The concept of “agency” is so basic to legal transactions in the United States and most of the world that it is often taken for granted. In its simplest form, it is simply appointing another to act on your behalf for a specified purpose. It is inherent in every employment relationship, most sales relationships, most organizations and business structures.
It is also far more complex than one would expect, as discussed in this article. How is agency created? What happens when an agent exceeds authority? What are the duties of an agent to the person appointing him or her and vice versa? Is the principal liable for the acts of the agent even if unauthorized or illegal? Can one create an agency by conduct even if one does not mean to? And how long does an agency last?
The questions above and far more are answered below but it is emphasized that this article is merely an introduction to this extensive area of the law.
DEFINITIONS AND BASICS:
Agency is a fiduciary relationship whereby one party expressly or impliedly authorizes another to act under his or her control and on his or her behalf. The party for whom another acts and from whom such authority derives is a “principal.” The one who acts for and represents the principal and acquires his or her authority from the principal is an “agent.” Pursuant to the grant of authority by the principal, the agent is the representative of the principal and acts for and instead of, the principal.
Any person who is capable of suing and/or being sued in a legal proceeding in his own name and has capacity to affect his or her legal relationships by giving consent to a delegable act or transaction may authorize an agent to act for him or her with the same effect as if such person were to act in person. This “person” can be an organization, a corporation or LLC, etc. Indeed, corporations and organizations must act by agents, either employees, officers or directors.
Further, any person has the capacity to act for another. Even if a person has legal disability such that his or her contracts are not binding on him or her, s/he may act as agent of another.
The relationship between an agent and a principal is a contractual one. Therefore, rights and duties of the agent and principal are in accordance with the agency contract. To establish an agency, there must be consent of both the principal and the agent, although such consent may be implied rather than expressed.
The written authorization by which principal appoints another as his or her agent and confers upon the agent the authority to perform certain specified acts or kinds of acts on behalf of the principal is often the power of attorney but can be any type of contract or employment or assignment agreement. Thus, one appoints a real estate agent; one employs an attorney; one hires an administrative assistant; one executes a durable power of attorney. All these are forms of creation of agency.
The relationship of principal and agent can be terminated only by the acts or agreement of the parties to the agency or by operation of law.
An agent cannot delegate his or her authority and have services performed by a subagent without express permission from principal unless permission can be implied from the nature of the business or custom.
TYPICAL TYPES OF AGENCY
The most common agency relationships are:
- Buyer’s Agency;
- Seller’s Agency;
- Dual Agency.
In a buyer’s agency relationship, the buyer is considered the client. A buyer’s agent has to be loyal, maintain confidentiality, be obedient, provide reasonable care and diligence, and give accounting for all funds.
Similarly, a seller’s agency relationship represents the seller in the transaction and the seller is considered the client. A seller’s agent is also known as a listing agent. The seller’s agent possesses the same fiduciary responsibilities to the seller as the buyer’s agent has to the buyer. In a seller’s agency, the client relationship is established through a listing agreement.
In a dual agency, an agent represents both buyer and seller in a single transaction and carries fiduciary responsibilities to both principals. The mistake of an agent acting as a dual agent becomes a mutual mistake of fact by both principals. This prevents one principal to make the other principal liable for the mistake of the agent. However, knowledge or notice to a dual agent is not imputed if the agent acted adversely or fraudulently. Dual Agency is only permitted with the informed and voluntary consent of both the buyer and the seller. Herdan v. Hanson, 182 Cal. 538 (Cal. 1920)
Employment and Contractors:
An employee is the agent of the employer and in performing acts within the scope of work, is acting on behalf of the employer. An independent contractor can also be the agent of the principal, again, performing tasks within the scope of specified authority.
Most courts impose a fiduciary duty of agency upon employees and a more limited fiduciary duty upon contractors, often relying on the employment or contracting agreement to determine the scope of the duty and agency.
