clarkson businesslaw

A

s discussed in the previous
chapter, the law of agency
focuses on the special relationship
that exists between a principal and
an agent—how the relationship is
formed and the duties the
principal and agent assume once
the relationship is established.This
chapter deals with another

important aspect of agency law—
the liability of principals and
agents to third parties.
We look first at the liability of
principals for contracts formed by
agents with third parties. Generally,
the liability of the principal will
depend on whether the agent was
authorized to form the contracts.

Scope of Agent’s Authority
The liability of a principal to third parties with whom
an agent contracts depends on whether the agent had
the authority to enter into legally binding contracts on
the principal’s behalf. An agent’s authority can be
either actual (express or implied) or apparent. If an
agent contracts outside the scope of his or her authority,the principal may still become liable by ratifying the
contract.

Express Authority
Express authority is authority declared in clear,
direct, and definite terms. Express authority can be
given orally or in writing. In most states, the equal
dignity rule requires that if the contract being executed is or must be in writing, then the agent’s authority must also be in writing. Failure to comply with the
equal dignity rule can make a contract voidable at the
option of the principal. The law regards the contract at
that point as a mere offer. If the principal decides to
accept the offer, the acceptance must be ratified, or
affirmed, in writing.
Assume that Pattberg (the principal) orally asks
Austin (the agent) to sell a ranch that Pattberg owns.

The second part of the chapter
deals with an agent’s liability to
third parties in contract and tort,
and the principal’s liability to third
parties because of an agent’s torts.
The chapter concludes with a
discussion of how agency
relationships are terminated.

Austin finds a buyer and signs a sales contract (a contract for an interest in realty must be in writing) on
behalf of Pattberg to sell the ranch. The buyer cannot
enforce the contract unless Pattberg subsequently ratifies Austin’s agency status in writing.Once the contract
is ratified, either party can enforce rights under the
contract.
Modern business practice allows an exception to
the equal dignity rule.An executive officer of a corporation, when acting for the corporation in an ordinary
business situation, is not required to obtain written

authority from the corporation. In addition, the equal
dignity rule does not apply when the agent acts in the
presence of the principal or when the agent’s act of
signing is merely perfunctory. Thus, if Healy (the principal) negotiates a contract but is called out of town
the day it is to be signed and orally authorizes Scougall
to sign, the oral authorization is sufficient.
Power of Attorney Giving an agent a power of
attorney confers express authority.1 The power of
attorney is a written document and is usually notarized. (A document is notarized when a notary
public—a public official authorized to attest to the
1. An agent who holds a power of attorney is called an attorneyin-fact for the principal. The holder does not have to be an
attorney-at-law (and often is not).

653


654

authenticity of signatures—signs and dates the document and imprints it with her or his seal of authority.)
Most states have statutory provisions for creating a
power of attorney. A power of attorney can be special
(permitting the agent to perform specified acts only),
or it can be general (permitting the agent to transact
all business for the principal).Because of the extensive
authority granted to an agent by a general power of
attorney (see Exhibit 32–1), it should be used with
great caution and usually only in exceptional circumstances. Ordinarily, a power of attorney terminates on

EXHIBIT 32–1

•

the incapacity or death of the person giving the
power.2

Implied Authority
An agent has the implied authority to do what is reasonably necessary to carry out express authority and
2. A durable power of attorney,however,continues to be effective
despite the principal’s incapacity. An elderly person,for example,
might grant a durable power of attorney to provide for the handling of property and investments or specific health-care needs
should he or she become incompetent (see Chapter 50).

A Sample General Power of Attorney

GENERAL POWER OF ATTORNEY
Know All Men by These Presents:
That I, ___________ , hereinafter referred to as PRINCIPAL, in the County of ___________
State of __________ , do(es) appoint ___________ as my true and lawful attorney.

In principal's name, and for principal's use and benefit, said attorney is authorized hereby;
(1) To demand, sue for, collect, and receive all money, debts, accounts, legacies, bequests, interest, dividends, annuities, and demands as are now or shall
hereafter become due, payable, or belonging to principal, and take all lawful means, for the recovery thereof and to compromise the same and give discharges for
the same;
(2) To buy and sell land, make contracts of every kind relative to land, any interest therein or the possession thereof, and to take possession and exercise control
over the use thereof;
(3) To buy, sell, mortgage, hypothecate, assign, transfer, and in any manner deal with goods, wares and merchandise, choses in action, certificates or shares of
capital stock, and other property in possession or in action, and to make, do, and transact all and every kind of business of whatever nature;
(4) To execute, acknowledge, and deliver contracts of sale, escrow instructions, deeds, leases including leases for minerals and hydrocarbon substances and
assignments of leases, covenants, agreements and assignments of agreements, mortgages and assignments of mortgages, conveyances in trust, to secure
indebtedness or other obligations, and assign the beneficial interest thereunder, subordinations of liens or encumbrances, bills of lading, receipts, evidences of

debt, releases, bonds, notes, bills, requests to reconvey deeds of trust, partial or full judgments, satisfactions of mortgages, and other debts, and other written
instruments of whatever kind and nature, all upon such terms and conditions as said attorney shall approve.
GIVING AND GRANTING to said attorney full power and authority to do all and every act and thing whatsoever requisite and necessary to be done relative to any of
the foregoing as fully to all intents and purposes as principal might or could do if personally present.
All that said attorney shall lawfully do or cause to be done under the authority of this power of attorney is expressly approved.
Dated: ____________

/s /__________________

State of
County of
On
State, personally appeared
known to me to be the person
to the within instrument and acknowledged that
Witness my hand and official seal.

SS.
, before me, the undersigned, a Notary Public in and for said
whose name
(Seal)

subscribed
executed the same.
Notary Public in and for said State.


655

accomplish the objectives of the agency.Authority can

also be implied by custom or inferred from the position the agent occupies. For example, Carlson is
employed by Packard Grocery to manage one of its
stores. Packard has not expressly stated that Carlson
has authority to contract with third persons.
Nevertheless, authority to manage a business implies
authority to do what is reasonably required (as is customary or can be inferred from a manager’s position)
to operate the business. This includes making contracts for hiring personnel, for buying merchandise
and equipment, and even for advertising the products
sold in the store.
In general, implied authority is authority customarily associated with the position occupied by the agent
or authority that can be inferred from the express
authority given to the agent to perform fully his or her
duties. For example, an agent who has authority to
solicit orders for goods sold by the principal generally
would not have the authority to collect payments for
the goods unless the agent possesses the goods. The
test is whether it was reasonable for the agent to
believe that she or he had the authority to enter into
the contract in question.
Also note that an agent’s implied authority cannot
contradict his or her express authority.Thus, if a principal has limited an agent’s authority—by forbidding a
manger to enter contracts to hire additional workers,
for example—then the fact that managers customarily
would have such authority is irrelevant.

Apparent Authority and Estoppel
Actual authority (express or implied) arises from what
the principal makes clear to the agent. Apparent
authority, in contrast, arises from what the principal
causes a third party to believe.An agent has apparent

authority when the principal, by either word or
action, causes a third party reasonably to believe that
the agent has authority to act, even though the agent
has no express or implied authority. If the third party
changes his or her position in reliance on the principal’s representations, the principal may be estopped
(prevented) from denying that the agent had authority.
Apparent authority usually comes into existence
through a principal’s pattern of conduct over time. For
example, Bain is a traveling salesperson with the
authority to solicit orders for a principal’s goods.
Because she does not carry any goods with her, she
normally would not have the implied authority to collect payments from customers on behalf of the principal. Suppose that she does accept payments from
Corgley Enterprises, however, and submits them to the
principal’s accounting department for processing. If
the principal does nothing to stop Bain from continuing this practice, a pattern develops over time, and the
principal confers apparent authority on Bain to accept
payments from Corgley.
At issue in the following case was a question of
apparent authority or, as the court referred to it,“ostensible agency.”

C A S E 32.1 Ermoian v. Desert Hospital
Court of Appeal of California, Fourth District, Division 2, 2007.
152 Cal.App.4th 475, 61 Cal.Rptr.3d 754.

•

Background and Facts In 1990, Desert Hospital in California established a comprehensive
perinatal services program (CPSP) to provide obstetrical care to women who were uninsured (perinatal
is often defined as relating to the period from about the twenty-eighth week of pregnancy to around one
month after birth). The CPSP was set up in an office suite across from the hospital and named “Desert

Hospital Outpatient Maternity Services Clinic.” The hospital contracted with a corporation controlled by Dr.
Morton Gubin, which employed Dr. Masami Ogata, to provide obstetrical services. In January 1994, Jackie
Shahan went to the hospital’s emergency room because of cramping and other symptoms. The emergency room physician told Shahan that she was pregnant and referred her to the clinic. Shahan visited
the clinic throughout her pregnancy. On May 15, Shahan’s baby, named Amanda, was born with brain
abnormalities that left her severely mentally retarded and unable to care for herself. Her conditions could
not have been prevented, treated, or cured in utero. Amanda filed a suit in a California state court against
the hospital and others, alleging “wrongful life.” She claimed that the defendants negligently failed to
inform her mother of her abnormalities before her birth, depriving her mother of the opportunity to make
an informed choice to terminate the pregnancy. The court ruled in the defendants’ favor, holding, among
other things, that the hospital was not liable because Drs. Gubin and Ogata were not its employees.
CASE CONTINUES


656

CASE 32.1 CONTINUED

Amanda appealed to a state intermediate appellate court, contending in part that the physicians were the
hospital’s “ostensible agents.”
IN THE LANGUAGE OF THE COURT

KING, J. [Judge]

* * * *
Agency may be either actual or ostensible [apparent]. Actual agency exists when
the agent is really employed by the principal. Here, there was evidence that the physicians were
not employees of the Hospital, but were physicians with a private practice who contracted with
the Hospital to perform obstetric services at the clinic.The written contract between the Hospital
and Dr. Gubin’s corporation (which employed Dr. Ogata) describes Dr. Gubin and his corporation
as “independent contractors with, and not as employees of, [the] Hospital.” [Maria Sterling, a registered nurse at the clinic and Shahan’s CPSP case coordinator] testified that Drs. Gubin and

