PRINCIPAL AND THIRD PARTY
Liability of Principal
Sec. 13. Scope of agent's authority. The principal is respon-
sible for those acts of the agent which arej^|ormed L_wilhin_the
scope of his authority. Stating the rule in a negative form, he is
noFTTable for the conduct of the agent when the latter exceeds his
actual or ^p^ent^authqrity. The reaf difficulty arises when an
attempt is made to ascertain the scope or limits of the agent's
authority in any particular instance.
Certain general principles have been worked out, however, and
may be used as signposts to aid in determining the powers created
by the appointment of different agents. Without question, the
agent possesses all those powers which are expressly conferred upon
him. In addition, he possesses other powers known as incidental
powers which are required for carrying out the major purpose of
the agency. 1
To illustrate: P appoints A to act as his agent to sell a certain
automobile for $600. As an incident to the authority conferred,
A has power to enter into a written contract with the purchaser and
sign P's name to the agreement. Whether he has any authority to
make express warranties or to sell on credit instead of for cash are
questions which depend on the rules set forth in the following sec-
Sec. 14. Custom and usage. The confines of an agent's powers
may be broadened or narrowed by the existence of general usage or
custom in the locality in which the agent operates. Thus, the
answer to the question suggested in the previous section concerning
the agent's power to sell on credit may be said to depend upon the
custom of the locality.
Furthermore, the custom of a particular line^oOillsiness has an
important influence on the authority of the agent. 2 For example,
a sales agent might well have power to warrant the quality of fish
to be delivered, but might not possess an implied power to warrant
the quality of a pair of rubber boots.
The customs of the particular principal in the conduct of his
business have an important bearing on the incidental powers of his
agent. Thus, generally speaking, a departmental buyer for a large
mercantile establishment possesses no authority to bind his princi-
pal by a contract of purchase. His business is to select needed
goods, subject to the approval of some superior official. However,
a well-defined custom of P to give all buyers power to purchase
could be relied upon in a special case, although it later appeared
that no such authority had been delegated to the agent involved.
Sec. 15. Secret limitations. It is said that secret limitations
imposed upon the powers of an agent do not bind third parties
unless their attention has been drawn to them. In other words the
third party, having established that an agency exists and having
determined in a general way the limits of the authority, is not
bound to explore for unexpected and unusual restrictions. He is
justified in assuming, in the absence of contrary information, that
the agent possesses those powers which like agents customarily
have. 3 Thus, an instruction not to sell to a certain individual, or
not to sell him on credit, could not affect the validity of a contract
effected by an agent with a third party, although the agent might
be liable to the principal for any resulting damages.
Sec. 16. Powers enlarged by emergency. An existing emer-
gency which necessitates immediate action on the part of the prin-
cipal or his representative may add sufficiently to the agent's
powers to enable him to meet the situation. However, if time per-
mits and the principal is available, any proposed remedy for the
difficulty should be submitted to the principal for approval. 4 It is
only when the principal is not available that the powers of the
agent are extended. Furthermore, the agent receives no power
greater than that sufficient to solve the difficulty. Thus, the power
of an agent to borrow money on the strength of his principal's credit
is rarely implied. Suppose, however, that a C. 0. D. shipment
arrives for the principal during his absence and money is not avail-
able to pay for the goods. Clearly, his representative in charge of
the business might borrow sufficient funds to pay for the goods and
thus avoid demurrage charges and other possible losses. The prin-
cipal would not be liable for any excess borrowed beyond that re-
quired to pay for the particular shipment.
Sec. 17. Notice to agent. Notice or knowledge acquired by an
agent while acting within the scope of his authority binds the prin-
cipal. This fact is true, because the agent is the principal's other
self, and, therefore, what one knows, the other knows. For the
principal to be bound, the notice must have been acquired by an
agent who represented the principal in regard to the particular sub-
8 Hichhorn Mack & Co. v. Bradley, 1902, 117 Iowa 130, 90 N.W. 592; p. 554.
4 The Terre Haute & Indianapolis R.R. Co. v. McMurray, 1884, 98 Ind. 358; p. 555.
PRINCIPAL AND THIRD PARTY 115
ject matter involved. 5 Thus, an agent, who is acquiring property
for his principal and has knowledge of certain unrecorded liens
against the property, takes the property for his principal subject
to those liens. Knowledge of some other agent who had never
represented the principal in the particular transaction, and who did
not receive the notice definitely for his principal, could not affect
the principal's interest.
