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Agency Law

Introduction

What is agency law? In short, it is the law that deals with agents. What agents? Nearly any agent you can think of, such as: search agents, travel agents, insurance agents, commercial agents, literary agents, sports agents, patent agents, real estate agents, etc., and our favorite Hollywood special agents, like Bond, James Bond. But what exactly does it mean to be an "agent" in the eyes of the law? Who do agents work for? What are agents’ responsibilities? Are agencies also agents? If you step back for a second, have you ever played the role of an "agent?" Maybe you have even held agency status like James Bond…

In this article we’ll explore the above questions and basic tenants of agency law, which applies to all types of agent and agency law relationships. We’ll also take a look at what it means to be an "agent," how agency authority is formed, how an agency relationship is created and ended, the different types of agents, examples of agency situations, and how you may even be an agent as you’re reading this article.

Next, we’ll explore how to create an "agent."

Creating an Agent

Simply put, an "agent" is created when a person (or entity) authorizes another person (or entity) to act on his or her behalf with a third party or third parties, i.e. other people or entities. The person giving authority is called the principal, while the person receiving authority from the principal is called the agent. So, in order to form an agency relationship there must be at least 2 people (or entities): (i) a principal and (ii) agent. Also, both the principal and agent must mutually agree to work together. Therefore, while a person may force another to work for him or her, this does not create an agency relationship.

In addition to the principal and agent, there are usually third parties involved with the agent and/or principal. The third parties are not part of the agency relationship, but they do interact with the principal and agent. So, the 3 people (or entities) generally involved in an agency situation include:

the principal,
the agent, and
the third party

Agency relationships are created everyday.

For example, when you drive your friend’s car to take him or her somewhere, you are the agent and your friend is the principal. That’s because your friend owns the car as the principal and you’re acting on your friend’s behalf as the agent. In a similar example, if your parent ever gave you money to buy groceries, you were your parent’s agent and he or she acted as your principal. Alternatively, if you as a parent gave your child the car keys to buy you groceries, you automatically became the principal and your child became your agent. Third parties would be any people that the agent has to deal with on behalf of a task for his or her principal. So, in the grocery store example, the people working at the grocery store that interacted with the child would be the third parties.

In short, the principal is the "boss" of the agent for particular duties. In James Bonds novels and films, we don’t always know James Bond’s principal, i.e. boss. A principal that is unknown is called an undisclosed principal, while known principals are referred to as disclosed principals. In the novels by Ian Fleming concerning James Bond, Bond’s principal, i.e. boss, is identified as Sir Miles Messervy (even though he is generally referred to as "M").

Next, let’s take a look at how the authority is created in an agency relationship.

Agency Authority

A key concept to keep in mind is that an agent must act with authority from the principal to hold the principal liable for the agent’s acts or omissions. In other words, if the agent acts outside the scope of the agency relationship, then the agent will be personally liable to third parties while the principal will not be liable at all.

There are two general questions to ask in every agency relationship:

Is there any actual authority to act by the agent?
If there is no actual authority, is there any apparent authority to act by the agent?

So, the first question should always be: Is there any actual authority to act? Actual authority is the authority that is actually given by the principal to the agent (assuming the agent accepts that authority). Actual authority can either be express or implied authority. Express authority includes the authority that the principal tells the agent he or she has (this is the authority that most of us think of). Implied authority refers to the authority implied from the express authority.

For example, assume Bo, a professional baseball player, asks Tom to be his sports agent and Tom accepts. Bo tells Tom that Tom can review the contracts offered to Bo from the various MLB baseball teams. Here, Tom has the express authority to review contracts. Tom then hires his own secretary to direct phone calls and deal with some of the paperwork involved with the contracts. Bo did not give Tom the express authority to hire the secretary and help Tom, but this would likely be allowed because it is implied authority stemming from Tom’s and Bo’s agency relationship.

If there is no actual authority, the second broad question should be: Is there any apparent authority to act? Apparent authority occurs when a third party "reasonably believes" that the agent has actual authority to act on behalf of the principal. Now, apparent authority cannot be created by the agent. Rather, the principal has to have given the third party a "reasonable belief" that the agent has actual authority. Let’s look at the Bo and Tom agency relationship again.

Assume that Bo tells the Milwaukee Brewers that Tom is his sports agent and Tom can negotiate all proposed contracts for Bo on Bo’s behalf. The Brewers then enter negotiations with Tom and ask if Tom can also negotiate an endorsement with the Brewers to promote their new ballpark, for which Bo will be paid extra. Here, Bo said Tom could negotiate all contracts, but may have only meant actual baseball contracts, not endorsement contracts. However, regardless of what Bo meant, it’s likely that Tom could negotiate the proposed endorsement contract because the Brewers would be reasonable to believe that Tom had that authority. In other words, at the very least, Tom likely has apparent authority to negotiate the endorsement contract with the Brewers.

So, now that we’ve covered how agency authority generally works, let’s take a look at the duties of an agent.

Agent’s Duties

Agents, whether you’re acting like James Bond, or as a real estate agent, sales agent, literary agent, or even an NFL agent, have duties to their principal. And in turn, the principal has duties to the agent. So, it’s a two-way street where the agent and principal have duties to each other. These duties are generally known as fiduciary duties.