Ogata, not the Hospital, provided the obstetric services to the clinic’s patients. Donna McCloudy,
a director of nursing [who set up the CPSP] at the Hospital, testified that while the Hospital provided some aspects of the CPSP services,“independent physicians * * * provided the obstetrical care * * * .” Based upon such evidence, the [trial] court reasonably concluded that the
physicians were not the employees or actual agents of the Hospital for purposes of vicarious
[indirect] liability.
Ostensible [apparent] agency on the other hand, may be implied from the facts of a particular
case, and if a principal by his acts has led others to believe that he has conferred authority upon
an agent, he cannot be heard to assert, as against third parties who have relied thereon in good
faith, that he did not intend to confer such power * * * .The doctrine establishing the principles of liability for the acts of an ostensible agent rests on the doctrine of estoppel. The essential
elements are representations by the principal,justifiable reliance thereon by a third party,and change
of position or injury resulting from such reliance. Before recovery can be had against the principal
for the acts of an ostensible agent, the person dealing with an agent must do so with belief in the
agent’s authority and this belief must be a reasonable one. Such belief must be generated by some
act or neglect by the principal sought to be charged and the person relying on the agent’s apparent authority must not be guilty of neglect. [Emphasis added.]
* * * *
Here, the Hospital held out the clinic and the personnel in the clinic as part of the Hospital.
Furthermore, it was objectively reasonable for Shahan to believe that Drs. Gubin and Ogata were
employees of the Hospital. The clinic was located across the street from the Hospital. It used the
same name as the Hospital and labeled itself as an outpatient clinic.Numerous professionals at the
clinic were employees of the Hospital. [Carol Cribbs, a comprehensive perinatal health worker at
the clinic] and Sterling indicated to Shahan that they were employees of the Hospital and that the
program was run by the Hospital. Sterling personally set up all of Shahan’s appointments at the
main Hospital rather than giving Shahan a referral for the various tests. Shahan was referred by
individuals in the emergency room specifically to Dr. Gubin.When she called for an appointment
she was told by the receptionist that she was calling the Hospital outpatient clinic which was the
clinic of Dr. Gubin. On days when Shahan would see either Dr. Gubin or Dr. Ogata at the clinic, she
would also see either Cribbs or Sterling, whom she knew were employed by the Hospital.
* * * At her first appointment she signed a document titled “patient rights and responsibilities,” which would unambiguously lead a patient to the conclusion that the clinic “was a one-stop
shop for the patient,” and that all individuals at the clinic were connected with the Hospital.All of
Shahan’s contacts with the physicians were at the Hospital-run clinic. Most, if not all, of the physician contacts occurred in conjunction with the provision of other services by either Sterling or
Cribbs. The entire appearance created by the Hospital, and those associated with it, was that the

Hospital was the provider of the obstetrical care to Shahan.

•

Decision and Remedy The state intermediate appellate court decided that, contrary to the
lower court’s finding, Drs. Gubin and Ogata were “ostensible agents of the Hospital.” The appellate
court affirmed the lower court’s ruling, however, on Amanda’s “wrongful life” claim, concluding that
the physicians were not negligent in failing to advise Shahan to have an elective abortion.


657

CASE 32.1 CONTINUED

•

The Ethical Dimension Does a principal have an ethical responsibility to inform an
unaware third party that an apparent (ostensible) agent does not in fact have authority to act on the
principal’s behalf?

•

The E-Commerce Dimension Could Amanda have established Drs. Gubin and Ogata’s
apparent authority if Desert Hospital had maintained a Web site that advertised the services of the
CPSP clinic and stated clearly that the physicians were not its employees? Explain.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Emergency Powers
When an unforeseen emergency demands action by
the agent to protect or preserve the property and rights

of the principal, but the agent is unable to communicate with the principal, the agent has emergency
power. For example, Fulsom is an engineer for Pacific
Drilling Company. While Fulsom is acting within the
scope of his employment, he is severely injured in an
accident at an oil rig many miles from home. Dudley,
the rig supervisor, directs Thompson, a physician, to
give medical aid to Fulsom and to charge Pacific for
the medical services. Dudley, an agent, has no express
or implied authority to bind the principal, Pacific
Drilling, for Thompson’s medical services. Because of
the emergency situation, however, the law recognizes
Dudley as having authority to act appropriately under
the circumstances.

3.
4.

5.

6.

contract without knowing all of the facts,the principal can rescind (cancel) the contract.3
The principal must affirm the agent’s act in its
entirety.
The principal must have the legal capacity to
authorize the transaction at the time the agent
engages in the act and at the time the principal ratifies.The third party must also have the legal capacity to engage in the transaction.
The principal’s affirmation (ratification) must
occur before the third party withdraws from the
transaction.

The principal must observe the same formalities
when approving the act done by the agent as would
have been required to authorize it initially.

Concept Summary 32.1 on the next page summarizes
the rules concerning an agent’s authority to bind the
principal and a third party.

Ratification
Ratification occurs when the principal affirms, or
accepts responsibility for, an agent’s unauthorized
act. When ratification occurs, the principal is bound
to the agent’s act, and the act is treated as if it had
been authorized by the principal from the outset.
Ratification can be either express or implied.
If the principal does not ratify the contract,the principal is not bound, and the third party’s agreement
with the agent is viewed as merely an unaccepted
offer. Because the third party’s agreement is an unaccepted offer, the third party can revoke it at any time,
without liability, before the principal ratifies the contract. The agent, however, may be liable to the third
party for misrepresenting her or his authority.
The requirements for ratification can be summarized as follows:

1. The agent must have acted on behalf of an identified principal who subsequently ratifies the action.
2. The principal must know all of the material facts
involved in the transaction. If a principal ratifies a

Liability for Contracts
Liability for contracts formed by an agent depends on
how the principal is classified and on whether the
actions of the agent were authorized or unauthorized.

Principals are classified as disclosed, partially disclosed, or undisclosed.4
A disclosed principal is a principal whose identity is known by the third party at the time the contract
is made by the agent.A partially disclosed principal
is a principal whose identity is not known by the third
party,but the third party knows that the agent is or may
be acting for a principal at the time the contract is
made.An undisclosed principal is a principal whose
3. If the third party has changed position in reliance on the
apparent contract, however, the principal can rescind but must
reimburse the third party for any costs.
4. Restatement (Second) of Agency, Section 4.


658

CONCEPT SUMMARY 32.1

Authority of an Agent to Bind the Principal and a Third Party
Authority
of Agent

Definition

Effect on Principal
and Third Party

EXPRESS AUTHORITY

Authority expressly given by the principal to
the agent.

Principal and third party are
bound in contract.

IMPLIED AUTHORITY

Authority implied (1) by custom, (2) from the
position in which the principal has placed the
agent, or (3) because such authority is
necessary if the agent is to carry out expressly
authorized duties and responsibilities.

Principal and third party are
bound in contract.

APPARENT AUTHORITY

Authority created when the conduct of the
principal leads a third party to believe that the
principal’s agent has authority.

Principal and third party are
bound in contract.

UNAUTHORIZED ACTS

Acts committed by an agent that are outside
the scope of his or her express, implied, or
apparent authority.

Principal and third party are
not bound in contract—unless
the principal ratifies prior to
the third party’s withdrawal.

identity is totally unknown by the third party, and the
third party has no knowledge that the agent is acting
in an agency capacity at the time the contract is made.

Authorized Acts
If an agent acts within the scope of her or his authority, normally the principal is obligated to perform the
contract regardless of whether the principal was disclosed, partially disclosed, or undisclosed.Whether the
agent may also be held liable under the contract,however, depends on the disclosed, partially disclosed, or
undisclosed status of the principal.
Disclosed or Partially Disclosed Principal

A disclosed or partially disclosed principal is liable to
a third party for a contract made by the agent. If the
principal is disclosed, an agent has no contractual liability for the nonperformance of the principal or the
third party. If the principal is partially disclosed, in
most states the agent is also treated as a party to the
contract, and the third party can hold the agent liable
for contractual nonperformance.5
Undisclosed Principal When neither the fact

of an agency relationship nor the identity of the principal is disclosed, the undisclosed principal is bound to
5. Restatement (Second) of Agency, Section 321.

perform just as if the principal had been fully disclosed at the time the contract was made.
When a principal’s identity is undisclosed and the

agent is forced to pay the third party, the agent is entitled to be indemnified (compensated) by the principal.The principal had a duty to perform, even though
his or her identity was undisclosed,6 and failure to do
so will make the principal ultimately liable. Once the
undisclosed principal’s identity is revealed, the third
party generally can elect to hold either the principal or
the agent liable on the contract.
Conversely, the undisclosed principal can require
the third party to fulfill the contract, unless (1) the
undisclosed principal was expressly excluded as a
party in the written contract; (2) the contract is a negotiable instrument signed by the agent with no indication of signing in a representative capacity;7 or (3) the
performance of the agent is personal to the contract,
allowing the third party to refuse the principal’s
performance.
6. If the agent is a gratuitous agent,and the principal accepts the
benefits of the agent’s contract with a third party, then the principal will be liable to the agent on the theory of quasi contract (see
Chapter 10).
7. Under the Uniform Commercial Code (UCC),only the agent is
liable if the instrument neither names the principal nor shows
that the agent signed in a representative capacity [UCC
3–402(b)(2)].


659

Unauthorized Acts
If an agent has no authority but nevertheless contracts
with a third party, the principal cannot be held liable
on the contract. It does not matter whether the principal was disclosed, partially disclosed, or undisclosed.
The agent is liable, however. For example, Scammon
signs a contract for the purchase of a truck, purportedly acting as an agent under authority granted by

Johnson. In fact, Johnson has not given Scammon any
such authority. Johnson refuses to pay for the truck,
claiming that Scammon had no authority to purchase
it. The seller of the truck is entitled to hold Scammon
liable for payment.
If the principal is disclosed or partially disclosed,
the agent is liable as long as the third party relied on the
agency status.The agent’s liability here is based on the
theory of breach of the implied warranty of authority,
not on breach of the contract itself.8 The agent’s
implied warranty of authority can be breached intentionally or by a good faith mistake.9 For example,
Kilmer (the principal) is a reclusive artist who hires
Higgs (the agent) to solicit offers for particular paintings from various galleries, but does not authorize him
to enter into sales agreements. Olaf, a gallery owner,
desires to buy two of Kilmer’s paintings right away for
an upcoming show.Higgs tells Olaf that he will draw up
a sales contract. By doing so, Higgs impliedly warrants
that he has the authority to enter into sales contracts on
behalf of Kilmer.If it later turns out that Kilmer does not
wish to ratify the sales contract signed by Higgs, Olaf
cannot hold Kilmer liable,but he can hold Higgs liable
for breaching the implied warranty of authority.
Note that if the third party knows at the time the
contract is made that the agent does not have authority, then the agent is not liable. Similarly, if the agent
expresses to the third party uncertainty as to the extent
of her or his authority,the agent is not personally liable.