Considerable dispute has arisen as to whether notice acquired by
an agent before he became such can affect the principal. The
better view is that notice which is acquired before the creation of
the agency and is later retained by the agent while representing his
principal is notice to the latter.
Notice to the agent, where he is under a duty to some third party
not to disclose the information, does not affect the principal. Fur-
thermore, notice to the agent, combined with collusion or fraud be-
tween him and the third party which would defeat the purpose of
the notice, would not bind the principal. Thus, notice by a third
party of an unrecorded mortgage on property, where the agent
agreed not to disclose the mortgage to his principal because of a
certain compensation, would not subject the property to a lien in
the hands of the principal.
Sec. 18. Real estate broker. The ordinary real estate broker
possesses no authority, in the absence of an express grant, to enter
into a contract for the sale of property listed with him. It is his
business to find a party who is willing to purchase the property
upon the proposed terms. The owner reserves the right to contract
or not, as he sees fit, at the time the broker's prospective buyer is
The same is true of many solicitors often called salesmen
whose authority is limited to obtaining orders for merchandise
which are subject to approval by the principal. If such a limita-
tion conforms to the custom or usage, the buyer's contract is in-
effective until it has been approved by the seller.
Sec. 19. Right to collect. The power of an agent to collect a
bill owed to his principal may not readily be implied. Thus it has
been held that possession of a statement upon the principal's bill-
head and in the principal's handwriting did not justify an assump-
tion of such authority.
A question of considerable difficulty is encountered concerning
the power of a salesman to collect. Clearly, the agent behind the
counter who sells the goods has an implied power to collect for
People ex rel. Carr v. Gullborg, 1927, 324 111. 538, 155 N.E. 324; p. 556.
them at the time of the sale. If, however, the sale is on credit, no
power exists to collect at a later date unless the business is a rela-
tively small one in which the agent performs a rather general
The agent who delivers goods which have been sold for cash un-
doubtedly has a right to collect all payments due at the time of
delivery. Otherwise the ordinary delivery boy has no authority to
collect unless it is expressly conferred or arises through custom.
The traveling salesman who covers certain designated territory
for his principal and merely solicits orders has no authority to col-
lect as payments fall due, except those payments to be made at the
time the order is obtained. 6 In the absence of express authority,
payments made to such agents, which fail to find their way into the
principal's possession, may again be collected from the debtor.
Authority to collect gives the agent no authority to accept any-
thing other than money in payment. He is not empowered to
accept negotiable notes or property in settlement of an indebtedness
unless expressly authorized. It is customary to accept checks as
conditional payment. Under such circumstances the debt is not.
paid unless the check is honored. If the check is not paid, the
creditor is free to bring suit on the contract which gave rise to the
indebtedness or to sue on the check, at his option.
Sec. 20. Purchase on credit. An agent who is given special
authority to purchase is limited to the quantity and quality of
goods set forth by the principal. Such limitations imposed upon
a general purchasing agent at a particular occasion would, however,
amount to secret limitations and would not, therefore, be effective
against innocent third parties. A general agent placed in charge of
a business presumably has power to purchase either on credit or for
cash. If the principal provides him with cash and instructs him
not to purchase on credit, the majority holds that the principal is
not liable for goods purchased on credit. 7 This rule is true only
where the agent has not in some manner been held out as possessing
Sec. 21. Written agreements how executed. The principal
is liable upon all contracts made by the agent so long as they relate
to matters within the scope of his authority and are properly exe-
cuted. So far as simple contracts are concerned, although the sig-
nature does not indicate definitely who the real contracting party is,
most of the states permit the use of parol evidence to show the
intention of the agent and the third party. 8 Without question this
Zazzaro v. Universal Motors, 1938, 197 Atl. 884; p. 557.
