Legal Centre for Business & Technology
When we think of agents, we usually think of travel agents or perhaps athletics' or movie stars' agents. This is ironic as most of us come in contact with other agents far more frequently in our day-to-day lives. Cashiers, salespeople, maintenance workers, and managers are a few of the agents that we see regularly, working for (or with the property of) their principal, who is most often their employer. Corporations especially must act through agents as the corporation is a legal entity only, and not a living person who can do his or her own work. Corporate agents, therefore, include all the directors, president, vice-president as well as all of the corporate employees. What then is agency?
Agency is the legal relationship that exists where one person (an agent) is authorized to act or conduct business for another party (a principal). Except in the very smallest of businesses, a business owner must rely, to some extent, on others to conduct portions of his business. Because of this, an understanding of the operation of the laws of agency will be important to the business.
The agency relationship can be created by either the acts of the parties, or by operation of law. The usual method of creating the relationship is for the principal to appoint the agent to act on his or her behalf by communicating with the agent either verbally or in writing. This is considered actual authority. The relationship might also be established by an act in which the principal, through a third person, authorizes the agent to act on his or her behalf.
The relationship is also established through apparent authority. In this situation, the agent has the authority to act on the behalf of the principal because of his or her position in relation to the principal. For example, your business manager or supervisor has the inherent authority to act in your name because of their position of authority. The agency relationship in this situation is created by operation of law to prevent fraud or injustice.
All employees are, to some degree, agents of their employers. Similarly independent contractors will also be agents of whomever they have contracted with. The extent of their authority will depend on the circumstances.
An agent's authority to act on behalf of his or her principal could be actual, or apparent.
a) Actual Authority
Actual authority is authority an agent has because the principal has given it to the agent. To have actual authority, both the agent and the principal must consent to the relationship. No consideration or payments to the agent are necessary. If the agency relationship involves buying or selling land, the agreement usually must be in writing. In most other cases, no written agreement is necessary to establish the relationship.
b) Implied Authority
Implied authority of an agent is the result of authority implied by reason of the agent's relationship with the principal of the principal's business, by reason of custom and usage, and by acquiescence. For example, an agent with actual authority to purchase goods on the principal's behalf will have the implied authority to pay for the goods either out of any of the principal's funds she has in her control, or on credit. There is also the implied authority to accept the delivery of any goods that she has the authority to purchase. Similarly, an agent who has the authority to sell her principal's property has the implied authority to give general warranties regarding the property. If the agent possesses the property, then she has the implied authority to collect payment.
c) Inherent Authority
In some situations, the courts find an inherent authority for the agent to act in order to protect innocent third persons. Under this concept, a principal is liable for the wrongdoing committed by his or her employees if the acts were within the scope of the employee's duties. For example, if a salesman is instructed by his employer not to warrant the fitness of any of the vacuums being offered for sale and the salesperson warrants a vacuum, the employer will be held to the warranty. In this context, scope of employment means that the employee is engaged in the furtherance of his or her employer's business.
d) Apparent Authority
A person is normally not responsible for another's acts unless that person is authorized to act on his or her behalf. An exception is the doctrine of "apparent authority" sometimes used by the courts to prevent injustice to third persons. The mere statement by a person that he or she is an agent of a certain person is insufficient to establish the agency. The third person has a duty to ascertain whether or not an agent has the authority to act in a particular situation. If the principal has led others to believe that the agency relationship exists, he will be bound by the acts that an agent in that situation would customarily have the authority to do.
The agency relationship would be used by the courts when the principal has a duty to deny the relationship but fails to do so. For example, if May in Cathy's presence tells others that she is Cathy's agent, Cathy has a duty to deny the relationship. If she fails to, then any third persons present might consider that May is, in fact, an agent of Cathy's. An agency relationship may also be found when the principal negligently allows another person to act as his agent. For example, a stranger comes into a store when no one is present, waits on a customer, sells a product, and pockets the money. Because it was reasonable for the customer to assume that the stranger was a clerk, the owner cannot force the customer to pay for the merchandise a second time.
e) Ratification of Unauthorized Acts
If an unauthorized person acts as a business owner's agent, the business owner can ratify (accept) the unauthorized transaction. If the owner does this, he or she is bound by the act of the unauthorized agent. To ratify the act, the principal must know of the material facts involved in the transaction and accept the entire transaction. He cannot approve the part favourable to him and deny the unfavourable portion. A principle can ratify only legal acts.