Actions by E-Agents
Although standard agency principles once applied
only to human agents,today these same agency principles are being applied to e-agents. An electronic agent,

or e-agent, is a semiautonomous computer program
that is capable of executing specific tasks. E-agents
used in e-commerce include software that can search
8. The agent is not liable on the contract because the agent was
never intended personally to be a party to the contract.
9. If the agent intentionally misrepresents his or her authority,
then the agent can also be liable in tort for fraud.

through many databases and retrieve only relevant
information for the user.
The Uniform Electronic Transactions Act (UETA),
which has been adopted at least in part by the majority of the states (see Chapter 19),includes several provisions relating to the principal’s liability for the
actions of e-agents. Section 15 of the UETA states that
e-agents may enter into binding agreements on
behalf of their principals. Presumably, then—at least
in those states that have adopted the act—the principal will be bound by the terms in a contract entered
into by an e-agent.Thus,if you place an order over the
Internet, the company (principal) whose system took
the order via an e-agent cannot claim that it did not
receive your order.
The UETA also stipulates that if an e-agent does not
provide an opportunity to prevent errors at the time of
the transaction, the other party to the transaction can
avoid the transaction. Therefore, if an e-agent fails to
provide an on-screen confirmation of a purchase or
sale, the other party can avoid the effect of any errors.
For example, Finig wants to purchase three each of
three different items (a total of nine items).The e-agent
mistakenly records an order for thirty-three of a single
item and does not provide an on-screen verification of

the order. If thirty-three items are then sent to Finig, he
can avoid the contract to purchase them.

Liability for Torts and Crimes
Obviously, any person, including an agent, is liable for
his or her own torts and crimes. Whether a principal
can also be held liable for an agent’s torts and crimes
depends on several factors,which we examine here.In
some situations, a principal may be held liable not
only for the torts of an agent but also for the torts committed by an independent contractor.

Principal’s Tortious Conduct
A principal conducting an activity through an agent
may be liable for harm resulting from the principal’s
own negligence or recklessness.Thus, a principal may
be liable for giving improper instructions, authorizing
the use of improper materials or tools, or establishing
improper rules that result in the agent’s committing a
tort. For instance, if Jack knows that Lucy cannot drive
but nevertheless tells her to use the company truck to
deliver some equipment to a customer, he will be


660

liable for his own negligence to anyone injured by her
negligent driving.

Principal’s Authorization
of Agent’s Tortious Conduct

Similarly, a principal who authorizes an agent to commit a tort may be liable to persons or property injured
thereby, because the act is considered to be the principal’s. For example, Selkow directs his agent,Warren,
to cut the corn on specific acreage, which neither of
them has the right to do. The harvest is therefore a
trespass (a tort), and Selkow is liable to the owner of
the corn.
Note that an agent acting at the principal’s direction
can be liable as a tortfeasor (one who commits a
wrong,or tort),along with the principal,for committing
the tortious act even if the agent was unaware that the
act was wrong. Assume in the above example that
Warren,the agent,did not know that Selkow lacked the
right to harvest the corn.Warren can still be held liable
to the owner of the field for damages, along with
Selkow, the principal.

Liability for Agent’s Misrepresentation
A principal is exposed to tort liability whenever a third
person sustains a loss due to the agent’s misrepresentation.The principal’s liability depends on whether the
agent was actually or apparently authorized to make
representations and whether the representations were
made within the scope of the agency. The principal is
always directly responsible for an agent’s misrepresentation made within the scope of the agent’s authority.
Assume that Bassett is a demonstrator for Moore’s
products. Moore sends Bassett to a home show to
demonstrate the products and to answer questions
from consumers. Moore has given Bassett authority to

make statements about the products. If Bassett makes
only true representations, all is fine; but if he makes

false claims, Moore will be liable for any injuries or
damages sustained by third parties in reliance on
Bassett’s false representations.
Apparent Implied Authority When a princi-

pal has placed an agent in a position of apparent
authority—making it possible for the agent to defraud
a third party—the principal may also be liable for the
agent’s fraudulent acts. For example, Frendak is a loan
officer at First Security Bank. In the ordinary course of
the job, Frendak approves and services loans and has
access to the credit records of all customers. Frendak
falsely represents to a borrower, McMillan, that the
bank feels insecure about McMillan’s loan and intends
to call it in unless McMillan provides additional collateral,such as stocks and bonds.McMillan gives Frendak
numerous stock certificates, which Frendak keeps in
her own possession and later uses to make personal
investments. The bank is liable to McMillan for losses
sustained on the stocks even though the bank was
unaware of the fraudulent scheme.
If, in contrast, Frendak had been a recently hired
junior bank teller rather than a loan officer when she
told McMillan that the bank required additional security for the loan, McMillan would not have been justified in relying on her representation. In that situation,
the bank normally would not be liable to McMillan for
the losses sustained.
The following case focused on a partner’s potential
liability for claims against the partnership arising from
the torts of its manager. The partner argued that he
could not be liable because the manager did not have
the apparent authority to commit torts. Among those

with claims against the firm was the partner’s mother.

C A S E 32.2 In re Selheimer & Co.
United States District Court, Eastern District of Pennsylvania, 2005. 319 Bankr. 395.

• Background and Facts Selheimer & Company was formed as a partnership in 1967 to act as

a securities broker-dealer, buying and selling stocks and bonds and providing other financial services, in
Pennsylvania. In 1994, during an investigation by the Securities and Exchange Commission (SEC), the
firm closed.a Perry Selheimer, the managing partner, was charged with various crimes and pleaded guilty
to mail fraud. Other partners, including Edward Murphy, and the firm’s clients, including Murphy’s mother,
Jeanne Murphy, filed claims with the Securities Investor Protection Corporation (SIPC) to be reimbursed
for their losses. The SIPC advanced more than $250,000 to pay these claims. Because the firm had more
a. The SEC is a federal agency that regulates the activities of securities brokers and others. See Chapter 41.


661

CASE 32.2 CONTINUED

than $1 million in claims outstanding, the SIPC petitioned the firm into involuntary bankruptcy in 2002.
Because the firm had few assets, the SIPC asked the court to rule that the personal assets of the individual partners could be used to cover the liability.b The SIPC filed a motion for summary judgment on this
issue. Edward Murphy opposed the request.
IN THE LANGUAGE OF THE COURT

STEPHEN RASLAVICH, Bankruptcy Judge.

* * * *
* * * [I]n Pennsylvania a partner is jointly and severally [separately] liable for certain torts chargeable to the partnership [if those torts are committed within the ordinary course of
the partnership business]. * * * [Emphasis added.]

* * * *
Murphy maintains that he is not * * * liable for Selheimer’s acts because the record does not
show that such conduct was within the ordinary course of business of the partnership * * * .
The record demonstrates that Selheimer & Co. perpetrated its fraud under the guise of operating a brokerage firm. The partnership was a registered securities broker-dealer that accepted
[funds] from clients for investment purposes. Instead, Selheimer embezzled those funds.
Selheimer’s criminal acts were performed within the normal operation of this partnership’s business. Put another way, at the time Selheimer was defrauding clients, it was acting in the ordinary
course of the partnership’s business. The partnership is therefore liable for those acts of Mr.
Selheimer. And if the partnership is liable for those debts, then individual partners, including
Murphy, are jointly and severally liable as well.
* * * *
Alternatively, Murphy argues that there is no evidence of partnership liability * * * because
there is nothing to indicate that Selheimer was acting within the scope of his apparent authority
when defrauding customers. In this Commonwealth, the doctrine of apparent authority has been
incorporated into the principles of agency law. Apparent authority has been defined [in the
Restatement (Second) of Agency, Section 8] as “the power to affect the legal relations of another
person by transactions with third persons, professedly as agent for the other, arising from and in
accordance with the other’s manifestations to third persons.” [According to the Restatement
(Second) of Agency, Section 27, the] general rule governing the creation of apparent authority is:
Except for the execution of instruments under seal or for the conduct of transactions required by statute to
be authorized in a particular way, apparent authority to do an act is created as to a third person by written
or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to
act for him.

Apparent authority exists when a principal, by words or conduct, leads people with whom the
alleged agent deals to believe the principal has granted the agent authority he or she purports to
exercise. Apparent authority may result when a principal permits an agent to occupy a position [in]
which, according to the ordinary experience and habits of mankind, it is usual for that occupant to
have authority of a particular kind. The nature and extent of an agent’s apparent authority is a question of fact for the fact-finder. [Emphasis added.]
Murphy misinterprets agency law when he argues that Selheimer lacked authority, express or
apparent, to defraud clients. His argument operates from the erroneous premise that the record

must show that Selheimer & Co., as principal, gave Perry Selheimer, as agent, license to steal. If that
were so, then the doctrine of apparent authority would be eviscerated [gutted]. What matters is
whether Selheimer & Co. was authorized to accept client funds for investment. And the record
shows that it certainly was: Selheimer & Co. was a broker-dealer registered with the SEC. Mr.
Selheimer formally admitted—pleaded guilty, in fact—to having committed “an abuse of trust” as
to his clients. Client confidence would not have been placed in him unless he held himself out as
b. As you will read in Chapter 36, in most states, the partners in a partnership are both jointly and severally (separately, or
individually) liable for all partnership obligations.
CASE CONTINUES


662

CASE 32.2 CONTINUED

an honest broker-dealer of financial investments; otherwise, clients simply would have taken their
business elsewhere. There is thus sufficient proof to support a finding that Selheimer was acting
within his apparent authority when defrauding clients. That, in turn, supports a finding of liability
as to the partnership which may by assessed against Murphy.

•

Decision and Remedy The court found that “Selheimer & Co. is deficient; that Murphy was
a partner of Selheimer & Co.; and that he is indirectly liable under Pennsylvania law for the acts of
Perry Selheimer which are chargeable to Selheimer & Co.” on a theory of apparent authority. The
court issued a summary judgment “in a liquidated amount for the $251,158.12 in claims advanced
by [the] SIPC and an additional $840,667 for the customer claim of Jeanne Murphy.”

• What If the Facts Were Different? If Selheimer & Company had not had the authority

to accept funds for investment, did not authorize its manager to accept such funds, and did not represent that the manager or the firm had this authority, would the outcome in this case have been different? Explain.

