Agency Outline

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Agency & Unincorporated Businesses Outline
I. The Agency Relationship
Carrier v. McLLarky
- Facts/ID/Proc Hist: ∆ McLLarky installed new water heater in home of ∏ Carrier. ∆ told ∏ he believed old one
(installed by different plumber) was under warranty and that he would try to obtain a credit for it and pass it on to ∏. ∆
returned the defective unit to a supplier but had not given ∏ the credit, claiming that he did not b/c he did not receive
payment from the manufacturer.
- Issue: (1) Was an Agency Relationship established? (2) If there was an Agency relationship, was there a breach of duty
on the part the Agent?
- Rule: (1) was there Agency Relationship?: is created when a principle gives authority to another to act on his or her own
behalf and the agent consents to do so [Real Authority]. The granting of authority or consent can be written but doesn’t
need to be, it may be implied from the parties conduct or other evidence of intent [Apparent Authority; was there an
Appearance of an agency relationship].
(2) duty of the Agent: to conduct the affairs of the principle with a certain level of diligence, skill and competence. (this
is also a question of fact that can’t be overturned unless “no rational trier of fact could come to the conclusion that the trial
court has reached.”) The Agent, upon his promise to act, must only make reasonable efforts to accomplish the directed
result.
- Hold: Sup Ct. NH here: (1) Agrees w/ dist ct that an Agency Relationship had been formed. (This is a question of fact to
be determined by trial court and cant be overturned unless the finding is compellingly unsupported by the evidence.) (2)
Court overturns dist ct here, believing that ∆ did make a reasonable attempt to obtain a refund for ∏.
- Reasoning: ∆ gave the old water heater to supplier to return to manufacturer (as he promised he would do) for a possible
credit but did not guarantee that the credit would be obtained.
Shoup case
- Facts: ∆ Shoup insurance agent recommended to ∏ Violette Scaroni a financial planner he met at a seminar, ∏ had
asked ∆ if he knew anyone who could sell her an aggressive tax shelter. ∏ invested heavily with Scaroni ($60k), ∆
received $2,400 for the referral. ∆ claimed he didn’t expect compensation from the recommendation. IRS determined it
was a potentially abusive tax shelter and it became insolvent. ∏ sued ∆ claiming (1) there was an agency relationship b/t
she and Shoup and (2) that Shoup breached his duty for referring ∏ to an incompetent financial planner.
- Hold: Court felt there was no manifestation of intent (no Appearance of Authority), no actual agency (no Real
Authority) here. “a person cannot become the agent of another simply by offering help or making a suggestion.”
 Could possibly argue for Appearance of Authority
Restatement Third of Agency – def of Agency

Is the fiduciary relationship that arises when one person (a “Principle”) manifests assent to another person (an “agent”)
that the agent shall (1) act on the principle’s behalf and (2) is subject to the principle’s control, and (3) the agent
manifests assent or otherwise consents so to act. [Acting on behalf and Control Elements are necessary to prove Agency
Relationship]
Explan: (1) Agent acts on behalf of principle (this creates the special powers and liabilities)
- Agent must not be acting on its own behalf; Must be working in manner that advances the interest of the principle.
Clapp
- ∏ sued Northwoods, owners of shopping mall after getting food poisoning from eating at Skewer, a tenant in the food
court. ∏ argued for an Agency Relationship (Skewer is Agent of Northwoods, principle) b/c Northwoods exercised
substantial control over how Skewer operates, had Skewer join association that promoted the mall and collected a
percentage of gross sales on top of fixed rent.
- Hold: Skewer was not an Agent of Northwoods (no Agency Relationship)
- Rule: A true Agency requires that the agent’s function be the carrying out of the Principle’s affairs.
- Reasoning: nothing suggests Skewer was tending to the affairs of Northwoods…it just so happens that in the course of
furthering its own business, Skewer benefits Northwoods
Explan: (2) Agent is subject to the Principle’s Control

- involves an element of subservience
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- the proof of control (whether strict or relaxed to the point of ignoring) required by the courts will differ from court to
court and the facts of the case
Explan: (3) Agent consents to act for Principle

- consent (mutual agreement) by both parties is required but it can be either Expressed or Implied. Parties sometimes
don’t realize they have entered into Agency Relationship, exa: when one asks a friend to do a slight service for him
- This element is frequently not addressed by courts
*The burden of proof is on the person asserting the existence of an Agency Relationship. And its based on the facts on
record
A. Duties of Principle to Agent – Duty to Deal Fairly and in Good Faith
Taylor v. Cordis Corp

- Facts/ID/Proc Hist: ∏ Taylor was employed by ∆ Cordis, sold pacemakers, turns out that pacemakers had battery
problems and were deemed unsafe by FDA. ∏ had signed no compete clause (good for 1 year after resigning).
Brought action against ∆ to rescind of K (took job with other medical supply co.), claiming ∆ breached its duty of good
faith and fair dealing by failing to timely provide him with material information relating to problems ∆ had discovered in
its pacemakers.
- Issue:
- Rule: (a) Principle has a duty to deal fairly and in good faith with an agent and to provide the agent with any
information which might subject the agent to physical or pecuniary loss in dealing with the product. (b) The principle’s
good faith duty to the agent also demands that the principle must maintain a standard of conduct which will not harm the
agent’s business reputation or reasonable self-respect.
- Hold: Court disagrees with ∏’s argument of what ∆’s duty to him was. “The duty cannot be interpreted to require the
principle to distribute to the agent copies of consumer complaints relating to the product performance or to report the
progress of all ongoing research into product efficiency…The duty to inform its sales agents of product problems attached
only when the company, in the exercise of reasonable diligence, knew that specific product defects posed a threat of harm
to consumers and a concomitant threat to the professional reputation of the sales agent. The court concluded that ∆’s
actions were reasonable.
- Reasoning:
B. Duties of Agent to Principle

- An Agent is a fiduciary and is subject to the directions of the principle.
- Fiduciary: a person who has a duty, created by his undertaking, to act primarily for the benefit of another in matters
connected with his undertaking.
A fiduciary must: account for $ or property received on account of the principle (must keep principle’s assets separate
from own); full disclosure; not prefer his own (or other’s) interests; cannot compete with principle; cannot sell his own
property to principle without disclosure of his interest; Has a duty of normal care.
I.E. (1) Care; (2) Disclosure; (3) Loyalty.
1. Duty of Good Conduct and to Obey

- Agent has a duty not to act in a manner that will bring disrepute to principle or “make friendly relations with principle
impossible”
- Agent must obey all reasonable directions of the principle
- However, an Agent has NO DUTY to perform acts which are illegal, unethical or unreasonable.
- If Agent does not act in these ways = breach of fiduciary duty. Exa: employee claims unemployment compensation
benefits but denied b/c he was in breach of fiduciary duty by making disparaging remarks at a social function about the
quality of merchandise his employer sold at a social function OR bank teller gambling repeatedly while off-duty
2. Duty to Indemnify Principle for Loss Caused by Misconduct

- An Agent (Servant) is under a duty to indemnify the Principle (Master) for damages the Principle had to pay resulting
from the Agent’s negligence while acting within the scope of employment.
 Principle has an action in tort or in contract against an agent who wrongfully causes loss for the principle where the
agent: (1) negligently damages the property of the principle; or (2) exceeds his authority; or (3) by negligence or fraud
causes the principle to be liable to a third person; or (4) violates a duty of loyalty owed the principle
- An innocent employer who is vicariously liable is entitled to indemnity from the employee.
3. Duty to Account
- An agent has a duty to keep and render accounts of money or other things which he has received or paid out on behalf of
the principle.
4. The Fiduciary Duties of Agents

(a) Commencement of Fiduciary Relationship
Martin v. Heinhold Commodities
- class action suit by customers claiming commodities broker failed to disclose substantial additional commissions,
concealed in a fee labeled “foreign service fee”
 ∆ Argued: (1) not bound by fiduciary duty during pre-Agency bargaining thus had no duty to communicate the fee…
customers had the duty to ask about the fee if it concerned them. (2) The fiduciary duty of full disclosure attached only
after it was agreed that ∆ would act as ∏’s broker.
- Appellate court in 4-3 decision (reversed trial court and) agreed with ∆ and/but held:
(a) general rule is that an agent’s fiduciary duty is limited to actions occurring within the scope of his agency and the
creation of the agency relationship is not itself within that scope.
HOWEVER [EXCEPTION]
(b) a fiduciary duty can be imposed upon a prospective agent prior to the formal creation of the Agency Relationship. 
in instances where the very creation of the agency relationship involves a special trust and confidence on the part of the
principle in the subsequent fair dealing of an Agent, the prospective agent MAY be under a fiduciary duty to disclose the
terms of his employment as Agent.
- DISSENT: pointed to Restatement Second to reject.
Also, Restatement (Third) endorses the notion that certain prospective agents have enhanced duties of disclosure. “…if
the creation of the relationship b/t an Agent and a Principle involves peculiar trust and confidence, AND the prospective
principle relies on the prospective agent to deal fairly with the prospective principle, the prospective agent is subject to a
duty to deal fairly in arranging the terms of the agency relationship, as if the prospective agent were an agent dealing
as an adverse party with a principle, with the principle’s knowledge.
(b) Duty of Care

Carrier v. McLLarky
- Issue: Duty of Care Agent ∆ plumber McLLarky owned his Principle Carrier – is there evidence in the record to support
a finding of breach?
- Rule: (a) Agents have a duty to conduct the affairs of the principle with a certain level of diligence, skill and
competence. [This is a question of fact left to the jury of the trial court and will not be overturned unless a it is
determined that no rational trier of fact could come to the conclusion the trial court has reached]
(b) In ordinary circumstances, the promise to act as an agent is interpreted as being a promise only to make reasonable
efforts to accomplish the directed result.
 Hold: Courts findings show ∆ made a reasonable effort to obtain refund for ∏
(c) the duties of an Agent toward his principle are always to be determined by the scope of the authority conferred.
 ∆ did not guarantee that the credit would be obtained.
(d) The degree of skill required by an agent in pursuit of the principle’s objective is limited to the level of competence
which is common among those engaged in like businesses or pursuits
 all ∆ had to do in his Agent capacity was execute the actual return and seek the credit…there was no proof that there
was a guarantee of a refund
(e) An Agent cannot be held liable to a Principle simply b/c he failed to procure for him something to which the latter is
not entitled.
- Someone who becomes an Agent to Principle Gratuitously, in general, has a standard of care that should reflect what is
reasonable to expect under the circumstances.
II.
Loyalty During the Relationship

