Rights, Duties, and Liabilities Between Principal and Third Parties
If an agent acts within the scope of his/her authority, a principal is bound by the act of his/her agent[i]. Moreover, a party is responsible for any action or inaction by the party or the party’s agent[ii]. The liability of the principal to a third person upon a transaction conducted by an agent is based upon facts such as:
- the agent was authorized;
- the agent was apparently authorized; or
- the agent had a power arising from the agency relation and not dependent upon authority or apparent authority.
A principal may be liable to a third person on account of a transaction with an agent because of the principles of estoppel, restitution, or negotiability, although he/she may not be subject to liability based on principles of agency. Unless a person has expressly or impliedly made such other his/her representative, no person is liable for the acts of another who assumes to represent him/her[iii]. Moreover, a person dealing with an agent cannot hold the principal liable for any act or transaction of the agent not within the scope of his/her actual or apparent authority[iv]. Unless the limitations of the agency are known or can be readily ascertained, the principal is bound by unauthorized acts of an agent through which a third party has sustained a loss[v].
The principal will no longer be liable for a particular act after the third person has notice of the principal’s repudiation of the agent’s authority to do such an act[vi]. After the termination of an agency for a particular purpose and notice of the revocation of the agency, the act of an agent will not bind the principal[vii]. A principal is liable for the tortious acts of an agent within the course and scope of the agent’s employment[viii]. Unless the principal commands or directs the act, a principal is not liable for the torts committed by an agent while acting adversely to the principal or outside the scope of the agent’s employment[ix].
Even though the principal does not authorize, ratify, participate in, or know of the misconduct, he/she may be held for an agent’s tort committed in the course and scope of the agent’s employment[x]. A master or other principal who is under a duty to provide protection is subject to liability to such others for harm caused to them by the failure of such agent to perform the duty. A principal is not relieved from the separable part of a contract which he/she authorized the agent to make by the fact that the agent undertook[xi]. Even where the agent’s unauthorized act constitutes a fraud on both the principal and the third person, the partial validity rule is applicable[xii].
Under circumstances which do not impute knowledge and without the principal’s knowledge or consent, the principal is not liable for an usurious agreement of an agent which is entered into[xiii]. The principal is bound where:
- the principal expressly or impliedly authorizes or ratifies the agent’s usurious agreement, or
- the circumstances are such that the agent’s conduct is presumed to be known to the principal[xiv].
- the issue is whether the agent had apparent authority to enter into an usurious agreement. Whether the principal is bound by the agent’s acts requires a case-by-case inquiry into whether the principal’s conduct reasonably induced a third party to believe that the agent had authority to act for the principal[xv].
Even if an act done by an agent is directly contrary to the instructions of the principal, the principal will be liable unless the third person with whom the agent dealt knew that the agent was exceeding his/her authority or violating his/her instructions[xvi]. A general agent for a disclosed or partially disclosed principal subjects his/her principal to liability for acts done on his/her account which usually accompany or are incidental to transactions which the agent is authorized to conduct if the other party reasonably believes that the agent is authorized to do them although they are forbidden by the principal[xvii]. A disclosed or partially disclosed principal authorizing an agent to make a contract is subject to liability upon a contract made in violation of such limitations with a third person who has no notice of them.
Even though the agent acts in his/her own interests and adversely to the principal, where the party with whom the agent contracts has no knowledge of the agent’s dereliction, the rule that a principal is liable for the contracts of an agent applies[xviii]. An agent cannot bind the principal where the person with whom the agent contracts knows that the agent is engaged in self-dealing or has an adverse interest[xix].
