What is agency in business law?

Why do we care about agency relationships? Because it is the fundamental concept on which other business or other relationships are built, such as partnerships, corporations, trusts, and the like!

An Agency relationship is:

·       [T]he fiduciary relation which results from the manifestation of consent by one person to another that the other person shall act in his behalf and is subject to his control; and consent by the other so to act.

RESTATEMENT (SECOND) OF AGENCY § 1(1).

è In other words, one person (the agent) agrees to do something for another party (the principal), subject to the control of the other party, and the other party (the principal) also agrees to the agreement.

It simultaneously means the principal is bound (normally) by what the agent does, since  the agent is acts as if the principal were there him/herself.

It is a fiduciary and consensual relationship between two “persons” where one person acts on behalf of the other person and where the agent can form legal relationships on behalf of the principal.

It may be a business or personal relationship.

It allows the principal the ability, if you will, to be more than one place at a time, thereby expanding their potential business opportunities.

è Simply stated, the agent acts for the principal as if it were the principal acting

-and with the same authority- as if it were the principal. ç

Usually results in the following relationships:[4211.05]

a. Principal and agent

b. Employer (master) and employee (servant)

c. Principal and Independent contractor

More on this later!

Definitions (some not in the text at this juncture):

●  Principal: The person or entity on whose behalf and subject to whose control an agent acts.   For example, your boss at work.

·       Agent: A person who agrees to act on behalf of and instead of his or her principal, subject to the principal's control. A good example would be an insurance agent.

Generally, in a business relationship, the principal and agent relationship requires being either an employee/employer relationship or an independent contractor.

·       Fiduciary: A person who undertakes to act on behalf of and primarily for the benefit of another.  For example, a trustee for a trust.

●  Fiduciary Duty: A duty arising from the trust and confidence placed in a fiduciary by those on whose behalf and for whose benefit he or she acts.

·       Person:  a natural person, corporation, partnership or other recognized entity

EMPLOYER-EMPLOYEE or

INDEPENDENT CONTRACTOR RELATIONSHIPS? [4212]

·       CONTRAST: Principal/Agent: Agent works for the benefit of the principal and under its control. Agent has right to represent the principal and make contracts with 3rd parties on behalf of principal.  HUGE responsibility and duty! More on this later…

·       Employee: One who works for, and receives payment from, an employer, whose working conditions and methods are controlled by the employer, and for whose acts and omissions occurring in the scope of employment the employer is liable.  A classic agency relationship!

Now, lets compare an employee  to an

·       Independent Contractor: One who does work for, and receives payment from, an employer, but whose working conditions and methods are not controlled by the employer, and for whose acts and omissions the employer is not liable.  For example, a CPA is paid by a client whom the CPA audits, but the CPA is free to review the records in any fashion they wish.  Also, the CPA would be liable to 3rd parties relying on the CPA’s work (but paid by the audited client!).

·       Whether a worker is an employee or an independent contractor may be determined by: (recall the principal is the employer)   [4212.03]

(1)   How much direction and control the employer exercises over the details of the person's work;

(2)   Whether the person is engaged in an occupation or business distinct from that of the employer;

(3)     Who supplies tools used at the place of work;

(4)          What degree of skill is required of the worker; and

(5)          the Duration of employment and method of payment.

This often becomes important for various tax items, such as W-2 or 1099 income reporting.  Usually people like to say an employee is an independent contractor so they don’t have to pay Social security taxes on those payments (actually wages).

SIDEBAR: When you hit the real world, BE VERY CAREFUL IF YOU DECIDE TO BE AN INDEPENDENT CONTRACTOR, after all, you then have to come up with the full social security load (12.4%), Medicare, and income tax!  This can be devastating particularly when you no longer have the funds!!! (after the $$$ is long since spent)

AGENCY RELATIONSHIPS:

èFORMATION/CREATIONç [4213]

·       Agency by Agreement/Contract: An agency relationship based on an express or implied agreement that the agent will act for the principal.  Obviously the most common form. In some cases, there weren’t enough required elements to form a contract, and thus only an “agreement.”

·       Agency by Ratification: A confirmation by the principal of an act or contract performed or entered into on his or her behalf by another, who assumed, without authority, to act as his or her agent. May be oral or written, usually cannot be rescinded, is retroactively applied back to original date the alleged contract was “made.”

·       Agency by Estoppel: If a principal (NOT THE AGENT) holds out to a third party that another is authorized to act on the principal's behalf, and the third party deals with the other person accordingly, the principal may not later deny that the other was the principal's agent for purposes of dealing with that third party.  RARE!

·       Agency by Operation of Law: Agencies recognized by courts -- e.g., family relationships, emergency situations -- in the absence of any formal agreement, confirmation, or act or omission by the principal that implied the agent's authority.  Usually deals with necessities.

·       Note that marriage is not necessarily considered an agency relationship solely due to the mere fact the couple is *married*. è èRecall an agency relationship results from manifestation of assent and direction from one to another (don’t laugh, married folks!) ç ç.

ACTUAL AUTHORITY [4225]

·       Express Authority: Authority declared in clear, direct, and definite terms, orally or usually in writing.

·       Equal Dignity Rule: If a contract being executed by an agent on the principal's behalf is in writing, most states require that the agent's authority must also be in writing; otherwise, the contract executed by the agent is voidable at the principal's option.

·       The equal dignity rule does not apply when the agent acts in the principal's presence or when the agent's act is merely perfunctory (ministerial).

·       Power of Attorney: A written document, usually notarized, authorizing an agent to act for a principal.  [4211.1a]

(i)    conferred by custom (“everyone in the job has always done this…”),

(ii) inferred from the position the agent occupies (you would expect a vice president to be able to act on behalf of the company), or

(iii) inferred as being reasonably necessary to carry out express authority (sign the contract).