Gelfand v. Horizon Corp.
- Facts/ID/Proc Hist: ∏-appellee Gelfand (Agent) a real estate salesman, sues his former employer ∆-Appellant Horizon
(Principle) for commissions and “overrides” (percentages) he claims were owed to him from 12 sales. Trial court allowed
∏ to collect on 11 of the 12 transactions. It was agreed by both parties that there was a breach of fiduciary duty in one of
the sales; in contention (∆’s appeal) is the amount that will offset ∏’s award. The trial court offset the profits accrued
directly to the agent but ∆ wants to also offset the profits which accrued to third parties allied with the agent.  ∏ sold
the property in contention to a “dummy corporation” in which his wife had 1/3 interest (she and their son were principles
in the corporation B&C. B&C was organized contemporaneously with the sale (for certain tax benefits?). Trial court
only offset 1/3 of the profits but wants all of them offset against ∏’s award. ∏ sold an option to buy the property to his
wife’s corp for $2,500. B&C then sold the option to another buyer for $60k and also the property for ∆’s asking price of
$165k. The $60k profit was split 3 ways b/t ∏’s wife and 2 other partners in B&C. B&C went out of business
immediately after the transaction.
- Issue: (1) [Not in dispute] There was a breach of fiduciary duty. (2)What are the appropriate damages? (2)(a) Does ∏
have to return his profits? (2)(b) Must ∏’s wife’s profits be returned? (2)(c) Must the third-party partners also return
their profits?
- Rule: (1) Fiduciary relationship: the Agent occupies a relationship in which trust and confidence is the standard. When
the Agent places his own interests above those of the Principle there is a breach of fiduciary duty to the principle. The
fiduciary (duty) is to make a full, fair, and prompt disclosure to his employer of all facts that threaten to affect the
employer’s interests or to influence the employer’s actions in relation to the subject matter of the employment.
(2) [Damages Issue] (a) broker is not entitled to compensation where he acts adversely to his principal’s interest. [Trial
Court correctly offset the profits ∏ collected via the sale of the property (but only this)] (b) Where an Agent seeks to
recover compensation growing out of the same transaction in which he was guilty of being disloyal to his principle, the
court is justified in denying the compensation, and the equitable principle applicable to the fiduciary that he is not to
profit from his own wrong comes into play. (c) A fiduciary who has made it possible for others to profit by violating his
obligation of loyalty to the Principle MAY be held accountable for that profit. The liability of the fiduciary and the
profiting third party is said to be joint and several.
- Hold: (1) There was a fiduciary duty owed by ∏ to ∆ and a violation of the fiduciary relationship was blatant.
(2)(b) Court holds that this transaction was part of the breach of the fiduciary relationship, [Reasoning] as ∏ was using his
wife for the indirect purpose of gaining a profit which could not be given to him directly.
(2)(c) Thus, court could have held ∏ accountable [To whom???] for the $37,500 profit made by the third-parties Braums
and Simms. However, here, court affirms the decision of the trial court and refuses to use its broad equity powers to take
away Braums and Simms profits.
- Reasoning: [(2)(c)] (i) court was not obligated to compel a fiduciary to reimburse the beneficiary [being who???] for
third party profits.
(ii) [Rule] doing justice is central to equity and requires case by case evaluation. thus:
∆ did not have a policy which forbade land purchases by employees or required disclosures;
∆’s management execs were not wholly ignorant of the circumstances surrounding this transaction;
there was no evidence of a strict trusteeship [Rule: Where self-interest and representative interests are combined]
applicable to the third-parties’ profits. i.e. there was no possibility of reciprocal tipping arrangements, no evidence that
Braums and Simms were in any position to return ∏’s favor through questionable real estate transactions or other means.
- Comment: What happens to the $20k that ∏’s wife is supposed to return? She obtained that money from selling the
option to Professional Homes which had nothing to do with ∆ Horizon, who received their required profits by the sales.
They have not connection or legitimate claim to the option profits received by ∏’s wife and the same holds true for the
profits taken by the other third-parties ($37,500). Would this money have been returned to Professional Homes as well,
then ∏ be responsible for paying Brauns and Simms? Did ∆ want these amounts to be offset from the money they still
owed ∏? = YES, ∆ could have recovered these monies for himself. The rationale is that this serves as a deterrant.
“Requiring the fiduciary to disgorge his own unjustly acquired gains serves as a punative as well as a compensatory
function even if no loss to the Beneficiary is proven!!!
Notes
The Middleman
In regards to forfeiture of compensation and duty of full disclosure.
- The Middle man is distinguished from the Agent – Middle man can work for both parties to a transaction and receive
compensation from each without disclosure. A finder or middle man has no fiduciary relationship and therefore no duty
to disclose b/c the finder merely introduces and brings parties together “without any obligation or power to negotiate the
transaction in order to earn a finder’s fee.”
VS Broker (who does have a fiduciary duty) broker also brings parties together BUT also must ordinarily bring parties to
an agreement.
- The scope of a duty of loyalty can vary with the position of the employee and with the nature of the alleged violation. 
Thus an hourly employee with no management or administrative authority can be a fiduciary.
- duty of Loyalty includes a duty not to use confidential information in competition with or to the injury of the principle.
Even if its subject matter not connected with the subject matter of his agency.
- The Agent also has a duty not to use information acquired by him as an Agent or by means of opportunities which he
has as Agent to acquire it, or acquired by him through a breach of duty to the Principle, for any purpose likely to cause his
principle harm or interfere with his business, although it is info not connected with the subject matter of his agency.
Exa: Finding oil scenario. Man is employed by company to find oil, if while on duty he finds oil his obligation is to
the employer who would have the claim to that oil well b/c he is employed to do this. Its within his scope of employment.
But if he was off duty, just enjoying himself and finds it, he has claim to that well himself but there would be a dispute b/c
employer would say that he probably found it while employed and didn’t report it and then went out there on his day off
to claim the well.
- The duty not to compete is not violated if the principle knows or has reason to know that the agent believes he is
privileged to compete or self-deal.
Post-Termination Competition
i.e. what rights and duties continue b/t parties after termination of their relationship?
 In general, Common Law will not stand in the way of competition, so long as it is fair. Analysis in assessing fairness
of the competition: circumstances under which employee left the business
Trade Secrets
The use by a former employee in competition with the former employer of information obtained during employment.
*Following case there is no express contractual term speaking to the issue.

Town & Country House & Home Service v. Newbery
- Facts/ID/Proc Hist: ∏ Town sued under theory of unfair competition to enjoin ∆ Newbery to prevent them from
servicing clients that were once Town’s for house cleaning services. ∆ were employed by ∏ for 3 years before breaking
off and not competing. There was no non-competition clause b/t them.
 ∏ argue that ∏’s enterprise “was unique, personal and confidential” and ∆ cannot engage in business without breach
of the confidential relationship in which ∆ learned its trade secrets, including the names and individual needs and tastes
of its customers. Part of the “uniqueness” or the “trade secret” learned by ∆ is cleaning by mass production methods i.e.
crews of men descend at different intervals and do their part in a hurry – like an assembly line factory.
- Issue:
- Rule: Even where a solicitor of a business does not operate fraudulently under the banner of his former employer, he still
may not solicit the latter’s customers who are not openly engaged in business in advertised locations or whose availability
as patron cannot readily be ascertained but “whose trade and patronage have been secured by years of business effort and
advertising, and the expenditure of time and money, constituting a part of the good-will of a business which enterprise and
foresight have built up
- Hold: Sup Ct. held that the only “trade secret” which could be involved here is ∏’s list of customers.
- Reasoning: ∏ obtained their customers through much work and expense by trial and error through cold-calling. For
every 200-300 people solicited, they netted 8-12 customers, when ∆ left, ∏ had about 240 customers. ∆ only solicited
∏’s customers, 20-25 refused to switch, but 13 of them did.
Notes
- Its still not clear what constitutes a trade secret which can be complex. First Restatement of Torts defines: “any formula,
pattern, device or compilation of information which is used in one’s business and which gives him the opportunity to
obtain an advantage over competitors who do not know or use it.
Distinguished from patents
- Shop Rights Doctrine: a Servant during his hours of employment, with his Master’s materials and appliances conceives
and perfects an invention for which he obtains a patent, he must accord his master a non-exclusive right to practice the
invention (though the invention remains credited to Servant)
 Distinguished from circumstances where an employee is employed specifically to invent, in the absence of any express
agreement, the courts will imply an agreement of the employee to assign his invention to the employer.
III. Vicarious Tort Liability
The Master-Servant Relationship

[Master (Principle, or Employer) vs. Servant (Agent or Employee) vs. Independent Contractor]
- Vicarious Liability: liability to employer in addition to the liability of the employee, who remains personally liable for
tortuous conduct.
*Key test/factor applied by the courts to determine if there is a Master/Servant relationship is if the alleged master has a
right of control over method or actor that is going to perform the service.
- Master: A principle who employs an agent to perform service in his affairs and who controls or has the right to control
the physical conduct of the other in the performance of the service
- Servant: An agent employed by a master to perform service in his affairs whose physical condict in the performance of
the service is controlled or is subject to the right to control by the master
- Independent Contractor: person who contracts with another to do something for him but who is not controlled by the
other nor subject to the other’s right to control with respect to his physical conduct in the performance of the undertaking
(may or may not be an agent).
 the Master/Principle is not liable to third persons for tangible harm resulting from his unauthorized physical conduct
within the scope of the employment.
 Deciding whether there is or isn’t a master-servant relationship in a particular case is left to the trier of fact (i.e. if the
inference is clear, the court can say it exists, if unclear, it is left for the jury to decide (with instructions by the court)).
4 theories for employing liability against Master, even though he may not be at fault (strict liability):
1) Deep pocket theory – master is likely to pay and has insurance
2) Identity theory – notion that master and servant are one, master has right of control, therefore act of agent is act
of master
3) deterrence – notion that master will be more careful in supervising acts of the servant (prof. doesn’t think this is
a valid argument) leads to strict liability
4) Enterprise theory – master takes profits and benefits therefore should also bear the expenses or losses.
 However, master is responsible/negligent by his hiring of the servant or also more laible by faulty training or
instruction to his employee
Kane Furniture Corp v. Miranda

- Facts/ID/Proc Hist: ∆-Appellant Kane, furniture store sold carpet installation business of their store to Perrone who
installed the carpets for Kane, Kane first gave them a 2 week probationary period where they inspected the work b/f
giving them more contracts. Perrone then used another carpet installer Krause. Krause, after installing carpets on two
homes (customers who went to ∆’s store) went drinking with his partner, on his way towards taking his partner to the
Kane parking lot to pick up his vehicle, they hit the Miranda car, killing the wife (∏). ∏ file wrongful death suit against
∏ under theory of vicarious liability. Tr Ct gave judgement to ∏.
- Issue: Was Krause acting in a Master-Servant capacity (i.e. in his scope of employment) for Kane to be liable or was he
an Independent Contractor?
Right of control as to the mode of doing the work is the principle consideration.
- Rule: If a person is subject to the control or direction of another as to his results only, he is an independent contractor.
If he is subject to control as to the means used to achieve the results he is a servant.
- Hold: Appellate Court reverses (granting summary judgment to ∆), finding error in trial court’s conclusion that Perrone
and Krause were Kane’s employees
- Reasoning: Kane’s salesman diagramed the installation layout plan, but the carpet installers Krause and Perrone had
unbridled discretion in the physical performance of their tasks. Perrone did not report to anyone at Kane and had
absolute discretion in contracting out the installation jobs.
- Re: Appearance of Master-Servant Relationship? You could make the argument here. I went to Kane and Kane sent
out these men to do the work (I don’t know if they are independent contractors, I assume that they are employees of
Kane). Customer could argue this reliance but the Miranda’s could not as they were not customers, they were just
passersby.
Soderback v. Townsend
- Facts/ID/Proc Hist: ∏-Appellant Soderback, sued ∆ Quasar Petroleum Co. for damages arising out of an auto accident.
∆ Townsend was the driver involved in the accident, was hired by Quasar to negotiate gas leases. Accident occurred
while Townsend was driving b/t cities to check on some leases. ∏ argues Townsend was acting as Quasar’s agent (and
acting within the scope of his employment at the time of the accident). ∆ Quasar argues that Townsend was an
independent contractor.
- Issue:
- Rule: A principle employing another to achieve a result but not controlling or having the right to control the details of
his physical movements is not responsible for incidental negligence while such a person is conducting the authorized
transaction…it is only when, in the agent-principle relationship, there is a right to control physical details as to the
manner of performance…that the person in whose service the act is done becomes subject to liability for the physical
conduct of the actor.
- Hold: Appellate court affirmed the summary judgment given in favor of ∆
- Reasoning: Record b/f the court showed: (1) Townsend, for 26 yrs, had been employed as an independent oil and gas
broker. (2) Townsend was hired by Quasar to negotiate gas leases in Oregon, Townsend was only told general areas of
interest. Quasar only placed maximum limits of negotiating authority on price and duration of the leases. Otherwise
manner and means were up to him, set own schedule and had no quotas
(3) Quasar had no control over Townsends operation of the vehicle…they did not tell Townsend when he would drive the
car, how to drive it, or what route to travel.
- ∏’s only argument was that Townsend had made statements (witnesses) that he “worked for Quasar” = insufficient
Hunter v. R.G. Watkins & Son, Inc.

