Agency & Authority — Business Associations

Olympia Motors makes Sam its sales manager. Privately, the owner tells him, never give a discount above 10% without my sign-off. Wanting the sale, Sam gives a customer 20% off. The owner never approved it and never knew about it. Is Olympia Motors bound to that deal?

Yes. Bound, and its only remedy is against Sam. Which tells you the shape of this whole topic. Agency runs on a triangle. The principal, the agent, and the third party who deals with the agent. And the question that decides almost everything is not what the principal wanted. It is who the principal talked to.

Here is the route. First how an agency forms, which takes less than you think. Then the two channels of authority that bind the principal, plus two backup routes. Then what the agent owes the principal, care and loyalty. Then when the agent is personally on the hook to the third party. And finally how authority ends, and why it can outlive its own ending.

Agency is a relationship, not a contract, and § 1.01 of the Restatement (Third) of Agency gives you four elements. The principal manifests assent, by words or conduct, that the agent should act for the principal. The action is on the principal's behalf. The agent is subject to the principal's control. And the agent consents to act.

Notice what is not on that list. No written contract. No payment. No magic words. A friend agrees to sell your car for you, for free. Agent, or not? Agent. Priya tells Devi, please order our flour this month while I am traveling, and Devi says sure. When Devi places the order, Priya is the buyer.

Two more practical rules. No formalities, so agency needs no writing and no consideration. And capacity runs one way. The principal must have capacity to do the act, but the agent needs only minimal capacity. Even a minor can serve as an agent.

And labels do not control. Courts look at the substance of the relationship, not what the parties call it. Writing independent contractor on a form will not defeat an agency the facts create. Calling someone your agent will not make them one if the control and consent are missing.

One caveat. Some states follow an equal-dignities rule, where if the act itself must be in writing, the agent's authority must be in writing too. The Franklin Agency Code § 12 is one. But on a starred topic expect no statute, and reason from the default that authority may be created orally.

Once an agency exists, the headline question is whether the agent's act binds the principal. And the single most important idea, the one the exam tests relentlessly, is who the principal communicated with. Actual authority looks at what the principal said to the agent. Apparent authority looks at what the principal signaled to the third party.

Actual authority exists when the agent reasonably believes, based on the principal's manifestations to the agent, that the principal wants the agent to act. That is § 2.01 and § 3.01. Express actual authority is spelled out. Sign the lease for up to $3,000 a month. Implied actual authority fills the gaps.

Implied means whatever is reasonably necessary to carry out the express task, plus authority from custom, the agent's position, or prior dealings. An agent told to run the store has implied authority to buy inventory, pay the utility bill and hire clerks, though none of it was spelled out.

Apparent authority, under § 2.03, is different. It exists when a third party reasonably believes the agent has authority, and that belief traces to the principal's own manifestations. The manifestation must come from the principal and reach the third party. Not from the agent's own claims. An agent cannot bootstrap authority by announcing it.

It often arises from position. A principal who installs someone as store manager has represented to the world that the person can do what store managers normally do. Which means apparent authority can exist where actual authority does not. Most importantly, when the principal has secretly limited the agent.

So back to Sam. No actual authority, because he violated the express 10% limit. But apparent authority, yes. The customer reasonably believed a sales manager could set price terms, and that belief traces to Olympia Motors putting Sam in the manager's chair. The secret cap does not bind a customer who never knew of it.

Two backups can bind a principal without authority at the moment of acting. Ratification, where a principal later approves an unauthorized act, expressly or by accepting its benefits with knowledge of the material facts. And estoppel, where a principal carelessly lets a third party believe someone is their agent and that party relies to its detriment. Spot them, but lead with actual and apparent.

Now the second side of the triangle. Because agency is fiduciary, the agent owes more than good faith. The agent must put the principal's interests first in everything connected to the agency. Two duties headline the exam, care and loyalty, and both are starred.

The duty of care, § 8.08, requires the care, competence and diligence normally used by agents in similar circumstances. It is objective. If the agent has, or claims to have, special skills, say a licensed accountant, the agent is held to that higher standard. And modern law applies this duty even to an unpaid agent.

The duty of loyalty, § 8.01, is the heart of agency. In all matters connected with the agency, the agent must act solely for the principal's benefit. Not for the agent's own gain, and not for a third party's. That breaks into four prohibitions.

No secret profits, so no undisclosed benefit from a third party, no kickback, no hidden commission. No self-dealing, so no dealing with the principal as an adverse party without informed consent. No competition during the relationship, though that duty ends when the relationship does. And no misuse of the principal's property or confidential information.

Two features make loyalty powerful. The remedies bite. A disloyal agent must disgorge any profit even if the principal lost nothing, may forfeit compensation for the period of disloyalty, and the transaction can be rescinded. And the duty can be waived, but only with informed consent after full disclosure.

Maya is the purchasing agent for a Columbia restaurant group, and a produce supplier quietly pays her $500 for every contract she steers its way. Her prices are fair and the group never overpays. Liable, or not? Liable. Loyalty targets the conflict and the secret profit, not the harm.

Now switch sides again. When an agent signs a contract for a principal, is the agent personally liable if things go wrong? The answer turns entirely on how much the third party knew about the principal at the time of contracting. Three categories, and the exam tests them quietly, through signature blocks.

Disclosed principal, where the third party knows the identity. The principal alone is liable, because the third party knowingly chose to contract with the principal and used the agent as a conduit. The agent drops out.