7 Americus Oil Co. v. Gurr, 1902, 114 Ga. 624, 40 S.E. 780; p. 558.
8 Goodenough v. Thayer, 1882, 132 Mass. 152; p. 558.
is true whenever the signature is ambiguous. It is possible, how-
ever, for the third party to desire to contract with the agent alone
and on the strength of his credit. Where such is true, the principal
is not liable.
There is a rule of law relating to negotiable instruments to the
effect that no one can be held thereon unless his name is attached
thereto. Because of this fact, the agent should exercise care to see
that any negotiable paper executed by him bears his principal's
name and his own, preceded by "by" or "per," following his princi-
pal's. If this procedure is not followed the ultimate holder of the
paper may be able to hold both the principal and the agent, or the
agent alone. Although considerable conflict exists, according to
the law of most states parol evidence may be introduced to explain
a signature to negotiable paper which is clearly ambiguous. Some
states hold that unless the instrument as a whole explains the sig-
nature, the agent shall be held liable.
Sec. 22. Undisclosed principal's contracts. For various rea-
sons a principal often desires to hide his identity. In such in-
stances he appoints an agent to act for him ; the agent enters into
all contracts in his own name, leaving the third party unaware of
any principal. Such agreements are always entered into on the
strength of the agent's credit, as no principal is disclosed. Al-
though such is the case, the third party, upon learning, of the prin-
cipal's identity, may elect to collect from the principal rather than
from the agent. 9 The principal is responsible for all contracts en-
tered into by the agent within the scope of the agent's authority.
Furthermore, even though the agent has been definitely limited,
the courts hold the principal liable for acts which would have been
within the apparent scope of the agent's authority had the principal
The undisclosed principal is never liable upon a negotiable in-
strument signed by his agent, as his name does not appear thereon.
It is possible in many such cases for the third party to waive the
note and sue upon the agreement which furnished the consideration
therefor, thus avoiding the difficulty encountered by a suit on the
note or bill of exchange.
Sec. 23. Settlement between principal and agent. In the pre-
ceding section it was indicated that the third party, after learning
of a principal's interest in any transaction, might elect to look to
the principal for performance. Suppose, in such a case, that the
principal supplied the agent with money to purchase the goods, but
"Kayton v. Barnett. 1889, 116 N.Y. 625, 23 N.E. 24; p. 559.
they were delivered to the agent on the strength of his own credit.
What should be the result? It is clear, under such circumstances,
that the principal is relieved of all responsibility. A slightly dif-
ferent problem arises where the principal settles with the agent
after the contract is made and the goods are delivered, but before
his disclosure to the third party. Any bona fide settlement before
disclosure apparently relieves the principal. A settlement cannot
have this effect, however, when it is made after the third party has
learned of the existence of the principal and the principal is aware
of that fact.
Such a rule seems to be fair to the third party, in that it gives him
all the protection which he originally bargained for, and at the same
time helps the principal, in that it protects him against a second
demand for payment.
Sec. 24. What is election. Election means choice, and a choice
becomes possible only when the third party learns of the existence
of a principal. 10 If a settlement has taken place previously, no
election is possible; otherwise, the third party may look to either
the agent or the principal for performance until such time as he
definitely elects to hold one or the other. No conduct on his part
which precedes the disclosure of the principal can constitute an
tained againsFtRe agenTl^fqi^jd^
party may evidence his election by
obtaining a judgment against one of the parties, or by making an
express declaration of his intention. It has been held that the
sending of a statement to one of the parties does not indicate an
election. Most states also hold that the receipt of a negotiable
instrument from one of them does not show an election. The mere
starting of a suit against one of the parties has been held insufficient
to cause an election. From these illustrations it can be seen that
very definite action is essential to constitute an election. The third
party is usually free at any time to sue the particular party whose
credit is best.