- Facts/ID/Proc Hist: Davis employee of ∆ Watkins driving his own vehicle. The vehicle he drives for work broke down
thus was sent to pick up a part for it, along the way Davis made a couple stops to run errands. Accident happened at 5pm,
while he finally on his way home, his normal work hours are typically until 5pm.
- Issue:
- Rule:
- Hold: Court concluded that Davis was acting within the scope of his employment at the time of the accident and
concluded that liability against ∆ Watkins was allowed even though they did not have say over the control of the vehicle
at the time.
- Reasoning: The fact that the employer lacked control of the method by which the employee
Limitations to the Independent Contractor Exception (2 Exceptions discussed)

Hixon v. Sherwin-Williams Co.
- Facts/ID/Proc Hist: ∏ American States (homeowner’s insurance co.) hired Hixon to install linoleum floor for client
Chess’ – Hixon subcontracted to ∆ Sherwin-Williams – they hired Louis Benkovich to install the floor. He had done floor
installations for them b/f and had a reputation for doing a good job. This time he had to glue plywood to cement floor b/f
installing the linoleum, this specifically he had never done, he used an extremely flammable glue, which he had never
used b/f and which contained visible warning labels. Benkovich ignored them and did not open windows for ventilation
and left boiler pilot on – glue exploded causing $27k in damages to Chess’ home which American States had to pay, they
sue Sherwin-Williams under theory of respondeat superior (Master-servant/Agent-principle relationship). Directed verdit
for ∆ was awarded by federal district court, affirmed by appellate court.
 Benkovich was self-employed ad was retained by Sherwon Williams as an independent contractor rather than
employee. Sherwin Williams did not supervise the work.
- ∏ argued this was an exception to the rule that a principle is not liable for the torts of his independent contractor.
[Rule] (1) The exception applies i.e. there is liability to the principle in cases of inherently dangerous/hazardous
activities… “The more hazardous the activity is, the higher is the cost-justified level of care; and if it is hazardous enough,
the principle should take his own precautions even though he does not supervise the details of the Ind Contractor’s work.
∏ argues that ∆ was liable b/c ∆ failed to ask Benkovich if he had ever laid plywood on cement. [Rule] (2) Principle is
liable for the consequences of negligently failing to select a competent contractor
- Hold: (1) Court said that there was nothing inherently about installing linoleum floor. It became dangerous by misuse
of the resources, by the same standard/rationale Construction work is also not considered to be inherently dangerous,
negligence is what makes it so.
(2) Benkovich had good reputation for installing linoleum, ∆ had no duty to “quiz” Benkovich about the details of his
experience.
- Reasoning: ADDITIONALLY, even if ∆ was negligent in selecting Benkovich, the negligence of selecting Benkovich
was not the proximate cause of the damage. Benkovich’s failure to pay attention to the warnings was the proximate
cause.
Notes
 Inherently Dangerous: work has been defined as work “which, in its nature, will create some peculiar risk of injury to
others unless special precautions are taken
Again, Exceptions are:
(1) Contracting for work on inherently dangerous activities (vicarious liability)
(2) Negligently hiring an Independent Contractor (direct liability)
Nepstad v. Lambert
- Facts/ID/Proc Hist: ∏ Nepstad employed by Arnold Co., general contractor, injured when crane got close to power lines.
Operator of crane (Pasma) was employed by Truck Crane Service Co owned by ∆ Lambert, Lambert was hired by Arnold
Co. Pasma was operating the crane pursuant to hand and arm signals from Morris, the foreman on the job and an
employee of L.G. Arnold Co.
- Issue: Which employer had the right of control of the particular act that caused ∏’s injury?
- To determine if ∆ has liability the court must determine if Pasma became a loaned servant of ∆ Lambert. Two tests are
used in the analysis:
- Rule: (1) whose business test: At the time of the negligent act, which employer’s business was being done or furthered.
 This test is valueless here b/c in the instant situation the worker is necessarily furthering and doing the business of
both employers.
(2) [MAIN] Right of Control Test: places the responsibility for the servant’s negligence upon the employer having the
right to control his actions at the time the negligent act occurs. Reasoning behind this test (used by courts) is that liability
is imposed upon the employer who was in the best position to prevent the injury.
 trickiness in this test (as here) is that multiple employers can exude control over the employee. Thus, the test allows
for finding that a given worker is the servant of one employer for certain acts and the servant of another for other acts.
 What is considered right to control?  Detailed authoritative control must distinguish from mere designation of
work or suggestions made. The orders of the borrowing employer must be commands not requests. There must be the
authority to exercise detailed authoritative control over the manner in which the work is to be done. Actual control
exercised (of the crane, here by Pasma, Lambert Agent) does not materially matter.
- Hold: Pasma was considered a loaned servant to Arnold Co. (special employer) with respect to the negligent act causing
∏’s injury. Pasma was under the detailed authoritative control of the Arnold Co. exclusively with respect to the act which
caused the injury. Thus, ∆ Lambert, the general employer of Pasma, is not liable for ∏’s injury.
- Reasoning: Without the directed hand signals of the Arnold employee (Morris), Pasma lacked the knowledge or
authority to make a move. Morris had the blueprints, knew the pattern and progress the work was to take. These signals
carried the force of command and are considered authoritative.
Gordon v. S.M. Byers Motor Car Co.

- Facts/ID/Proc Hist: Hazlett (in retail and wholesale gasoline business) entered into agreement w/ ∆ Byers to possibly
buy truck from ∆ Beyers, was to use for 1 week, if he did not buy would pay $10 per day for usage of the truck. Lewis,
employee of ∆ was to be Hazlett’s driver. The license plates and owners card identified ∆. Lewis was delivering gas
pursuant to Hazlett’s orders and caused the explosion by negligently overflowing the gas. ∏ Gordon, wife of man who
died in explosion sues both Byers and Hazlett.
- Issue:
- Rule:
- Hold: The negligent conduct was found to exist on behalf of both parties. Byers controlled lewis as demonstrator for the
purpose of selling the truck, Hazlett controlled him in delivery of the gasoline. [Rule]: While breach of Lewis’ duty to
either alone would not have involved the other in responsibility for damage, he was negligent in doing an act for the
account of both, they are joint tort-feasors.
- Reasoning: This transaction involved a double service to both Byers Co. and Hazlett. Hazlett had direction and control
over Lewis limited to the delivery of the gasoline but also Lewis was assisting in making a sale of the truck for Byers.
Depratt v. Sergio
- Facts/ID/Proc Hist:
- Issue: Whether to discard the borrowed servant rule in favor of dual liability approach.
- Rule: Dual Liability approach is same as Enterprise Theory: both employers should be responsible to the injured party
b/c both exercise a degree of control, both profit from employers conduct and both are capable of planning for and
transferring the losses incurred.
- Hold: Admits its difficult to apply but still keeps borrowed servant rule. The dual liability rule does not offer a simple
and easily applicable alternative.
- Reasoning:
Second Restatement for Scope of Employment

- Must find a, b, and c, all three for servant to be within scope of employment. d only applies in situations of force.
Conduct of a servant is within the scope of employment if:
(a) it is of the kind he is employed to perform; AND
(b) it occurs substantially within the authorized time and space limits; AND
(c) it is actuated, at least in part, by a purpose to serve the master
(d) if force is intentionally used by the servant against another, the use of force is not unexpectable by the master.
Fiocco v. Carver
- Facts/ID/Proc Hist: - ∆ Carver Co. transported items from Manhattan to Staten Island, driver employee made delivery to
Staten Island. After making the delivery he was supposed to drop off vehicle at company located on west side of
Manhattan but instead decides to go visit his mother who lives on the east side of the island. While there, he encounters a
carnival with boys in costumes who want to get a ride on his truck, he does give them a ride then comes to a stop goes to a
store, comes back and supposedly tells boys to get off, he was now going to go take vehicle to company. ∏ Fiocco is
injured boy is still getting off when driver takes off and ends up running over ∏’s foot.
- Issue: Is ∆ liable? i.e. was driver acting within the scope of employment?
- Rule:
- Hold: Court feels that driver left the scope of his employment thus ∆ is not liable.
- Reasoning: Court said that it would only be possible to say that driver reentered his scope of employment or duty when
beginning his trip back to the office, maybe. However, here, the court looked at the aggregate circumstances of when the
accident happened, driver was being merry w/ friends, which is what drew the attention of the boys and its not that clear
what driver intended to do next as he started the car and drove over ∏’s foot. Driver’s abandonment of duty is still
manifest.
 Case deals with issue of re-entry i.e. did servant re-enter the scope of his employment, which must be clear
- Employer tells employee to use Road B in the scope of his employment. Employee one day just decides to take road C.
Is the employee within the scope of his employment? Yes, most courts would say that it was only a minor deviation from
that route. If he deviates his route and performs an act that is not a part of his employment, he has likely deviated and is
outside of the scope but again, when would he have re-entered the scope?
Clover v. Snowbird Ski Resort

- Facts/ID/Proc Hist: ∏ Clover was patron at ∆ Snowbird Ski Resort, suing for damages from injury suffered via a ski
accident with Zulliger who was employee of ski resort. He was instructed to check restaurant at mid-base prior to
beginning work at the base at 3pm. He had planned to ski this day with a fellow employee b/f beginning work.
Employees of the resort are preferred to know how to ski so they can get around better. Zulliger inspected the restaurant
on 1st run but then did 4 more runs. On final run, took route often taken by employees but that was a bit more dangerous
that had a jump ski patrol prevented skiers from using this jump and signs told skiers to go slowly through this area.
Zulliger went down w/ great speed in this area made the jump, didn’t see ∏ and collided with her.
- Issue: was Zulliger within the scope of his employment when accident occurred?
- Hold: - Lower court gave summary judgment for ∆, his actions were not sufficient within the scope. But Sup Ct. of Utah
reverses, feeling that this was a question left to the jury to decide if he might have completed the 3 requirements needed to
be considered acting within the scope of employment:
- Rule:
1) conduct is of general kind the employee is employed to perform?
2) occurred substantially within the hours ordinary spatial boundries of employment
3) conduct motivated at least in part by the purpose of serving employers interests?
- Reasoning: (1) evidence that ∆ intended Zulliger to use the ski lifts and ski runs on his trips to Mid-base…actions could
be considered to “be of the general kind that the employee is employed to perform.”
(2) Zulligers actions occurred within the hours and normal spatial boundaries of his employment as Z was expected to
monitor the operations at the mid-base during the time the lifts were operating and when he was not working at the plaza.
Throughout the trip he would have been on employer’s premises
(3) Z actions in monitoring the operations at Mid-base, per employers instructions, could be considered “motivated, at
least in part by the purpose of serving the employer’s interest.”
Intentional Torts
- What happens to vicarious liability when a Servant commits an intentional tort?
Bremen State Bank v. Hartford Accident and Indemnity Co.

- ∆ Bekins Van & Storage was hired by ∏ Bremen a bank that was moving, to move its property from one location to
another. A teller didn’t move her money from her locker like she was supposed to. An employee for ∆ Bekins stumbled
upon the money and stole/kept it.
- Hold: Court did not hold ∆ liable for the $10k, b/c the thief was acting in his own interest and not in the interest of the ∆
Bekins. =
- Rule: “employer is not liable for the criminal act of its employee.” “employer is held liable when criminal act is done in
furtherance of the business of the employer.”
- other arguments: 1) scope of employment and 2) abuse of position (will see in following cases)
Lisa M v. Henry Newhall Memorial Hospital

- ∏ Lisa M, pregnant 19 year old woman was sexually molested by ultrasound technician Tripoli. Was criminally
prosecuted but fled. ∏ Lisa sued the hospital arguing for vicariously liable under respondiat superior.
- [Rule] Court says that for a Principle to be held liable for the intentional tort of its Agent/Servant [Rule] (a) employer
will not be held liable for an assault or other intentional tort that did not have a causal nexus to the employees work. 
the “nexus” required must be engendered by or arise from the work = it must be an “outgrowth of the employment” and
risk of tortuous injury must be inherent in the working environment,” or “typical of or broadly incidental to the enterprise
the employer has undertaken.” (b) Also, the tort must be foreseeable from the employees duties….are sure to occur in the
conduct of the employer’s enterprise.
- Court Hold: rejected ∏’s argument and stated that the situation here did not apply to either part of the rule.
 For ∏: Court felt that sexual misconduct can be foreseeable. HOWEVER,
For ∆: the technicians misconduct was not “engendered by” or an “outgrowth” of his employment…and will not be
considered so unless its motivating emotions were fairly attributable to work-related events or conditions.
Thus: Tripoli’s decision to exploit did not arise out of the performance of the examination, although the circumstances of
the examination made it possible….the flaw in ∏’s argument is not so much that Tripoli’s actions were personally
motivated but that those personal motivations were not generated by or an outgrowth of workplace responsibilities,
conditions or events.
- “Although the routine examination involved physical contact on ∏, the assault did not originate with, and not a generally
foreseeable consequence of that contact…i.e. from the nature of the work he was employed to perform.”
- ∏ also argues #2 abuse of position but the court rejected this claim, stating that the case law ∆ used in support applied
only specifically to police who have such authority not an ultrasound technician, Lisa has freedom to choose.
Types of Abuse of Position that ppl attempt to create Vicarious Liability (another option to scope of employment)
[there is overlap sometimes]
1) Abuse of authority or power – usually applied to cases in police or teachers
2) Abuse of trust or confidence – most commonly involve priest, minister or a therapist, psychs
3) Abuse of access – janitor, maintenance worker, security guard
Restatement Second § 219(2)(d)
Costos v. Coconut Island Corp.