APPARENT AUTHORITY [4225]

·       Apparent Authority: Authority that arises when a principal, by either words or actions, causes a third party to believe that an agent has authority to act, even though the agent has no express or implied authority to act with regard to the particular matter at hand.

·       If the third party changes his or her position in reliance on the principal's representations regarding the agent's authority, the principal may be estopped from denying that the agent had authority to act. Estopped means “kings x, you can’t go back on the deal”

·       Emergency Powers: When an unforeseen situation demands action to protect or preserve the property and rights of the principal, but the agent is unable to contact the principal, the agent has emergency authority to act on the principal's behalf.

·       Ratification:    The express or implied affirmation of a previously unauthorized contract made by a purported agent. In summary:

(1)   The purported agent must have acted on behalf of the principal who subsequently ratified the action;

(2)   The principal must know all material facts involved in the transaction;

(3)   The agent's act must be affirmed in its entirety by the principal;

(4)   The principal must have the legal capacity to affirm the transaction both

(a) at the time the agent acts, and

(b) at the time the principal ratifies;

(5) The principal must affirm before the third party withdraws from the transaction;

and (all of this stuff must exist!)

(6)   The principal must observe the same formalities when he or she ratifies the act as would have been required to authorize it initially.

AGENT'S DUTIES TO THE PRINCIPAL (Principal’s Rights) [4219]

·       Loyalty: An agent has the duty to act solely for the benefit of his or her principal, and not in the interest of the agent or a third party. Moreover, any information or knowledge obtained in the course of the agency is confidential. THE AGENT CANNOT PROFIT INDIVIDUALLY WITHOUT PERMISSION FROM THE PRINCIPAL.

·       Obedience: An agent has the duty to follow all lawful and clearly stated instructions of the principal. Why else would anyone agree to have an agent/principal relationship???

·       Accounting: Unless otherwise agreed, an agent has the duty to keep and make available to the principal an account of all property and money received and paid out on the principal's behalf, including gifts received from third persons.

·       Performance: An agent impliedly agrees to use reasonable diligence and skill (except for a specialist, who is held to a higher degree of skill) in performing the task in its entirety.  In other words, due care.

·       Notification: An agent is required to notify the principal of all matters that come to the agent's attention concerning the subject matter of the agency.  As a result, the principal must be in constant communication with the agent.

PRINCIPAL'S DUTIES  (Agent’s rights)

TO THE AGENT [4220]

·       Compensation: When a principal requests certain services from an agent, the principal has a duty to pay the agent, in a timely manner, for those services rendered.

·       Reimbursement: Whenever an agent disburses sums of money to fulfill the principal's request or to pay for necessary expenses incurred in the reasonable performance of his or her duties, the principal has the duty to reimburse the agent.

·       Indemnification:      Subject to the terms of the agency agreement, the principal has a duty to compensate, or indemnify, the agent for liabilities arising from the agent's lawful and authorized acts on the principal's behalf.

·       Cooperation: A principal has the duty to cooperate with the agent and to assist the agent in performing his or her duties.

·       Safe Working Conditions: A principal has the duties (i) to provide its agents and employees with safe working premises, equipment, and conditions, and (ii) to inspect working conditions and warn agents and employees of unsafe areas.

PRINCIPAL'S REMEDIES [4223]

·       Most principal-agent relationships are governed by some actual or implied contract; therefore, most of the remedies available to a principal are the same available to any plaintiff in a breach of contract case.  In other words, the principal can sue!!!

·       However, in the event that the agent violates her fiduciary duties to the principal, the following may also apply:

o     Constructive Trust: Anything an agent obtains by virtue of the agency relationship belongs to the principal; therefore, a principal may sue to recover any benefits retained by the agent.  This is the reason anything developed in intellectual property while on the job belongs to the employer, not the employee, although usually, but not necessarily,  the employer will allow the employee to share in the royalties.

o     Avoidance: In the event that the agent breaches her contract with the principal, the principal may elect to avoid any contract he entered into with the agent.

o     Indemnification: To the extent that the agent's breach causes harm to some third party, who then sues the principal, the principal may seek indemnification from the agent.

LIABILITY FOR CONTRACTS:

AUTHORIZED ACTS/CLASSIFICATION

[4225, 4215, 4216]

A disclosed or partially disclosed principal is liable to a third party for a contract made by an agent who is acting within the scope of his or her authority.

·       Disclosed Principal: A principal whose identity is known to the third party at the time the agent makes a contract for the principal with the third party. For example, I go in and say I am representing my client, Mr. X, on his behalf.

·       Partially Disclosed Principal: A principal whose identity is not known to the third party, but the third party does know that the agent is representing some principal at the time the agent makes a contract with the third party. In many states, the agent is also liable on a contract with a partially disclosed principal.  For example, maybe I am representing someone big, like Disney, and I am buying some land for a new amusement park.  If the seller knew it was Disney, the price would skyrocket.

·       Undisclosed Principal: When neither the fact of agency nor the identity of the principal is disclosed by an agent to the third party at the time a contract is made, the agent is presumed to be acting on his or her own behalf, and will be liable as a party to the contract. NOTICE: If, in fact, the agent was authorized to act on behalf of the undisclosed principal, then the principal will also be liable on the contract and subject to indemnification. Here, I go in and don’t say a word that I am representing someone else.

LIABILITY FOR CONTRACTS: UNAUTHORIZED ACTS (by Agent) [4225, 4226]

·       If an unauthorized agent contracts with a third party, the principal cannot be held liable on the contract, regardless of whether the principal was disclosed, partially disclosed, or undisclosed. Rather, the agent will be solely liable.