It should be kept in mind that the concepts are extremely broad: when one hires an accountant to do one’s taxes or an attorney to bring a case, this is “employment” which creates both agency and a fiduciary relationship.
A great deal of law has dealt with whether other types of professions, most particularly stock brokers, are held to fiduciary and agency duties to their clients, with the crash of 2008 resulting in shocked reactions when many people discovered that their brokers were not considered their agents. They achieved this status by fine wording in their retention agreements indicating that they were not acting as agents. (Lesson: read the contract.)
It is important to understand how broad agency can be. If one hires a contractor to rebuild the kitchen, he or she will hire numerous subcontractors (plumbers, electricians, etc.) who will buy materials (from suppliers) and the law holds that you have become the principal for all these agents and subagents; the suppliers are allowed to sue you directly for the materials if purchased by the subcontractors. See our article on mechanics liens.
Any limited liability entity must have agents to act for it. That is true of corporations, limited liability companies and limited partnerships. Usually those agents are managers, directors, officers and employees. All have a fiduciary duty to the entity, can bind the entity, and are subject to the corporate opportunity doctrine.
In reality, the above are only a small sampling of the myriad agency relationships that can be created. Almost all of us are both principals and agents in a dozen or more relationships all the time-if you work or are an independent contractor, you are an agent. If you are an officer of your church or a community group, you are an agent. If you employ an accountant, a nanny, a secretary or are on the board of a little league team, you are a principal with agents reporting to you. It is an inherent part of social and legal life.
And there are as many additional types of agency relationships as there are conceivable delegation arrangements between people and between people and entities.
CREATION OF AGENCY
Agency is a relationship between a principal and an agent in which the principal confers his or her rights on the agent to act on principal’s behalf. Such a relationship is based on an agency contract. The rights and duties of the agent and principal are in accordance with the express or implied terms of the contract.
With the exception of implied agency discussed below, to create an agency, the consent of the agent and the principal is necessary. The principal must intend that the agent act for him or her, the agent must intend to accept the authority and act on it. The intention of the agent and the principal must be either in express terms of the contract or can be inferred from the conduct of the parties
An agency relationship can arise only at the will and by the act of the principal. Existence of agency is always a fact to be proved by tracing it to some act or agreement of the alleged principal.
Note that there are two types of agency: (1) actual, either express or implied, and (2) apparent. The relationship of an agent and a principal may also arise by estoppel, necessity or operation of law.
In transactions conducted by parties through an intermediary, whether an agency relation has been created depends on the intention of the parties. In such cases, terms used to designate the capacity of the intermediary in the written instrument attending the transaction are not always conclusive. Factors to be considered in determining if there is an agency and which party is the principal of the intermediary include the duties of the intermediary, the exercise of such duties, and the personfor whose benefit they are being performed. Carr v. Hunt, 651 S.W.2d 875 (Tex. App. Dallas 1983)
Implied and Express Agency
An agency is defined as a contract, either express or implied, by which one of the parties confides to the other the management of some activity or business, to be transacted in his or her name, or on his or her account, by which that other assumes to do the actions or business, and to render an account of it. Express agency is an actual agency created by the written or spoken words of the principal authorizing the agent to act on behalf of the principal. In express agency, authority is directly granted to or conferred upon the agent or employee in express terms, and it extends only to such powers as the principal gives the agent in direct terms, with the express provisions controlling. Kurtz v. Farrington, 104 Conn. 257 (Conn. 1926).
An agency relationship can be either express or implied. Agency is created by implication when, from the nature of the principal’s business or actions and the position of the agent in regard to that action or within that business, the agent is deemed to have permission from the principal to undertake certain acts. In other words, implied agency involves permission to act, even though permission is not explicitly established orally or in writing. An implied agency is frequently established by the conduct and communication of the parties and the circumstances of the particular case. Keytrade United States v. M/V Ain Temouchent, 2003 U.S. Dist. LEXIS 597 (E.D. La.).