- ∏ Costos was staying at hotel with friend who knew manager of hotel, owned by ∆ Coconut. They all went out that
evening, ∏ went to bed, while her friend entertained her company, ∏ woke up to manager of hotel Bonney having sex
with her.
- ∆ argued vicarious liability must not be imposed for acts committed by employee outside scope of employment unless
employee has acted with apparent authority or deceit.
- Rule: A master may be liable for the torts of his or her servants who are acting outside the scope of their employment
when they are aided in accomplishing the tort by the existence of the agency relation.
- Court held ∆ Coconut to be vicariously liable. Here, Bonney had abuse of access b/c he had a key to the room “by
virtue of his agency relationship w/ ∆.”
Punitive Damages
- Can be imposed on Employer/Master/Principle under vicarious liability (i.e. for the fraud, malice, or gross negligence of
its employees acting within their scope of employment).
 Most states only allow recovery against employer for punitive damages only on the basis of culpability, such as
authorizing or ratifying the tortuous behavior.
IV. Contractual Powers of Agents
Express Authority (& Power of Atty)
King v. Bankerd
- Facts/ID/Proc Hist: ∏ Mr. Bankard had property, moved West and had little contact with ex-wife and his appointed
Agent ∆ King who had power of atty. Power of atty had been redrawn/changed later. King tried to find Mr. Bankard,
unsuccessfully, claimed that he even thought that Bankerd was possibly dead (he was 69 yo), and felt that at the very least
Bankerd had abandoned his property. She is in a sympathetic situation, she has to pay all the upkeep, taxes etc. ∆
conveyed ∏’s interest in the property to Ms. Bankerd by deed, Mrs. Bankerd gave no consideration for the transfer and ∆
received no compensation for the transaction, she then sold the property to a third aprty. Bankard came back and saw his
property sold and thus sued King for breach of fiduciary duty and breach of trust. All the courts gave judgment to ∏.
- ∆ Argues: that the language in the Power of Atty gave him broad powers (to sell and convey the property “for such
price and on such terms as to him shall seem proper”), and with these broad powers he could not be precluded from
gratuitously transferring ∏’s property.
- Hold/Rule: Court rejected ∆’s argument. Court said that even with this broad Power of Atty the language authorizing ∆
to sell and convey the property “for such price and on such terms as to him shall seem proper” implies a sale for the
Principle’s benefit. “Such a PoA does not authorize the agent to make a gift of the property, or to convey or transfer it
without a present consideration to the Principle.
An Agent with broad PoA lacks power to make a gift of principle’s property, unless that power is 1) expressly
conferred 2) arises as a necessary implication from the conferred powers, 3) clearly intended by the parties, as evidenced
by the surrounding facts and circumstances.
Van Wedel v. McGrath

- German Natl, knowing war was imminent, goes back to Germany but first conveys a very broad power of Atty to
Kooiman. Kooiman gives gift of property to the wife who stayed in the US. However, land was seized by US govt.
- GOvt did not allow wife to keep property. Here the power of atty was as broad as it could get but then the man also
specified certain things. This added confusion, thus concurring opinion could not decipher the intent. Majority opinion
stated that in dealing with the PoA language strictly, it refers solely to Von Wedels’s ordinary business affairs.
 Many times we want to give broad powers but if you give specific instructions too, court will not be able to decipher
your intent.
 Powers of Atty terminate at time of death, but most states have statutes that permit a “durable Power of Atty” that will
survive disability or death. Means Atty can continue to act on behalf of executive of estate or court appointed guardian
until such time as agent is fired. Can prevent a gap when no one is able to act.
Implied Authority
- [Two meanings][From Restatment Third] Actual Authority either (1) to do what is necessary, usual and proper to
accomplish or perform an agent’s express responsibilities; OR (2) to act in a manner in which an agent believes the
principle wishes the agent to act based on the agent’s reasonable interpretation of the principle’s manifestation in light of
the principle’s objectives and other facts known to the agent.
 *this is proven circumstantially i.e. by principle’s conduct other than written or spoken statements that explicitly
authorize an action.
Delegation of Authority
- by an Agent to a third party
White
- Facts: Smith, Agent repossess cars, recruited a friend (Huddy) to help him. Huddy is driving a repo’d car to lot to be
sold and negligently causes an accident.
- Issue: Is Smith’s Employer (Principle) liable for the loss under vicarious liability?
- Hold: NO.
- Rule: The relation of master and servant cannot be imposed upon a third party without the Principle’s consent, either
express or implied. Exception: when Agent engages an assistant in a case of an emergency where Agent is unable to
perform the work alone.
 i.e. Agent cannot delegate its powers to a third party without the express or implied authority to do so, given by
principle.
- Reasoning: This was not an emergency, thus does not fall within the Exception.
Incidental Authority
- Unless otherwise agreed, authority to conduct a transaction also allows the agent authority to do acts which are
incidental (related) to it, usually accompany it, or are reasonably necessary to accomplish it.
Apparent Authority
Very often exactly the same as the real authority. But many situations where there is an appearance of authority but the
agent doesn’t have any authority.
- Authority which is viewed from the perspective of the third party. Third party reasonably believes based on appearances
from the principle – must be a manifestation by principle that creates an appearance of authority which the person relies.
 Most common situations:
1) Where agent appointed to - usually include Sometimes this authority is denied by this principle to this agent. Thus
normally, the implied authority becomes apparent authority to the third parties who are unaware of any denials, contests to
the authority.
2) Where an agent is permitted to do a series of acts that will imply authority to continue to do the same or similar acts,
and even thought the authority isn’t real, doesn’t exist, has been terminated…the apparent authority will continue as to
any ppl who were unaware of the termination of authority.
3) Where a person is given some indicia of authority or given the apparent ownership of property. exa: Someone given
title, someone wearing uniform.
 Sometimes there is confusion b/t inherent authority it is a form of apparent authority, its real. Apparent Authority
appears real, but might not exist.
Sauber v. Northland Insurance Co.

- Facts: McDonald sold car to ∏ Sauber, MCDonald had a 2 year insurance policy w/ ∆ Northland. Sauber called insurer
to tell them he purchased the car and asked if he was covered by the current (McDonald’s) insurance policy. The agent
that answered the phone told him it was ok and that he could drive the car. ∏ crashes the car and ∆ does not want to pay
off the coverage.
- Rule: Apparent Authority: the power of an apparent agent to affect the legal relations of an apparent principle with
respect to a third person by acts done in accordance with such principle’s manifestations of consent to such third person
that such agent shall act as his agent.
- Hold: Court affirmed verdict for ∏, as jury accepted ∏’s story and not ∆’s rebuttal saying that she was wrong and that
she was not an authorized agent to give an answer to ∏’s question. “When an employee of the business place answers the
telephone at such established place of business and purports to act for such concern, a presumption arises that such
person has authority to act.
- Reasoning/Rule: lady on the phone was an agent. There was apparent authority here. It was reasonable for Sauber to
believe that the agent in representing the insurance co is authorized to do what was requested by him. This is rebuttable
by the ∆ insurance agency, saying that she wasn’t authorized.
Notes
- Apparent Authority has a basic requirement that the principle be responsible for the information which comes to the
mind of the third person (similar to the requirement for the creation of actual authority that the principle be responsible
for the information that comes to the agent). Thus, either the Principle must intend to cause the third person to believe
that the agent is authorized to act for him; OR he should realize that his conduct is likely to cause such belief.
[From class notes]:

(Real Authority = 1 of 2 kinds)
(1) Expressed
(2) Implied authority which is is expressly granted to an agent or accompanies a position to which an agent is appointed.
- Inherent authority: subdivision of implied authority – flows from the grant of actual authority. Exa: agent who
- Apparent Authority: appearance of authority created by the principle, which third party reasonably relies. An
emergency may cause authority to expand.
- In terms of agent appointing a substitute or sub-agent to help out, as a general rule, agent has no authority to appoint an
agent or substitute. With ministerial things there may be authority. If subagent is qualified there may be implied
authority.
Examples:
1) A has authority to act for P, T with whom deals with P. T has no knowledge of authority or of P’s existence. Real
authority yes, but not apparent.
2) P appoints A as his agent, informs T of this fact. Real authority? Apparent Authority? Yes, Yes
V. Fraudulent Acts of Agents

- Fraud is a tort, exposing a principle to vicarious liability for misconduct of its agents….reliance of the victim on
impressions created by the principle is an important element of fraud.
Elements of Fraud (all 5 needed)

(1) Representation made by the ∆
(2) knowledge of the ∆ that the representation is false, or that he has not a sufficient basis of information to make it;
(3) intention of the ∆ to induce ∏ to act (or refrain from acting) in reliance upon the misrepresentation;
(4) justifiable reliance by the ∏ upon the representation; AND
(5) damage to the ∏ resulting from such reliance.
 In considering liability of the principle for the fraudulent tort of the agent, courts take into account the motive of the
agent…the employee’s intention must be to serve a purpose of the employer before tortuous conduct will be characterized
as within the scope of employment.
Entente Mineral Co. v. Parker

- Facts/ID/Proc Hist: ∏-appellant Entente Mineral Co employs Sneed who is a petroleum landman. Sneed negotiated
with Young to purchase ½ of Young’s interest in a land that likely had oil prospects. They orally agreed for ∏ Entente to
purchase the land for $25k, no consideration given though to Young, Sneed presented Young with a $25k draft and
royalty deed. They take it to Young’s banker Edwards to look over the documents, Edwards suggests going to Young’s
law firm so they review the deed and perform a title search, Sneed and Young meet w/ Parker, a partner in the firm.
Parkers tells his brother about this land, brother thinks its good for oil and tells Parker to offer $30k, Parker asks another
partner if it was ok to offer to purchase land from a client, Partner confirmed that it was ok, Parker then offers Young
$27k and Young accepts. Sneed learns of what happened and sues Parker and his firm in Fed Ct. for tortuous
interference w. business relations and K violation under MS law, and that the law firm was vicariously liable for
Parker’s tortuous conduct.
- Issue: For the law firm to be found vicariously liable for Parker’s tortuous conduct:
(1) The Agent’s conduct must be within the scope of his employment; OR
(2) The “Agency Relationship” b/t Agent and Principle aided the Agent in committing allegedly tortuous acts (i.e. (a)
Agent purported to act on behalf of principle or there was a reliance of apparent authority; (b) Principle placed Agent in a
position to commit a tortuous act, even though the Agent acted on his own authority)
- Rule: (a) Every partner is an agent of the partnership for the purpose of its business…any wrongful act…of any partner
acting in the ordinary course of business of the partnership…loss or injury is caused to any person…the partnership is
liable therefor to the same extent as the partner so acting.
(b) A principle or Master is liable for the torts of his servant or agent that are committed within the scope of employment.
To be within the scope of employment, the agent’s conduct must be actuated, at least in part, by a purpose to serve the
master.
(c) Even if servant is acting outside the scope of employment, the master may still be subject to liability for the torts of his
servant if:
(1) the Agent purports to be acting on behalf of the Principle; AND
(2) There was reliance by Apparent Authority OR Agent was aided in accomplishing the tort “by the existence of
the Agency relationship [?].”
(d) If a principle puts a servant or other agent in a position which enables the agent, while apparently acting within his
authority, to commit fraud upon a third person, the Principle is subject to liability to such person for fraud.
- Hold: (1) undisputed that Parker was motivated only by a desire to serve himself in purchasing the royalty. Thus,
Parker could not have been acting within the scope of his employment when he purchased the royalty interest.
(2) Rules (c) and (d) here, do not apply in the instant case. The court says that there must be a relationship b/t the
Principle and the customer, and then the customer was defrauded by Principle’s agent (as was found in the cases argued
by ∏). The court finds no relationship b/t the firm and Entente that could be imputed to Entente’s Agent Parker.
VI. The Undisclosed Principle

- Principle appoints an Agent to act on Principle’s behalf but Principle remains undisclosed, thus the appearance was that
the Agent was the Principle. [Undisclosed principle can/may then step in and enforce contracts created by Agent]
- Partially disclosed principle/unidentified principle: Agent had disclosed to the contracting parties that he was acting on
someone’s behalf but refused to disclose his principle’s identity.
A. Exceptions
Kelly Asphalt Block Co. v. Barber Asphalt Paving Co.

