4 Agency

The agency relationship

Agency is a legal relationship in which an agent acts on behalf of a principal and is subject to the principal’s control. Agency rules address when an agent can affect the principal’s legal relations, what duties the parties owe each other, and when either may be liable to third parties.

The principles described here reflect general U.S. common law. Statutes and state-court rules can differ, and the precise duties and remedies may depend on the jurisdiction and the parties’ agreement.

Creating and ending agency

An agency relationship arises when the principal indicates consent for the agent to act on the principal’s behalf and subject to the principal’s control, and the agent agrees or otherwise consents. The parties do not need to use the word “agency”; a written contract or payment is generally not required. Courts look at the parties’ conduct and actual relationship.

For example, a shop owner who authorizes a worker to buy supplies for the shop may create an agency without a formal agreement. By contrast, a seller–buyer relationship alone does not necessarily create agency: a retailer buying goods for resale typically acts for itself, not as the supplier’s agent.

Agency normally ends by agreement, completion of the assigned task, or revocation of the agent’s authority. Ending actual authority does not always end apparent authority immediately. Third parties who reasonably rely on the principal’s earlier conduct may need notice that the relationship or authority has ended.

How agents receive authority

Authority is the agent’s power to affect the principal’s legal relations. A principal may be bound by an agent’s act through actual authority, apparent authority, or ratification.

• Actual authority arises when the agent reasonably understands from the principal’s words or conduct that the principal authorized the act. It may be express, meaning directly stated, or implied, meaning reasonably necessary or customary to carry out an express assignment. For example, if a principal asks an agent to arrange a delivery, the agent may have implied authority to hire an ordinary carrier.

• Apparent authority arises from the principal’s manifestations to a third party, not merely from the agent’s own claim of authority. For example, depending on the circumstances, a business that presents an employee as its purchasing manager may lead suppliers reasonably to believe that the employee can place routine orders.

• Ratification occurs when a principal, with knowledge of the material facts, affirms an act done or purportedly done on the principal’s behalf. The principal may affirm expressly or, in appropriate circumstances, by accepting the transaction’s benefits without timely rejecting it. Ratification can bind the principal even if the agent lacked authority when acting.

An agent’s private instructions may limit actual authority without eliminating apparent authority toward a third party who reasonably relies on the principal’s contrary outward conduct. A principal may also be prevented from denying authority when the principal’s conduct foreseeably induced a third party’s reasonable, detrimental reliance.

Duties between principal and agent

An agent is a fiduciary and must act in good faith in matters connected with the agency. A fiduciary duty commonly includes the following responsibilities:

• Loyalty: Act for the principal’s benefit within the agency. Avoid undisclosed conflicts and self-dealing, do not secretly profit from the position, and do not divert the principal’s business opportunity.

• Care: Use the care, competence, and diligence reasonably expected in the circumstances.

• Obedience: Follow the principal’s lawful instructions within the agreed scope of the agency.

• Information and accounting: Disclose relevant information and properly account for money or property received for the principal.

An agent who breaches a duty may owe damages or have to surrender an improper benefit. The principal’s duties may include paying agreed compensation, reimbursing authorized expenses, and cooperating as required by the agreement and applicable law. The precise duties and available remedies can vary by jurisdiction and by the parties’ agreement.

Contracts with third parties

When an agent makes an authorized contract on the principal’s behalf, the principal is generally bound. Whether the agent is also personally a party often depends on what the third party knew and what the contract says.

• Disclosed principal: When both the agency and the principal’s identity are known, the principal is ordinarily the contracting party.

• Undisclosed principal: If the agent does not disclose the principal, the agent is ordinarily also a party. The undisclosed principal may nevertheless be bound if the agent acted with actual authority, subject to relevant defenses and contract terms.

An agent who purports to make a contract for a principal but lacks authority may be personally liable to the third party for falsely representing that the agent had authority, depending on the circumstances and governing law. The principal may still become bound through later ratification.

Tort liability

An agent remains personally responsible for the agent’s own torts. A principal may also be liable for its own wrongdoing, such as negligent selection or supervision, under the applicable rules.

Separately, under respondeat superior, an employer or other principal is generally vicariously liable for an employee-agent’s tort committed within the scope of employment. Whether conduct falls within that scope is fact- and jurisdiction-specific. A minor work-related detour may be treated differently from a substantial personal departure.

An independent-contractor label alone does not resolve liability; the nature of the relationship and applicable exceptions matter.