Liability for Agent's Torts
Sec. 25. Negligent acts. The principal becomes liable to third
parties for any damage occasioned them by the negligence of the
agent so long as the latter is acting in the course of his employ-
ment. Should the agent be engaged in his own business when the
tort is committed, having left temporarily his principal's business,
the principal is relieved of any liability. The fact that he may
10 Lindquist v. Dickson, 1906, 98 Minn. 369, 107 N.W. 958; p. 560-
PRINCIPAL AND THIRD PARTY 119
have been in the possession of his employer's vehicle does not ex-
tend the liability of the principal. 11 The real test is: Was the
agent about his principal's business when the tort was committed?
The mere fact that he has combined his own with the principal's
business does not release the principal, unless the agent has quite
definitely departed from his principal's business at the time of the
The principal cannot avoid liability by showing that he has in-
structed the agent not to do the particular act complained of. 12
Neither is he released by evidence that the agent was riot doing the
work his principal had instructed him to do, where the agent had
misunderstood the instruction. So long as the agent is attempting
to follow out his principal's business, the principal is liable.
Sec. 26. Willful acts. Thus far attention has been given to
a situation in which the third party is damaged by negligent con-
duct of the agent. Suppose, however, the agent willfully and de-
liberately injures the third party. Is the principal liable? Clearly,
if the willful misconduct of the agent has nothing to do with his
principal's business and is animated entirely by hatred or a feeling
of ill-will toward the third party, the principal is in no respect
liable. Where the predominantjnotive _is_ notjto work off a per-
sonal gru3ge7T^ his principal's interests^ it iias
beenTHeld that the principal IsTiaBTer
Tufthermore, where the principal lias invited the public to his
premises, it is said that he owes them a special duty of protection
from the misconduct of his employees. Thus, the proprietor of a
business is liable for an unprovoked attack upon a customer by one
of his employees. Again, if the agent has been intrusted with the
use of physical force in the performance of his duties, the principal
becomes responsible for an excessive use of the force.
Sec. 27. Notice in event of termination. Termination of the
agency, as explained elsewhere, may take place by act of the parties
or by operation of canadian law. If the parties by their own action have
terminated the agency, it is the duty of the principal to notify all
third parties, who have learned of the existence of the agency, of
its termination. 13 Those entitled to such notice may be divided
into two groups: (1) those who have previously relied upon the
agency by dealing with the agent; and (2) those who have never
previously dealt with him, but who, nevertheless, have learned of
the agency. The principal's duty to the first class can be satisfied
only by the actual receipt of notice by the third party. He satis-
11 Jones v. Cook, 1922, 90 W.Va. 710, 111 S.E. 823; p. 561.
"Cosgrove v. Ogden, 1872, 49 N.Y. 255, 10 Am. Dec. 361; p. 562.
18 Meeker v. Mannia, 1896, 162 111. 203, 44 N.E. 397; p. 563.
fies his duty to the second group by giving public notice, such as
newspaper publicity, in the location involved. If any one of the
second group, not having seen the newspaper account of the termi-
nation, relies upon the continuation of the agency to his detriment,
he has no cause of action. If a member of the first group has not
received direct notice from the principal, but has learned indirectly
of the severance of relation or of facts sufficient to place him on
inquiry, he is no longer justified in extending credit to the agent.