-Facts/ID/Proc Hist: ∏ Kelly and ∆ Barber are competitors selling paving blocks. ∏ wanted to purchase blocks from ∆
(for resale) but suspected ∆ wouldn’t sell him the blocks, thus ∏ retained Booth (also engaged in this business elsewhere)
to purchase the blocks for him from ∆. They were delivered and paid for with money from ∏. However, there was a
problem with the blocks, and ∏ discloses himself to get his money back but ∆ doesn’t want to give ∏ his money back.
 ∆ argues for an exception to the general rule on the ground that Principle concealed his identity on purpose under the
belief that if he disclosed his identity no K would have been made and ∆ would NOT have made the sale.
- Issue:
- Rule: (1) General Rule: A K made by an Agent for an Undisclosed Principle, may be sued on (i.e. the K) by the real
principle at the Real Principle’s election…An Agent who contracts in his own name for an undisclosed principle does not
cease to be a party b/c of his agency. The Agent, having made himself personally liable may enforce the K…The agent is
liable as Principle.
(2) Acceptable Exceptions: Fraud – If one who is in reality an agent denies his agency when questioned, and falsely
asserts that his principle has no interest in the transaction…the K may become voidable b/c the K has been fraudulently
procured.  so if asked directly, Agent must disclose his principle.
- Hold: Court rejects ∆’s argument. (upon determination that there are no other problems with the K) The unsuspected
existence of an undisclosed principle can supply no ground for the avoidance of a K unless Fraud is proven (and NOT
mistake, which is what we have here).
- Reasoning: Booth made no misrepresentation to ∆.
Finley v. Dalton
-Facts/ID/Proc Hist: ∏-Appellant Finley attempted to rescind selling a 138 acre tract of land to ∆-Appellee Duke Power
Co. (the undisclosed Principle) and Dalton (Agent) by claiming fraudulent misrepresentation or concealment on part of
∆ buyer. ∏ asked directly what Dalton planned to do with the land (who had demanded a quick sale) and Dalton
answered that it was for a long-range timber investment for his children. In reality Dalton was acting as Agent for Duke
Power Co who wanted to use the land for hydroelectric purposes. The land was sold to ∆ for $4100. ∏ claims that for the
actual hydroelectric purposes, the value of the land is at least $27k
- Issue:
- Rule: (a) On Fraudulent Misrepresentation: An informed vendee must limit himself to silence in order to escape the
imputation of fraud…if there is any word or act that suppresses the truth or distracts the other party’s attention from the
real facts, the line is overstepped and the concealment becomes fraud. However, (b) the misrepresentation or
concealment must be Material to the contract and in inducing the vendor to sell.
- Hold: The court affirms for ∆ because ∏ was unable to show that the misrepresentation was material to the contract
thereby inducing ∏ to sell.
- Reasoning: Court also discusses/feels that ∆ had the opportunity (K law) to make as good a deal or bad a deal as he
could.
Notes
Limitations on the Undisclosed Principle
 If a K expressly refers to the agent as a principle, or if the language of the K indicates an intent to treat the agent as the
sole contracting party, the undisclosed principle cannot enforce the K as a party, nor be held liable in such a capacity.
 An undisclosed principle cannot tender its own performance if the third party has a substantial interest in receiving
the performance of the agent.
 If Agent transfers Undisclosed Principle’s property to another the transferee will prevail against the undisclosed
principle if he pays value and takes without notice of the undisclosed principle’s interest. The reasoning is that the agent
is transferring legal title to the property.
B. Liabilities of the Undisclosed Principle

1. Authorized Transactions
- [Rule] An Undisclosed Principle is bound by the K and can be sued by the party contracting with UP’s Agent.
(a) Remedies of the Third Party

- Is entitled to all customary contractual remedies against Undisclosed Principle.
(b) Can the third party sue both the principle and the agent in one suit and get judgments against both, then execution of
against the assets of either or both until paid?
(i) From Restatement Second

- If the third person with knowledge of the facts obtains judgment against either one, he cannot have judgment against the
other, although if he obtains judgment against the agent with no knowledge of the identity of the principle, he can later get
judgment against the principle.
 Election Rule: Traditional American rule did not allow the third party to sue both the agent and the principle, obtain
judgments against them, and execute on the judgments until it receives satisfaction…(ca procedurally sue both but) The
third party was forced to choose from whom it wishes to obtain judgment.
(ii) From Restatement Third (jurisdictions use either/or) -more recent, “better rule”
- Satisfaction Rule: Only the satisfaction of the judgment discharges the liability of an undisclosed principle or an Agent
who made a contract on behalf of an Undisclosed Principle.
 consistent w/ view that a judgment against one person who is liable for a loss does not terminate the claim that the
injured party may have against another party who may also be liable for the loss.
 However, the recovery against both parties may not exceed the amount of the judgment. [Sounds like joint and several
liability? What is the diff?]
2. Unauthorized Transactions
- Can an undisclosed principle be exposed to liability for unauthorized transactions by his Agent?
Watteau v. Fenwick
- Facts/ID/Proc Hist: The doctrine of usual authority was held applicable to such a case also. Humble owned a hotel. He
sold it to the defendants, who retained him as manager. The licence continued to be held in his name, which remained
over the door. The plaintiffs supplied cigars to H, to whom alone they gave credit, believing him to be the owner. They
had never heard of the defendants, who had forbidden H to buy cigars on credit. Upon learning that the defendants were
the owners of the hotel the plaintiffs sued them for the amount outstanding. The county court judge gave judgment in
favour of the plaintiffs and his decision was upheld by the Divisional Court.
- Rule: Once it is established that the defendant was the real principal, the ordinary doctrine as to principal and agent
applies - that the principal is liable for all the acts of the agent which are within the authority usually confided to an agent
of that character, notwithstanding limitations, as between the principal and the agent, put upon that authority.
 Restatement Third abandons the term inherent agency and adopts Watteau v. Fenwick in these terms:
An Undisclosed Principle may not rely on instructions given an Agent that qualify or reduce the agent’s authority to less
than the authority a third party would reasonably believe the agent to have under the same circumstances if the principle
had been disclosed.
VII. Liability of the Agent to the Third Persons
A. Liability on the Contract
1. Liability When The Principle is Disclosed: Special Circumstances

- general rule: An agent for a disclosed Principle is not liable on the contract arranged by the Agent
- Exception: unless there is clear and explicit evidence of the agent’s intention to substitute or superadd his own personal
liability for or to that of his principle.
 Exa: of clear expression of intent in Gigandet language in K stated that undersigner agreed to personally gurantee
payment when corporation fails to pay what is due.
 Exa: of implied intent in Mediacomp industry custom was accepted as an exception.
Copp v. Breskin
- Facts/ID/Proc Hist: ∆-Appellant Breskin law firm hired ∏-Appellee Copp, an expert witness, on behalf of a client.
Before hiring ∏, ∆ advised him that his fees were to be paid by the client. ∏ sent ∆ an initial bill which ∆ paid with a
“trust check” and sent an accompanying letter assuring ∏ that any future charges would be paid within 30 days of his
testimony (∆ claimed to have given this assurance on behalf of client). Client paid some of ∏’s bills directly. After trial
∏ sent ∆ a final bill saying he expected payment within 30 days as previously agreed. ∆ sent letter to ∏ stating that client
only would pay 30% of bill and offered to commence action against client free of charge. ∏ files this action against ∆.
- ∆ argues the general disclosed agency rule, ∆ being an agent of a disclosed principle, is not liable for his principle’s
costs/contractual obligations unless the agent (attorney) expressly or impliedly agrees to be bound to the K.
- Hold: Court rejects application of the general rule, instead applying the exception of Custom, which holds attorneys (as
agent) liable to third party (expert witness here) even though the Principle was disclosed (client).
- Rule: When a litigation service provider contracts with an attorney based on the attorney’s credit, and the atty is aware,
or should be aware of this, it should not matter that the client’s identity is known. The service provider reasonably
expects that the attorney will be responsible, as surety or guarantor of the client’s performance, and any contrary
expectation of the attorney is unreasonable or fraudulent.
 The Custom exception (from Restatement Second of Agency): (a) An Agent may guarantee performance by the
principle by proof of a custom to that effect.” (b) Custom is applicable if both parties are aware of it and neither knows or
should know that the other party has an intention contrary to it [This is arguable by ∆].
- Reasoning: The court notes that application of this rule for attorneys is the modern trend in most jurisdictions. That
formal agency reasoning does not reflect the attorney’s role as strategist in litigation or the common understanding of
litigation service providers…The attorney should be held liable in the absence of a disclaimer b/c the service provider
deals with the attorney, not the client and generally accepts employment based on the attorney’s credit, not the client’s.
 ∏ testified that he relied upon the custom whereby experts look to attys for payment of their fees…and ∆ was aware of
this custom locally.
 The court stated that ∆’s argument that ∏’s fees were to be paid by client does not address the situation where a client
is unwilling to pay, i.e. ∆ should’ve directly addressed this scenario (would’ve saved them).
2. Liability When the Principle is Partially Disclosed or Unidentified
Liability of the Agent, Principle and Third Party when the Principle is an unidentified principle/partially disclosed:
When an agent acting with actual or apparent authority makes a K on behalf of an unidentified principle,
(1) the Principle and the Third Party are parties to the K; AND
(2) the Agent is a party to the K unless the agent AND the Third Party agree otherwise.
Van D. Costas, Inc. v. Rosenberg

- Facts/ID/Proc Hist: ∏-Appellant Van Costas is a contractor, wrote the K entered into with ∆-Appellee Jeff Rosenberg,
1/3 owner and President of Seascape Restaurants, which owned Magic Moment Restaurant. The other parties: Gilbert
Rosenberg – 1/3 owner of Seascape owner of parcel of property where MMR sat; Chris Moore 1/3 owner and VP of
Seascape. Jeff and Chris ran the restaurant. K was for ∏ to remodel the entrance to the restaurant. Jeff signed the K
where appeared “Jeff Rosenberg, The Magic Moment.” Dispute arose over performance and payment. ∏ sues Jeff
individually for payment on the K. ∏ thought that Jeff (and Gilbert) owned the restaurant, knew nothing of Seascape.
 Tr Ct gave summary judgment for ∆ simply reasoning that the restaurant was not owned by Jeff individually but by
Seascape; that ∆ knew he was entering into a K with MMR and not Jeff individually, thus the owners of MMR should be
the correct parties that should be sued.
- Issue:
- Rule: (a) For an Agent to avoid personal liability on a K negotiated on the Principle’s behalf, he must (1) disclose
himself as an Agent; AND (2) give the identity of his Principle; even if the third party might have known that the Agent
was acting in a representative capacity.  The inference is that Agent is the Principle, thus is party to a K unless
Principle is ID’d.
(b) The fact that only the trade name was used in the K is not sufficient disclosure of the ID of the principle so as
eliminate the liability of the Agent.
(c) If the contracting party knows the identity of the Principle for whom the Agent purports to act, the Principle is deemed
disclosed.
- Hold/Reasoning: Court reverses and finds Jeff personally liable on the K entered into with ∏. Stating that Jeff knew the
unidentified Principle (owner of MMR) was Seascape and in order to avoid personal liability on the K he should have
properly disclosed the principle. Also, there is no evidence that ∏ knew or should have known who the true Principle was.
Partially Disclosed Principle

Also hold the Agent liable b/c “The Agent in a partially disclosed setting can always specify the principle but in the
absence of wording making it clear courts infer that the third party’s expectation is that the agent is a party to the K.
- Situation applied where Principle is a corporation -

Benjamin Plumbing, Inc. v. Barnes
- Whitcomb was Director of Response to Hunger Network, Inc., nonprofit corp. entered into K with Benjamin for $10k in
plumbing services, Whitcomb signed K “William K. Whitcomb, Canning Committee – RHN;” Letterhead captioned
“RESPONSE TO HUNGER NETWORK. Only $5k was paid, Benjamin sues WW for personal liability.
- Court said: general rule holding agents contractually liable where the Principle is partially disclosed is the same situation
here thus creating the rule…An Agent is liable where the contracting party us not aware of the corporate status of the
principle…the failure to use the “Inc.” notation is correspondence b/t the Agent and the Third Party or in the K itself is
often critical in determination of whether there is adequate disclosure of corporate status.
VIII. Doctrine of Ratification
From Evans v. Ruth

