AGENT AND THIRD PARTY
Liability of Agent to Third Party
Sec* 47. Liability on contract. The agent seldom incurs any
liability to the third party upon contracts entered into for a known
principal. In such cases he negatives any personal responsibility
by a proper execution of the contract. Only if the agent carelessly
executes a written agreement may he find himself bound by the
contract. To use an illustration suggested previously, the agent
who signs a negotiable instrument for his principal, but fails to
indicate clearly the principal's existence and his relation to the in-
strument, is personally liable.
It often happens that the third party, for certain reasons, desires
to add the credit of the agent to that of the principal, or to contract
with the agent alone. The credit of the principal may be weak or
his credit rating may be unknown. Under such circumstances, the
third party, who is well acquainted with the agent, is perfectly will-
ing to contract with the latter but not with the former. Where,
therefore, the agent voluntarily assumes the burden of performance
in his personal capacity, he unquestionably becomes liable in the
event of nonperformance by his principal.
In addition to the above situation, the agent of an undisclosed
principal always assumes personal liability. So far as the third
party is informed, he is the only principal involved. The contract
is made with the agent, and he takes on full responsibility for its
performance. It should be noted in this connection, however, that
the third party has an option. He may elect to hold either the
agent or the principal, provided he acts within the proper time after
he learns of the existence of the undisclosed principal. If the agent
is held liable, he in turn has recourse against the principal.
Sec. 48. Warranty of authority. Occasionally an agent at-
tempts to act for a principal when he possesses no power to bind
the latter. In such instances he may or may not be aware of the
limitation of his power; he may honestly think his authority ex-
tends to the act complained of, or he may be, well aware that he was
never appointed an agent. In either event he becomes liable to
third parties for the damages resulting from his failure to bind the
principal. His liability is said not to rest upon _the ^ontig^iulsfilf ,
b^ji^to^resultfrom breach of an implied warranty. Every agent
impliedljTwarrants to Ithird parties that he possesseifpower to affect
AGENT AND THIRD PARTY 133
the contractual relations of his principal. 1 If in any particular
transaction he fails to bear such a relation to his principal, he vio-
lates this implied warranty. In addition, an agent who intention-
ally misrepresents his authority may be liable in an action of deceit.
In such a case all the elements of fraud are present. Presumably,
in either event, the damages would be those suffered because the
agent failed to possess the authority which he attempted to exer-
The agent may escape liability for damages arising from lack of
authority by a full disclosure to the third party of all facts relating
to the source of his authority. Where all the facts are available,
the third party is as capable of judging the limits of the agent's
powers as is the agent. In other words the third party must rely
upon the warranty in order to hold the agent for its breach. Where
he has full knowledge of all particulars, he relies upon his own judg-
ment and not upon the agent's representation of authority.
The liability of the agent is qualified in one other respect, He is
not liable when, unknown to him, his agency has been cut short
by the death of his principal. Such an event as death is usually
accompanied by sufficient publicity to reach third parties. At least
the facts are equally available to both parties.
Sec. 49. Competent principal. Every agent who deals with
third parties warrants that his principal is in existence and is ca-
pable of being bound. Thus, an agent who acts for a minor or for
a corporation not yet formed may find himself liable for the non-
performance of his principal. The same rule enables the third
party to recover from the agent where his principal is an unincorpo-
rated association. In such a case, since there is no entity capable
of being bound, a breach of the warranty results. The third party
has a right to insist^that the principal be a person, a firm, or a cor-
porate entity capable of entering into an enforceable agreement.
An unincorporated body has no legal entity, and only those voting
for the particular transaction, or later adopting it, are liable.
Where, however, the third party is fully informed that the princi-
pal is an unincorporated organization, and he agrees to look entirely
to it for performance, the agent is relieved. 2 The evidence must
clearly indicate such an agreement, as the normal presumption is
that the third party expects to look to one party and not to the
membership for performance.
In case the principal is a corporation, the agent does not warrant
that his principal has legal capacity to enter into the particular
transaction. In other words the agent is not responsible for ultra
vires contracts. The limits of a corporation's powers are governed
by its charter. Since charters are usually made a matter of public
record, the powers of the corporation are equally available to the
agent and to the third party.
Sec. 50. To account for money received. An agent who, in
the course of his employment, receives money from third parties for
the benefit of the principal owes no duty to account to the third
parties. If such money does not find its way into the principal's
hands, it may be recovered in an action by the principal against the
agent. This rule adequately protects all parties. On the other
hand, money paid to an agent who has no authority to collect it,
and which is not turned over to the principal, may be recovered in
an action by the third party. To illustrate: A traveling salesman
normally has no authority to collect for his principal. Should he
do so and surrender the money to his principal, the debtor has no
cause of action. A failure on his part to account to his principal,
however, subjects him to an action by the third party.