·       However, if the third party knows or should know at the time of the contract that the agent lacks authority to contract on behalf of the principal, the agent will not be liable to the third party.

PRINCIPAL’S LIABILITY FOR AGENT'S TORTS [4227]

·       Respondeat Superior: The doctrine by which an employer or other principal is liable, along with the agent or employee, for any tort committed by the agent or employee while acting within the scope of their agency or employment.

·       To determine whether a tort was within the scope of agency or employment, courts look at the following:

(1)          whether the act was authorized;

(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)   whether the employer's interest was advanced;

(5)   whether the employee's interests were involved;

(6)   whether the employer furnished the means or instrumentality by which the injury was inflicted;

(7)   whether the employer had reason to know; and

(8)   whether the act involved a serious crime.

Generally the principal is not responsible for the torts of an independent contractor, except in situations which is inherently dangerous, illegal, nondelegatable, or impossible to separate from the principal.

·       "Frolics": A principal is not liable for the acts of an agent who substantially departs from the principal's business.  For example, someone takes the company truck to Galveston to go on the beach when he should be in Conroe and hurts someone while in Galveston.

·       Borrowed Servants: A principal may be liable for the acts of an agent "lent" to another if the principal retained the primary right to control the agent's activities.

·    Dangerous Conditions: A principal is charged with know­ledge of any dangerous conditions discovered by an agent and pertinent to the agency regardless of whether the agent actually informs the principal of the condition.

·       Intentional Torts: Principals are liable only for those intentional torts that are committed within the course and scope of the agent's actions on behalf of the principal.

·       Crimes: A principal is not liable for an agent's crime if the agent independently undertook the crime.

·       Subagents: A principal is liable for the acts of subagents hired by an agent authorized to hire subagents.

AGENCY RELATIONSHIPS: TERMINATION [4229]

·       By Act of the Parties: An agency may be terminated by any of the following:

(1)          lapse of time;

(2)          accomplishment of particular purpose for agency;

(3)          occurrence of a specific event (closed the deal, for example);

(4)   mutual agreement of the agent and principal; and

(5) renunciation (by the agent) or revocation (by the principal) of the agent's authority.

·       By Operation of Law: An agency may also terminate as a matter of law due to:

(1)               death or incompetence of the agent or principal;

(2)               impossibility of performance;

(3)               materially changed circumstances; and/or

Agency is a relationship between a principal and an agent in which the principal confers his or her rights on the agent to act on principal's behalf. Such a relationship is based on an agency contract. The rights and duties of the agent and principal are in accordance with the express or implied terms of the contract.

• Choosing a career.
• Groups joining a social movement.
• Picking a spouse (also called affective individualism).
• Selecting a dessert off a menu.
• Voting in free elections.

It is also far more complex than one would expect, as discussed in this article. How is agency created? What happens when an agent exceeds authority? What are the duties of an agent to the person appointing him or her and vice versa? Is the principal liable for the acts of the agent even if unauthorized or illegal? Can one create an agency by conduct even if one does not mean to? And how long does an agency last?

The questions above and far more are answered below but it is emphasized that this article is merely an introduction to this extensive area of the law.

DEFINITIONS AND BASICS:

Agency is a fiduciary relationship whereby one party expressly or impliedly authorizes another to act under his or her control and on his or her behalf. The party for whom another acts and from whom such authority derives is a “principal.” The one who acts for and represents the principal and acquires his or her authority from the principal is an “agent.” Pursuant to the grant of authority by the principal, the agent is the representative of the principal and acts for and instead of, the principal.

Any person who is capable of suing and/or being sued in a legal proceeding in his own name and has capacity to affect his or her legal relationships by giving consent to a delegable act or transaction may authorize an agent to act for him or her with the same effect as if such person were to act in person. This “person” can be an organization, a corporation or LLC, etc. Indeed, corporations and organizations must act by agents, either employees, officers or directors.

Further, any person has the capacity to act for another. Even if a person has legal disability such that his or her contracts are not binding on him or her, s/he may act as agent of another.

The relationship between an agent and a principal is a contractual one. Therefore, rights and duties of the agent and principal are in accordance with the agency contract. To establish an agency, there must be consent of both the principal and the agent, although such consent may be implied rather than expressed.

The written authorization by which principal appoints another as his or her agent and confers upon the agent the authority to perform certain specified acts or kinds of acts on behalf of the principal is often the power of attorney but can be any type of contract or employment or assignment agreement. Thus, one appoints a real estate agent; one employs an attorney; one hires an administrative assistant; one executes a durable power of attorney. All these are forms of creation of agency. The relationship of principal and agent can be terminated only by the acts or agreement of the parties to the agency or by operation of law.

An agent cannot delegate his or her authority and have services performed by a subagent without express permission from principal unless permission can be implied from the nature of the business or custom.

TYPICAL TYPES OF AGENCY

Real Estate:

The most common agency relationships are:

In a buyer’s agency relationship, the buyer is considered the client. A buyer’s agent has to be loyal, maintain confidentiality, be obedient, provide reasonable care and diligence, and give accounting for all funds.

Similarly, a seller’s agency relationship represents the seller in the transaction and the seller is considered the client. A seller’s agent is also known as a listing agent. The seller’s agent possesses the same fiduciary responsibilities to the seller as the buyer’s agent has to the buyer. In a seller’s agency, the client relationship is established through a listing agreement.