A person receiving the document from the agent is not entitled to hold the principal thereon, if he had notice that the agent filled the blanks, where a principal entrusts an agent with an executed document containing blanks with authority to fill the blanks. A representation by an authorized agent of the principal is binding upon the principal[xx]. A principal cannot repudiate statements made by an agent in the course of employment[xxi]. The principal is bound by the agent’s material representations of fact to the same extent as if the principal had made them personally[xxii]. However, an agent cannot bind the principal by statements which are not made in the course of, and within the scope of, the business being transacted for the principal[xxiii]. The third person cannot hold the principal liable for representations made by an agent if the third person did not rely thereon to his/her disadvantage[xxiv]. The principal is not liable for statements of the agent which are not representations.
The principal is bound only where the person to whom payment is made is in fact an authorized agent of the person to whom the indebtedness is owed. The debtor makes payment to a person other than the principal at his/her own risk[xxv]. If a party is informed that the person with whom he/she deals is merely the agent of another, such party will not be allowed afterward to charge the principal.[xxvi] However, the burden is on the principal to show that it was the intention of the third person and the agent that exclusive credit was being given to the agent[xxvii].
The principal is bound by the knowledge of or notice to an agent received while the agent is acting within the scope of his/her authority[xxviii]. The agent’s knowledge or notice is imputed to the principal and is constructive notice[xxix]. The liability of a principal is affected by the knowledge of an agent concerning a matter as to which he acts within his/her power to bind the principal or upon which it is his/her duty to give the principal information that:
- except where the agent is acting adversely to the principal or where knowledge as distinguished from reason to know is important, the principal is affected by the knowledge which an agent has a duty to disclose to the principal or to another agent of the principal to the same extent as if the principal had the information; and
- except where there is reliance upon the appearance of agency, a principal is not bound by knowledge of an agent concerning matters as to which he has only apparent authority.
Unless the notifier has notice that the agent has an interest adverse to the principal, a notification given to an agent is notice to the principal if it is given:
- to an agent authorized to receive it,
- to an agent apparently authorized to receive it,
- to an agent authorized to conduct a transaction, with respect to matters connected with it as to which notice is usually given to such an agent, unless the one giving the notification has notice that the agent is not authorized to receive it,
- to an agent to whom by the terms of a contract notification is to be given, with reference to matters in connection with the contract, or
- to the agent of an unidentified or undisclosed principal with reference to transactions entered into by such agent within his/her powers, until discovery of the identity of the principal; thereafter as in the case of a disclosed principal.
The rule of imputed knowledge is a rule of public policy based upon the necessities of general commercial relationships. Where a principal acts through an agent, a third person dealing with the agent is entitled to rely upon the agent’s knowledge and notice and it binds the principal rather than innocent third parties[xxx]. The relationship of principal and agent must exist between the parties in order for one person’s knowledge to be imputed to another under the law of agency[xxxi]. Even though the agent is not under the full control of the principal, any knowledge acquired by an agent within the scope of his/her employment is chargeable to the principal[xxxii].
The knowledge of an agent may be imputed to the principal only where it is relevant to the agency and to the matters entrusted to the agent[xxxiii]. If the knowledge acquired or notice received by an agent:
- does not pertain to the duties of the agent,
- does not relate to the subject matter of the employment, or
- affects matters outside the scope of the agency, it is not chargeable to the principal unless actually communicated to him/her[xxxiv].
The rule charging the principal with an agent’s knowledge is not necessarily restricted to matters of which the agent has actual knowledge[xxxv]. The principal is not affected by knowledge which the agent should have acquired in the performance of his/her duties unless the principal has a duty to others that care will be exercised in obtaining information[xxxvi]. Moreover, the principal is not affected by the knowledge which an agent should have acquired in the performance of the agent’s duties to the principal or to others, except where the principal or master has a duty to others that care shall be exercised in obtaining information.