Generally, one should look from the viewpoint of the principal and the agent to determine whether the agent has implied authority. Orleans Parish Sch. Bd. v. Goodyear Tire & Rubber Co., 1995 U.S. Dist. LEXIS 8638 (E.D. La.). However, if a third party reasonably believes that such agency exists predicated on the acts or omissions of the principal, then implied agency can be created. That is the essence of apparent agency.
It is basic agency law that an agency relationship may be implied, inferred, or based on apparent authority. Implied or inferred agency is actual authority given implicitly by the principal to his or her agent circumstantially proved, or evidenced by conduct, or inferred from a course of dealing between the alleged principal and the agent. Authority can be implied only from facts. Implied powers must be based on some act or acquiescence of the principal, express or implied. Anderson v. Brock Investor Servs., 1993 U.S. Dist. LEXIS 19455 (D. Minn.1993).
Note that apparent agency is a variation of implied agency. If a principal acts in a manner such that third parties can reasonably assume an agency exists, then the courts may impose an agency even if the principal did not mean to create one. Thus, if one allows a person to represent to third parties that an agency exists and does not affirmatively clarify the lack of agency with the third parties, such an agency can be imposed if equity requires it.
TERMINATION OF AGENCY
The relation of principal and agent is normally terminated by the act or agreement of the parties to the agency or by operation of law. “An agency, when shown to have existed, will be presumed to have continued, in the absence of anything to show its termination, unless such a length of time has elapsed as destroys the presumption.” Merchant v. Foreman, 182 Kan. 550, 555 (Kan. 1958).
The agent’s duty and right to act on behalf of the principal comes to an end on the termination of agency. The timeframe for termination of an agency can be stipulated by a particular statute or agreement. In such a case, if the instrument specifies in plain and unambiguous terms that an agency will terminate without action on the part of the principal or agent upon the expiration of the time specified in the instrument, the agency will in fact, terminate.
If, after the expiration of the time stated in the contract, the parties continue their relationship as principal and agent, a rebuttable presumption is raised that their relations are governed by the original contract and that the contract is renewed for a similar period. For instance, if the parties entered into a contract for one year and continued to act under the contractual terms after one year, the court may presume that the parties in fact intended to keep the contract alive for another year. Cinefot International Corp. v. Hudson Photographic Industries, 13 N.Y.2d 249, 252 (N.Y. 1963).
On the other hand, if the parties did not fix any appropriate time for the termination of agency arrangement, the contract is deemed to be terminated after a “reasonable time.” This issue is a recurring one in litigation and is avoided by appropriate drafting of the agency agreement. Where the contract is silent, the courts use common sense and a review of the circumstances. “What constitutes a reasonable time during which the authority continues is determined by the nature of the act specifically authorized, the formality of the authorization, the likelihood of changes in the purposes of the principal, and other factors”. Hotchkiss v. Nelson R. Thomas Agency, Inc., 96 Cal. App. 2d 154, 158 (Cal. App. 1950). The burden of proving the termination or revocation of an agency rests on the party asserting it.
A power is coupled with an interest where the agent receives title to all or a part of the subject matter of the agency. In order to support a claim of power coupled with an interest, either legal title or equitable title is sufficient. A power coupled with an interest will survive to the personal representative of the agent upon the agent’s death. Phoenix Title & Trust Co. v. Grimes, 101 Ariz. 182 (Ariz. 1966).
An agency created for a specific purpose as well as an agency created by a power of attorney is usually terminated once the particular purpose for which it was created was accomplished. After the termination of the agency, the agent is free of any fiduciary duty to the principal arising from the agency relationship.
Durable Powers of Attorney are unique types of agency creations and each state has specific laws limiting their scope and effect. They normally do not terminate absent direction of a competent principal but, indeed, are created to maintain existence even if the principal becomes incompetent. See our article on that type of agency relationship in California.
