breach of Duty of Loyalty

Self-dealing – Action taken by the agent that is done for the benefit of the agent
instead of the benefit of the principal

• No breach of duty of loyalty if self-interest is disclosed

• In cases involving self-dealing the principal can elect to rescind or ratify the
agent’s action
• Example: Mary is an agent for real estate deals for her principal Jane, a land

developer. Mary and her husband own property in Dover, Delaware that Mary
sells to Jane without disclosing Mary’s ownership = self-dealing?
• Bottom Line: Agent is not supposed to personally benefit from a transaction done on

behalf of the principal. Agent, of course, is paid by the principal for the agent’s
efforts on behalf of the principal, but the agent should not directly profit from the
transaction, unless principal approves

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§2: Liability of Agent to Principal –
Agent’s Breach of Duty of Loyalty

Usurping an opportunity – taking a business opportunity intended for the principal
• No breach if the agent takes the business opportunity after the principal rejects it after the

agent’s full disclosure of the opportunity to the principal
• Example: Mary is an agent who searches nationwide for real estate deals for her principal

Jane, a land developer. Mary learns of property available at a site where a mall will soon be
built. Mary purchases the land for Mary and her husband Jim without informing Jane =
usurping an opportunity?

• What if Mary tells Jane about the property but not the mall and Jane refuses to buy property
and Mary buys it?

Competing with principal – Agent acts as an agent for someone engaged in, or agent
personally does business in, a line of work that competes with the principal’s

• Example: Mary is an agent for real estate deals for her principal Jane, a land developer.
Mary is also an agent for Sally, another land developer. And, Mary and her husband Jim are
also land developers = competing with principal?

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§2: Liability of Agent to Principal –
Agent’s Breach of Duty of Loyalty

Misuse of confidential information – Agent discloses to third-party, or uses for her own
benefit, information about the principal’s business (such as trade secrets, customer lists,
business plans)

• No breach if agent uses skills and knowledge acquired independently by agent
• Example: Mary discloses to third party Jane’s plan to buy vacant property near a soon

to be built mall = misuse of information?

Dual agency – Agent acts as an agent for two unrelated principals in the same transaction
• Not a breach of duty of loyalty if dual agency is disclosed and everyone involved in the

transaction agrees to it
• Example: Mary is an agent purchasing land for Jane, a land developer. In the same

transaction Mary is selling agent for the owner of the property = dual agency?

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§3: Contract Liability of Principals and Agents
to Third Parties

Liability of Principals on Contracts Entered Into by Agents

• If principal authorizes agent to enter into a contract with third party, the
principal is always ultimately liable to the third party on the contract because
the agent had actual (expressed or implied) authority.

• So if an agent is sued by a third party for a breach of a contract that the agent
entered into with the third party on behalf of the principal, the agent might be
required to pay the third party, but the agent will receive reimbursement from the
principal because the principal is ultimately liable for the contracts the principal
authorizes the agent to enter into

• Example: Principal refuses to pay for the house that principal authorized
agent to purchase. If seller sues agent and wins, agent can obtain
reimbursement from principal because the principal is always ultimately
liable on an authorized contract

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§3: Contract Liability of Principals and Agents
to Third Parties

Liability of Principals on Contracts Entered Into by Agents

• If principal does not authorize agent to enter into a contract with third party,
only the agent is liable to the third party

• The principal is not liable. Only the agent is liable
• Example: Principal refuses to pay for the house that principal did not authorize agent

to purchase. If seller sues principal seller will lose because only the agent is
ultimately liable when the contract is unauthorized

• If principal does not authorize agent to enter into a contract with third party,
the principal (and agent) would be liable to third party if agent had
apparent authority, but principal can receive indemnification from agent
(reimbursement for any payments principal is required to make to third party)

• Example: If seller sues principal and wins because the court determines the agent acted
under apparent authority, the principal can obtain reimbursement from agent because
only agent is ultimately liable on an unauthorized contract

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§3: Liability of Agents Contracts That are
Authorized by Principal

If a principal authorizes an agent to enter into a contract with a third party on
behalf of principal:

• Agent is not liable when the agency is FULLY DISCLOSED.

• Fully Disclosed Agency means the third party knows, through the principal,
agent, or some other source:

• That agent is acting for a principal
• Actual identity of the principal
• Agent is liable only if she guarantees that the principal will perform the contract.

• But agent can obtain reimbursement (indemnification) from principal
• To clearly establish agency, agent should sign the contract in a way that conveys

agent/principal relationship (e.g., “Mary agent for Jane”)

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§3: Liability of Agents Contracts That are Authorized
by Principal (Cont.)