Except for knowledge acquired confidentially, the time, place, or manner in which knowledge is acquired by a servant or other agent is immaterial in determining the liability of his/her principal. In order to be an effective notice, a notification must be given to or by an agent during the time when the agent has power to affect his principal by giving or receiving such notification. A principal is not affected by notice which comes to the agent outside the course of the transaction in which the agent is employed[xxxvii]. The relevant consideration is whether the agent has the knowledge at the time it becomes relevant in his/her work for the principal. Then, the principal is bound regardless of whether the agent’s knowledge was acquired as a result of the agency[xxxviii]. The burden is on the party seeking to charge the principal with the knowledge acquired by the agent to prove that such knowledge remained present in the mind of the agent at the time of the transaction. The principal will not be held chargeable with notice thereof, if the proof is doubtful[xxxix]. If the person giving notice has a right to rely upon the appearance of the continuance of the agency and has no reason to be aware that it has terminated, the principal may be chargeable with notice given to a former agent[xl].
The principal is affected by the knowledge which the agent has when acting for the principal or, if it is the duty of the agent to communicate the information and not otherwise to act, the principal is affected after the lapse of such time as is reasonable for its communication. The principal is charged with the agent’s notice thereof in a transaction that occurs after the agency is terminated, if a fact is of general or continuing significance[xli]. Even though the agent may no longer be in the principal’s employ, where the principal claims through a transaction, he/she is chargeable with knowledge of the agent gained relative thereto[xlii]. However, where the former agent abandoned the matter without result, a principal is not chargeable with the knowledge of an agent employed merely to conclude a particular transaction. It is subsequently transacted without reference to the former agency, or to any business of the principal other than that then transacted where the fact had no apparent materiality. The subsequent transaction is independent thereof[xliii].
The principal is not affected by the knowledge of an agent as to matters involved in a transaction in which the agent deals with the principal or another agent of the principal as, or on account of, an adverse party. The agent’s knowledge generally is not imputed to the principal where the conduct and dealings of an agent are such as to raise a clear presumption that s/he will not communicate to the principal the facts in controversy.[xliv] Moreover, a principal is not affected by the knowledge of an agent in a transaction in which the agent secretly is acting adversely to the principal and entirely for his/her own or another’s purposes, except where the principal is affected by the knowledge of an agent who acts adversely to the principal if the failure of the agent to act upon or to reveal the information results in a violation of a contractual or relational duty of the principal to a person harmed thereby, if:
- the agent enters into negotiations within the scope of his/her powers and the person with whom he/she deals reasonably believes him/her to be authorized to conduct the transaction; or
- before he/she has changed his/her position, the principal knowingly retains a benefit through the act of the agent which otherwise s/he would not have received.
An agent’s adverse dealings or fraud cannot alter the legal effect of the agent’s knowledge or notice with respect to the principal with regard to third persons who had no connection with such agent in relation to the perpetration of the adverse dealings or fraud and no knowledge that the agent was acting adversely[xlv]. Unless the third person has notice of the agent’s adverse purposes, a notification by or to a third person or by an agent is not prevented from being notice to or by the principal because of the fact that the agent, when receiving or giving the notification, is acting adversely to the principal.
If the failure of the agent to act upon or to reveal the information results in a violation of a contractual or relational duty of the principal to a person harmed thereby, the rule that the knowledge of an agent acting adversely to the principal will not be imputed to the latter may also not apply[xlvi]. Where the principal fails to disavow what was assumed to be said and done in his/her behalf by the agent, the doctrine of imputed knowledge may be invoked[xlvii].
Where the agent is the sole representative of the principal, although engaged in perpetrating such an act on his/her own account, a principal who asserts or stands on the transaction, either affirmatively or defensively, or seeks to retain the benefits of the transaction, is charged with the agent’s knowledge[xlviii]. However, where the third party did not reasonably believe that he/she was dealing solely with the agent, the principal may not be liable for the acts of the agent[xlix].
Where the agent owes a duty to another not to communicate facts that have come to his/her knowledge, the law will not impute knowledge thereof to the principal[l].
The mistake of an agent acting as a dual agent becomes a mutual mistake of fact by both principals which prevents one principal from seeking to impose liability on the other for the mistake of the agent[li]. When the agent was acting adversely or fraudulently with respect to the principal being sought to be charged, knowledge or notice to a dual agent is not imputed[lii].
