Cecily Zamora
Agency law is a common law doctrine that governs the relationship between agents and principals. It is a fundamental concept in legal transactions, especially in the United States, and is inherent in most employment, sales, and business relationships. A principal-agent relationship is established when the agent is authorized to act on behalf of the principal. This authorization can be express, implied, or apparent. The principal's liability for contracts made by the agent depends on whether the agent had the authority to make the contract. Even if the agent lacked authority, the principal may still be liable if they ratify the agent's actions after the fact. The principal is generally responsible for indemnifying the agent against claims and liabilities incurred while acting within the scope of their authority.
| Characteristics | Values |
|---|---|
| Nature of the relationship | Fiduciary |
| Nature of the duties | General |
| Termination | Can be terminated at will by the principal |
| Ratification | Principal may be liable if he ratifies the agent's acts |
| Authority | Express, implied, apparent |
| Liability | Principal is liable for tortious acts of the agent |
| Indemnification | Principal must indemnify the agent |
| Loyalty | Agent owes principal a duty of loyalty |
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What You'll Learn
Principal's liability depends on the agent's authority
The concept of "agency" is fundamental to legal transactions in the United States and most of the world. In its simplest form, it involves appointing an agent to act on one's behalf for a specified purpose. A principal-agent relationship is created when the agent is given authority to act on behalf of the principal.
The liability of the principal depends on the agent's authority, which can be acquired expressly, impliedly, or apparently. Express authority refers to the agent's power to take any actions requested by the principal, as well as any actions necessary to accomplish those requests. Implied authority, on the other hand, is based on what may be reasonably inferred from the parties' relationship and the principal's conduct. For example, a business manager has implied authority to buy goods and services, hire and fire employees, and direct the ordinary operations of the business. Apparent authority occurs when a third party reasonably believes that the agent has the authority to act on the principal's behalf due to the principal's words or conduct, even if no such authority exists.
The principal may be liable for contracts made by the agent if the agent was authorized to negotiate and close the deal. This authorization must be communicated to the third party. Even if the agent had no actual or apparent authority, the principal may still be liable if they ratify the agent's acts before the third party withdraws from the contract. Ratification is a voluntary act where the principal accepts the results of the agent's actions as if they were authorized.
It is important to note that a principal owes certain contractual duties to their agent, including indemnification and protection against claims, liabilities, and expenses incurred while correctly discharging their assigned duties. The principal is also responsible for any action or inaction by their agent. However, an agent acting within the scope of their authority is generally not liable on contracts made on the principal's behalf, as they are not a party to the contract.
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Ratification by the principal
Agency by ratification refers to a legal principle where a person (the principal) approves and accepts the actions or contracts undertaken on their behalf by another person (the agent) who initially lacked the authority to act for the principal. In other words, the principal retroactively ratifies the agent's actions.
For agency by ratification to occur, certain conditions must be met. Firstly, the agent must have taken some action on behalf of the principal without proper authority or without an existing agency relationship. Secondly, the principal must have knowledge of all material facts regarding the agent's actions. This includes proof that the principal was aware of the act and either accepted the benefits or chose to be bound by the agent's conduct. Thirdly, the principal must clearly and voluntarily express the intent to ratify the agent's actions, either explicitly or implicitly through behaviour. Lastly, the principal must have the legal capacity to authorize the action at the time of ratification.
Ratification usually relates back to the time of the undertaking, creating authority after the fact as though it had been established initially. It is a voluntary act by the principal, who can choose to affirm or disavow the results of the action. To ratify, the principal may explicitly tell the parties concerned or manifest their willingness to accept the results through their conduct. In some cases, silence may also be interpreted as ratification under certain circumstances.
In the context of contracts, ratification by the principal can occur when an individual, without proper authorization, signs a contract on behalf of a company. If the company later learns about the contract, reviews its terms, and explicitly approves or accepts it, they are ratifying the contract. Similarly, in real estate transactions, an agent may sell a property on behalf of a principal without proper authorization. If the principal discovers the sale and agrees to the transaction, the agency relationship is ratified. In business negotiations, an employee who enters into negotiations or makes a deal without explicit authorization can create an agency by ratification if the employer approves or accepts the arrangement.
It is important to note that ratification does not require the usual consideration of contract law. However, it is also true that an agent is not liable on contracts made on the principal's behalf; the agent is not a party to a contract made by the agent on behalf of the principal.
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Principal's liability for tortious acts
The concept of "agency" is inherent in every employment relationship, most sales relationships, and most business structures. A principal may be liable for the tortious acts of their agent, but they are generally not held criminally liable for criminal acts that were not prompted by the principal.
