Principals and Agents

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An agent is a person who acts for a principal in dealings with third parties. The agent stands in the shoes of the principal when entering into transactions with third parties on behalf of the principal. An agent can act for the principal in numerous ways and for different purposes. One such purpose would the execution of a contract on behalf of the principal.  A typical example would be a leasing agent entering into a lease with a tenant of property owned by the owner/principal.   In order for an agent to bind the principal by agent’s acts, the agent must have received authority to so act from the principal.

  1. The Characteristics of an Agency Relationship

    There are three characteristics of an agency relationship: (1) the agent has the power to bind the principal in the agent’s dealings with third parties on behalf of the principal; (2) the agent has a fiduciary relationship to the principal when acting on behalf of the principal; and (3) since the agent’s authority comes from the principal, the principal has the right to control the conduct of the agent connection with the authority granted the agent.  

  2. The Fiduciary Duty owed by an Agent to His Principal

    A fiduciary duty includes the duty to act with great care, and in good faith for the benefit of the principal. The duty of an agent is similar to that of a trustee. The agent must not act in such a way as to harm the Principal, or to act on behalf of anyone else whose interests are adverse to the interests of the principal. The agent must make the fullest disclosure of important facts relevant to the transaction for which the principal has given the agent authority to act. The agent also has the duty to keep confidential any confidential information imparted to him by the principal. The agent also must refrain from acting on his own behalf in connection with the transaction his principal has authorized him to engage in.

  3. The Establishment of an Agency Relationship

    One may become an agent based on his or her agreement with the principal that he or she will act on behalf of the principal. In addition to the principal’s express authorization of the agent to act for him, one may become an agent of another if the other’s conduct has led the agent to reasonably believe he has authority to act for the other. Thus, an agency relationship may be established in writing, or may be oral, or may be based solely on the conduct of the principal. 
    An agency relationship may also be established either before the fact, or after the fact. In other words, it can be created before the agent takes action on behalf of the principal. Or, if the agent acts without authority, the agent’s actions may later be ratified by the principal. In that instance, the individual becomes the agent of the principal upon the principal’s ratification of the agent’s conduct.

  1. Actual Authority

    An agent’s authority may be actual or ostensible, and an agent’s actual authority may be express or implied. Express authority is authority the principal expressly grants the agent, either by the principal’s words or conduct. The principal’s conduct creating an express authority is conduct which reasonably leads the agent to believe he has such authority.

  2. Implied Authority

    Implied authority is the authority to take certain action which the principal has not expressly authorized, but which nevertheless is necessary in order for the agent to fulfill the purpose for the express authority granted to the agent. As an example, if the principal is injured, and the agent has authority to see that the principal receives medical care, the agent will have authority to waive the principal’s right to sue the doctor or hospital in court for malpractice, and instead, agree to arbitration of any malpractice claim.

  3. Ostensible Authority

    Ostensible authority is the authority created by the principal by acting in such a way as to reasonably lead third parties to believe that the agent has authority. The difference between actual authority resulting from the principal’s conduct and ostensible authority resulting from the principal’s conduct is that in the former instance, the conduct leads the agent to believe he has the authority, whereas in the latter instance, the conduct leads third parties to believe the agent has the authority.

  4. The Equal Dignities Rule

    Typically, no formalities, or any written instrument, or any express terms are required to create an agency relationship. As noted above, conduct by the principal may be sufficient to create an agency relationship. However, if a contract entered into by a principal would be required to be in writing to be enforceable, the authority of the agent to enter into such a contract on behalf of the principal must also be in writing.

As with most rules, however, there are exceptions. For instance, no written authorization is necessary if the agent is not given any discretionary power, but is required by the authority granted him only to perform a simple task of the principal.  An example would be signing a document for the principal.  The equal dignities rule similarly does not apply when the agent acts at the direction of and in the presence of the principal.

Nor must the authority of the chief executive officer of the corporation be in writing in order for the CEO to bind the corporation. That is because the corporation can act only through its authorized representatives, and the CEO of a corporation has such authority by operation of law.

The equal dignities rule also does not apply to immunize a principal from liability to the agent. Consider this example:  The principal leads the agent to reasonably believe that he has authority to enter into a contract on behalf of the principal.  However, the principal does not give that agent that authority in writing.  The agent then enters into a contract required to be in writing in order to be enforceable.  Should the principal then renege on the contract his agent entered into on the principal’s behalf, and the agent is found liable to the other party to the contract, the agent will be entitled to indemnification from the principal.

Similarly, if the principal by his conduct causes a third-party to reasonably believe that the agent has written authority to enter into a contract on the principal’s behalf, the principal will not be able to avoid liability to the third-party if the principal breaches the contract.

The Law Office of William J. Tucker is familiar with the law of agency, and provides free initial phone consultations to individuals and companies with issues involving agency relationships.  Feel free to Schedule an Appointment