Even though the third persons have not known of or dealt with the agent in question, if they have had dealings with the principal or with some other agent of the principal, the rule of imputation of an agent’s knowledge to the principal may apply[liii]. The rule may not be invoked where:
- third persons use the agent to further their own frauds upon the principal; or
- the third person did not intend or expect that the agent would communicate the facts or the truth to the principal [liv].
A principal is entitled to the rights and benefits which result from the agent’s authorized act and the act of an agent within the scope of his/her authority or employment is in legal effect the act of the principal[lv]. As a result, where the agent buys property of a third person, the principal acquires equitable title to property, subject to all the incidents attached to such estate, from the moment of purchase, even though the deed or contract of sale is made out in the agent’s name[lvi]. The third party with whom an unauthorized agent deals has the right to withdraw from the transaction at any time prior to ratification by the principal[lvii].
The other party to a contract made by an agent for a disclosed or partially disclosed principal, acting within his/her authority is liable to the principal as if he/she had contracted directly with the principal, unless the principal is excluded as a party by the form or terms of the contract[lviii]. If an agent procures a contract by illegal means, the principal is affected by it to the extent that he/she cannot enforce the contract so secured, though ignorant of, and not consenting to, the wrongful act[lix].
A third person is liable in tort for damages and injuries he/she caused to the property or interests of the principal in the same manner and to the same extent as if no agency existed[lx]. Where a third person perpetrates a fraud upon an agent, either by misrepresentation or by silence, the fraud is considered as worked upon the principal. The principal has a right of action against the third person for redress[lxi]. A person who fraudulently obtains a contract through, or enters into a transaction with, an agent acting within the scope of his/her power to bind the principal, or who by fraud causes the agent to do what would be a violation of his/her duty to the principal if the agent knew the facts, is subject to liability to the principal whether the fraud is committed against the agent or the principal.
A person who intentionally causes or assists an agent to violate a duty to the principal is subject to liability in tort for the harm such person has caused the principal or in a restitutional action for any profit such person derived from the transaction[lxii]. Unless a person reasonably believes that the other party acquiesces in the double employment, the person who, knowing that the other party to a transaction has employed an agent to conduct a transaction for him/her, employs the agent on his/her own account in such transaction is subject to liability to the other party[lxiii]. However, the third person is not liable to the principal for the agent’s breach of duty if he/she did not participate in the agent’s wrongful act[lxiv]. Therefore, a principal may not recover from another on the basis of a misrepresentation made by the principal’s own agent[lxv].
If an agent acquires personal property with the principal’s funds, it may be followed into the hands of a third person, though innocent, having no notice of the right of the principal, who purchased for value, because a third person cannot ordinarily obtain any better title than the agent had[lxvi]. The principal is under no duty to a third person to discover and notify the latter of a wrongful disposal of property by an agent who does not assume to act for the principal in disposing of the property. The principal is not liable or responsible for the agent’s fraudulent disposal or conversion of the principal’s property or for the failure, in advance of the discovery, to give notice of the agent’s act. He/she is not precluded from recovering or holding the third person liable for the property wrongfully transferred[lxvii].