The principal's liability depends on whether the agent was authorized to make the contract. Express authority is that which is actually given and spelled out, while implied authority may be inferred from the parties' relationship and is incidental to the agent's express authority. Apparent authority is that which reasonably appears to a third party to have been given by the principal. A principal may also be liable if they ratify the agent's contract after the fact, even if the agent had no authority.
Vicarious tort liability is primarily a function of the employment relationship and not agency status. In the case of tortious physical conduct by a servant, the master will be liable to the victim for damages unless the victim was another employee. In such a case, the workers' compensation system will be invoked. An agent is not liable on contracts made on the principal's behalf, and the principal is liable to indemnify the agent for payments made under the agency.
There is a distinction between torts prompted by the principal and those of which the principal was innocent. If the principal directed the agent to commit a tort or knew that their instructions would bring harm to someone, the principal is liable. This rule also applies when the principal is negligent in their use of agents, such as through inadequate supervision or faulty directions. However, an agent is personally liable for their wrongful acts and must reimburse the principal for any damages the principal was forced to pay, as long as the principal did not authorize the wrongful conduct.
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Agent's duty of loyalty
Agency law is a fundamental concept in legal transactions, particularly in employment, sales, and business structures. It involves appointing another to act on one's behalf for a specified purpose. Within this framework, an agent owes their principal a duty of loyalty, which is one of the most basic fiduciary duties.
The duty of loyalty requires an agent to act solely in the best interests of their principal at all times, excluding all other interests. This means that an agent must not take any actions that would conflict with their principal's interests. For instance, if a manager is approached by a competitor with a job offer, they must not disclose confidential company information or use company resources to benefit the competitor while still employed.
The duty of loyalty also includes the responsibility to avoid possible conflicts of interest, thereby preventing an agent from self-dealing or taking advantage of opportunities for personal gain. This duty requires individuals, especially corporate officers and directors, to act in the best interests of their organization. It involves not usurping corporate opportunities, avoiding personal interests in transactions, and keeping the organization's information confidential.
In addition to these responsibilities, an agent must also disclose any known material facts about a property or transaction to their principal. Material facts refer to information that could reasonably impact the value or desirability of the property.
Breaches of the duty of loyalty can result in legal action, restitution, and reputational damage. While this duty generally cannot be waived, certain aspects may be addressed through disclosures and consent in specific situations.
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Termination of the agency relationship
The relationship may also be terminated by mutual consent, express agreement for termination at a certain time or upon a certain event, or by an implied agreement from the circumstances. An agency contract can be cancelled at the will of either party, or upon the non-performance of some expressed condition. However, the principal cannot cancel if the agent is fulfilling their part of the agreement. The contract may also be cancelled based on an express stipulation in the contract, and in such cases, reasonable notice of termination should be given.
Additionally, the principal may unilaterally cancel the agency without incurring liability for breach of contract under certain circumstances, such as misconduct or habitual intoxication of the agent, refusal to obey reasonable instructions, serious neglect or breach of duty, dishonesty, failure to pay an indebtedness, or disloyalty. An agent may also renounce the relationship by expressly notifying the principal, orally or in writing, or by cessation of all relations, which may be treated as renunciation.
Finally, an agency relationship formed under duress may be terminated using this as a legal defence. If the agency's purpose cannot be fulfilled, this may also be grounds for termination.
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Frequently asked questions
Agency law refers to the legal relationship between a principal and an agent, where the agent is given the authority to act on behalf of the principal. A contract liability principal refers to the liability that a principal may incur when their agent enters into contracts with third parties.
There are three types of authority that can bind a principal to a contract: express authority, implied authority, and apparent authority. Express authority is explicitly given and spelled out, implied authority can be reasonably inferred from the parties' relationship and is incidental to express authority, while apparent authority is that which appears to have been given by the principal to a third party under the circumstances.
Yes, a principal may still be liable for a contract made by their agent even if the agent had no actual or apparent authority. This can occur if the principal ratifies or adopts the agent's acts before the third party withdraws from the contract. Ratification is a voluntary act where the principal accepts the results of the agent's actions as if they were authorized.
The doctrine of apparent authority refers to situations where the law imposes a contract on a principal when there was no actual principal-agent relationship. This may occur when the principal's conduct leads a third party to reasonably believe that the agent had the authority to act on their behalf.
The primary duties of a principal to their agent include indemnifying and protecting the agent against claims, liabilities, and expenses incurred while correctly discharging their assigned duties. This includes indemnifying the agent for payments made during the course of their relationship, irrespective of whether the expenditure was expressly authorized. Another duty is to act in accordance with the express and implied terms of the contract, and a breach of this duty can result in the agent recovering based on a breach of contract claim.