-Rule: If A assumes to act for B without authority from B, and B subsequently affirms A’s act, it is a ratification and
relates back and supplies original authority for the act. B is bound then to the same extent as if previous authority had
been granted A.
 Ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly
done on his account, the act then is given effect as if originally authorized by him.
 Affirmance: a manifestation of an election by the one on whose account an unauthorized act has been performed to
treat the act as authorized, or conduct by him justifiable only if there is such an election.
Dempsey v. Chambers
- Facts/ID/Proc Hist: McCullock broke window in ∏ dempseys building, while making a coal delivery, which had been
ordered by ∏ from ∆ Chambers. McCullock had not been authorized to make the delivery and was not an employee of ∆
(McCullock was a member of ∆’s household and was always around the coalyard). Owner of coal co. did invoice ∏ for
coal this served as the ratification, thus making McCullock a Servant and ∆ the Master. Thus having been ratified, the
transaction related back to time of delivery of the coal, which was when ∏’s window was broken.
- Hold: (a) The ∆’s ratification of the employment established the relation of master and servant from the beginning of the
transaction. (b) The Master-Servant relation thus existing, makes the master answerable for the torts which he has not
ratified specifically, just as he is for those which he has not commanded, as he would for those which he has expressly
forbidden.
The No Partial Ratification Rule
Rakestraw v. Rodrigues
- Facts/ID/Proc Hist: Joyce Rakestraw (Joyce) is cross-complainant against cross-defendant Rodrigues, who along with
William Rakestraw helped to forge Joyce’s signature on a $75k promissory note and a deed of trust (on her property) in
order to secure a loan from ∏ Acme (brought suit against Joyce when they didn’t receive payment). Rodrigues helped by
getting the notary to notarize the documents (as if Joyce had been there and signed them herself). Joyce endorsed the
$75k check without realizing that she was purportedly liable on the loan and that her property had been encumbered.
Joyce also admitted to learning of the forgeries days after signing the check, claiming ownership of her husband’s
supermarket (where the money was used to pay debts on it), consulted an atty but neglected his advice to report the matter
to the trustee on the deed of trust.
 Rodrigues argues that b/c Joyce ratified the forgeries he is relieved from any liability in damages to Joyce.
- Hold: Court agrees with Rodrigues’ argument.
- Rule: (1) Ratification by a person of an act purportedly done on his behalf not only creates the relationship of principle
and agent but also constitutes approval by the ratifier of the purported agent’s act, relieving such agent of liability to the
ratifier of the act.
(2) Forgeries can be ratified thereby relieving the wrongdoer agent of liability to the principle which would otherwise
result from the fact that he acted independently and without authority.
 (a) Ratification is the voluntary election by a person to adopt in some manner as his own an act which was purportedly
done on his behalf by another person, the effect of which, as to some or all persons, it to treat the act as if originally
authorized by him. (b) A purported agent’s act may be adopted expressly or it may be adopted by implication based on
conduct of the purported principle from which an intention to consent or adopt the act may be fairly inferred, including
conduct which is “inconsistent with any reasonable intention on his part, other than that he intended approving and
adopting it.”
 One cannot ratify only part of the transaction…[From Restatement Second] The purported principle cannot affirm a
sale and disavow unauthorized representations or warranties which the purported agent made to induce it. He cannot
affirm a contract and disavow unauthorized terms which the purported agent included.”
Changed Circumstances Limitation on Ratification

[Restatement Second] when the situation has so materially changed that it would be inequitable to subject the other party
to liability thereon, the other party has the election to avoid liability.
IX. Notice and Notification; Imputed Knowledge
Notice: of the legal consequence which follows after a person has received a notification or has acquitred relevant
knowledge.
Notification: Act intended to give information to another
Knowledge: is subjective, though the evidence to prove it is objective. It is entirely factual
Notification
Deliberate effort to bring some fact to the attention of a person or group of persons, or all present or future persons who
may have or claim an interest in the subject matter.
 Q: Under what circumstances will notification to an agent be effective in binding the principle?
 Exa: re: Clients represented by an atty. Freeman Court upheld a contempt conviction for petitioner’s failure to pay
counsel fees and court costs for divorce after being ordered to do so. Claimed to not have known of the order. But he was
represented in court by counsel when order was made.
- Hold: Court said: “the attorney’s presence created a rebuttable presumption that he had received knowledge and this
could support the finding of fact of knowledge “even if there is contradicting evidence presented.”
- Rule/Reasoning: general rule: that notice to or knowledge possessed by the agent is imputable to the principle applies
to the relation b/t attorney and client. The agent (attorney) has acquired the knowledge of which it is his duty to
communicate to his principle, and the presumption in this relationship is that he has performed that duty.
St. Louis and St. Charles Bridge Co v. Union Elec Light & Power Co.
- Facts/ID/Proc Hist: ∏ owns Bridges, ∆ is Elec. co. they have an agreement, ∆ transmits electricity to St. Charles through
uninsulated high tension wire strung on ∏’s bridge. Agreement also states: that ∆ would indemnify ∏ from liability
resulting from the presence of the wires [Doesn’t this automatically award ∏, there are no conditions re: indemnity] ;
when ∏ needs to do repairs and alterations to bridge, upon Notice given to ∆, ∆ will have a representative in attendance to
guide and instruct the workers maneuvering on the bridge in order to keep a safe distance from the wires.
 ∏ worker is severely injured by while painting bridge, no ∆ representative was present. ∏ settles w/ worker then sues
∆ for reimbursement. ∆ was that there was no notice given to them, ∏ refutes this.
 Facts: ∏ had begun to paint bridge. President of ∏, in a chance mtg at a restaurant was introduced by a mutual
acquaintance to Jones, who was a new manager for ∆. Prez told Jones of his plan to add toll and that he wanted certain
wires moved, also told Jones of the painting that was currently taking place (the whole bridge) even pointing out the
painters which could be seen from the restaurant. Jones told him moving the wires would be expensive but that he would
get him the pertinent info for it later. Jones did not know of the contract agreement b/t ∏ and ∆.
 Thus, ∏ argues that based on presented facts, ∆ had sufficient knowledge and notice to meet the requirements of the
K.
- Issue: Was there sufficient knowledge or notice from ∏ to ∆?
- Rule: knowledge which comes to an officer or agent of a corporation through his private transactions, and beyond the
range of his duties as such officer or agent is NOT NOTICE to the corporation. Notice to an officer or agent of the
corporation applies only:
(1) Where the matter with reference to which the notice is given or acquired is within the scope of his authority and has
some direct connection with his agency; AND
(2) The notice or knowledge comes to, or is possessed by him in his official or representative capacity; AND
(3) Where the officer or agent in the line of his duty ought, and could reasonably be expected, to act upon or communicate
the knowledge to the corporation.
- Hold: The evidence is INSUFFICIENT to show any such notice was given to ∆ corporation of the painting of the bridge
in order to meet the condition of the contract. The conversation or casual notice happened informally, while parties
discussed a business proposition that did not have the remotest connection with the respective rights and obligations of
the ∏ and ∆ under the provision of the K in question.
- Reasoning: The information received by Jones was NOT RECEIVED in his representative or official capacity nor
within the scope of his authority, thus was not imputable to the corporation.
[From Restatement Third]

Notice: A person has notice of a fact if the person: knows the fact, has reason to know the fact, has received an effective
notification of the fact, or should know the fact to fulfill a duty owed to another person, notice of a fact that an agent
knows or has reason to know is imputed to the principle.
 reason to know: a fact reasonably drawn based on the inferences made from the facts already known (may discharge
principle’s duty) vs. should know: (will not discharge principle’s duty)
Notification: A manifestation that is made in the form required by agreement among parties or by applicable law, or in a
reasonable manner in the absence of an agreement or an applicable law, with the intention of affecting the legal rights of
the notifier and notifiee.
Imputed Knowledge (“passed along” or “attributed to”)

- An agent has a duty to use reasonable effort to transmit material facts to the Principle.
Imputation charges a principle with the legal consequences of having notice of the material fact, whether or not the fact
is useful to principle.
 If the AGENT has Actual Knowledge of the fact, the PRINCIPLE will be charged with the legal consequences of
having Actual Knowledge.
 If the AGENT has reason to know a fact, the PRINCIPLE will be charged with the legal consequences of having
reason to know the fact.
- Thus, Imputation prevents the Principle from arguing that the material fact does not apply to him b/c Agent kept silent.
Adverse Interest Qualification

- A principle is not affected by the knowledge of an Agent in a transaction in which the (1) agent secretly is acting
adversely to the principle; AND (2) entirely for his own or another’s purposes.
In re Mifflin Chem Corp.

- Facts/ID/Proc Hist: Mifflin sold denatured alcohol, salesmen collaborated with bootleggers for the purposes of making
alcoholic beverages, thus increasing sales for the Company and commissions for the salesman. Fed govt sues Mifflin to
recover high taxes owed to them from alcohol withdrawn and distributed in violation of regulations.
 ∆ argued that the knowledge of its salesman should not be attributed to them b/c they were acting contrary to the
company’s interests for their own gain.
- Issue:
- Rule: (1) general rule knowledge of an Agent or employee obtained within the sphere of his Agency or employment
will be imputed to the corporation.
(2) The fact that the Agent’s primary interests are not coincident with those of the principle does not prevent the latter
from being affected by the knowledge of the agent if the agent is acting for the principle’s interests.
- Hold: Mifflin was charged with responsibility for the knowledge of its employees.
- Reasoning: Thus, here, court points out that b/c Principle wasn’t being Adversely affected by their Agent’s actions, and
were in fact gaining, they were imputed with their Agent’s knowledge and thus liable.
X. Termination of the Agency Relationship
Termination by Will
- general rule: Authority created in any manner terminates when either party in any manner manifests to the other dissent
to its continuence.
- A Principle has the power to terminate an agent’s authority at any time. However, the termination may breach its
contract with the agent
Some consequences of Termination of an Agency Relationship

- Termination can be accomplished without conflict b/t the parties when (1) the object of the agency is accomplished; OR
(2) the term of the K b/t the Principle and Agent is completed.
- Conflict and litigation currently is taking place when these relationships are treated as an at-will employment
relationship with full-time employment where the Principle decides to end it against the wishes of the Agent.  At-will
employment is assumed to be a K and it is accepted that a K include an implied term of good faith and fair dealing, which
means that a discharge can only be made with good cause.
 Also, now emerging is the tort of wrongful discharge which is nascent and being formed by jurisdictions, some
defining it as any discharge without good cause.
Campbell v. U.S.
- Facts/ID/Proc Hist: Flower bonds (popular b/c they are purchased at cheap price with the incentive to pay fed estate
taxes at higher par rate b/f the bonds even reach maturity) were purchased on decedent ∏ Campbell’s behalf (by his son)
with old power of atty, beginning when he became comatose and shortly b/f he died.
 ∆ Govt argues that the Pwr of Atty lapsed when the decedent became comatose, the purchase of the bonds on his
behalf were ineffective and Campbell was not the owner of the bonds when he died, which is a condition for the early
redemption of the bonds at par to pay estate taxes.
- Issue: Whether the bonds were actually owned by Campbell at his death
Rule:
- Re: Pwr of Atty – In Texas and in most federal courts, becoming comatose does not immediately terminate the power of
attorney and continues effective for some brief period, subject to disaffirmance by the executrix after death.
VS.
- Govt argues Rule from Second Restatement: except as stated in the caveat, the loss of capacity by the principle has the
same effect upon the authority of the agent during the period of incapacity as has the principle’s death.
Caveat: no opinion as to the effect of the Principle’s temporary incapacity due to mental disease.
 The Agent of a person that becomes mentally incompetent to act on his own account or to appoint an agent does not
necessarily lose authority to act for the principle.
- Hold: Court here, takes the stance taken by the Second Circuit from Manny, a case with same circumstances. The court
interpreted the Restatement Second language as depriving agents of capacity only where the incapacity of their
principles is known to be permanent from the outset; mental or physical incapacity where there is a possibility of
recovery makes the interim acts of the agent possibly voidable but NOT automatically void. AND those temporarily
unable to act for themselves should be able to benefit from favorable acts which their agents take during their incapacity
 In this specific case, court allows the purchase and usage of the bonds. The estate did not reject the purchase of the
bonds (which was their right to do).
Notice of Termination (b/t Principle and Agent) to Third Parties
There are three broad classes of Agent:
1. Universal agents hold broad authority to act on behalf of the Principal, e.g. they may hold a power of attorney
(also known as a mandate in civil law jurisdictions) or have a professional relationship, say, as lawyer and client.
2. General agents hold a more limited authority to conduct a series of transactions over a continuous period of time;
and
3. Special agents are authorized to conduct either only a single transaction or a specified series of transactions over a
limited period of time.
For Special Agents