Where the agency is terminated by action of lawyer, such as death,
insanity, or bankruptcy, no duty to notify third parties devolves
upon the principal. Such matters receive publicity through news-
papers, official records, and otherwise, and third parties normally
become aware of the termination without the necessity for addi-
Liability of Third Party
Sec. 28. Contracts for disclosed principal. The disclosed prin-
cipal may sue the third party upon any contract made by the agent
for the former's benefit. This rule applies to all simple contracts
in which the principal is the real party in interest, despite the fact
that they are made in the agent's name. Furthermore, any con-
tract made for the benefit of the principal, although the agent acted
outside the scope of his authority, entitles the principal to per-
formance, provided the contract has been properly ratified before
Sec. 29. Undisclosed principal. The undisclosed principal is
entitled to performance by third parties of all simple contracts
made for his benefit by the agent. In the ordinary case, it is no
defense for the third party to say that he entered into no contract
with the principal. Where, however, the contract is one which
involves the skill or confidence of the agent, and which would not
have been entered into but for this skill or confidence, its perform-
ance may not be demanded by the principal. In other words,
whenever a contract made for the benefit of an undisclosed princi-
pal is such that it cannot be assigned, the principal cannot demand
In all cases the principal takes over the contract subject to all
defenses which the third party could have established against the
agent. 14 Thus, if the third party contracts to buy from such an
agent, and expects to be able to set off an account which he has
against the agent, he has this same right of setoff against the undis-
14 F. T. Banking Corp. v, Gerseta Corp,, 1923, 237 N.Y, 265, 142 NJB. 607, 31 Ai JR.
732 j p, 663,
PRINCIPAL AND THIRD PARTY 121
Review Questions and Problems
1. For what acts of the agent is the principal responsible? What is
the effect of custom and usage on the powers of the agent?
2. Mrs. G owned a store and placed her son in general charge thereof.
She gave him very definite instructions not to enter into any contracts for
advertising without her consent. Nevertheless, he entered into a contract
for advertising, which would compare favorably with advertising in othir
stores of like size. Is the mother liable?
3. A operated a department store and for each department there
was a party known as the buyer, although he possessed no actual author-
ity to purchase. The duty of each buyer was to select the goods and
submit his choice to the management for approval. T sold an order of
goods to one of the buyers and the goods were shipped without the ap-
proval of the management. Was A liable?
4. What effect has an emergency upon the powers of an agent? Are
there any limitations upon the powers of an agent under such circum-
5. One A was the traveling salesman for P. He sold and delivered to
T goods amounting to $300. At the time of delivery he collected the
sale price, but failed to turn it in to P. Will T have to pay again?
Would the result be the same if P had shipped the goods and A had col-
lected at the end of the month? Suppose A had sold the goods in ex-
change for groceries and had used the groceries. Would P have been
able to collect again of T?
6. A, while acting as traveling salesman for B, is informed of the dis-
solution of the firm of X & Y. Later A, being now employed by P, sells
goods to F. P assumes that X is still a partner, inasmuch as the same
firm name is continued. Is P charged with notice of the dissolution?
7. What are the duties of a real estate broker? May he enter into
a binding contract of sale?
8. Has a purchasing agent any implied authority to purchase on
credit? Suppose the agent is one in general charge of a business. What
is the result if the principal furnishes such an agent with cash to carry
on the business?
9. Is the principal always liable on a written contract made for his
benefit regardless of how the agent signs? Who is liable on an ordinary
contract to which the signature is ambiguous? How should negotiable
instruments be signed where an agent is acting for his principal?
10. A was the purchasing agent of P for the purpose of buying poultry
and farm produce. In all his transactions with the farmers A acted as
the principal and purchased on the strength of his own credit. A failed
to pay for certain of the produce purchased. The farmers, having ascer-
tained that P was the true principal, seek to hold him. May they do so?
Suppose P had previously settled with -4?
11. What is meant by election? May election take place before the
principal is disclosed?
12. A y a delivery boy for P, was instructed never to drive the truck over
fifteen miles an hour and never to drive on the left side of the street.
While disobeying both of these instructions, A ran into and injured T.
Assuming that A was engaged in delivering goods for P at the time of the
accident, is P liable to T?
13. P ordered A to make collection from T of the final payment on a
diamond ring and instructed him, if he could not obtain payment, to
repossess the ring. T refused to make the payment or to surrender the
ring. A became enraged and in the fight which ensued, seriously injured
T. T sued P in an attempt to recover damages for the injury. Should
he have been permitted to recover?
14. J discharged his collection agent and published notice thereof in
a local paper. The agent thereafter collected a $250 account from S.
Under what circumstances, if any, is S still liable to 7?
15. A, a traveling salesman for the A' Company, checked his trunk con-
taining samples for transportation over the Y Railway Company. The
goods were lost in transit. May the X Company recover from the Y