•

The Global Dimension Suppose that Selheimer & Company handled accounts for a number of clients located in foreign nations. Would these foreign clients be able to sue under U.S. agency
law and hold Murphy indirectly liable for the acts of his partner Selheimer? Why or why not?
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Misrepresentation Tort liability
based on fraud requires proof that a material misstatement was made knowingly and with the intent to
deceive. An agent’s innocent mistakes occurring in a
contract transaction or involving a warranty contained
in the contract can provide grounds for the third
party’s rescission of the contract and the award of
damages.Moreover, justice dictates that when a principal knows that an agent is not accurately advised of
facts but does not correct either the agent’s or the third
party’s impressions, the principal is directly responsible to the third party for resulting damages.The point
is that the principal is always directly responsible for
an agent’s misrepresentation made within the scope of
authority.

Innocent

Liability for Agent’s Negligence
Under the doctrine of respondeat superior,10 the
principal-employer is liable for any harm caused to a
third party by an agent-employee within the scope
of employment. This doctrine imposes vicarious
liability, or indirect liability, on the employer—that is,
liability without regard to the personal fault of the

10. Pronounced ree-spahn-dee-uht soo-peer-ee-your. The doctrine of respondeat superior applies not only to employeremployee relationships but also to other principal-agent
relationships in which the principal has the right of control over
the agent.

employer for torts committed by an employee in the
course or scope of employment.11 Third parties
injured through the negligence of an employee can
sue either that employee or the employer, if the
employee’s negligent conduct occurred while the
employee was acting within the scope of employment.
Rationale Underlying the Doctrine of
Respondeat Superior At early common law, a

servant (employee) was viewed as the master’s
(employer’s) property.The master was deemed to have
absolute control over the servant’s acts and was held
strictly liable for them no matter how carefully the
master supervised the servant. The rationale for the
doctrine of respondeat superior is based on the social
duty that requires every person to manage his or her
affairs, whether accomplished by the person or
through agents, so as not to injure another. Liability is
imposed on employers because they are deemed to
be in a better financial position to bear the loss. The
superior financial position carries with it the duty to
be responsible for damages.
Generally, public policy requires that an injured
person be afforded effective relief, and a business
enterprise is usually better able to provide that relief

than is an individual employee. Employers normally

11. The theory of respondeat superior is similar to the theory of
strict liability covered in Chapter 7.


663

carry liability insurance to cover any damages
awarded as a result of such lawsuits.They are also able
to spread the cost of risk over the entire business enterprise.
The doctrine of respondeat superior, which the
courts have applied for nearly two centuries,continues
to have practical implications in all situations involving principal-agent (employer-employee) relationships.Today, the small-town grocer with one clerk and
the multinational corporation with thousands of
employees are equally subject to the doctrinal
demand of “let the master respond.” (Keep this principle in mind as you read through Chapters 33 and 34.)
Determining the Scope of Employment

The key to determining whether a principal may be
liable for the torts of an agent under the doctrine of
respondeat superior is whether the torts are committed
within the scope of the agency or employment. The
Restatement (Second) of Agency, Section 229, outlines
the following general factors that courts will consider
in determining whether a particular act occurred
within the course and scope of employment:

1. Whether the employee’s act was authorized by the
employer.

2. The time, place, and purpose of the act.
3. Whether the act was one commonly performed by
employees on behalf of their employers.

4. The extent to which the employer’s interest was
advanced by the act.

5. The extent to which the private interests of the
employee were involved.
6. Whether the employer furnished the means or
instrumentality (for example,a truck or a machine)
by which an injury was inflicted.
7. Whether the employer had reason to know that the
employee would perform the act in question and
whether the employee had done it before.
8. Whether the act involved the commission of a serious crime.
The Distinction between a “Detour” and a
“Frolic” A useful insight into the concept of “scope

of employment” may be gained from Judge Baron
Parke’s classic distinction between a “detour” and a
“frolic” in the case of Joel v. Morison (1834).12 In this
case, the English court held that if a servant merely
took a detour from his master’s business, the master
12. 6 Car. & P. 501, 172 Eng. Rep. 1338 (1834).

will be responsible. If, however, the servant was on a
“frolic of his own” and not in any way “on his master’s
business,” the master will not be liable.

Consider an example. Mandel, a traveling salesperson, while driving his employer’s vehicle to call on a
customer, decides to stop at the post office—which is
one block off his route—to mail a personal letter. As
Mandel approaches the post office,he negligently runs
into a parked vehicle owned by Chan. In this situation,
because Mandel’s detour from the employer’s business
is not substantial, he is still acting within the scope of
employment, and the employer is liable. The result
would be different, though, if Mandel had decided to
pick up a few friends for cocktails in another city and
in the process had negligently run his vehicle into
Chan’s. In that circumstance, the departure from the
employer’s business would be substantial, and the
employer normally would not be liable to Chan for
damages. Mandel would be considered to have been
on a “frolic” of his own.
Employee Travel Time An employee going to

and from work or to and from meals is usually considered to be outside the scope of employment. In contrast, all travel time of traveling salespersons or others
whose jobs require them to travel is normally considered to be within the scope of employment for the
duration of the business trip, including the return trip
home, unless there is a significant departure from the
employer’s business.
of Dangerous Conditions The
employer is charged with knowledge of any dangerous conditions discovered by an employee and pertinent to the employment situation.Suppose that Brad,a
maintenance employee in an apartment building,
notices a lead pipe protruding from the ground in the
building’s courtyard. Brad neglects either to fix the
pipe or to inform his employer of the danger. John falls
on the pipe and is injured. The employer is charged

with knowledge of the dangerous condition regardless
of whether Brad actually informed the employer. That
knowledge is imputed to the employer by virtue of the
employment relationship.

Notice

Borrowed Servants Employers sometimes lend
the services of their employees to other employers.
Suppose that an employer leases ground-moving equipment to another employer and sends along an
employee to operate the machinery. Who is liable for
injuries caused by the employee’s negligent actions on


664

the job site? Liability turns on which employer had the
primary right to control the employee at the time the
injuries occurred.Generally,the employer who rents out
the equipment is presumed to retain control over her or
his employee. If the rental is for a relatively long period
of time, however, control may be deemed to pass to the

EXTENDED

C A S E 32.3

employer who is renting the equipment and presumably controlling and directing the employee.
The following case illustrates the two-pronged test
that courts often use to determine liability in situations

in which one employer lends an employee to another
company for a particular project.

Galvao v. G. R. Robert Construction Co.
Supreme Court of New Jersey, 2004. 179 N.J. 462, 846 A.2d 1215.

Justice LaVECCHIA delivered the opinion of the Court.

* * * *
On October 27,1998,plaintiff,Sergio Galvao,was injured while working on the Route 21 Viaduct
Replacement Project (the Project) in Newark [New Jersey]. Specifically, a rebar cage used for the
pouring of concrete failed and plaintiff fell twenty feet onto another rebar cage. Employees of
[G. R. Robert Construction Company (Robert)] had constructed the defective rebar cage. * * *
George Harms Excavating Company (Excavating), * * * [was] the payor of plaintiff’s salary.
* * *
Robert and Excavating are wholly owned subsidiaries of George Harms Construction Company
(GHCC) * * * .
Robert and Excavating serve as payroll companies that supply employees to GHCC and receive
reimbursement from GHCC for their respective payroll expenses. * * *
* * * [W]hen plaintiff was injured,GHCC was performing construction and related services
on the Project pursuant to a contract (the Contract) with the New Jersey Department of
Transportation (DOT). * * *
In respect of the performance of work on the Project,GHCC controlled the direction and supervision of all workers, which necessarily included all employees of Robert and Excavating. * * *
In May 1999, plaintiffs filed this * * * action [in a New Jersey state court] against Robert,
asserting liability under the doctrine of respondeat superior for the alleged negligent construction
of the rebar cage by Robert’s employees.Plaintiffs already had filed a workers’compensation claim
against GHCC and received benefits. The trial court dismissed the complaint on Robert’s motion
for summary judgment. * * *
* * * [A state intermediate appellate court] affirmed * * * . [The New Jersey Supreme
Court] granted plaintiffs’ petition for certification.

* * * *
* * * [T]he test * * * for determining whether a general employer (i.e. Robert) may be
held vicariously liable for the alleged negligence of its special employee loaned to a special
employer (i.e. GHCC) necessarily contains two parts.The threshold inquiry is whether the general
employer controlled the special employee. By “control,” we mean control in the fundamental
respondeat superior sense,which * * * [is] the right to direct the manner in which the business
shall be done, as well as the result to be accomplished, or in other words, not only what shall be
done,but how it shall be done.In addition to evidence of direct or “on-spot”control over the means
by which the task is accomplished, we will infer an employer’s control based on the method of payment, who furnishes the equipment, and the right of termination. The retention of either on-spot, or
broad, control by a general employer would satisfy this first prong. [Emphasis added.]
If a general employer is not found to exercise either on-spot, or broad, control over a special
employee, then the general employer cannot be held vicariously liable for the alleged negligence of
that employee. If the general employer did exercise such control, however, then it must be ascertained whether the special employee furthered the business of the general employer. A special
employee is furthering the business of the general employer if the work being done by the special
employee is within the general contemplation of the general employer, and the general employer
derives an economic benefit by loaning its employee.If the answer to the second question is in the


665

CASE 32.3 CONTINUED

affirmative,the general employer may be held vicariously liable for the alleged negligence of a special employee. [Emphasis added.]
* * * *
In this matter, we are confident that plaintiffs cannot satisfy either prong necessary to hold
Robert vicariously liable under the doctrine of respondeat superior. In respect of the first prong
concerning control,* * * Robert did not have the type of broad influence over the Project from
which we might infer the right to control, such as paying plaintiff’s salary, furnishing construction
materials or equipment for the Project,or retaining the right to hire forepersons and assign employees to particular aspects of the Project. Nor is there any evidence that Robert had on-spot control
of the special employees. Robert did not direct the on-site work, design the rebar cages, or have

any responsibility for safety.Thus, under the facts of this matter, Robert did not control the Project
or the activities on the Project. For that reason alone, we conclude that Robert cannot be held
vicariously liable under respondeat superior for plaintiff’s injuries.
Although the lack of control ends the inquiry, for completeness we add the following analysis
of the second prong. Robert did not derive any economic benefit by providing special employees
to GHCC. Robert’s only income was reimbursement from GHCC for its payroll expenses, a passthrough transaction. Any benefit derived from the use of Robert’s employees on the Project, economic or otherwise, was GHCC’s alone. It was GHCC that created Robert and Excavating * * * ,
and it was GHCC that entered the contract with, and was paid by, DOT for completing the Project.
The only beneficiaries of the contract between DOT and GHCC, other than the principals themselves, were the employees who received remuneration for their services. Therefore, as with the
control prong, plaintiff failed to meet the business-furtherance prong to demonstrate that Robert
may be held vicariously liable for the alleged negligence of the special employees here.
* * * *
The judgment of the [state intermediate appellate court] is affirmed.