If a principal authorizes an agent to enter into a contract with a third
party on behalf of principal
• Agent (and principal) are liable to the third party for principal’s breach of the

contract if agency is Partially Disclosed or Undisclosed
• Partially Disclosed means the third party:

• Knows that agent is acting for a principal
• But does not know the identity of the principal

• Undisclosed Agency means third party is unaware of:
• Existence of an agency
• Identity of principal

• Example: Principal refuses to pay for the house that principal authorized partially disclosed or
undisclosed agent to purchase. If home seller sues agent, seller will win. Agent can obtain
reimbursement from principal

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§4: Liability of Agents Contracts That are NOT Authorized by
Principal

As noted previously, the agent is ultimately liable when the agent enters into
an unauthorized contract.
• Beach of Implied warranty of authority – The legal theory under which a third party would sue

an agent who enters into an unauthorized contract
• An agent who enters into a contract on behalf of another party warrants to third party that

she has the authority to do so. An agent breaches that implied warranty of authority if she
enters into a contract that is not authorized by the principal

• This is a breach of the implied warranty of authority NOT breach of contract
• Agent, alone, is liable for breaching the implied warranty of authority

• The principal is liable only if she ratifies the contract. That is, the principal accepts the
agent’s unauthorized contract
• Example: Mary is authorized by Jane to find land deals in the US. Mary travels to Australia because she

learns of a potentially very lucrative opportunity for Jane. She travels without obtaining Jane’s approval
to seek business in foreign countries. Mary fully discloses her agency to an Australian land owner and
thereafter signs a contract to purchase land located in Australia from that person. Does Jane have to
perform this contract?

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§5: Tort Liability of Principals and Agents
to Third Parties

Principal and agent are each individually and personally liable for their own
tortious conduct

• When is Principal liable to Third Parties for Tortious acts of Agent?
• Principal is liable for tortious conduct of agent when agent is acting

within the scope of authority (scope of employment)

• When is Agent liable to third parties for Tortious acts of Principal?
• Agent is liable for tortious conduct of principal only if agent directly or

indirectly, aids and abets the principal’s conduct

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§5: Principal’s Liability for Agent’s Tort (Cont.)

Why is the Principal Liable for Tortious Conduct of Agent: Respondeat Superior

• Respondeat Superior: Principals are liable for negligent conduct of agents acting within
the scope of the agent’s employment

• Respondeat superior (“let the master answer”), is based on the theory of vicarious
liability which states that liability should run to any person (master) who had the ability
and duty to control the actions of the servant (agent)

• So respondeat superior is a form of strict liability because it is akin to liability without
fault. That is, the principal did not do anything wrong, the agent did, but the principal is
liable by virtue of the principal’s control of the agent through their contractual
(agent/principal) relationship.

• Rationale: Principal controls the agent’s behavior and should assume responsibility for the
agent’s actions. Moreover, if the principal benefits through the agent, the principal should be
liable through, and bear the cost of, agent’s negligence

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§5: Principal’s Liability for Agent’s Tort (Cont.)

What Work is Within an Agent’s Scope of Employment (or scope of authority)? –
any work that is expressly authorized by the principal or that can be implied because it
is customarily connected with or reasonably necessary for the performance of the
authorized work and is done for the benefit of the principal

• In other words, any work within the agent’s express or implied authority
• Example #1: Mary crashes into another car while driving to meet the owner of land

the principal is interested in purchasing = Who is liable to the injured person?
• Example #2: Mary is authorized by Jane to locate land for development in the US.

Mary travels to Australia because she learns of a potentially very lucrative
opportunity for Jane. She travels without obtaining Jane’s approval to seek
business in foreign countries. Mary injures a person while driving her rental car in
Australia = Who is liable to injured party?

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§5: Principal’s Liability for Agent’s Tort (Cont.)

When is an Agent not Acting Within the Scope of the Agent’s Employment?

• Frolic vs. Detour
• Frolic- agent briefly but substantially strays from authorized activities to

engage in fun/entertaining personal activities such that she can be said to be
engaged in conduct that is completely unrelated to the authorized work

• Example: Mary, while scouting land deals for Jane in NY, stops at a museum to browse
its art collection. She accidentally destroys artwork = Negligence for whom?