[i] Taylor v. Werner Enters., Inc., 329 Ore. 461 (Or. 1999)
[ii] Alken-Ziegler, Inc. v. Waterbury Headers Corp., 461 Mich. 219 (Mich. 1999)
[iii] Hatton v. Quad Realty Corp., 100 A.D.2d 609 (N.Y. App. Div. 2d Dep’t 1984)
[iv] Leach & Co. v. Peirson, 275 U.S. 120 (U.S. 1927)
[v] Richards v. General Motors Corp., 991 F.2d 1227 (6th Cir. Mich. 1993)
[vi] Johns v. Jaycox, 67 Wash. 403 (Wash. 1912)
[vii] Smith v. Joyce, 214 N.C. 602 (N.C. 1938)
[viii] United Mine Workers v. Patton, 211 F.2d 742 (4th Cir. Va. 1954)
[ix] Wolfson Car Leasing Co. v. Weberg, 200 Neb. 420 (Neb. 1978); White v. Revco Discount Drug Ctrs., Inc., 33 S.W.3d 713 (Tenn. 2000)
[x] Stockwell v. United States, 80 U.S. 531 (U.S. 1871)
[xi] Lachmiller v. Lachmiller Engineering Co., 144 Cal. App. 2d 533 (Cal. App. 2d Dist. 1956)
[xii] De Boer Constr., Inc. v. Reliance Ins. Co., 540 F.2d 486 (10th Cir. Okla. 1976)
[xiii] Brown v. Johnson, 43 Utah 1 (Utah 1913)
[xiv] ROBINSON v. BLAKER, 85 Minn. 242 (Minn. 1902)
[xv] Hollingsworth v. American Finance Corp., 86 Wis. 2d 172 (Wis. 1978)
[xvi] Hartmann v. Prudential Ins. Co. of Am., 9 F.3d 1207 (7th Cir. Ill. 1993)
[xvii] Holloway v. Howerdd, 536 F.2d 690 (6th Cir. Tenn. 1976)
[xviii] Jones v. Federated Fin. Reserve Corp., 144 F.3d 961 (6th Cir. Mich. 1998)
[xix] Wagner v. Nichols, 5 A.D.2d 191 (N.Y. App. Div. 1st Dep’t 1958); Langlois v. Gragnon, 123 La. 453 (La. 1909).
[xx] Pereira v. Aetna Cas. & Sur Co. (In re Payroll Express Corp.), 186 F.3d 196 (2d Cir. N.Y. 1999)
[xxi] Georgiades v. Biggs, 197 Va. 630 (Va. 1956)
[xxii] Bauman v. Grand T. W. Railroad, 18 Mich. App. 450 (Mich. Ct. App. 1969)
[xxiii] Grease Monkey Int’l v. Montoya, 904 P.2d 468 (Colo. 1995)
[xxiv] Atlantic Nat’l Bank v. Korrick, 29 Ariz. 468 (Ariz. 1926)
[xxv] Catlin v. Reed, 141 Okla. 14 (Okla. 1929)
[xxvi] Ford v. Williams, 62 U.S. 287 (U.S. 1858)
[xxvii] Rochell v. Moore-Handley Hardware Co., 239 Ala. 555 (Ala. 1940)
[xxviii] Curtis, Collins & Holbrook Co. v. United States, 262 U.S. 215 (U.S. 1923)
[xxix] N.Y. Marine & Gen. Ins. Co. v. Tradeline (L.L.C.), 266 F.3d 112 (2d Cir. N.Y. 2001)
[xxx] Farnsworth v. Hazelett, 197 Iowa 1367 (Iowa 1924); Hale v. Depaoli, 33 Cal. 2d 228 (Cal. 1948); State Farm Fire & Casualty Co. v. Sevier, 272 Ore. 278 (Or. 1975)
[xxxi] Illinois Bankers’ Life Ass’n v. Mann, 158 Ark. 425 (Ark. 1923)
[xxxii] Harris v. Gulf Refining Co., 240 F.2d 249 (5th Cir. Miss. 1957)
[xxxiii] Ford Motor Credit Co. v. Weaver, 680 F.2d 451 (6th Cir. Tenn. 1982)
[xxxiv] Thompson v. Sun Oil Co., 135 Fla. 731 (Fla. 1939); Gemmell v. Davis, 75 Md. 546 (Md. 1892); Wittenbrock v. Parker, 102 Cal. 93 (Cal. 1894).