1. What are the two “prongs” of the test for liability for injuries caused by the negligence of
borrowed servants (employees) under the doctrine of respondeat superior, according to
the court in the Galvao case?
2. How does the basis for the second “prong” of this test resemble the basis for the imposition of strict liability in other cases?
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Liability for Agent’s Intentional Torts
Most intentional torts that employees commit have no
relation to their employment; thus,their employers will
not be held liable. Nevertheless, under the doctrine of
respondeat superior, the employer can be liable for
intentional torts of the employee that are committed
within the course and scope of employment, just as
the employer is liable for negligence. For example, an
employer is liable when an employee (such as a
“bouncer” at a nightclub or a security guard at a
department store) commits the tort of assault and battery or false imprisonment while acting within the

scope of employment.
In addition, an employer who knows or should
know that an employee has a propensity for committing tortious acts is liable for the employee’s acts even

if they would not ordinarily be considered within the
scope of employment. For example, if an employer
hires a bouncer knowing that he has a history of
arrests for criminal assault and battery, the employer
may be liable if the employee viciously attacks a
patron in the parking lot after hours.
An employer is also liable for permitting an
employee to engage in reckless actions that can injure
others. For example, an employer observes an
employee smoking while filling containerized trucks
with highly flammable liquids. Failure to stop the
employee will cause the employer to be liable for any
injuries that result if a truck explodes. Needless to say,
most employers purchase liability insurance to cover
their potential liability for employee conduct in many
situations (see Chapter 49).


666

Liability for
Independent Contractor’s Torts
Generally, an employer is not liable for physical harm
caused to a third person by the negligent act of an
independent contractor in the performance of the
contract. This is because the employer does not have

the right to control the details of an independent contractor’s performance.Exceptions to this rule are made
in certain situations,though,such as when the contract
involves unusually hazardous activities—for example,
blasting operations, the transportation of highly
volatile chemicals, or the use of poisonous gases. In
these situations, an employer cannot be shielded from
liability merely by using an independent contractor.
Strict liability is imposed on the employer-principal as
a matter of law. Also, in some states, strict liability may
be imposed by statute.

Liability for Agent’s Crimes
An agent is liable for his or her own crimes. A principal
or employer is not liable for an agent’s or employee’s
crime simply because the agent or employee committed the crime while otherwise acting within the scope
of authority or employment. An exception to this rule
is made when the principal or employer participated
in the crime by conspiracy or other action. In some
jurisdictions, under specific statutes, a principal may
be liable for an agent’s violating, in the course and
scope of employment, such regulations as those governing sanitation,prices,weights,and the sale of liquor.

Termination of an Agency
Agency law is similar to contract law in that both an
agency and a contract may be terminated by an act of
the parties or by operation of law. Once the relationship between the principal and the agent has ended,
the agent no longer has the right (actual authority) to
bind the principal. For an agent’s apparent authority
to be terminated,though,third persons may also need to
be notified that the agency has been terminated.

Termination by Act of the Parties
An agency relationship may be terminated by act of
the parties in a number of ways, including those discussed here.
Lapse of Time An agency agreement may specify
the time period during which the agency relationship

will exist.If so,the agency ends when that time expires.
For example,Akers signs an agreement of agency with
Janz “beginning January 1,2009,and ending December
31, 2010.” The agency is automatically terminated on
December 31, 2010. If no definite time is stated, then
the agency continues for a reasonable time and can
be terminated at will by either party. What constitutes
a reasonable time depends on the circumstances and
the nature of the agency relationship.
Purpose Achieved An agent can be employed to

accomplish a particular objective, such as the purchase of stock for a cattle rancher. In that situation, the
agency automatically ends after the cattle have been
purchased. If more than one agent is employed to
accomplish the same purpose, such as the sale of real
estate,the first agent to complete the sale automatically
terminates the agency relationship for all the others.
Occurrence of a Specific Event An agency
can be created to terminate on the happening of a certain event. For example, if Posner appoints Rubik to
handle her business affairs while she is away, the
agency automatically terminates when Posner returns.
Mutual Agreement Recall from basic contract

law that parties can rescind (cancel) a contract by
mutually agreeing to terminate the contractual relationship at any time.The same holds true in agency law
regardless of whether the agency contract is in writing
or whether it is for a specific duration.
At the Option of One Party As a general rule,
either party can terminate the agency relationship—
because agency is a consensual relationship, and thus
neither party can be compelled to continue in the relationship.The agent’s act is said to be a renunciation of
authority. The principal’s act is a revocation of authority.Although both parties may have the power to terminate the agency, they may not possess the right to
terminate and may therefore be liable for breach of
contract.

Wrongful Termination. Wrongful termination can
subject the canceling party to a lawsuit for breach of
contract. For example, Rawlins has a one-year employment contract with Munro to act as agent in return for
$65,000. Munro has the power to discharge Rawlins
before the contract period expires.If Munro discharges
Rawlins,though,he can be sued for breaching the contract and will be liable to Rawlins for damages
because he had no right to terminate the agency.


667

Even in an agency at will—that is, an agency that
either party may terminate at any time—the principal
who wishes to terminate must give the agent
reasonable notice.The notice must be at least sufficient
to allow the agent to recoup his or her expenses and,
in some situations, to make a normal profit.

Manning has lost the bid,Stone’s authority to make the
transportation arrangement terminates. If the agent’s
authority is written, however, normally it must be
revoked in writing (unless the written document contained an expiration date).

Termination by Operation of Law
Agency Coupled with an Interest. A special rule
applies in an agency coupled with an interest. This type
of agency is not an agency in the usual sense because
it is created for the agent’s benefit instead of for the
principal’s benefit.For example,suppose that Julie borrows $5,000 from Rob, giving Rob some of her jewelry
and signing a letter authorizing him to sell the jewelry
as her agent if she fails to repay the loan. After Julie
receives the $5,000 from Rob, she attempts to revoke
his authority to sell the jewelry as her agent. Julie will
not succeed in this attempt because a principal cannot revoke an agency created for the agent’s benefit.
An agency coupled with an interest should not be
confused with a situation in which the agent merely
derives proceeds or profits from the sale of the subject
matter. For example, an agent who merely receives a
commission from the sale of real property does not
have a beneficial interest in the property itself.
Notice of Termination When an agency has

been terminated by act of the parties, it is the principal’s duty to inform any third parties who know of the
existence of the agency that it has been terminated
(notice of the termination may be given by others,
however).
Although an agent’s actual authority ends when
the agency is terminated,an agent’s apparent authority

continues until the third party receives notice (from
any source) that such authority has been terminated.
If the principal knows that a third party has dealt with
the agent, the principal is expected to notify that person directly. For third parties who have heard about
the agency but have not yet dealt with the agent,
constructive notice is sufficient.13
No particular form is required for notice of termination of the principal-agent relationship to be effective.
The principal can personally notify the agent, or the
agent can learn of the termination through some other
means. For example, Manning bids on a shipment of
steel, and Stone is hired as an agent to arrange transportation of the shipment. When Stone learns that
13. With constructive notice of a fact, knowledge of the fact is
imputed by law to a person if he or she could have discovered
the fact by proper diligence. Constructive notice is often accomplished by publication in a newspaper.

Certain events will terminate agency authority automatically because their occurrence makes it impossible for the agent to perform or improbable that the
principal would continue to want performance. We
look at these events here. Note that when an agency
terminates by operation of law, there is no duty to
notify third persons—unless the agent’s authority is
coupled with an interest.
Death or Insanity The general rule is that the
death or insanity of either the principal or the agent
automatically and immediately terminates an ordinary
agency relationship.14 Knowledge of the death or
insanity is not required. For example, Grey sends
Bosley to Japan to purchase a rare book.Before Bosley
makes the purchase, Grey dies. Bosley’s agent status is
terminated at the moment of Grey’s death,even though
Bosley does not know that Grey has died.(Some states,

however, have changed the common law by statute to
make knowledge of the principal’s death a requirement for agency termination.)
An agent’s transactions that occur after the death of
the principal are not binding on the principal’s estate.
Assume that Bosley is hired by Grey to collect a debt
from Cochran (a third party). Grey dies, but Bosley, not
knowing of Grey’s death, still collects the debt from
Cochran. Cochran’s payment to Bosley is no longer
legally sufficient to discharge the debt to Grey because
Bosley no longer has Grey’s authority to collect the
funds.If Bosley absconds with the funds,Cochran must
pay the debt again to Grey’s estate.
Impossibility When the specific subject matter of
an agency is destroyed or lost, the agency terminates.
For example, Gonzalez employs Raich to sell
Gonzalez’s house. Prior to any sale, the house is
14. There is an exception to this rule in banking.UCC 4–405 provides that the bank, as agent, can continue to exercise specific
types of authority even after the customer’s death or insanity
unless it has knowledge of the death or incompetence. As discussed in Chapter 27, when the bank has knowledge of the customer’s death, it has authority for ten days after the death to pay
checks (but not notes or drafts) drawn by the customer unless it
receives a stop-payment order from someone who has an interest in the account, such as an heir.


668

destroyed by fire. Raich’s agency and authority to sell
the house terminate.Similarly,when it is impossible for
the agent to perform the agency lawfully because of a
change in the law, the agency terminates.
Circumstances When an event

occurs that has such an unusual effect on the subject
matter of the agency that the agent can reasonably
infer that the principal will not want the agency to
continue, the agency terminates. Suppose that Baird
hires Joslen to sell a tract of land for $40,000.
Subsequently, Joslen learns that there is oil under the
land and that the land is therefore worth $1 million.
The agency and Joslen’s authority to sell the land for
$40,000 are terminated.

Changed

nated. In certain circumstances, such as when the
agent’s financial status is irrelevant to the purpose of
the agency, the agency relationship may continue.
Insolvency (defined as the inability to pay debts when
they come due or when liabilities exceed assets), as
distinguished from bankruptcy, does not necessarily
terminate the relationship.
War When the principal’s country and the agent’s

country are at war with each other,the agency is terminated. In this situation, the agency is automatically suspended or terminated because there is no way to
enforce the legal rights and obligations of the parties.
See Concept Summary 32.2 for a synopsis of the rules
governing the termination of an agency.