In a dual agency, an agent represents both buyer and seller in a single transaction and carries fiduciary responsibilities to both principals. The mistake of an agent acting as a dual agent becomes a mutual mistake of fact by both principals. This prevents one principal to make the other principal liable for the mistake of the agent. However, knowledge or notice to a dual agent is not imputed if the agent acted adversely or fraudulently. Dual Agency is only permitted with the informed and voluntary consent of both the buyer and the seller. Herdan v. Hanson, 182 Cal. 538 (Cal. 1920)

Employment and Contractors:

An employee is the agent of the employer and in performing acts within the scope of work, is acting on behalf of the employer. An independent contractor can also be the agent of the principal, again, performing tasks within the scope of specified authority.

Most courts impose a fiduciary duty of agency upon employees and a more limited fiduciary duty upon contractors, often relying on the employment or contracting agreement to determine the scope of the duty and agency.

It should be kept in mind that the concepts are extremely broad: when one hires an accountant to do one’s taxes or an attorney to bring a case, this is “employment” which creates both agency and a fiduciary relationship.

A great deal of law has dealt with whether other types of professions, most particularly stock brokers, are held to fiduciary and agency duties to their clients, with the crash of 2008 resulting in shocked reactions when many people discovered that their brokers were not considered their agents. They achieved this status by fine wording in their retention agreements indicating that they were not acting as agents. (Lesson: read the contract.)

It is important to understand how broad agency can be. If one hires a contractor to rebuild the kitchen, he or she will hire numerous subcontractors (plumbers, electricians, etc.) who will buy materials (from suppliers) and the law holds that you have become the principal for all these agents and subagents; the suppliers are allowed to sue you directly for the materials if purchased by the subcontractors. See our article on mechanics liens.

Business Structures

Any limited liability entity must have agents to act for it. That is true of corporations, limited liability companies and limited partnerships. Usually those agents are managers, directors, officers and employees. All have a fiduciary duty to the entity, can bind the entity, and are subject to the corporate opportunity doctrine.

In reality, the above are only a small sampling of the myriad agency relationships that can be created. Almost all of us are both principals and agents in a dozen or more relationships all the time-if you work or are an independent contractor, you are an agent. If you are an officer of your church or a community group, you are an agent. If you employ an accountant, a nanny, a secretary or are on the board of a little league team, you are a principal with agents reporting to you. It is an inherent part of social and legal life.

And there are as many additional types of agency relationships as there are conceivable delegation arrangements between people and between people and entities.

CREATION OF AGENCY

Agency is a relationship between a principal and an agent in which the principal confers his or her rights on the agent to act on principal’s behalf. Such a relationship is based on an agency contract. The rights and duties of the agent and principal are in accordance with the express or implied terms of the contract.

With the exception of implied agency discussed below, to create an agency, the consent of the agent and the principal is necessary. The principal must intend that the agent act for him or her, the agent must intend to accept the authority and act on it. The intention of the agent and the principal must be either in express terms of the contract or can be inferred from the conduct of the parties

An agency relationship can arise only at the will and by the act of the principal. Existence of agency is always a fact to be proved by tracing it to some act or agreement of the alleged principal.

Note that there are two types of agency: (1) actual, either express or implied, and (2) apparent. The relationship of an agent and a principal may also arise by estoppel, necessity or operation of law.

In transactions conducted by parties through an intermediary, whether an agency relation has been created depends on the intention of the parties. In such cases, terms used to designate the capacity of the intermediary in the written instrument attending the transaction are not always conclusive. Factors to be considered in determining if there is an agency and which party is the principal of the intermediary include the duties of the intermediary, the exercise of such duties, and the personfor whose benefit they are being performed. Carr v. Hunt, 651 S.W.2d 875 (Tex. App. Dallas 1983)

Implied and Express Agency

An agency is defined as a contract, either express or implied, by which one of the parties confides to the other the management of some activity or business, to be transacted in his or her name, or on his or her account, by which that other assumes to do the actions or business, and to render an account of it. Express agency is an actual agency created by the written or spoken words of the principal authorizing the agent to act on behalf of the principal. In express agency, authority is directly granted to or conferred upon the agent or employee in express terms, and it extends only to such powers as the principal gives the agent in direct terms, with the express provisions controlling. Kurtz v. Farrington, 104 Conn. 257 (Conn. 1926).

An agency relationship can be either express or implied. Agency is created by implication when, from the nature of the principal’s business or actions and the position of the agent in regard to that action or within that business, the agent is deemed to have permission from the principal to undertake certain acts. In other words, implied agency involves permission to act, even though permission is not explicitly established orally or in writing. An implied agency is frequently established by the conduct and communication of the parties and the circumstances of the particular case. Keytrade United States v. M/V Ain Temouchent, 2003 U.S. Dist. LEXIS 597 (E.D. La.).

Generally, one should look from the viewpoint of the principal and the agent to determine whether the agent has implied authority. Orleans Parish Sch. Bd. v. Goodyear Tire & Rubber Co., 1995 U.S. Dist. LEXIS 8638 (E.D. La.). However, if a third party reasonably believes that such agency exists predicated on the acts or omissions of the principal, then implied agency can be created. That is the essence of apparent agency.

It is basic agency law that an agency relationship may be implied, inferred, or based on apparent authority. Implied or inferred agency is actual authority given implicitly by the principal to his or her agent circumstantially proved, or evidenced by conduct, or inferred from a course of dealing between the alleged principal and the agent. Authority can be implied only from facts. Implied powers must be based on some act or acquiescence of the principal, express or implied. Anderson v. Brock Investor Servs., 1993 U.S. Dist. LEXIS 19455 (D. Minn.1993).