A different problem is presented when money is paid to an agent
in error, such as occurs by overpayment of an account. If the
agent has passed the money on to his principal before the mistake
is discovered, it is clear that only the principal is liable. 3 Never-
theless, money which is still in the possession of the agent when he
is notified of the error should be returned to the third party. The
agent does not relieve himself of this burden by subsequently mak-
ing payment to his principal.
Any payment made in error to an agent and caused by his mis-
take or misconduct may always be recovered from him, although he
may have surrendered it to his principal. Likewise, any overpay-
ment may be recovered from the agent of an undisclosed principal.
In such a case the agent is dealt with as the principal.
Sec, 51. Liability for torts. An agent may not defend an ac-
tion against him for his misconduct by offering proof that he was
about his principal's business at the time. The agent is always
liable to third parties for the result of his negligence. The same
ruling is also true of conversion or trespass. The agent may be-
lieve, and have good cause to believe, that he is handling his prin-
cipal's property. Yet, should it prove to belong to a third party,
he is liable for conversion. The same is true of trespass. The
principal may definitely instruct his agent to cut certain timber.
The agent, assuming that it belongs to his employer, proceeds with
the work. It is later discovered that the timber belongs to some
third person. It is clear in such a case that the agent is liable for
8 Cabot v. Shaw and Others, 1889, 148 Mass. 459; p. 575.
AGENT AND THIRD PARTY 135
the damage caused, although he may in turn recover indemnity
from his principal.
Liability of Third Party to Agent
Sec. 52. On contract. Normally the agent possesses no right
to bring suit on contracts made by him for the benefit of his princi-
pal. It is only where the agent binds himself to the third party,
either intentionally or ineptly by a failure properly to express him-
self , that he may maintain an action. To illustrate: An agent of
an undisclosed principal always binds himself. As a result, he may,
in his own name, sue the third party in the event of nonperform-
ance by the latter. Under the circumstances outlined, either the
agent or the principal might bring suit. But, in case of a dispute,
the right of the principal is superior.
Custom has long sanctioned an action by the agent, based upon
a contract in which he is interested because of anticipated commis-
sions. As a result, a factor may institute an action in his own name
to recover for goods sold. He may also recover against a railroad
for delay in shipment of goods sold or to be sold.
Similarly, an agent who has been vested with title to commercial
paper may sue the maker thereof. The same is true of any claim
held by the principal which he definitely placed with the agent for
collection and suit where such is necessary. In all cases of this
character, the agent retains the proceeds as a trust fund for his
Sec, 53. In tort. Most torts committed by third parties give
rise to a cause of action irrespective of an agency. There are two
distinct cases, however, in which the employment becomes impor-
tant. First, any third party who maliciously influences the prin-
cipal to terminate his agent's employment thereby commits a tort.
He must compensate the agent for any damages which result from
such conduct. 4 Second, any third person who influences another
in breaching a contract in which the agent is interested thereby
renders himself liable to the agent. To illustrate: The agent has
sold goods to T upon which he is entitled to a commission. Any-
one who causes T to refuse to carry out the agreement thereby dam-
ages the agent and is correspondingly liable.
Review Questions and Problems
1. Is an agent ever liable on contracts made for the benefit of his prin-
cipal? What liability does the agent of an undisclosed principal incur?
2. Does an agent always warrant his authority to act? Suppose that
'Loughery et al. v. Huxford et al., 1910, 106 Mass. 324, 92 N.E. 328; p. 576.
'A, thinking that he possesses authority to represent P in a certain transac-
tion, but possessing no authority, nevertheless acts for P. Is A liable to
the third party for damages suffered because of his lack of authority?
3. -A, acting for a corporation which is soon to be formed, orders two
delivery trucks from T. The corporation is formed, but refuses to ratify
the contract. Under what circumstances is A liable to Tl
4. T, by reason of an error on the part of A, an agent for P, overpays
to the extent of some $300 his account with P. Before A pays the money
over to P, T discovers the error and demands the excess from A. Is A
under a duty to return the money to T or may he turn it over to P?
5. Is an agent liable to third parties for his torts, although at the time
they are committed he is performing some service for his principal? Is
the same true where the agent is unaware that he is committing a tort?
6. Name two instances in which the agent may sue the third party
for breach of a contract, the contract being made for the benefit of the
7. T 7 , because of his dislike of A, persuades P to discharge A. Assum-
ing that A does not have a contract for any definite period, may he re-
cover damages from Tl