[xxxv] Fleming v. United States, 648 F.2d 1122 (7th Cir. Wis. 1981)
[xxxvi] State v. One (1) Certain 1969 Ford Van, 191 N.W.2d 662 (Iowa 1971)
[xxxvii] Howard Ins. Co. v. Halsey, 8 N.Y. 271 (N.Y. 1853)
[xxxviii] Fireman’s Fund Indem. Co. v. Boyle General Tire Co., 392 S.W.2d 352 (Tex. 1965)
[xxxix] Constant v. University of Rochester, 111 N.Y. 604 (N.Y. 1889)
[xl] Lockwood v. Dillenbeck, 104 A.D. 71 (N.Y. App. Div. 1905)
[xli] Acme Precision Products, Inc. v. American Alloys Corp., 422 F.2d 1395 (8th Cir. Mo. 1970)
[xlii] United States v. Ridglea State Bank, 357 F.2d 495 (5th Cir. Tex. 1966)
[xliii] Irvine v. Grady, 85 Tex. 120 (Tex. 1892); Murray v. Preferred Acc. Ins. Co., 199 Iowa 1195 (Iowa 1925)
[xliv]Mutual Life Ins. Co. v. Hilton-Green, 241 U.S. 613 (U.S. 1916)
[xlv] Armstrong v. Ashley, 204 U.S. 272 (U.S. 1907)
[xlvi] State Farm Fire & Casualty Co. v. Sevier, 272 Ore. 278 (Or. 1975)
[xlvii] Anderson v. General American Life Ins. Co., 141 F.2d 898 (6th Cir. Ky. 1944)
[xlviii] Curtis, Collins & Holbrook Co. v. United States, 262 U.S. 215 (U.S. 1923)
[xlix] Anderson v. General American Life Ins. Co., 141 F.2d 898 (6th Cir. Ky. 1944)
[l] TTT Stevedores, Inc. v. M/V Jagat Vijeta, 696 F.2d 1135 (5th Cir. Tex. 1983)
[li] Messall v. Merlands Club, Inc., 233 Md. 29 (Md. 1963)
[lii]Herdan v. Hanson, 182 Cal. 538 (Cal. 1920)
[liii] Hale v. Depaoli, 33 Cal. 2d 228 (Cal. 1948)
[liv] National Life Ins. Co. v. Minch, 53 N.Y. 144 (N.Y. 1873); Mutual Life Ins. Co. v. Hilton-Green, 241 U.S. 613 (U.S. 1916)
[lv] Epperson v. Helbron, 145 Ark. 566 (Ark. 1920)
[lvi]Follansbe v. Kilbreth, 17 Ill. 522 (Ill. 1856)
[lvii] Equity Mut. Ins. Co. v. General Casualty Co., 139 F.2d 723 (10th Cir. Kan. 1943)
[lviii] Ford v. Williams, 62 U.S. 287 (U.S. 1858)
[lix] Dimock State Bank v. Boehnen, 46 S.D. 50 (S.D. 1922)
[lx] New Jersey Steam Navigation Co. v. Merchants’ Bank of Boston, 47 U.S. 344 (U.S. 1848)
[lxi] Leeper v. Beltrami, 53 Cal. 2d 195 (Cal. 1959)
[lxii] Farmers & Merchants Nat’l Bank v. Boardwalk Nat’l Bank, 101 N.J. Super. 528 (App.Div. 1968)
[lxiii] Martin Co. v. Commercial Chemists, 213 So. 2d 477 (Fla. Dist. Ct. App. 4th Dist. 1968)
[lxiv] Michigan Milling Co. v. Vernon State Bank, 235 Mich. 318 (Mich. 1926)
[lxv] Traylor v. Gray, 547 S.W.2d 644 (Tex. Civ. App. Corpus Christi 1977)
[lxvi] Stevenson v. Kyle, 42 W. Va. 229 (W. Va. 1896)
[lxvii] Dixie Guano Co. v. Wessel, 296 F. 433 (4th Cir. Va. 1924)