Note that apparent agency is a variation of implied agency. If a principal acts in a manner such that third parties can reasonably assume an agency exists, then the courts may impose an agency even if the principal did not mean to create one. Thus, if one allows a person to represent to third parties that an agency exists and does not affirmatively clarify the lack of agency with the third parties, such an agency can be imposed if equity requires it.

TERMINATION OF AGENCY

The relation of principal and agent is normally terminated by the act or agreement of the parties to the agency or by operation of law. “An agency, when shown to have existed, will be presumed to have continued, in the absence of anything to show its termination, unless such a length of time has elapsed as destroys the presumption.” Merchant v. Foreman, 182 Kan. 550, 555 (Kan. 1958).

The agent’s duty and right to act on behalf of the principal comes to an end on the termination of agency. The timeframe for termination of an agency can be stipulated by a particular statute or agreement. In such a case, if the instrument specifies in plain and unambiguous terms that an agency will terminate without action on the part of the principal or agent upon the expiration of the time specified in the instrument, the agency will in fact, terminate.

If, after the expiration of the time stated in the contract, the parties continue their relationship as principal and agent, a rebuttable presumption is raised that their relations are governed by the original contract and that the contract is renewed for a similar period. For instance, if the parties entered into a contract for one year and continued to act under the contractual terms after one year, the court may presume that the parties in fact intended to keep the contract alive for another year. Cinefot International Corp. v. Hudson Photographic Industries, 13 N.Y.2d 249, 252 (N.Y. 1963).

On the other hand, if the parties did not fix any appropriate time for the termination of agency arrangement, the contract is deemed to be terminated after a “reasonable time.” This issue is a recurring one in litigation and is avoided by appropriate drafting of the agency agreement. Where the contract is silent, the courts use common sense and a review of the circumstances. “What constitutes a reasonable time during which the authority continues is determined by the nature of the act specifically authorized, the formality of the authorization, the likelihood of changes in the purposes of the principal, and other factors”. Hotchkiss v. Nelson R. Thomas Agency, Inc., 96 Cal. App. 2d 154, 158 (Cal. App. 1950). The burden of proving the termination or revocation of an agency rests on the party asserting it.

A power is coupled with an interest where the agent receives title to all or a part of the subject matter of the agency. In order to support a claim of power coupled with an interest, either legal title or equitable title is sufficient. A power coupled with an interest will survive to the personal representative of the agent upon the agent’s death. Phoenix Title & Trust Co. v. Grimes, 101 Ariz. 182 (Ariz. 1966).

An agency created for a specific purpose as well as an agency created by a power of attorney is usually terminated once the particular purpose for which it was created was accomplished. After the termination of the agency, the agent is free of any fiduciary duty to the principal arising from the agency relationship.

Durable Powers of Attorney are unique types of agency creations and each state has specific laws limiting their scope and effect. They normally do not terminate absent direction of a competent principal but, indeed, are created to maintain existence even if the principal becomes incompetent. See our article on that type of agency relationship in California.

The parties can terminate the agency by mutual agreement. An agency relationship requires the mutual assent of the parties and both the parties have power to withdraw their assent. Depending on the terms of the agency agreement, certain agencies may not be terminated by the act of one of the parties or by occurrence of an event. The mutual abandonment of an agency is a question of fact, since it is a matter of intention of both the parties. The court will ascertain such intent from the surrounding facts and circumstances of the transaction as well as implied from the conduct of the parties. Preszler v. Dudley, 153 Cal. App. 2d 120, 124 (Cal. App. 2d Dist. 1957).

The agency, itself, may be of extreme value to the agent, such as when one receives the right to represent a product or service in a territory, and the courts have long considered what rights may arise in such a situation. Most often, the agency agreement specifies what rights accrue, if any. In some jurisdictions, such as Europe, agents cannot be easily terminated without substantial payments to them for their lost property rights in the agency. In the United States, absent contract to the contrary, an agency may be revoked at the will of the principal when an agency is not coupled with an interest, and no third party’s rights are involved. In some agreements or jurisdictions, the party terminating the agency must show good cause. Thus, when A enters into a contract whereby B is to provide A for a stated period of time with goods or services, which both parties realize are for use in a particular enterprise owned by A, in the absence of a specific clause so providing, A cannot escape his obligations under that contract by voluntarily selling his interest in the enterprise before the expiration of the expressed contract term. If the right to cancel an agency contract is dependent upon some contingency, the cancellation must be justified by establishing the happening of such contingency. Carleno Coal Sales, Inc. v. Ramsay Coal Co., 129 Colo. 393, 398 (Colo. 1954).

An agency contract to be performed to the principal’s satisfaction can generally be canceled at will by the principal. Similarly, a power of attorney that is not a durable power of attorney, constituting a mere agency, may be revoked at any time, with or without cause.

Ordinarily, an agent may renounce the agency relationship by expressly notifying the principal, either orally or in writing. An agent’s cessation of all relations with the principal, and abandonment by the agent may be treated as a renunciation. However, mere violation of instructions by the agent will not amount to renunciation and may expose the agent to liability for breach of duty.

Although agency can often be terminated at will, law usually stipulates that notice must be given to the party affected by termination. However, express notice to the agent that the agency has been revoked, or to the principal that the agency is renounced, is not always necessary if the affected party actually knows, or has reason to know the facts resulting in such revocation or renunciation.

On the other hand, to avoid apparent authority, the principal should provide sufficient notice to third parties as to the revocation of agent’s authority. Otherwise, the acts of an agent after his/ her authority has been revoked may bind a principal as against third persons who reasonably rely upon the agency’s continued existence. This may often happen to transactions initiated by the agent before the revocation of authority, and the rule is applied in favor of persons who have continued to deal with insurance agents, purchasing agents, and similar situations. Morton Marks & Sons, Inc. v. Hill-Chase Steel Co., 196 Va. 268 (Va. 1954).