- in ordinary circumstances, no notice of revocation is necessary b/c third parties will not be relying on any custom to deal
with the agent in that way and there is no appearance of continuing authority.
- Rule may be that the reasonable expectations of the third party ordinarily will prevail under the circumstance where a
principle has placed indications of authority in the hands of an agent (whether special or general) and third party relied on
that.
For General Agents

- Principle is required to give third parties notice of termination of the Agent’s authority in order to protect those who
relied on the agent’s authority in the past or who may rely on the appearance of continuing authority .
*How to give Notice? Actual Notice is required to be given to third parties who in the past had given or received credit.
Public notice is sufficient for all others (ads in paper or other reasonable means).
 Expectations of the third party are to be reasonable. Apparent authority is terminated when the third party knows or
has reason to know that the principle does not consent to the act the agent is purporting to have authority to do.
Termination by Operation of Law

- Death by either the Principle or the Agent terminates the agency relationship automatically (terminates actual authority
and apparent authority of an agent to act for principle).
 No notice to third parties relying on good faith on the apparent authority of an agent is required.
[From Restatement Third]

(rejected the rule that the death of the principle revokes the authority of the agent to act on the principle’s behalf)
- While an agent’s actual authority terminates on the death of the principle, that termination is effective only when the
agent has notice of the principle’s death.
- An agent’s apparent authority MAY continue even if the agent’s actual authority has terminated due to the death of the
principle.
XI. The Creation of a Partnership

- general partnership can be created by oral agreement, no forms files, with considerable informality, or even without
realizing it.
The Limited Liability Partnership (LLP)

- Provides for limited liability of partners in general partnership upon filing of a document with the state.
LLP “full-shield” States: (1) no vicarious contractual liabilities of partners AND (2) No vicarious tort liabilities on the
partnership.
Vs.
LLP “Partial-shield” States: No vicarious tort liability on partnership; OR Limit the availability of the LLP only to
certain business, OR both.
 trend is to Full-shield in most states, which is called for by the ULLPA (Uniform LLP Act of 1996), an amendment to
RUPA (revised Uniform Partnership Act of 1994).
Other possible requirements from States:

(1) LLP must maintain minimum insurance requirements (ULLPA does not require this)
(2) LLP must identify itself as such an entity by placing the initials “LLP” in the name of the partnership (Yes - ULLPA)
(3) Filing of Annual Reports (Yes – ULLPA)
(4) Some states say partner will be liable for the tortuous misconduct of “persons under the partner’s direct supervision
and control.” (No – ULLPA)  makes most sense for direct liability (imposing vicarious liability on co-agency
relationship makes no sense under RUPA and also under the UPA it would undermine the limited liability protections of
the statute).
The Uniform Partnership Act (1914) [UPA] and the Revised Uniform Partnership Act (1997) [RUPA]
- Partnership (UPA): An association of two or more persons to carry on as co-owners, a business for profit.
- RUPA is much longer and makes changes to UPA, it makes express much of what is implied in the UPA.
- States make their own changes too in adopting the RUPA, using it more as a Model Act rather than a Uniform Act.
-* UPA serves a dual function:
(1) It establishes certain basic principles of law which operate regardless of any agreement b/t the partners (“mandatory
rules”); AND
(2) It also establishes certain principles that function only in the absence of agreement b/t the partners (“default rules”)
- RUPA also does same, all rules are clearly identified as default, except 9 mandatory rules
[Place these notes in my UPA print out]

Association §6(1)
- Requires voluntary agreement by all the parties, express or implied, involving choice of person (b/c of the potential for
partners to create liabilities for the other partners)
- Each Partner is a general agent of the firm w/ mgmt rights, info rights, dissolution powers
- choice of person can be waived by agreement
Persons §2
- Corporation or another partnership can be a partner
- incompetent persons cannot become partners
Co-Ownership §6
- involves “the power of ultimate control”
- capital can be provided by only one partner
Business §2
- Every trade, occupation or profession…and consists of a series of acts directed toward an end
For profit §6
- Partnership is a branch of commercial law…operation of the act should be confined to assocaitons organized for profit.
Existence of the Partnership §7(4)
- receipt by a person of a share in the profits of a business is prima facie evidence that he is a partner in the business. But
also lists 5 situations where “no such inference shall be drawn.”
Joint Ventures
Arrangements in which two or more parties combine forces to engage in a specific economic activity.
 Joint ventures = isolated transactions vs. continuing enterprises (partnership) – Partnership law is still applied with
little or no modification.
The main/only difference b/t JV and partnerships is: the contractual and tort liability of members of a joint venture may be
more limited than that of partners due to the narrower scope of the activities of a joint venture.
Lupien v. Malsbenden
- Facts/ID/Proc Hist: ∏-Appellee Lupien entered into K with Cragin owner of York Motor Mart who was to construct ∏
a Bradley automobile, total purchase price was to be bout $8k, gave $500 initially then bout $4k 1 week later, ∏
continuously went to YMM to check on status of car, and there he always dealt with ∆-appellant Malsbenden who was
essentially running the place, admitted to using his own personal checks to purchase Bradley car kits, Cragin even
“disappeared” for period of time, and was still at the business 3 years later after commencement of this litigation. ∆ asked
∏ to sign over ownership of his pick up truck, the sale of which would go towards balance, ∏ complied, ∆ also provided
∏ w/ a rental, which was a demo model of the Bradley while ∏’s vehicle order was completed, that vehicle was entrusted
to YMM for resale, and ∆ bought it for ∏’s use. ∏ never received the car he contracted to purchase. ∏ files suit against
∆.
 ∆ argues that his interest in YMM was only as a banker, supplying Cragin w/ $85k w/out interest to finance the
Bradley portion of YMM’s business, w/ the proceeds to be repaid w/ the proceeds of each car sold.
- Rule: [UPA applied here] (a) [from UPA] partnership is an association of 2 or more persons…to carry on as co-owners
a business for profit (b) relationship may be considered a partnership based upon evidence of an agreement either express
or implied. (c) to place money, effects, labor, skill, or all of above in lawful commerce or business with the understanding
that a community of profits will be shared. (d) it is possible for parties to intend no partnership and yet form one if they
agree upon an arrangement which is a partnership in fact, it is of no importance that they call it something else, or that
they even express not to be partners
- Hold: ∆ is a partner, the evidence showed that the Bradley car operation represented a pooling of ∆’s capital and
Cragin’s auto skills w/ joint control over the business and intent to share the fruits of the enterprise.
- Reasoning: (1) ∆’s “total involvement” in the business; (2) $85k loan without interest; (3) ∆ had day to day control of
business, even firing a person; (4) ∆’s interactions w/ ∏ (telling him to sell car, always at shop, Cragin’s disappearance,
Bradley rental purchase)
In RUPA analysis of the formation of a partnership or joint venture weighs these factors:
(1) receipt or right to receive a share of profits of the business;
(2) expression of an intent to be partners in the business;
(3) participation or right to participate in the control of the business;
(4) sharing or agreeing to share:
(A) losses of the business or
(B) liability for claims by third parties against the business; AND
(5) contribution or agreeing to contribute money or property to the business.
* No one factor has an absolute determinative effect and not all factors need to be satisfied.
Spousal Relationship as a Partnership

Lampe v. Williamson
- Facts/ID/Proc Hist: Husband and wife, farmer had business set up as a sole proprietorship, but had help of his spouse.
There is a bankruptcy proceeding. Trustee of the proceeding wants to establish wife’s liability thus is arguing this is a
partnership, evidenced by the wife co-owning the farm equipment, jointly participating in the work and sharing the profits
(some elements of partnership).
- Rule: Trustee bear burden of proving that this was a partnership
- Hold/Reasoning: Court rejects trustee’s argument because they felt that these typical indicia of partnership were blurred
by the interactions of the marital relationship…co-owning property, sharing profits, apparent authority of one spouse
acting for the other are all common to marital relationship. ∆’s testified that no partnership was intended. There was no
other evidence (needed to be more compelling) showing partnership – wife then was entitled to claim tools of the trade
exemption.
Income Tax Considerations – Brief Summary

- Partnerships (unlike Corporations) do not pay federal income tax on the income generated by partnership business.
Instead, each individual partner is taxes directly on his share of the partnership’s taxable income; losses taken on his
personal return.
- The partnership, as an entity, is required to file a return showing its income and losses – it can have an impact on the
individual partner’s tax liability e.g. if a partnership fails to make a favorable tax election, the individual partners are
powerless to take action ontheir own individual returns (what does this mean???)
Apparent Authority
Burns v. Gonzalez
- Facts/ID/Proc Hist: ∆ Gonzalez and Bosquez owned and operated Mexican corporation that sold broadcast time in a
Mexican radio station, in 1957, entered into K w/ ∏ Burns, Burns buying 2 15-min. daily segments of airtime on the
station “so long as the franchise of the radio station remained in force” for $100k, which were paid per the K in 4
installments. Radio station was shut down numerous times, thus the broadcast periods describes in the K were not made
available to ∏ after June 16, 1962. On Nov 28, 1962 Bosquez purported to act on his own behalf and on behalf of the
partnership executed another note w/ ∏ giving ∏ $40k over a 2 year period; the radio station at this point was under
receivership and the broadcast periods ∏ was entitled to under the 1957 K would not be available any more. Both
Bosquez and ∏ recognized one of the reasons for executing the note was for the promise by ∏ that he wouldn’t sue the
partnership.
- Issue:
- Rule: [From §9(1) UPA] (a) Every partner is an Agent of the partnership for the purpose of its business. The act of
every partner (including execution of any instrument in the partnership name) will bind the partnership if such an act can
be classified as an act “for apparently carrying on in the usual way the business of the partnership.” [In Agency, same as
rule that establishes vicarious liability based on apparent authority.]
Unless (1) the partner in fact has no authority to act for the partnership for that particular matter; AND (2) the person with
whom he is dealing with knows that the partner has no such authority.
(b) Liability imposing language (§9(1)) indicates that the burden of proof is on the person seeking to hold the non-
participating partner accountable.
[Court states the Agency laws here that influenced the UPA laws and used the agency laws to help analyze the facts of the
case and the conclusion drawn]
Trading or Nontrading partnership? [Agency Law]
Trading partnerships have implied authority to bind the partnership to commercial paper. Non-trading partnerships do
not.
 If a partnership contemplates the periodical or continuous or frequent purchasing, not as incidental to an occupation,
but for the purpose of selling again the thing purchased, it is a trading partnership, otherwise it is not.
 In Texas case law, similar language: the implied/apparent authority to enter into commercial negotiable instruments
came when the partnership business contemplated “the periodical or continuous or frequent purchasing, not as incidental
to an occupation, but for the purpose of selling again the thing purchased.” The nature of the partnership must “make
frequent resort to borrowing a necessity…for the advantageous prosecution of the business.”
- Hold: (1) Bosquez had no real authority to bind the partnership to a negotiable instrument, this was unknown to Burns,
thus it will need to be shown that entering into the new K can be classified as an act “carrying on in the usual way the
business of the partnership”.…
(2) There is no evidence relating to manner in which firms engaged in the sale of advertising time on radio stations usually
transact business…specifically, no evidence as to whether or not the borrowing of money or execution of a negotiable
instrument was incidental to the transaction of business…
(3) Thus, Court must determine who has the burden of proof concerning the “usual way” of transacting business…And
determines that it is Burns.
The Court concludes that Bosquez had no Apparent Authority to enter the partnership into a commercial paper
instrument. (Gonzalez was not liable upon other grounds anyway). Nothing to show that the transaction of such business
required “periodical or continuous or frequent purchasing” or made “frequent resort ot borrowing a necessity…for the
advantageous prosecution of a prosperous business.”
- Reasoning: Bosquez was not the managing partner (as ∏ argued) and the record shows that all instruments significantly
affecting the partnership were signed by both Gonzalez and Bosquez.
Rights and Duties among Partners – Leaving the Business
Meehan v. Shaughnessy
- Facts/ID/Proc Hist: ∏ Meehan & Boyle partners in law firm left to start their own firm, sued their old firm Parker
Coulter to recover money they claim the ∆ owed them under the partnership agreement; ∆ counterclaimed that ∏ violated
their fiduciary duties, breached the partnership agreement and tortuously interfered with their advantageous business and
contractual relationships – asserting improper conduct by ∏ taking cases and clients from the firm and inducing
employees to join the new firm. Rumors of leaving became apparent, ∏ denied them at first but then gave notice that they
were leaving within 1 month by placing letter in every partner’s desk. Partnership agreement called for 3 month notice
period, was waived by one of the partners. ∏ removed approximately 142 of 350 pending contingency cases, 39 coming
from attys that were ∆ clients, not old clients of ∏. Partnership agreement calls for allocation to departing partner of a
share of the firm’s current net income , and return of capital contributions. Also, that the partner has the right to remove
any case which came to the firm “through the personal effort or connection” of the partner and is entitled to retain all
future fees in the case except a fair charge owed to the dissolved firm. Partnership agreement said they are to give list of
clients they plan to take to firm.
- Hold: (1) Court disagrees with ∆’s argument that ∏ breached its fiduciary duty not to compete by setting up a secret law
firm…[Rule] fiduciaries may compete with the entity which they owe allegiance provided that in the course of their
arrangements they do not otherwise act in violation of their fiduciary duties.”
(2) Court agrees with ∆’s argument that ∏ breached its fiduciary duty by unfairly acquiring consent from clients to
remove cases from ∆. Court felt that ∏’s preparation for obtaining client’s consent, secrecy concerning which client’s
they intended to take, substance and method of their communications with clients, obtained an unfair advantage over their
former partners in breach of their fiduciary duties. [Rule UPA § 20]: A partner has an obligation to render on demand true
and full information of all things affecting the partnership to any partner.
[Reasoning] on three occasions ∏ denied that he was leaving to his partners; during period of secrecy ∏ made
preparations for obtaining removal authorization from clients; used their position of trust and confidence to disadvantage
of ∆: delay in giving client list, immediate communication with clients and referring attys.
(3) The content of the letter sent to clients was unfairly prejudicial against ∆. [Reasoning]: no choice given to clients of
representation, i.e. one-sided announcement on ∆ letterhead; prevented their firm from presenting their services to clients
*By engaging in these activities ∏ violated the duty of good faith and loyalty which they owed their partners.
(4) Correct Remedy (for cases ∏ unfairly removed) Issue – [Rule §21 UPA] Every partner must account to the partnership
for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any
transaction connected with the formation, conduct or liquidation of the partnership. [Hold] Partner must account for any
profits which flow from the breach of fiduciary duty. ∏ must give ∆ any profits they receive in addition to paying the
partnership a fair charge on the cases pursuant to the agreement for whatever clients left the firm as a result of ∏’s breach.
The Duty of Care
Bane v. Ferguson
-Partner in law firm retired, had pension plan in firm, there was an agreement that if firm dissolved, pension would cease.
Firm dissolved, ∏ claims due to negligent mismanagement (no deliberate wrongdoing) (b/c of an attempted merger which
turned disastrous, members of the firm acted unreasonably in doing this also in purchase of PCs and other equipment and
in leaving the firm)
- Court did not let him collect, court rejected 4 arguments (only 2 apply to Agency/UPA):
1) ∆’s acts of mismanagement that resulted in dissolution of firm violated the UPA §9(3)(c) “unless authorized by the
other partners…one or more but less than all the partners have no authority to: do any…act which would make it
impossible to carry on in the ordinary business of the partnership.
Court rejects this argument, the provision is inapplicable. [Reasoning] (1) b/c ∏ (Bane) ceased to be a partner, thus he
can’t claim this as a cause of action but also (2) the purpose of the provision is not to make negligent partners liable to
persons with whom the partnership transacts (i.e. Bane) but to limit the liability of the other partners from the
unauthorized of one partner…to protect the partners!
2) ∏ argues that ∆ owed him a fiduciary duty. Again only applies when he’s part of firm. [Rule] A partner is a fiduciary
of his partners but not of his former partners, for the withdrawal of a partner terminates the partnership as to him.
 Additionally, Even if ∆ were fiduciaries of ∏ (other arguments ∏ might make), the business-judgment rule would
shield them from liability for mere negligence in the operation of the firm, just as it would shield a corporation’s directors
and officers, who are fiduciaries of the shareholders.
 Business-Judgment Rule:
When a partner alleges another has violated his fiduciary duty, the allegedly violating partner (has the burden of proof)
must show he acted: (1) in good faith; (2) with the care an ordinary prudent person in a like position would exercise under
similar circumstances; AND (3) in a manner the partner reasonably believes to be in the best interest of the partnership.
 Rule will NOT apply if the partners have engaged in self-dealing, fraud, or other unconscionable conduct.
- Common Law of Agency requires an Agent to indemnify the principle for losses caused by the Agent’s negligence.
XII. Dissolution of a Partnership

