When does an agent incur personal liability?

Answer 1

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

132

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-

cise.

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

principal.

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.

136 AGENCY

'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

principal.

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