Bankruptcy If either the principal or the agent

petitions for bankruptcy, the agency is usually termi-

CONCEPT SUMMARY 32.2

Termination of an Agency
Method of
Termination

Rules

Termination of
Agent’s Authority

ACT OF THE PARTIES
1. Lapse of time.

Automatic at end of the stated time.

2. Purpose achieved.

Automatic on the completion of the purpose.

3. Occurrence of a specific
event.

Normally automatic on the happening of the
event.

Notice to Third Parties
Required—

4. Mutual agreement.

Mutual consent required.

5. At the option of one party
(revocation, if by principal;
renunciation, if by agent).

Either party normally has a right to terminate
the agency but may lack the power to do so,
which can lead to liability for breach of
contract.

1. Direct to those who have
dealt with agency.
2. Constructive to all others.

OPERATION OF LAW
1. Death or insanity.

Automatic on the death or insanity of either
the principal or the agent (except when the
agency is coupled with an interest).

2. Impossibility—destruction
of the specific subject matter.

Applies any time the agency cannot be
performed because of an event beyond the
parties’ control.

3. Changed circumstances.

Events so unusual that it would be inequitable
to allow the agency to continue to exist.

4. Bankruptcy.

A bankruptcy decree (not mere insolvency)
usually terminates the agency.

5. War between principal’s
country and agent’s country.

Automatically suspends or terminates the
agency—no way to enforce legal rights.

No Notice Required—
Automatic on the happening
of the event.


669

Liability to Third Parties and Termination
Lynne Meyer, on her way to a business meeting and in a hurry, stopped at a Buy-Mart
store for a new pair of nylons to wear to the meeting. There was a long line at one of the
checkout counters, but a cashier, Valerie Watts, opened another counter and began loading the cash
drawer. Meyer told Watts that she was in a hurry and asked Watts to work faster. Instead, Watts only
slowed her pace. At this point, Meyer hit Watts. It is not clear from the record whether Meyer hit Watts
intentionally or, in an attempt to retrieve the nylons, hit her inadvertently. In response, Watts grabbed

Meyer by the hair and hit her repeatedly in the back of the head, while Meyer screamed for help.
Management personnel separated the two women and questioned them about the incident. Watts was
immediately fired for violating the store’s no-fighting policy. Meyer subsequently sued Buy-Mart, alleging
that the store was liable for the tort (assault and battery) committed by its employee. Using the
information presented in the chapter, answer the following questions.
1. Under what doctrine discussed in this chapter might Buy-Mart be held liable for the tort committed
by Watts?
2. What is the key factor in determining whether Buy-Mart is liable under this doctrine?
3. How is Buy-Mart’s potential liability affected depending on whether Watts’s behavior constituted an
intentional tort or a tort of negligence?
4. Suppose that when Watts applied for the job at Buy-Mart, she disclosed in her application that she
had previously been convicted of felony assault and battery. Nevertheless, Buy-Mart hired Watts as a
cashier. How might this fact affect Buy-Mart’s liability for Watts’s actions?

equal dignity rule 653

power of attorney 653

express authority 653

ratification 657

implied authority 654

respondeat superior 662

apparent authority 655

notary public 653

undisclosed principal 657

disclosed principal 657

partially disclosed principal 657

vicarious liability 662

e-agent 659

32–1. Adam is a traveling salesperson for
Peter Petri Plumbing Supply Corp. Adam
has express authority to solicit orders from
customers and to offer a 5 percent discount if payment
is made within thirty days of delivery. Petri has said nothing to Adam about extending credit. Adam calls on a
new prospective customer, John’s Plumbing Firm. John
tells Adam that he will place a large order for Petri products if Adam will give him a 10 percent discount with

payment due in equal installments thirty,sixty,and ninety
days from delivery. Adam says he has authority to make
such a contract. John calls Petri and asks if Adam is
authorized to make contracts giving a discount.No mention is made of payment terms. Petri replies that Adam
has authority to give discounts on purchase orders. On
the basis of this information, John orders $10,000 worth
of plumbing supplies and fixtures. The goods are delivered and are being sold. One week later, John receives a


670

bill for $9,500, due in thirty days. John insists he owes

only $9,000 and can pay it in three equal installments, at
thirty, sixty, and ninety days from delivery. Discuss the liability of Petri and John only.

32–2. QUESTION WITH SAMPLE ANSWER
Alice Adams is a purchasing agent-employee
for the A & B Coal Supply partnership. Adams
has authority to purchase the coal needed by A & B to
satisfy the needs of its customers.While Adams is leaving
a coal mine from which she has just purchased a large
quantity of coal, her car breaks down. She walks into a
small roadside grocery store for help. While there, she
runs into Will Wilson, who owns 360 acres back in the
mountains with all mineral rights. Wilson, in need of
cash, offers to sell Adams the property for $1,500 per
acre. On inspection of the property, Adams forms the
opinion that the subsurface contains valuable coal
deposits. Adams contracts to purchase the property for
A & B Coal Supply, signing the contract “A & B Coal
Supply, Alice Adams, agent.” The closing date is August 1.
Adams takes the contract to the partnership.The managing partner is furious, as A & B is not in the property business. Later, just before closing, both Wilson and the
partnership learn that the value of the land is at least
$15,000 per acre. Discuss the rights of A & B and Wilson
concerning the land contract.
• For a sample answer to Question 32–2,
go to Appendix I at the end of this text.

32–3. Paula Enterprises hires Able to act as its agent to
purchase a 1,000-acre tract of land from Thompson for
$1,000 per acre. Paula Enterprises does not wish
Thompson to know that it is the principal or that Able is

its agent.Paula wants the land for a new country housing
development, and Thompson may not sell the land for
that purpose or may demand a premium price. Able
makes the contract for the purchase, signing only his
name as purchaser and not disclosing the agency relationship to Thompson. The closing and transfer of deed
are to take place on September 1.
(a) If Thompson learns of Paula’s identity on August 1,
can Thompson legally refuse to deed the property
on September 1? Explain.
(b) Paula gives Able the funds for the closing, but Able
absconds with the funds, causing a breach of Able’s
contract at the date of closing. Thompson then
learns of Paula’s identity and wants to enforce the
contract.Discuss fully Thompson’s rights under these
circumstances.

32–4. ABC Tire Corp. hires Arnez as a traveling salesperson and assigns him a geographic area and time schedule in which to solicit orders and service customers.
Arnez is given a company car to use in covering the ter-

ritory. One day, Arnez decides to take his personal car to
cover part of his territory. It is 11:00 A.M., and Arnez has
just finished calling on all customers in the city of
Tarrytown. His next appointment is at 2:00 P.M. in the city
of Austex, twenty miles down the road. Arnez starts out
for Austex, but halfway there he decides to visit a former
college roommate who runs a farm ten miles off the
main highway. Arnez is enjoying his visit with his former
roommate when he realizes that it is 1:45 P.M. and that he
will be late for the appointment in Austex. Driving at a
high speed down the country road to reach the main

highway, Arnez crashes his car into Thomas’s tractor,
severely injuring Thomas, a farmer. Thomas claims that
he can hold ABC Tire Corp. liable for his injuries. Discuss
fully ABC’s liability in this situation.

32–5. Undisclosed Principal. John Dunning was the sole
officer of the R.B. Dunning Co. and was responsible for
the management and operation of the business. When
the company rented a warehouse from Samuel and Ruth
Saliba, Dunning did not say that he was acting for the
firm.The parties did not have a written lease.Business faltered,and the firm stopped paying rent.Eventually,it went
bankrupt and vacated the property. The Salibas filed a
suit in a Maine state court against Dunning personally,
seeking to recover the unpaid rent.Dunning claimed that
the debt belonged to the company because he had been
acting only as its agent. Who is liable for the rent, and
why? [Estate of Saliba v. Dunning, 682 A.2d 224 (Me.
1996)]
32–6. Liability for Employee’s Acts. Federated Financial
Reserve Corp. leases consumer and business equipment. As part of its credit-approval and debt-collection
practices, Federated hires credit collectors and authorizes them to obtain credit reports on its customers.
Janice Caylor, a Federated collector, used this authority
to obtain a report on Karen Jones, who was not a
Federated customer but who was the former wife of
Caylor’s roommate, Randy Lind.When Jones discovered
that Lind had her address and how he had obtained it,
she filed a suit in a federal district court against
Federated and the others. Jones claimed, in part, that
they had violated the Fair Credit Reporting Act, the goal
of which is to protect consumers from the improper use

of credit reports. Under what theory might an employer
be held liable for an employee’s violation of a statute?
Does that theory apply in this case? Explain. [Jones v.
Federated Financial Reserve Corp., 144 F.3d 961 (6th Cir.
1998)]
32–7. Liability for Independent Contractor’s Torts. Greif
Brothers Corp., a steel drum manufacturer, owned and
operated a manufacturing plant in Youngstown, Ohio. In
1987, Lowell Wilson, the plant superintendent, hired
Youngstown Security Patrol, Inc. (YSP), a security company, to guard Greif property and “deter thieves and van-


671

dals.” Some YSP security guards, as Wilson knew, carried
firearms.Eric Bator,a YSP security guard,was not certified
as an armed guard but nevertheless took his gun, in a
briefcase, to work. While working at the Greif plant on
August 12,1991,Bator fired his gun at Derrell Pusey,in the
belief that Pusey was an intruder. The bullet struck and
killed Pusey. Pusey’s mother filed a suit in an Ohio state
court against Greif and others, alleging, in part, that her
son’s death was the result of YSP’s negligence, for which
Greif was responsible. Greif filed a motion for a directed
verdict. What is the plaintiff’s best argument that Greif is
responsible for YSP’s actions? What is Greif’s best
defense? Explain. [Pusey v. Bator, 94 Ohio St.3d 275, 762
N.E.2d 968 (2002)]

32–8. CASE PROBLEM WITH SAMPLE ANSWER

In 1998,William Larry Smith signed a lease for
certain land in Chilton County, Alabama,
owned by Sweet Smitherman.The lease stated that it was
between “Smitherman, and WLS, Inc., d/b/a [doing business as] S & H Mobile Homes” and the signature line
identified the lessee as “WLS, Inc. d/b/a S & H Mobile
Homes . . . By: William Larry Smith, President.” The
amount of the rent was $5,000, payable by the tenth of
each month. All of the checks that Smitherman
received for the rent identified the owner of the
account as “WLS Corporation d/b/a S & H Mobile
Homes.” Nearly four years later, Smitherman filed a suit
in an Alabama state court against William Larry Smith,
alleging that he owed $26,000 in unpaid rent. Smith
responded, in part, that WLS was the lessee and that he
was not personally responsible for the obligation to
pay the rent. Is Smith a principal, an agent, both a principal and an agent, or neither? In any event, in the
lease, is the principal disclosed, partially disclosed, or
undisclosed? With the answers to these questions in
mind, who is liable for the unpaid rent, and why?
Discuss. [Smith v. Smitherman, 887 So.2d 285
(Ala.Civ.App. 2004)]
• To view a sample answer for Problem 32–8,
go to this book’s Web site at academic.
cengage.com/blaw/clarkson, select
“Chapter 32,” and click on “Case Problem
with Sample Answer.”