The parties can terminate the agency by mutual agreement. An agency relationship requires the mutual assent of the parties and both the parties have power to withdraw their assent. Depending on the terms of the agency agreement, certain agencies may not be terminated by the act of one of the parties or by occurrence of an event. The mutual abandonment of an agency is a question of fact, since it is a matter of intention of both the parties. The court will ascertain such intent from the surrounding facts and circumstances of the transaction as well as implied from the conduct of the parties. Preszler v. Dudley, 153 Cal. App. 2d 120, 124 (Cal. App. 2d Dist. 1957).
The agency, itself, may be of extreme value to the agent, such as when one receives the right to represent a product or service in a territory, and the courts have long considered what rights may arise in such a situation. Most often, the agency agreement specifies what rights accrue, if any. In some jurisdictions, such as Europe, agents cannot be easily terminated without substantial payments to them for their lost property rights in the agency. In the United States, absent contract to the contrary, an agency may be revoked at the will of the principal when an agency is not coupled with an interest, and no third party’s rights are involved. In some agreements or jurisdictions, the party terminating the agency must show good cause. Thus, when A enters into a contract whereby B is to provide A for a stated period of time with goods or services, which both parties realize are for use in a particular enterprise owned by A, in the absence of a specific clause so providing, A cannot escape his obligations under that contract by voluntarily selling his interest in the enterprise before the expiration of the expressed contract term. If the right to cancel an agency contract is dependent upon some contingency, the cancellation must be justified by establishing the happening of such contingency. Carleno Coal Sales, Inc. v. Ramsay Coal Co., 129 Colo. 393, 398 (Colo. 1954).
An agency contract to be performed to the principal’s satisfaction can generally be canceled at will by the principal. Similarly, a power of attorney that is not a durable power of attorney, constituting a mere agency, may be revoked at any time, with or without cause.
Ordinarily, an agent may renounce the agency relationship by expressly notifying the principal, either orally or in writing. An agent’s cessation of all relations with the principal, and abandonment by the agent may be treated as a renunciation. However, mere violation of instructions by the agent will not amount to renunciation and may expose the agent to liability for breach of duty.
Although agency can often be terminated at will, law usually stipulates that notice must be given to the party affected by termination. However, express notice to the agent that the agency has been revoked, or to the principal that the agency is renounced, is not always necessary if the affected party actually knows, or has reason to know the facts resulting in such revocation or renunciation.
On the other hand, to avoid apparent authority, the principal should provide sufficient notice to third parties as to the revocation of agent’s authority. Otherwise, the acts of an agent after his/ her authority has been revoked may bind a principal as against third persons who reasonably rely upon the agency’s continued existence. This may often happen to transactions initiated by the agent before the revocation of authority, and the rule is applied in favor of persons who have continued to deal with insurance agents, purchasing agents, and similar situations. Morton Marks & Sons, Inc. v. Hill-Chase Steel Co., 196 Va. 268 (Va. 1954).
In addition, an agency may be terminated by operation of law. Usually, the death or bankruptcy of the principal operates as an immediate and absolute revocation of the agent’s authority, unless the agency is one coupled with an interest. The rule is the same even if the agency is created with more than one principal. Where the power or authority is created by two or more principals jointly and one of them dies, the agency will normally be terminated unless it is coupled with an interest. However, an agency may be made irrevocable by statute, notwithstanding the death of the principal.
Death of a principal and the effect on agency is often litigated when third parties or the agents are in the midst of reliance on the agency. In most United States jurisdictions, two views are prevailing. According to one view, unless the agency is one coupled with an interest, it will terminate on the death of the principal, notwithstanding the fact that the agent and third person are ignorant of the fact. Another view is that if the third person dealing with the agent acts in good faith and in ignorance of the principal’s death, the revocation of the agency on the death of the principal takes effect only from the time that the agent receives notice of such death. In such a case, the principal’s estate may be bound. See, however, our article on Durable Powers of Attorney.
