What is an agent and how is an agency relationship established?

In an agency relationship, the principal MAY be liable to a third party for the actions of an agent. This applies to debts and contracts, but it also applies to other claims, such as an injury to a third party. For the purposes of our overview of corporate law we are primarily concerned with the agent’s ability to enter into a contract or to create a debt on behalf of the business.

The two ways an agent can create a liability for the principal are through what are known as “actual authority” and “apparent authority.” Actual authority is just what it sounds like; the agent actually has been given the authority to carry out some action on behalf of the principal. It gets somewhat more complicated, however, as actual authority can be express or implied.

Express actual authority arises when there is an oral or written indication of the principal’s wishes to the agent.  A supervisor telling one of her employees “John, please take the truck to the mechanic and ask them to fix the exhaust.  Have them charge it to our corporate account” would give the employee the express actual authority to carry out the assigned task.  However, in general there must be an agency relationship at the time of the communication, and the following three elements must also exist: 1) does the agent actually believe that that principal wishes the agent to take specific action, 2) is the belief reasonable, and 3) is the belief based on the principal’s actions and/or communications (written, oral, or through conduct) to the agent?  If all of those factors are in place, then the agent has the express actual authority to carry out the task.

The other type of actual authority is implied actual authority. This gives the agent power to do things necessary to fulfill the agency relationship. The following elements are required:

  • 1) Agent actually believes the action is:
    • a.      Implied by the principal’s statements or conduct, OR
    • b.      Necessary or incidental to achieving the principal’s objectives, OR
    • c.       Proper, usual, and necessary to do their job;
  • 2) The belief is reasonable; and
  • 3) The belief is based on the principal’s statements or conduct.

In this situation an employee may have a certain set of duties that necessitate carrying out a certain task.  Perhaps John is tasked with overseeing a grounds keeping crew that has run out of grass seed while working on a project; buying seed for the project from the business’ normal supplier would be proper, usual and necessary, and if John knows that his employer authorized this sort of action when approached by other crew supervisors he would likely have the implied actual authority to go out and buy seed for his crew’s equipment.

The other form of an agent’s authority is apparent authority. This occurs when a third party reasonably believes that the actor is authorized to act on behalf of the purported principal. This type of authority is very different from actual authority. There is no need for a prior existing agency relationship. The elements required are:

  • 1) principal must consent to or knowingly acquiesce to the agent’s conduct;
  • 2) the third party must actually believe that the actor has authority to act on behalf of the principal;
  • 3) the belief must be reasonable; and
  • 4) the third party must rely, to his detriment, on the agent’s apparent authority.

To use our previous example of the grounds keeping crew, even if the employer had only authorized certain supervisors to make purchases and charge it to the company’s account, if the salesman at the supply store knew John worked for his employer and that the employer allowed other supervisors to purchase supplies, if he sold John the supplies and charged it to the company account the company would have to pay for the supplies.  

So we’ve covered how a business can act through its agents. Our next goal is to go over the various types of corporate entities so that you can decide which one is right for you!

© 2016 John V. Robinson, P.C.