32–9. Apparent Authority. Lee Dennegar and Mark
Knutson lived in Dennegar’s house in Raritan, New
Jersey. Dennegar paid the mortgage and other household expenses. With Dennegar’s consent, Knutson managed their household’s financial affairs and the “general

office functions concerned with maintaining the house.”
Dennegar allowed Knutson to handle the mail and “to
do with it as he chose.” Knutson wrote checks for

Dennegar to sign, although Knutson signed Dennegar’s
name to many of the checks with Dennegar’s consent.
AT&T Universal issued a credit card in Dennegar’s name
in February 2001. Monthly statements were mailed to
Dennegar’s house, and payments were sometimes made
on those statements. Knutson died in June 2003. The
unpaid charges on the card of $14,752.93 were assigned
to New Century Financial Services, Inc. New Century
filed a suit in a New Jersey state court against Dennegar
to collect the unpaid amount. Dennegar claimed that he
never applied for or used the card and knew nothing
about it.Under what theory could Dennegar be liable for
the charges? Explain. [New Century Financial Services,
Inc. v. Dennegar, 394 N.J.Super. 595, 928 A.2d 48 (A.D.
2007)]

32–10. A QUESTION OF ETHICS
Warren Davis lived with Renee Brandt in a
house that Davis owned in Virginia Beach,
Virginia. At Davis’s request, attorney Leigh Ansell prepared, and Davis acknowledged, a durable power of
attorney appointing Ansell to act as Davis’s attorney-infact. Ansell was authorized to sign “any . . . instrument of . . . deposit” and “any contract . . . relating
to . . . personal property.” Ansell could act “in any circumstances as fully and effectively as I could do as part
of my normal, everyday business affairs if acting personally.” A few days later, at Davis’s direction, Ansell prepared,and Davis signed,a will that gave Brandt the right
to occupy, rent-free, the house in which she and Davis
lived “so long as she lives in the premises.” The will’s
other chief beneficiaries were Davis’s daughters, Sharon

Jones and Jody Clark. According to Ansell, Davis
intended to “take care of [Brandt] outside of this will”
and asked Ansell to designate Brandt the beneficiary
“payable on death” (POD) of Davis’s $250,000 certificate of deposit (CD).The CD had no other named beneficiary. Less than two months later, Davis died. A suit
between Brandt and Davis’s daughters ensued in a
Virginia state court. [Jones v. Brandt, 645 S.E.2d 312
(Va. 2007)]
(a) Should the language in a power of attorney be interpreted broadly or strictly? Why?
(b) In this case, did Ansell have the authority under the
power of attorney to change the beneficiary of
Davis’s CD? Explain.
(c) Ansell advised Davis by letter that he had complied with the instruction to designate Brandt the
beneficiary of the CD. Davis made no objection. On
these facts, what theory might apply to validate the
designation?


672

For updated links to resources available on the Web, as well as a variety of other materials, visit
this text’s Web site at
academic.cengage.com/blaw/clarkson
The Legal Information Institute (LII) at Cornell University is an excellent source for information on agency law,
including court cases involving agency concepts.You can access the LII’s Web page on this topic at
www.law.cornell.edu/wex/index.php/Agency
There are now numerous “shopping bots” (e-agents) that will search the Web to obtain the best prices for
specified products.You can obtain the latest reviews on the merits of various shopping bots by going to
www.botspot.com

Legal Research Exercises on the Web

Go to academic.cengage.com/blaw/clarkson, the Web site that accompanies this text. Select “Chapter 32” and
click on “Internet Exercises.” There you will find the following Internet research exercises that you can perform to
learn more about the topics covered in this chapter.
Internet Exercise 32–1: Legal Perspective
Power of Attorney
Internet Exercise 32–2: Management Perspective
Liability in Agency Relationships


T

raditionally, employment
relationships in the United
States were governed primarily by
the common law.Today, in contrast,
the workplace is regulated
extensively by federal and state
statutes. Recall from Chapter 1 that
common law doctrines apply only
to areas not covered by statutory
law. Common law doctrines
have thus been displaced to a
significant extent by statutory
law. In this chapter, we look at the
most significant laws regulating
employment relationships.We

examine other important laws
regulating the workplace—those
prohibiting employment

discrimination—in the next
chapter.
Keep in mind, however, that
certain aspects of employment
relationships are still governed by
common law rules, including the
rules under contract, tort, and
agency law discussed in previous
chapters of this text. Given that
many employees (those who deal
with third parties) normally are
deemed to be agents of their

Employment at Will
Traditionally, employment relationships have generally been governed by the common law doctrine of
employment at will. Under this doctrine, either the
employer or the employee may terminate an
employment contract at any time and for any reason, unless the contract specifically provides to the
contrary.This doctrine is still in widespread use, and
only one state (Montana) does not apply it. Indeed,
as discussed in the Contemporary Legal Debates feature in Chapter 12 on pages 260 and 261, the legal
status of the majority of American workers is
“employee at will.” Nonetheless, as has occurred in
many other areas of employment law, federal and
state statutes have partially displaced the common
law and now prevent the doctrine from being
applied in a number of circumstances. Today, an

employer, agency concepts are
especially relevant in the

employment context, as is the
distinction between employees
and independent contractors.
Generally, the laws discussed in
this chapter and in Chapter 34
apply only to the employeremployee relationship and not to
independent contractors. Here,
we begin our discussion by
examining one other common law
doctrine that has not been entirely
displaced by statutory law—that of
employment at will.

employer may not fire an employee if to do so
would violate a federal or state statute, such as one
prohibiting termination of employment for discriminatory reasons (see Chapter 34).

Exceptions to the
Employment-at-Will Doctrine
Under the employment-at-will doctrine, as mentioned,
an employer may hire and fire employees at will
(regardless of the employees’ performance) without
liability, unless the decision violates the terms of an
employment contract or statutory law. Because of the
harsh effects of the employment-at-will doctrine for
employees, courts have carved out various exceptions
to this doctrine. These exceptions are based on contract theory, tort theory, and public policy.
Exceptions Based on Contract Theory

Some courts have held that an implied employment

673


674

contract exists between the employer and the
employee. If the employee is fired outside the terms of
the implied contract, he or she may succeed in an
action for breach of contract even though no written
employment contract exists.
For example, an employer’s manual or personnel
bulletin may state that, as a matter of policy, workers
will be dismissed only for good cause. If the employee
is aware of this policy and continues to work for the
employer, a court may find that there is an implied
contract based on the terms stated in the manual or
bulletin. Generally, the key consideration in determining whether an employment manual creates an
implied contractual obligation is the employee’s reasonable expectations.
Oral promises that an employer makes to employees regarding discharge policy may also be considered part of an implied contract.If the employer fires a
worker in a manner contrary to what was promised, a
court may hold that the employer has violated the
implied contract and is liable for damages. Most state
courts will consider this claim and judge it by traditional contract standards. In some cases, courts have
held that an implied employment contract existed
even though the employees agreed in writing to be
employees at will.1 In a few states, courts have gone
further and held that all employment contracts contain an implied covenant of good faith. In those states,
if an employer fires an employee for an arbitrary or
unjustified reason, the employee can claim that the
covenant of good faith was breached and the contract

violated.
Exceptions Based on Tort Theory In some

situations, the discharge of an employee may give rise
to an action for wrongful discharge under tort theories.Abusive discharge procedures may result in intentional infliction of emotional distress or defamation.In
addition, some courts have permitted workers to sue
their employers under the tort theory of fraud. Under
this theory,an employer may be held liable for making
false promises to a prospective employee if the person
detrimentally relies on the employer’s representations
by taking the job.
For example, suppose that an employer induces a
prospective employee to leave a lucrative position and
move to another state by offering “a long-term job with
a thriving business.” In fact, the employer is having sig1. See, for example, Kuest v. Regent Assisted Living, Inc., 111
Wash.App. 36, 43 P.3d 23 (2002).

nificant financial problems.Furthermore,the employer
is planning a merger that will result in the elimination
of the position offered to the prospective employee. If
the person takes the job in reliance on the employer’s
representations and is laid off shortly thereafter, he or
she may be able to bring an action against the
employer for fraud.2
Exceptions Based on Public Policy The

most widespread common law exception to the
employment-at-will doctrine is that made on the basis
of public policy.Courts may apply this exception when
an employer fires a worker for reasons that violate a

fundamental public policy of the jurisdiction.
Requirements for the Public-Policy Exception.
Generally, the courts require that the public policy
involved be expressed clearly in the statutory law governing the jurisdiction. The public policy against
employment discrimination, for instance, is expressed
clearly in federal and state statutes.Thus, if a worker is
fired for discriminatory reasons but has no cause of
action under statutory law (because, for example, the
workplace has too few employees to be covered by
the statute), that worker may succeed in a suit against
the employer for wrongful discharge in violation of
public policy.3
Whistleblowing and Public Policy. On occasion,a
public-policy exception will also be made to protect
an employee who has engaged in whistleblowing—
that is, reporting to government officials, uppermanagement authorities, or the press that the
employer is involved in some unsafe or illegal activity.
Whistleblowers have sometimes been protected from
wrongful discharge for reasons of public policy, as
have employees who were fired for refusing to perform
an illegal act when directed to do so by the employer.
Does a nursing home employee have a cause of
action against her employer for a discharge in violation of public policy when she is fired for reporting the
abuse of a patient as mandated by a state statute? That
was the question in the following case.

2. See,for example,Lazar v.Superior Court of Los Angeles Co., 12
Cal.4th 631,909 P.2d 981,49 Cal.Rptr.2d 377 (1996); and Helmer v.
Bingham Toyota Isuzu, 129 Cal.App. 4th 1121, 29 Cal.Rptr.3d 136
(2005).

3. See,for example,Molesworth v.Brandon, 341 Md.621,672 A.2d
608 (1996); and Wholey v.Sears Roebuck, 370 Md.38,803 A.2d 482
(2002).