The ratification of an agent's unauthorized acts may be by express approval, by acceptance of the benefits of the act, or by silence when the principal had a duty to speak. The third person can withdraw from the transaction if he notifies the principal before the principal ratified the transaction.
Generally, a third person cannot sue an agent since his contract is with the principal, not the agent. Exceptions to this rule may occur when the agent, for example, fails to disclose that he or she is acting on behalf of a principal, or when there is a clear intent by the agent to be bound to the terms of the contract.
If the third person knows the principal, and the agent acted within his or her authority, the principal is bound by the contract. If the principal's identity was unknown when the contract was entered into, then both the agent and the principal will be bound on the contract and the third person can sue either or both.
An agency relationship can be terminated in a number of ways. If the agency relationship is for a specific period of time, it will terminate at the end of that period. If no time period is agreed upon between the agent and his principal, then the courts will imply termination within a reasonable time. In many cases the agency will terminate when a certain event occurs. For example, if an agent is hired to sell property for you, the agency terminates when the property is sold.
A change of circumstances that materially changes the relationship will also terminate the agency. For example, closing of the business associated with the agency or the insolvency of either the principal or agent. A major breach of an agent's fiduciary duty will also terminate the relationship as will the death of either party or the loss of the capacity to enter into a contract, e.g., becoming insane. When corporations or partnerships are involved, dissolution will also terminate the agency. Either party can terminate the agency by informing the other party. The power to terminate exists even in those cases when there is a contractual agreement not to terminate. In this case, the party breaching the contract might be liable for breach of contract, but he or she still has the right to cancel the agency.
The agent has the duty of undivided loyalty toward his or her principal. A person cannot act as an agent for more than one party or self-deal with the principal's property without the principal's expressed permission. If the agent has any interests that are adverse to those of the principal he or she has a duty to disclose them.
The agent is liable for any loss the principal suffers as the result of failure of the agent to complete his or her duties or follow the reasonable directions of his principal. The agent is also obligated to perform his or her duties in a reasonable and prudent manner. This duty applies even to those situations in which the agent is gratuitously acting on behalf of the principal.
If the agent breaches his or her duties, the principal can sue the agent for either breach of contract or in tort. Tort refers to an action brought because of negligent or wrongful acts that cause injuries to others. Under a breach of contract action, an agent can be held liable for any reasonably foreseeable damages that his or her principal suffers as the result of the agent's failure to fulfil the agency contract. In a tort suit, the principal can recover for any damages suffered because of the agent's wrongful or negligent act. In some cases, the principal can also collect punitive damages. Punitive damages are those damages assessed by a court in excess of the actual damages and imposed as punishment.
The principal owes a duty to reasonably compensate the agent for the agent's time and effort unless the agent has agreed to act without pay. In addition, the principal must reimburse the agent for any reasonable expenses incurred. Additional duties may be imposed by the contract. In most situations, the agent has a lien against the property of the principal for any monies owed to him or her.
Under the doctrine of "respondent superior", a principal might be liable for certain acts of his agent. To be liable there must be an agency relationship, and the conduct must be within the scope of employment. To be within the scope of employment, an employment situation must exist. If the agent is an independent contractor, whose duties the principal has no right to control, no employment situation exists and the principal is not usually liable for the acts of the agent.
To determine if an employment situation exists, the courts not only look at the degree of control that the principal has over his agent, but also whether or not his agent is engaged in a distinct business, the degree of skill involved in the duties, and the period of employment. If the court determines that the agent is in fact an employee and not an independent contractor, the employer (principal) will be liable for the torts (misconduct and negligent acts) he or she committed that injured others or damaged property belonging to others.