In addition, an agency may be terminated by operation of law. Usually, the death or bankruptcy of the principal operates as an immediate and absolute revocation of the agent’s authority, unless the agency is one coupled with an interest. The rule is the same even if the agency is created with more than one principal. Where the power or authority is created by two or more principals jointly and one of them dies, the agency will normally be terminated unless it is coupled with an interest. However, an agency may be made irrevocable by statute, notwithstanding the death of the principal.

Death of a principal and the effect on agency is often litigated when third parties or the agents are in the midst of reliance on the agency. In most United States jurisdictions, two views are prevailing. According to one view, unless the agency is one coupled with an interest, it will terminate on the death of the principal, notwithstanding the fact that the agent and third person are ignorant of the fact. Another view is that if the third person dealing with the agent acts in good faith and in ignorance of the principal’s death, the revocation of the agency on the death of the principal takes effect only from the time that the agent receives notice of such death. In such a case, the principal’s estate may be bound. See, however, our article on Durable Powers of Attorney.

Similarly, death of the agent will revoke an agency not coupled with an interest and this is the rule even when there are two or more agents. However, in the case where a sub agent is appointed by the agent, the authority of a subagent is terminated by the death of the agent, unless the agent appointed the subagent at the principal’s request. In that event, the subagent derives his/her authority form the principal and not from the agent.

The loss or destruction of the subject matter of the agency or the termination of the principal’s interest is yet another ground for terminating the agent’s authority. The agent’s authority ceases when the agent has notice of the fact. However, destruction of subject matter will not always result in termination of agency, especially when the subject matter can be replaced without substantial detriment to either party.

In addition, a change of law making the required act illegal may terminate an agency contract. If the authority or power of an agent is coupled with an interest, it is not revocable by the act, condition, death, or mental incapacity of the principal before the expiration of the interest, unless there is some agreement to the contrary.

The agent’s duty to act on behalf of the principal comes to an end on the termination of agency.

Even without contractual terms so providing, a principal may normally unilaterally cancel an agency without incurring liability for breach of contract based upon: misconduct or habitual intoxication of the agent which interferes with his/her employment, the refusal of the agent to obey reasonable instructions or to permit the principal to make a proper audit of his/her accounts, serious neglect or breach of duty by the agent, dishonesty or untrustworthiness of the agent, the agent’s failure to pay an indebtedness owing to the principal, disloyalty of the agent like using the agency to make secret profits.

Ordinarily, an agent may renounce the agency relationship by expressly notifying the principal, either orally or in writing. An agent’s cessation of all relations with the principal, and abandonment by the agent may be treated as a renunciation. However, mere violation of instructions by the agent will not amount to renunciation.

DISPUTES BETWEEN AGENTS AND PRINCIPALS

The relationship between a principal and an agent is fiduciary and an agent’s actions bind the principal. The law of agency controls the legal relationship in which an agent interacts with a third party for his/her principal.

An agent owes certain duties towards his/her principal and a principal owes certain duties towards his/her agent. The scope of an agent’s duty to the principal is determined by:

An agent’s primary duties are:

Other duties of an agent include:

An agent is liable to indemnify a principal for loss or damage resulting from his/her violation of the duties described above.

A principal owes certain contractual duties to his/her agent. A principal’s primary duties to his/her agent include:

When an agent acts within the scope of actual authority, the principal is liable to indemnify the agent for payments made by agent under the agency during the course of the relationship irrespective of whether the expenditure was expressly authorized or merely necessary in promoting the principal’s business.

The usual areas of conflict arise from authorized acts by agent which are alleged to have exceeded authority granted; conflict of interest in which the agent violates his or her duty to the principal; and negligence in performing duties by agent. With the principal, the usual conflict is failure to pay the agent as contracted.

THIRD PARTIES AND AGENCY

If an agent acts within the scope of his/her authority, a principal is bound by the act of his/her agent. Moreover, a principal is responsible for any action or inaction by the principal’s agent. The liability of the principal to a third person upon a transaction conducted by an agent is based upon facts such as:

A principal may be liable to a third person on account of a transaction with an agent because of the principles of estoppel, restitution, or reasonable reliance, although he/she may not be subject to liability based on principles of agency. Unless a person has expressly or impliedly made such other his/her representative, no person is liable for the acts of another who assumes to represent him/her. Moreover, a person dealing with an agent cannot hold the principal liable for any act or transaction of the agent not within the scope of his/her actual or apparent authority.

However, unless the limitations of the agency are known or can be readily ascertained, the principal may be bound by unauthorized acts of an agent through which a third party has sustained a loss if reasonable reliance on the agent’s authority is demonstrated.

The principal will no longer be liable for a particular act after the third person has notice of the principal’s repudiation of the agent’s authority to do such an act. After the termination of an agency for a particular purpose and notice of the revocation of the agency, the act of an agent will normally not bind the principal. Often, a principal is liable for the tortuous acts of an agent within the course and scope of the agent’s employment. However, it must be emphasized that unless the principal commands or directs the act, a principal is not liable for the torts committed by an agent while acting adversely to the principal or outside the scope of the agent’s employment.

