AGENCY
A consensual relationship created by contract or by law where one party, the principal, grants authority for another party, the agent, to act on behalf of and under the control of the principal to deal with a third party. An agency relationship is fiduciary in nature, and the actions and words of an agent exchanged with a third party bind the principal.
An agreement creating an agency relationship may be express or implied, and both the
agent and principal may be either an individual or an entity, such as a corporation or partnership.
Under the law of agency, if a person is
injured in a traffic accident with a delivery
truck, the truck driver’s employer may be liable
to the injured person even if the employer was
not directly responsible for the accident. That is
because the employer and the driver are in a
relationship known as principal-agent, in which
the driver, as the agent, is authorized to act on
behalf of the employer, who is the principal.
The law of agency allows one person to
employ another to do her or his work, sell her or
his goods, and acquire property on her or his
behalf as if the employer were present and acting
in person. The principal may authorize the
agent to perform a variety of tasks or may
restrict the agent to specific functions, but
regardless of the amount, or scope, of authority
given to the agent, the agent represents the principal and is subject to the principal’s control.More important, the principal is liable for theconsequences of acts that the agent has beendirected to perform.A voluntary, GOOD FAITH relationship oftrust, known as a fiduciary relationship, existsbetween a principal and an agent for the benefitof the principal. This relationship requires theagent to exercise a duty of loyalty to the principaland to use reasonable care to serve and protectthe interests of the principal. An agent whoacts in his or her own interest violates the fiduciaryduty and will be financially liable to theprincipal for any losses the principal incursbecause of that breach of the fiduciary duty. Forexample, an agent who accepts a bribe to purchaseonly the goods from a particular sellerbreaches his fiduciary duty by taking the money,since it is the agent’s duty to work only for thebest interests of the principal.An agency relationship is created by the consentof both the agent and the principal; no onecan unwittingly become an agent for another.Although a principal-agent relationship can becreated by a contract between the parties, a contractis not necessary if it is clear that the partiesintend to act as principal and agent. The intentof the parties can be expressed by their words orimplied by their conduct.Perhaps the most important element of aprincipal-agent relationship is the concept ofcontrol: the agent agrees to act under the controlor direction of the principal. The extent of theprincipal’s control over the agent distinguishesan agent from an INDEPENDENT CONTRACTOR,over whom control and supervision by the principalmay be relatively remote. An independentcontractor is subject to the control of anemployer only to the extent that she or he mustproduce the final work product that she or hehas agreed to provide. Independent contractorshave the freedom to use whatever means theychoose to achieve that final product. When theemployer provides more specific directions, orexerts more control, as to the means and methodsof doing the job—by providing specificinstructions as to how goods are to be sold ormarketed, for example—then an agency relationshipmay exist.The agent’s authority may be actual orapparent. If the principal intentionally confersexpress and implied powers to the agent to actfor him or her, the agent possesses actual authority.When the agent exercises actual authority, itis as if the principal is acting, and the principalis bound by the agent’s acts and is liable forthem. For example, if an owner of an apartmentbuilding names a person as agent to lease apartmentsand collect rents, those functions areexpress powers, since they are specifically stated.To perform these functions, the agent must alsobe able to issue receipts for rent collected and toshow apartments to prospective tenants. Thesepowers, since they are a necessary part of theexpress duties of the agent, are implied powers.When the agent performs any or all of theseduties, whether express or implied, it is as if theowner has done so.A more complicated situation arises whenthe agent possesses apparent authority. In thiscase, the principal, either knowingly or evenmistakenly, permits the agent or others toassume that the agent possesses authority tocarry out certain actions when such authoritydoes not, in fact, exist. If other persons believe ingood faith that such authority exists, the principalremains liable for the agent’s actions andcannot rely on the defense that no actualauthority was granted. For instance, suppose theowner of a building offers it for sale and tellsprospective buyers to talk to the rental agent. Ifa buyer enters into a purchase agreement withthe agent, the owner may be liable for breachingthat contract if she later agrees to sell the buildingto someone else. The first purchaser reliedon the apparent authority of the agent and willnot be penalized even if the owner maintainsthat no authority was ever given to the agent toenter into the contract. The owner remainsresponsible for acts done by an agent who wasexercising apparent authority.The scope of an agent’s authority, whetherapparent or actual, is considered in determiningan agent’s liability for her or his actions. Anagent is not personally liable to a third party fora contract the agent has entered into as a representativeof the principal so long as the agentacted within the scope of her or his authorityand signed the contract as agent for the principal.If the agent exceeded her or his authority byentering into the contract, however, the agent isfinancially responsible to the principal for violatingher or his fiduciary duty. In addition, theagent may also be sued by the other party to thecontract for FRAUD. The principal is generallynot bound if the agent was not actually orapparently authorized to enter into the contract.With respect to liability in TORT (i.e., liabilityfor a civil wrong, such as driving a car in a negligent manner and causing an accident),the principal is responsible for an act committedby an agent while acting within his or herauthority during the course of the agent’semployment. This legal rule is based onrespondeat superior, which is Latin for “let themaster answer.” The doctrine of RESPONDEATSUPERIOR, first developed in England in the late1600s and adopted in the United States duringthe 1840s, was founded on the theory that amaster must respond to third persons forlosses negligently caused by the master’s servants.In more modern terms, the employer issaid to be vicariously liable for injuries causedby the actions of an employee or agent; inother words, liability for an employee’s actionsis imputed to the employer. The agent can alsobe liable to the injured party, but because theprincipal may be better able financially to payany judgment rendered against him or her(according to the “deep-pocket” theory), theprincipal is almost always sued in addition tothe agent.A principal may also be liable for an agent’scriminal acts if the principal either authorizedor consented to those acts; if the principaldirected the commission of a crime, she or hecan be prosecuted as an ACCESSORY to the crime. Some state and federal laws provide thata corporation may be held criminally liable forthe acts of its agents or officers committed inthe transaction of corporate business, since bylaw a corporation can only act through itsofficers.An agent’s authority can be terminated onlyin accordance with the agency contract that firstcreated the principal-agent relationship. A principalcan revoke an agent’s authority at any timebut may be liable for damages if the terminationviolates the contract. Other events—such as thedeath, insanity, or BANKRUPTCY of the principal—end the principal-agent relationship byoperation of law. (Operation of law refers torights granted or taken away without the party’saction or cooperation, but instead by the applicationof law to a specific set of facts.) The rulethat death or insanity terminates an agent’sauthority is based on the policy that the principal’sestate should be protected from potentialfraudulent activity on the part of the agent.Some states have modified these common-lawrules, allowing some acts of the agent to be bindingupon other parties who were not aware ofthe termination.
FURTHER READINGS
Gregory, William A. 2001. The Law of Agency and Partnership.3d ed. St. Paul,Minn.:West Group.Hynes, J. Dennis. 2001. Agency, Partnership, and the LLC in aNutshell. 2d ed. St. Paul,Minn.:West Group.
CROSS-REFERENCES
Contracts; Fiduciary; Good Faith; Imputed; Liability;Masterand Servant; Respondeat Superior; Vicarious Liability.
