Agency Relationships

Photo by reynermedia is licensed under CC 2.0.

Agency relationships exist where one party has authority to act on behalf of another party. Agency relationships are a significant concept in the law and so a basic understanding of the terms and concepts governing their existence is important.

Agency can be a complex legal concept with implications for a variety of day-to-day activities. Agency relationships can even be formed unintentionally. Agency law developed over centuries as a way to provide fairness to daily activities, particularly business activities, and so the laws of agency do not always come with the obvious formalities that many people expect when dealing with matters of great legal significance.

Important Terms of Agency Relationships

1. The principal: the legal person authorizing another to act on his behalf.
2. The agent: the person empowered to act on the principal’s behalf.
3. The third party: the person with whom the agent interacts.
4. Manifestation: words—written or oral—or conduct, that reasonably leads another person to understand that he has been authorized to act on another’s behalf. The manifestation must always come from the principal and not a third party.
5. Co-agent: several agents working for the same principal.
6. Superior and subordinate agents: exist when there is a hierarchy among the agents serving one principal.
7. Dual agents: agents with more than one principal.
8. Disclosed principal: the third party knows that the agent is acting on behalf of a principal and who the principal is.
9. Undisclosed principal: the third party does not know that the agent is acting on behalf of a principal.
10. Unidentified principal: the third party knows that the agent is acting on behalf of a principal, but does not know who the principal is.
11. Gratuitous agency: agency without compensation. Unlike a contract, agency does not require consideration, compensation, or mutuality.

Actual and Apparent Authority

Agency relationships can be created through both actual and apparent authority. Actual authority is created by a manifestation of the principal to the agent. The agent must reasonably believe that he is acting for and under the control of the principal.

Apparent authority exists when a third party reasonably believes that the agent has authority to act on behalf of the principal based upon a manifestation of the principal.

Inherent authority exists when a principal gives someone a position, job, title, or role with which there is some sort of inherit authority associated. This is often considered to be a type of apparent authority.

Restitution

If one party gives a benefit where he thinks there is an agency, and the principal accepts that benefit, then the principal has an obligation to pay for the benefit. This will not, however, make an invalid contract valid. It simply requires the party retaining the benefit to pay for the value of the benefit.

Estoppel

Whenever the facts and circumstances are such that it would be equitable to impose liability based upon the breach of some duty, then the courts may in their discretion use the doctrine of estoppel to estop the principal from denying liability.

There is such a thing as passive manifestation. A principal’s failure to act may result in a manifestation that gives apparent authority, thereby estopping the principal from denying an agency.

Ratification

Ratification occurs where the principal ratifies an agency relationship after the fact. That is, if a individual acted on behalf of the principal without the authority to do so, the principal can ratify the agency relationship, even though it did not exist when the agent performed the conduct in question.

For ratification to occur:

1. There must be a prior act.
2. The act must have been done by another.
3. The act must have been done without actual or apparent authority.
4. The act must have been done or purportedly done on behalf of the person who wants to ratify.
5. The purported principal must manifest assent to the entire thing; there can be no partial ratification.
6. The purported principal has to have knowledge of all the material facts.

Conduct will amount to ratification only when the conduct can be understood in no other way. That is, the only reasonable interpretation is that the party meant to accept the benefits and liabilities associated with the contract.

It is important to note that the purported principal must have existed at the time of the prior act in order to ratify it. A purported principal—such as a business—that did not come into existence until after the prior act cannot then ratify that act.

---

See Also:

Creating and Terminating an Agency Relationship

Agent Liability to a Third Party