The principal is bound by the knowledge of or notice to an agent received while the agent is acting within the scope of his/her authority. The agent’s knowledge or notice is imputed to the principal and is constructive notice. The liability of a principal is affected by the knowledge of an agent concerning a matter as to which he acts within his/her power to bind the principal or upon which it is his/her duty to give the principal information that:

Unless the notifier has notice that the agent has an interest adverse to the principal, a notification given to an agent is notice to the principal if it is given:

The doctrine of imputed knowledge is a rule of public policy based upon the necessities of general commercial relationships. But note that the knowledge of an agent may be imputed to the principal only where it is relevant to the agency and to the matters entrusted to the agent. If the knowledge acquired or notice received by an agent:

Further note that the rule charging the principal with an agent’s knowledge is not necessarily restricted to matters of which the agent has actual knowledge but may be enlarged based on the duty of the principal. The principal is not affected by knowledge which the agent should have acquired in the performance of his/her duties unless the principal has a duty to others that care will be exercised in obtaining information. Moreover, the principal is not affected by the knowledge which an agent should have acquired in the performance of the agent’s duties to the principal or to others, except where the principal or master has a duty to others that care shall be exercised in obtaining information.

Note that a principal is not bound by the knowledge of an agent in a transaction in which the agent secretly is acting adversely to the principal and entirely for his/her own or another’s purposes, except where the principal is affected by the knowledge of an agent who acts adversely to the principal if the failure of the agent to act upon or to reveal the information results in a violation of a contractual or relational duty of the principal to a person harmed thereby, if:

Where a third person perpetrates a fraud upon an agent, either by misrepresentation or by silence, the fraud is considered as worked upon the principal. The principal has a right of action against the third person for redress. A person who fraudulently obtains a contract through an agent acting within the scope of his/her power to bind the principal, or who by fraud causes the agent to do what would be a violation of his/her duty to the principal if the agent knew the facts, is subject to liability to the principal whether the fraud is committed against the agent or the principal directly.

A person who intentionally causes or assists an agent to violate a duty to the principal is subject to liability in tort for the harm such person has caused the principal or in a restitutional action for any profit such person derived from the transaction. This type of conduct is essentially a conspiracy to defraud the principal and actionable. Unless a person reasonably believes that the principal acquiesces in the double employment, the person who, knowing that the other party to a transaction has employed an agent to conduct a transaction for him/her, employs the agent on his/her own account in such transaction is subject to liability to the other principal. See our article on unfair business practices. However, the third person is not liable to the principal for the agent’s breach of duty if he/she did not knowingly participate in the agent’s wrongful act. Put simply, a principal may not recover from another on the basis of a misrepresentation made by the principal’s own agent.

UNDISCLOSED AGENCY

If a third person has no knowledge about the fact that the agent is acting for a principal, then both the agency and the principal is “undisclosed.” The agent of an undisclosed principal can be held liable on the contract as the real obligor as s/he contracted in that capacity. Similarly, an undisclosed principal can also be held liable as s/he must also assume its burdens.

The liability of an undisclosed principal and the agent is normally an alternative liability. It means that the third party can only make either the principal or the agent liable and not both of them together. A third party can decide whether to make the principal or the agent responsible only after discovery of the principal and opportunity to make an intelligent choice. However, once an election is made by a third party, it is generally irrevocable.

If an agent acts in his/her own name without disclosing the principal this will not preclude liability of the principal. Note that if there is no proof of an actual agency relationship, there can be no reliance on the doctrine of undisclosed principals. Also, the principal is not liable where the contract provides that an undisclosed principal is not a party to it.

Similarly, an agent will be held liable if s/he fails to disclose the agency and the identity of the principal while making the contract. In such case, the agent will be subject to all the liabilities created by the contract, in the same way as if the agent were the principal in interest.

Likewise, in order to avoid personal liability of the agent, disclosure of the principal must normally be made at the time of contract. After the principal is disclosed, the agent will not be liable for subsequent authorized acts between the third person and the principal.

When an agent makes a contract for the principal concealing the fact that s/he is an agent, the principal can claim all the benefits of the contract from the other contracting party, so far as the principal does not cause any injury to the other party. However, a third person will not be liable to an undisclosed principal, if the specific terms of the contract exclude liability to any undisclosed principal or to the particular principal. There is nothing “illegal” or “unethical” about an undisclosed agency…it is done often…so long as fraud and injury to the third party is not caused by the undisclosed agency and the agreement does not prohibit it.

Undisclosed agents are often used to avoid negotiations that would otherwise be biased or tainted. Thus, if I am selling a building to a very rich buyer, I may negotiate a much higher price assuming I can do so. That buyer may use an undisclosed agent until the deal is signed to avoid that type of bias on my part. The way to avoid that danger if you are a third party is to simply put into the agreement the fact that no undisclosed principals are involved.

SUBAGENTS

A subagent is a person to whom the agent delegates authority as his/her agent. Through a subagent, the agent can perform an act for the principal. If an agent feels that the appointment of subagents are necessary to the proper transaction and carrying on of the business committed to the agent, then the agent has an implied authority to make such appointments absent contrary provisions in the agreement. Generally, if an agent employs a subagent, then the agent is the employing person and the principal is not a party to the contract of employment.

If an agent employs a subagent for his/her principal, and by his/her authority, then the subagent is the agent of the principal and is directly responsible to the principal for his/her conduct, and if damage results from the conduct of such subagent, the agent is only responsible in case s/he has not exercised due care in the selection of the subagent.

But if the agent employs a subagent on his/her own account to assist him/her in the work at his/her own risk, then there is no agreement between such subagent and the principal. Under this circumstance, a subagent is only responsible to the agent, while the agent is responsible to the principal for the actions done by him/her and the actions by the subagent.

An agent is responsible to the principle for the conduct of a subagent with reference to the affairs of the principal entrusted to the subagent. However, a subagency cannot give more power to the subagency than the agency has and when that general agency ceases to exist, it will automatically dissolve the subagency.