675

C A S E 33.1 Wendeln v. The Beatrice Manor, Inc.
Supreme Court of Nebraska, 2006. 271 Neb. 373, 712 N.W.2d 226.

•

Background and Facts Rebecca Wendeln, a twenty-one-year-old certified nursing assistant,
worked as a staffing coordinator at The Beatrice Manor, Inc., in Beatrice, Nebraska. One of the patients at
Beatrice Manor was wheelchair-bound. Moving the patient required two persons and a gait belt (an
ambulatory aid used to transfer or mobilize patients). In December 2001, two medical aides told
Wendeln that the patient had been improperly moved and had been injured. Wendeln reported the incident to the Nebraska Department of Health and Human Services, as required under the state Adult
Protective Services Act (APSA). A few days later, Wendeln’s supervisor angrily confronted her about the
report. Intimidated, Wendeln asked for a day off, which was granted. On her return, she was fired. She
filed a suit in a Nebraska state court against Beatrice Manor, alleging, among other things, that her discharge was a violation of the state’s public policy. A jury returned a verdict in her favor, awarding damages of $79,000. Beatrice Manor appealed to the Nebraska Supreme Court.
IN THE LANGUAGE OF THE COURT

McCORMACK, J. [Justice]

* * * *
* * * Beatrice Manor asserts that * * * “[t]here is no clear legislative enactment declaring an important public policy with such clarity as to provide a basis for [Wendeln’s]
civil action for wrongful discharge.”
The clear rule in Nebraska is that unless constitutionally, statutorily, or contractually prohibited,
an employer,without incurring liability,may terminate an at-will employee at any time with or without reason.We recognize, however, a public policy exception to the at-will employment doctrine.
Under the public policy exception, we will allow an employee to claim damages for wrongful discharge when the motivation for the firing contravenes public policy. * * * [H]owever, * * * it

[is] important that abusive discharge claims of employees at-will be limited to manageable and
clear standards.Thus, the right of an employer to terminate employees at will should be restricted
only by exceptions created by statute or to those instances where a very clear mandate of public
policy has been violated. [Emphasis added.]
* * * [A]n employee could state a cause of action for retaliatory discharge based upon the
allegation that the employee was terminated from her employment because she filed a workers’
compensation claim. * * * Nebraska law neither specifically prohibit[s] an employer from discharging an employee for filing a workers’ compensation claim,nor specifically [makes] it a crime
for an employer to do so. Nevertheless, * * * the general purpose and unique nature of the
Nebraska Workers’ Compensation Act itself provides a mandate for public policy. * * * [T]he
Nebraska Workers’ Compensation Act was meant to create * * * rights for employees and
* * * such [a] beneficent purpose would be undermined by failing to adopt a rule which
allows a retaliatory discharge claim for employees discharged for filing a workers’ compensation
claim.This is because were we not to recognize such a public policy exception to the employmentat-will doctrine,the * * * rights granted by the Nebraska Workers’ Compensation Act could simply be circumvented by the employer’s threatening to discharge the employee if he or she
exercised those rights.
* * * *
* * * [In Nebraska] the law imposes an affirmative obligation upon an employee to prevent
abuse or neglect of nursing home residents, and the employee fulfills that obligation by reporting
the abuse [and may be subject to criminal sanctions for failing to do so. An] employer’s termination of employment for fulfillment of the legal obligation exposes the employer to a wrongful termination action under the fundamental and well-defined public policy of protecting nursing home
residents from abuse and neglect. * * * By applying the public policy exception * * * ,
employees [are] relieved of the onerous burden of choosing between equally destructive alternatives: report and be terminated, or fail to report and be prosecuted. [Emphasis added.]
CASE CONTINUES


676

CASE 33.1 CONTINUED

* * * [T]he purpose of the APSA would be circumvented if employees mandated by the
APSA to report suspected patient abuse could be threatened with discharge for making such a
report.The [Nebraska] Legislature articulates public policy when it declares certain conduct to be

in violation of the criminal law. The APSA makes a clear public policy statement by utilizing the
threat of criminal sanction to ensure the implementation of the reporting provisions set forth to
protect the vulnerable adults with which the APSA is concerned.Thus, we determine that a public
policy exception to the employment-at-will doctrine applies to allow a cause of action for retaliatory discharge when an employee is fired for making a report of abuse as mandated by the APSA.

•

Decision and Remedy The state supreme court affirmed the trial court’s judgment. The
appellate court emphasized that under the employment-at-will doctrine an employer may fire an atwill employee at any time with or without cause. The court recognized an exception to this principle,
however, “for wrongful discharge when the motivation for the firing contravenes public policy.” Under
this exception, an employee has a cause of action for retaliatory discharge when she is fired for
reporting abuse of a nursing home patient, as state law requires.

•

The Ethical Dimension Is it fair to sanction an employer for discharging an employee who
reports on the employer’s unsafe or illegal actions to government authorities or others? Discuss.

• The Global Dimension In many countries, discharging an employee is more difficult and
costly for the employer than it is in the United States. Why?

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Whistleblowing Statutes. Today, whistleblowers
also have some protection under statutory law. For
example, most states have enacted so-called whistleblower statutes that protect whistleblowers from subsequent retaliation on the part of employers. On the
federal level,the Whistleblower Protection Act of 19894
protects federal employees who blow the whistle on
their employers from their employers’ retaliatory
actions. Whistleblower statutes may also provide an

incentive to disclose information by providing the
whistleblower with a monetary reward. For example,
under the federal False Claims Reform Act of 1986,5 a
whistleblower who has disclosed information relating
to a fraud perpetrated against the U.S. government will
receive between 15 and 25 percent of the proceeds if
the government brings a suit against the wrongdoer.

Wrongful Discharge
Whenever an employer discharges an employee in violation of an employment contract or a statutory law
protecting employees, the employee may bring an
action for wrongful discharge. Even if an employer’s
4. 5 U.S.C. Section 1201.
5. 31 U.S.C. Sections 3729–3733. This act amended the False
Claims Act of 1863.

actions do not violate any express employment contract or statute, the employer may still be subject to liability under a common law doctrine, such as a tort
theory or agency. For example, suppose that an
employer discharges a female employee and publicly
discloses private facts about her sex life to her coworkers. In that situation, the employee could bring a
wrongful discharge claim against the employer based
on the tort of invasion of privacy (see Chapter 6).

Wage and Hour Laws
In the 1930s, Congress enacted several laws regulating
the wages and working hours of employees. In 1931,
Congress passed the Davis-Bacon Act,6 which requires
the payment of “prevailing wages” to employees of
contractors and subcontractors working on government construction projects. In 1936, the Walsh-Healey
Act7 was passed. This act requires that a minimum

wage, as well as overtime pay at 1.5 times regular pay
rates, be paid to employees of manufacturers or sup6. 40 U.S.C. Sections 276a–276a-5.
7. 41 U.S.C. Sections 35–45.


677

pliers entering into contracts with agencies of the federal government.
In 1938, with the passage of the Fair Labor
Standards Act 8 (FLSA), Congress extended wage-hour
requirements to cover all employers engaged in interstate commerce or in the production of goods for
interstate commerce. Here we examine the FLSA’s provisions in regard to child labor, maximum hours, and
minimum wages.

Under the FLSA, any employee who works more
than forty hours per week must be paid no less than
1.5 times her or his regular pay for all hours over forty.
Note that the FLSA overtime provisions apply only
after an employee has worked more than forty hours
per week. Thus, employees who work for ten hours a
day, four days per week, are not entitled to overtime
pay because they do not work more than forty hours
per week.

Child Labor

Overtime Exemptions

The FLSA prohibits oppressive child labor. Children
under fourteen years of age are allowed to do certain

types of work, such as deliver newspapers, work for
their parents, and be employed in the entertainment
and (with some exceptions) agricultural areas.
Children who are fourteen or fifteen years of age are
allowed to work, but not in hazardous occupations.
There are also numerous restrictions on how many
hours per day and per week they can work. For example, minors under the age of sixteen cannot work during school hours, for more than three hours on a
school day (or eight hours on a nonschool day), for
more than eighteen hours during a school week (or
forty hours during a nonschool week), or before 7 A.M.
or after 7 P.M. (9 P.M. during the summer). Most states
require persons under sixteen years of age to obtain
work permits.
Working times and hours are not restricted for persons between the ages of sixteen and eighteen, but
they cannot be employed in hazardous jobs or in
jobs detrimental to their health and well-being. None
of these restrictions apply to those over the age of
eighteen.

Certain employees—usually executive, administrative,
and professional employees; outside salespersons; and
computer programmers—are exempt from the overtime provisions of the FLSA. Employers are not
required to pay overtime wages to exempt employees.
In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the U.S. Department of Labor (DOL)
regulations. In the past, because the salary limits were
low and the duties tests were complex and confusing,
some employers were able to avoid paying overtime
wages to their employees. This prompted the DOL to
substantially revise the overtime regulations in 2004 for
the first time in more than fifty years. The revisions

effectively expanded the number of workers eligible
for overtime by nearly tripling the salary threshold.10
Employers can continue to pay overtime to ineligible employees if they want to do so, but they cannot waive or reduce the overtime requirements of
the FLSA. The exemptions to the overtime-pay
requirement do not apply to manual laborers or
other workers who perform tasks involving repetitive
operations with their hands (such as nonmanagement production-line employees, for example). The
exemptions also do not apply to police, firefighters,
licensed nurses, and other public-safety workers.
White-collar workers who earn more than $100,000
per year, computer programmers, dental hygienists,
and insurance adjusters are typically exempt—
though they must also meet certain other criteria.An
employer cannot deny overtime wages to an
employee based solely on the employee’s job title.11
(Does the FLSA require employers to pay overtime

Hours and Wages
The FLSA provides that a minimum wage of a specified amount (which will reach $7.25 per hour by 2009)
must be paid to employees in covered industries.
Congress periodically revises this minimum wage.9
Under the FLSA, the term wages includes the reasonable costs of the employer in furnishing employees
with board, lodging, and other facilities if they are customarily furnished by that employer.
8. 29 U.S.C. Sections 201–260.
9. Note that many state and local governments also have
minimum-wage laws;these laws may provide for higher minimumwage rates than that required by the federal government.

10. 29 C.F.R. Section 541.
11. See, for example, In re Wal-Mart Stores, Inc., 395 F.3d 1177
(10th Cir. 2005); and Martin v. Indiana Michigan Power Co., 381

F.3d 574 (6th Cir. 2004).