- Dissolution: point where partners cease to carry on business together, still partners but no longer carrying on as partners,
collect the assets, pay the debts, no new business during that period, collect debts, pay assets until end.
Then liquidation, whatever is left is now distributed to partners, winding up then termination. Once all the affairs of
the partnership have been wound up, liquidated, and distributed; now can have termination of the partnership.
- No commonly, some of partners may continue in practice, after dissolution of partnership, many partnership agreements
have agreements for new partnerships, usually on the same terms as the old partnership, usually there will be provisions
for the buying out of any deceased or dividing interest in the partnership. It is a new partnership on whatever terms
agreed to, old partnership no more.
Dreifurst v. Dreifurst
- Facts/ID/Proc Hist: ∏ (multiple) & ∆ were partners, all brothers, no written partnership. It operated two feed mills in
WI. ∏ served notice to ∆ for dissolution and wind-up of partnership. It commenced but the partners were unable to agree
to the winding-up.
 Persuant to UPA §38(1) ∆ wanted the partnership/properties sold, remaining brothers could bid on property forming
new partnership without him and ∆ partnership equity could be satisfied in cash.
 Tr Ct. instead divided the partnership in kind giving ∆ one property and the brothers the other property
- Issue: Whether partner, upon dissolution, can force the sale of partnership assets even without a partnership agreement.
- Rule: (1) UPA §38(1) When dissolution is caused in any way, except in violation of the partnership agreement…each
partner may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net
amount owing to the respective partners.
(2) UPA § 37 Unless otherwise agreed, partners who have not wrongfully dissolved a partnership have a right to wind up
the partnership.
(3) In Kind distribution of assets is permissive only in very limited circumstances, really only if agreed to by all the
partners. One case in MI allowed only a rare exception and i.e. situations where: (1) there were no creditors to be paid
from the proceeds, (2) ordering a sale would be senseless since no one other than the partners would be interested in the
assets of the business, AND (3) an in-kind distribution was fair to all partners. Not the case here!
- Hold: Neither parties wrongfully dissolve the partnership; winding up requires liquidation to pay creditors per UPA; no
in kind distribution allowed.
Liability of an Incoming Partner

§17 and §41(7) of UPA incoming partner is liable for the existing debts of the business but such liability “shall be
satisfied only out of partnership property.”
- new partners assume responsibility for obligations that benefit the firm during their tenure
- If partnership is LLP full-shield state, there would be no liability for the incoming partner even under the executory
portion of the K, absent an assumption of liability.
Liability of Withdrawing Partner

To creditors §36(1)-(3) the rights of creditors are not affected by agreements among the partners to which the creditor is
not a party…
The Limited Partner

The Control Question
Holzman v. De Escamilla
- Facts/ID/Proc Hist: Russel and Andrew were limited partners to Hacienda Farms; ∆ De Escamilla was the general
partner, limited partnership. It goes into bankruptcy, ∏ Holzman is appointed trustee overseeing the bankruptcy, sues all
3 as geneal partners liable to the creditors of the partnership.
- Issue:
- Rule: From § 7 of ULPA (Uniform Limited Partnership Act) A limited partner shall not become liable as general partner
unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in control of the business.
- Hold: Russel and Andrew are considered now general partners by establishing control of the business and are liable to
creditors as such.
- Reasoning: (1) two men had absolute power to withdraw all partnership funds in the banks without the knowledge or
consent of the general partner.
(2) R or A could take control of the business from De Escamilla by refusing to sign checks for bills contracted by him and
thus limit his activities in managing the business.
(3) R&A required de Escamilla to resign as manager and selected the successor.
(4) R&A were active in dictating the crops to be planted, some against the wishes of de Escamilla.
 Usually a limited partner’s liability is only to the extent of their investment, no personal liability.
 Rule applied in this case is essentially punitive, can’t have your cake and eat it too, if any parties relied on you having a
control of the business, will have personal liability if this is found out. If third party sees the limited partner in control,
can hold him liable personally.
XIII. The LLC (Limited Liability Company)

- Its new
- for co-owners of an unincorporated business, make proper filing with state, the LLC offers:
(1) freedom from personal liability for the debts of the business,
(2) the option to manage the business,
(3) tax advantage of partnership status, i.e. income of a business will pass through directly to its owners, without separate
taxation at the entity level
(4) owners of LLC enjoy limited liability – owners remain liable for personal wrongdoing but NOT vicariously liable for
the contract or tort obligations of the business. (these are same immunities that shareholders of a corporation enjoy)
 offers a flexible form of doing business, none of the formalities of the corp. unless the owners choose to introduce
formalities, can structure any way they wish. Many states provide for a choice of management: member-manager
(similar to partnership) or manager-manager (similar to limited partners).
 Diff b/t LLP and LLC? LLC is seen as an improvement over the limited partnership b/c it allows for the exercise of
managerial powers without the risk of personal liability for the debts of the business, a status which the limited partner
does not fully enjoy.
 LLC is an improvement over the corporation in some situations b/c: (1) it can be run more informally and (2) the
double taxation of operating in corporate form is avoided.
 An improvement over an S Corporation b/c the organization and operation are far less restricted.
 Uniform act now – ULLCA (Uniform Limited Liability Company Act of 1995)
The Creation of an LLC

- Articles of organization are to be filed with the state (many states allow it to be formed only by 1 person – taxation
similar to sole proprietorship here)
- Owners of LLC called “members,” name of entity must contain letters “LLC,” most states require filing of annual
reports (if don’t administrative dissolution will follow).
- After filing, members typically enter into an “operating agreement” which details the relationship among the members.
Lack of an operating agreement is not fatal to LLC; ULLCA only states that member may enter into an operating
agreement, subsequently, default provisions will apply. However, the operating agreement is a very important part of
LLC documentation.
 LLC is typically funded by contributions from members, which may include tangible property or other benefit of the
company, including K for services performed.
- States may allow converting an existing entity or sole proprietorship into an LLC.

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Agency & Unincorporated Businesses Outline

I. The Agency Relationship

Restatement Third of Agency – def of Agency

Explan: (2) Agent is subject to the Principle’s Control

Explan: (3) Agent consents to act for Principle

A. Duties of Principle to Agent – Duty to Deal Fairly and in Good Faith

Taylor v. Cordis Corp

B. Duties of Agent to Principle

1. Duty of Good Conduct and to Obey

2. Duty to Indemnify Principle for Loss Caused by Misconduct

4. The Fiduciary Duties of Agents

(b) Duty of Care

Loyalty During the Relationship

*Following case there is no express contractual term speaking to the issue.

III. Vicarious Tort Liability

The Master-Servant Relationship

Kane Furniture Corp v. Miranda

Hunter v. R.G. Watkins & Son, Inc.

Limitations to the Independent Contractor Exception (2 Exceptions discussed)

Gordon v. S.M. Byers Motor Car Co.

Second Restatement for Scope of Employment

Clover v. Snowbird Ski Resort

Bremen State Bank v. Hartford Accident and Indemnity Co.

Lisa M v. Henry Newhall Memorial Hospital

Restatement Second § 219(2)(d)

Costos v. Coconut Island Corp.

IV. Contractual Powers of Agents

Express Authority (& Power of Atty)

Van Wedel v. McGrath

Sauber v. Northland Insurance Co.

[From class notes]:

V. Fraudulent Acts of Agents

Elements of Fraud (all 5 needed)

Entente Mineral Co. v. Parker

VI. The Undisclosed Principle

Kelly Asphalt Block Co. v. Barber Asphalt Paving Co.

B. Liabilities of the Undisclosed Principle

(a) Remedies of the Third Party

(i) From Restatement Second

VII. Liability of the Agent to the Third Persons

A. Liability on the Contract

1. Liability When The Principle is Disclosed: Special Circumstances

2. Liability When the Principle is Partially Disclosed or Unidentified

Van D. Costas, Inc. v. Rosenberg

Partially Disclosed Principle

- Situation applied where Principle is a corporation -

VIII. Doctrine of Ratification

From Evans v. Ruth

The No Partial Ratification Rule

Changed Circumstances Limitation on Ratification

IX. Notice and Notification; Imputed Knowledge

[From Restatement Third]

Imputed Knowledge (“passed along” or “attributed to”)

Adverse Interest Qualification

In re Mifflin Chem Corp.

X. Termination of the Agency Relationship

Some consequences of Termination of an Agency Relationship