The agent’s duties to the principal include to:

act within the confines of the law
act with reasonable care
maintain loyal to the principal
disclose any material information to the principal

Agents must act in the best interests of their principals, but cannot break the law to do so. However, sometimes if an agent breaks the law on behalf of the principal, the principal can be held liable for the agent’s acts. Agents must also act reasonable like a prudent person would act. What’s reasonable is often determined on a case-by-case basis.

Agents must maintain loyalty to the principal and take advantage of the agency relationship for the agent’s personal benefit. For example, if the principal gave the agent a limousine to drive the principal’s friend to the airport, the agent could use that limo to take his or her friends out to a party. That action would be outside the scope of the agency relationship and break the agent’s duty of loyalty to the principal. Also, agents must disclose important material information to the principal. For example, if the agent learns that the principal’s friend became ill, the agent must inform the principal.

The principal’s duties to the agent generally include to:

pay the agent
reimburse the agent for reasonable expenses

The principal must pay the agent for the agent’s work and reimburse the agent for reasonable expenses associated with the agency relationship. Reasonable expense include those expenses that are generally required to complete the project(s), which can vary depending on the particular facts of the agency relationship.

Types of Agents

Next, let’s take a look at the different types of agents.

Agents come in all kinds of different forms – it just depends on the situation. However, you can usually classify agents into a few different main types. Besides the regular agency relationship with 1 principal and 1 agent, other types of agents include:

Co-agents

When multiple agents have an agency relationship with just 1 principal

Dual-agents

When 1 agent acts on behalf of multiple principals in regard to the same transaction

For example, a real estate agent may act as the agent for the buyer and the seller on the same piece of property
Dual-agents also include spies who work for 2 or more governments.

Sub-agents

Is an agent of an agent, where the original agent grants authority to a sub-agent

For example: principal (hires)--> agent (hires)--> subagent

The subagent acts on behalf of the first agent and the principal
Sub-agents are only allowed if it is:

Necessary to complete a project
- For example, a general contractor might hire a subcontractor who then hires subagents to do specific tasks
- General contractor (principal) --> subcontractor (agent) --> mason (subagent)
Customary in the business industry
The principal expressly allows the agent to hire a subagent
It deals with a very trivial matter

As you can see, there are different types of agents depending on the particular situation

Next, let’s take a look at a hypothetical agency example with a bar bouncer to clarify the roles of principal, agent, and third party.

Agency Example

It’s important to know if you’re acting as an agent, principal, or third party in many situations, and where your responsibilities in any of these three roles begins and ends. Let’s take a look at an example of a bar bouncer working for a local pub to clarify the roles of principal, agent and third party:

Bar Bouncer Agency Example

There is a bar called Owen’s Pub. The owner, Owen, hires a bouncer, Ben, to keep order in the pub. Owen gives Ben authority to throw visitors out of Owen’s Pub if they cause any violence. Owen is therefore the principal and Ben is his agent.

Ryan, a local town drunk, enters the bar one night and starts a fight with another customer for no good reason. Ben, the bouncer, sees Ryan throw the first punch and Ben immediately grabs Ryan and throws him outside on the curb. Ben injured Ryan by tossing him out the door and Ryan now wants to sue. Who can Ryan sue?

Ryan sues Ben, because Ben injured him. However, can Ryan sue Owen? This depends on the nature of the relationship between Owen and Ben. As mentioned earlier, Owen is the principal of Ben. As long as Ben acted within the scope of his employment on behalf of Owen, Ryan could sue Owen as the principal of Ben. In other words, Ryan would sue Owen because Owen authorized Ben to throw Ryan out of the bar. In the eyes of the law, Owen is liable for the actions of Ben.

However, Owen and Ben would both argue that they’re innocent because Ryan deserved to get thrown out. And Owen and Ben are likely right, and if so, neither would be liable. However, if a jury or judge determined that Ben acted unreasonably and was liable to Ryan, then Owen would be liable too.

Now, assume that Ben walked up to Ryan and beat him up for no legitimate reason whatsoever. In this case, Owen would not be liable for Ben’s actions because Ben would be acting outside the scope of his employment. So, keep in mind that a principal is only liable for the actions of his or her agent if the agent acts within the scope of his or her employment! This is a concept that often confuses many people.

Finally, we’ll wrap up this article by showing how an agency relationship is terminated and offer some additional thoughts to keep in mind.

Conclusion

In this article we took a look at the basic tenants of agency law, including what it means to be an "agent," how agency authority is formed, how an agency relationship is created, the different types of agents, and examples of agency situations. In addition, agency relationships can end in many ways (often like how they begin), including: by contract, where both the principal and agent agree to end the relationship, or where there is no more need for the agency.

You should have a much better understanding about how agency law operates, and keep in mind that the tenants of agency law mentioned in this article apply generally to all types of agency relationships.

Did you read this article for someone else, perhaps for a work or school project? If so, you were likely reading this article in the capacity of an agent. Make sure you disclose to your principal what you’ve learned or you may have violated your agency duties, and James Bond, "007," surely wouldn’t approve of that no matter what kind of agent you are.

On a final note, check out the Harry Walker agency which acts as a large agency for big-name speaking celebrities.