An agent is not liable to third persons for the misfeasance or malfeasance of a subagent employed by him/her in the service of his/her principal, unless s/he is guilty of negligence in the appointment of such subagent or improperly co operates in the acts or omissions of the subagent. Baisley v. Henry, 55 Cal. App. 760 (Cal. App. 1921).

Agency law also defines the relationship among agents, principals, and third parties who interact with them. As is discussed below, the principal is bound by and liable for the acts of the agent that are done within the scope of the agent's authority.

Agencies can exist in virtually every type of relationship. For example, a spouse can act as their spouse's agent. A personal representative can act as an agent of a deceased person's estate. An employee can act as the agent of their employer. The examples are numerous.

Agency law is particularly important in business relationships. Here is a closer look at the law of agency and how it affects businesses and investors.

Agency is a common relationship in the business world:

The list of possible agency relationships in the business realm goes on and on.

An agency can be created in two ways. They can be express, such as when one party gives another authority to act verbally or in writing. Or they can be implied, such as when one party acts in a way such that it is legal and fair to hold them accountable for something another party does.

Express agencies are commonly created with a verbal or written business contract. In such a contract, both the agent and principal confirm their intention to enter into an agency relationship.

The contract can define the scope of authority that the principal gives the agent. For example, the principal might give the agent control of the company's investment portfolio or allow them to manage real estate holdings. Similarly, the principal might give the agent the power to enter into certain contracts on their behalf.

Implied agencies are created by the conduct of the parties. In an implied agency, the conduct of the principal gives the agent the power to do acts reasonably necessary to accomplish the principal's purposes. The scope of the agent's authority to act is implied (more properly, inferred) from the circumstances.

One example of implied agency is the relationship between business partnerships. Both partners can enter into contracts, as well as perform negotiations and regular business activities on behalf of the other partner. If one partner makes an agreement with a third party, the contract is legally binding even though the other partner did not take part in the process.

Another example is the relationship between a board of directors and their company. The decisions the board makes on behalf of the company are legally binding on the company as a whole.

Thanks to implied agency, third parties who deal with the representatives of a company can be confident that the deal they make is protected by law.

As part of their daily business operations, businesses routinely hire or designate (lawyers might say, “appoint) other parties to perform tasks on their behalf. The agent's job is to represent the interests of the principal. When an agent is required to provide specific services, these requirements are often set out in a contract.

For example, the New York Times might hire a logistics company to help distribute its newspapers in New York City. The Times would become the principal; the logistics company would become the agent.

The obligations of the logistics company would be set out in a written contract between the parties. In our example, if the logistics company is supposed to deliver the newspapers by a specific time each day, the contract would so specify.

As noted above, agency law governs not just the relationship between the principal and agent, but also the relationship among principals, agents, and any third parties they encounter. This is important when determining business liability.

As a general rule, principals are liable for the acts of their agents if the agent is acting within the scope of their authority. For example, suppose you have an employee who is responsible for hiring others and negotiating their contracts. Under agency law, you are responsible for honoring those contracts.

A corollary is that if an agent signs a contract on your behalf, the contract is yours — not the agent's. The agent is not bound by the contract's terms, even if they negotiated and signed it.

Agencies are essential for businesses to function. Without them, a company could not take any action. When forming an agency relationship, the hope is that the agency benefits both the principal and the agent, who in a business context is typically paid for their work. An agency relationship can also be a way for a business to get the expertise it needs but does not otherwise have.

However, some agency relationships do not work out for the best. An agent may also do something that hurts the principal's brand.

The law of agency is defined as the ability to act through another. In most cases, this applies to commercial relationships or contractual agreements. The most common example of this is in the employer-employee relationship. The employer is authorizing the employee to complete work on their behalf.

The employee is representing the employer in this relationship. This also means that the employer is liable for any inabilities to complete work. If the employee acts in a way that is poorly representative of the business, it is possible that the principal could be liable for the actions because they agreed to the agency agreement.

The agency is the agreement in which one party entrusts another party to conduct business on their behalf. The agency agreement comes in the following forms:

A true agency is approved before the actions begin. One person cannot become the agent of the other without their approval. This creates a contract of agency. This contract of agency approves one party to represent the other in the intended tasks. Some agency agreements are verbally expressed or based on intentions. Others, however, are in the form of a legal entity, such as with a corporation or legal partnership.

It is also possible to have a fiduciary relationship. This is also known as a relationship of trust. It is expected that the agent is that act in the best interests of the principal. If they do not, they might be financially liable for any damages caused.

One of the most important factors to consider with an agency in business law is the element of control. The agent is agreeing to act under the control of the principal, while the principal is agreeing to give up control and allow the agent to act on their behalf. The authority of the agent can be in the form of an actual direction or apparent and intended direction.

The agent has two types of control:

Implied powers are tricky because the agent is assuming the needs of the principal. If their actions are not approved by the principal but are in line with implied powers, the principal may still be liable for the agent's actions. Additionally, if the agent participates in illegal or unethical actions with the principal's knowledge, the principal may have exposure to liability. However, if the principal can provide evidence that the agent acted in a way that was outside of their scope of expected powers, the agent instead might be liable for any damages.

It is important to take the appropriate steps when terminating an agent's authority. If there is no evidence that the agent's authority was revoked and they act in an illegal or unethical way, the principal could still be liable for their actions. When terminating an agent's authority, it is important to follow the terms of the initial contract.

The principal must stay within the terms agreed to in the contract. For this reason, it is necessary to have a clause on the process of terminating the agent agreement. There are some situations in which the agent's authority gets terminated without additional documentation:

However, even with these rare situations, there are some cases in which the agent is still bound to the principal. Always follow the termination clauses set out in the initial agency agreement.