Partially disclosed, which the Restatement (Third) calls unidentified. The third party knows someone stands behind the agent but not who. Both are liable, because the third party could not size up that unknown party's creditworthiness.

Undisclosed principal, where the third party knows nothing. Both are liable. Ben buys a parcel in his own name for the Franklin Land Trust, so the seller will not raise the price. Ben is personally liable, because as far as the seller knew, Ben was the buyer. When the seller learns of the Trust, it may hold the Trust too.

So read the signature. Franklin Corp., by Ben, its agent, signals a disclosed principal, and the agent is not liable. Just the agent's own name signals an undisclosed principal. Agent liable, or not? Liable.

One more route to personal liability. Under § 6.10, a person who purports to contract on another's behalf impliedly warrants that they have authority. If there was no authority, or no principal at all, the agent is personally liable for breach of that warranty. Even in complete good faith. The third party is never left with no one to sue.

Finally, endings. Actual authority terminates by the agreement's own terms, when the time expires or the purpose is achieved. By revocation by the principal or renunciation by the agent. By a change of circumstances the agent should recognize. By death or loss of capacity. Or by operation of law.

One distinction inside that list. The principal always has the power to revoke, and the agent always has the power to quit, even when doing so breaches a contract between them. Revoking may leave the principal liable in damages, but it still ends the authority. Power and right are different questions.

Now a rule the exam loves, precisely because it changed. Under old common law a principal's death instantly terminated the agent's authority, even if the agent had no idea. Modern law rejects that. Under § 3.07 and § 3.08, death or loss of capacity ends actual authority only when the agent has notice. An agent who signs without yet knowing the principal has died can still bind the estate.

And one last twist. Ending actual authority does not automatically end apparent authority. As to third parties who dealt with the agent, it lingers until they receive notice the relationship is over. A Columbia distributor lets Rosa call on its accounts for years, then fires her and tells nobody. Rosa places an order with a long-time account. The distributor may be bound.

Which is why a principal who fires an agent notifies existing customers directly and gives public notice to the wider world. One exception. A power given as security, an agency coupled with an interest held for the holder's own benefit, is irrevocable, and survives revocation and death.

A word on authorities. This episode named no cases, and there were none to name. Modern agency law lives in the Restatement (Third) of Agency, published in 2006, and a NextGen question rarely asks you to name a doctrine. It drops you into a lawyer's chair and asks whether the company is bound.

If you keep only three, keep these. § 1.01, the four elements, assent, on behalf of, control, consent. The two channels, § 2.01 for actual and § 2.03 for apparent, because who the principal talked to decides most questions. And § 8.01, loyalty, because the remedy is disgorgement whether or not the principal lost a dollar.

Now the traps, straight from the examiners' favorites. One. Confusing the two channels. Actual is principal to agent. Apparent is principal to third party. Two. Thinking a secret limit defeats apparent authority. It does not, as to a third party who never learned of it. Three. Assuming a gratuitous agent owes no duty of care. They do.

Four. Forgetting that a disloyal agent must disgorge even a fair, harmless deal. Five. Treating a disclosed-principal signature as making the agent personally liable. It does not. Six. Applying the old rule that death instantly ends authority, instead of the modern notice rule.

And seven. Overlooking lingering apparent authority after a quiet firing. Two more worth holding. The agent's own say-so never creates apparent authority, so hunt for a manifestation from the principal. And reasonable belief is required on both routes, so a third party who knows the agent is exceeding authority cannot rely on it.

Time for the quick check, and this one comes straight from the BARGO question bank. A homeowner gives his property manager written authority to sign leases on his rental units. The homeowner dies unexpectedly on a Monday. The manager, who has not yet heard the news, signs a new lease with a tenant on Tuesday in the ordinary course.

The estate later tries to void the lease, arguing the manager's authority ended the instant the homeowner died. Is the estate right? Option one. Yes, because a principal's death instantly terminates all of the agent's actual authority. Option two. No, because the manager's written authority survives death by its own terms. Option three. No, because death ends actual authority only once the agent has notice. Pause here if you want a moment.

The answer is option three. Under modern agency law a principal's death terminates actual authority only when the agent has notice, and the old rule of automatic termination has been rejected. The manager had not yet learned of the death when he signed, so he still had authority, and the lease binds the estate.

Option one states exactly the discarded common-law rule, which is the trap the fact pattern sets with had not yet heard. Option two is wrong for the opposite reason. Authority does not survive death indefinitely. It ends once the agent receives notice. There are thirty plus more questions on this topic alone, each with every option explained like that.

Five things to take away. One. Agency needs assent, on behalf of, control and consent, and no writing, no payment and no magic words. Two. Actual authority is what the principal said to the agent. Apparent authority is what the principal signaled to the third party, and a secret limit does not shrink it.

Three. Loyalty means disgorgement of any secret profit, even where the deal was fair and the principal lost nothing. Four. Disclosed principal, the agent walks away. Partially disclosed or undisclosed, both are liable, and an agent with no authority at all is liable on the implied warranty. Five. Death ends actual authority only on notice, and apparent authority lingers until third parties are told.

Which is why Olympia Motors eats a 20% discount it expressly forbade. It never told the customer anything about a 10% cap. It only told Sam. Next time, Vicarious Liability.

Practice this topic with more than 2,900 exam-style questions, free to start, at nextgenbargo.com. This episode is for education and exam preparation only, not legal advice, and we are not affiliated with or endorsed by the NCBE or any bar examining authority.