• Detour – agent briefly but insubstantially strays from authorized activities to
tend to a personal matter

• Agent is always personally liable during frolic and during detour
• Principal is liable for detour NOT frolic

• Example: Mary, while scouting land deals for Jane in NY, stops at a museum to use the
bathroom and eat lunch in its cafeteria. While there she accidentally destroys causes a fire =
Negligence for whom?

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§5: Principal’s Liability for Agent’s Tort (Cont.)

Coming and Going – principal is not liable for tortious acts committed by agent on
the way to work from home and from work to home, even if the means of
transportation and related expenses are provided for and paid by the principal

• The agent has not “clocked in” or has “clocked out” so such conduct is not within
the scope of employment”

• But principal is liable if employee is on a “dual purpose mission.” That is, agent
is detouring from “home trip” to run an errand for principal
• Example #1: Mary on her way home from work negligently injured Tom in a car

accident = liability for whom?
• Example #2: Mary on her way home is asked by Jane to stop at Bloomingdale’s

to pick up Jane’s mink coat. Mary negligently injures Tom in a car accident =
liability for whom?

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§5: Principal’s Liability for Agent’s Tort (Cont.)

Agent’s conduct Agent liable Principal liable

Frolic Yes No

Detour Yes Yes

Coming and going rule Yes No

Dual-purpose mission Yes Yes

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§6: Liability of Principal for Torts of Independent Contractor

Independent contractors – outsiders employed by principals to perform tasks on the
principal’s behalf and over whom the principal has no control

• Independent contractors are personally liable for their own TORTS

• A principal is not generally liable for the torts of its independent contractors because the
principal has no control over the independent contractor. Why? Because there is no
master servant relationship (so no control) to create respondeat superior liability

• It is the level of control the principal exerts over the independent contractor that
determines the principal’s liability. Even if an independent contractor is referred to
as such, if the principal controls the time, manner and method of the independent
contractor’s work, then the independent contractor might be deemed to be an employee
and the principal is liable
• Is there a way the person who hired the independent contractor could be found liable even if the IC is not

deemed to be an employee? Answer = no. Principal is never liable for the torts of IC! Because there is
no master servant relationship (so no control) to create respondeat superior liability

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§7: Liability of Principal for Contracts entered into by
Independent Contractors

A principal is not liable on a CONTRACT an independent contractor enters into with a
third party UNLESS the principal expressly or impliedly authorizes the independent
contractor to enter into the contract

• If the principal does provide such authorization, the rules we have discussed
regarding contracts authorized by the principal will apply

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§8: Termination of Agency by Act of Parties
Agency can be terminated by the following acts

•Mutual agreement of the parties

•If a time stated in the contract has lapsed
• Example: Page lists her property for sale with Alex, a real estate agent, for six

months. The agency ends when that six month period ends

•If a specified purpose is achieved
• Example: Calvin, a cattle rancher, hires Abe as his agent in the purchase of

fifty breeding stock. The agency ends when the cattle have been purchased

•Occurrence of a stated event
• Example: Meredith appoints Allen to handle her business affairs while she is

away on vacation. The agency terminates when Meredith returns

Clarkson/Miller, : Text and Cases, Fifteenth Edition. © 2021 Cengage. All Rights Reserved.
May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

§8: Termination of Agency by Act of Parties –
Notice of Termination

Notice of Termination of Agency – Principal must provide

• Direct notice – to persons who have dealt with agent

• Constructive notice – to persons aware of agency but who have not dealt with the
agent
• Constructive notice is, for example, placement of a notice in a

newspaper of general circulation in the place where agent does
business or in a place that is reasonably likely to inform third
parties, such as posting the notice in public places or on websites
likely to be visited by relevant third parties.

• Example of a Public Notice Section of a Newspaper
• Notice is not required if a third party is unaware of the agency

./Public%20Notice%20Section%20of%20Newspaper.jpg

Slide 1
§1: LEARNING OBJECTIVES
§2: Liability of Agent to Principal
Slide 4
Slide 5
Slide 6
Slide 7
Slide 8
Slide 9
Slide 10
Slide 11
§5: Tort Liability of Principals and Agents to Third Parties
§5: Principal’s Liability for Agent’s Tort (Cont.)
§5: Principal’s Liability for Agent’s Tort (Cont.)
§5: Principal’s Liability for Agent’s Tort (Cont.)
§5: Principal’s Liability for Agent’s Tort (Cont.)
§5: Principal’s Liability for Agent’s Tort (Cont.)
§6: Liability of Principal for Torts of Independent Contractor
Slide 19
§8: Termination of Agency by Act of Parties
Slide 21