Similarly, death of the agent will revoke an agency not coupled with an interest and this is the rule even when there are two or more agents. However, in the case where a sub agent is appointed by the agent, the authority of a subagent is terminated by the death of the agent, unless the agent appointed the subagent at the principal’s request. In that event, the subagent derives his/her authority form the principal and not from the agent.
The loss or destruction of the subject matter of the agency or the termination of the principal’s interest is yet another ground for terminating the agent’s authority. The agent’s authority ceases when the agent has notice of the fact. However, destruction of subject matter will not always result in termination of agency, especially when the subject matter can be replaced without substantial detriment to either party.
In addition, a change of law making the required act illegal may terminate an agency contract. If the authority or power of an agent is coupled with an interest, it is not revocable by the act, condition, death, or mental incapacity of the principal before the expiration of the interest, unless there is some agreement to the contrary.
The agent’s duty to act on behalf of the principal comes to an end on the termination of agency.
Even without contractual terms so providing, a principal may normally unilaterally cancel an agency without incurring liability for breach of contract based upon: misconduct or habitual intoxication of the agent which interferes with his/her employment, the refusal of the agent to obey reasonable instructions or to permit the principal to make a proper audit of his/her accounts, serious neglect or breach of duty by the agent, dishonesty or untrustworthiness of the agent, the agent’s failure to pay an indebtedness owing to the principal, disloyalty of the agent like using the agency to make secret profits.
Ordinarily, an agent may renounce the agency relationship by expressly notifying the principal, either orally or in writing. An agent’s cessation of all relations with the principal, and abandonment by the agent may be treated as a renunciation. However, mere violation of instructions by the agent will not amount to renunciation.
DISPUTES BETWEEN AGENTS AND PRINCIPALS
The relationship between a principal and an agent is fiduciary and an agent’s actions bind the principal. The law of agency controls the legal relationship in which an agent interacts with a third party for his/her principal.
An agent owes certain duties towards his/her principal and a principal owes certain duties towards his/her agent. The scope of an agent’s duty to the principal is determined by:
- the terms of the agreement between the parties; and
- extent of the authority conferred and
- the fiduciary obligations to the principal.
An agent’s primary duties are:
- act on behalf of and be subject to the control of the principal;
- act within the scope of authority or power delegated by the principal;
- discharge his/her duties with appropriate care and diligence; and
- avoid conflict of interest between his/her personal interests and the interests of the principal.
Other duties of an agent include:
- not to acquire any undisclosed material benefit from a third party in connection with transactions conducted or through the use of his/her positions as an agent;
- to act with the care, competence, and diligence normally exercised by agents in similar circumstances;
- to take action only within the scope of the his/her actual authority;
- to comply with all lawful instructions received from the principal and persons designated by the principal concerning agent’s actions on behalf of the principal;
- to act reasonably and to refrain from conduct that is likely to damage the principal’s interests.
An agent is liable to indemnify a principal for loss or damage resulting from his/her violation of the duties described above.
A principal owes certain contractual duties to his/her agent. A principal’s primary duties to his/her agent include:
- To compensate the agent as agreed; and
- To indemnify and protect the agent against claims, liabilities, and expenses incurred in the agent correctly discharging the duties assigned by the principal.
When an agent acts within the scope of actual authority, the principal is liable to indemnify the agent for payments made by agent under the agency during the course of the relationship irrespective of whether the expenditure was expressly authorized or merely necessary in promoting the principal’s business.
The usual areas of conflict arise from authorized acts by agent which are alleged to have exceeded authority granted; conflict of interest in which the agent violates his or her duty to the principal; and negligence in performing duties by agent. With the principal, the usual conflict is failure to pay the agent as contracted.
THIRD PARTIES AND AGENCY
If an agent acts within the scope of his/her authority, a principal is bound by the act of his/her agent. Moreover, a principal is responsible for any action or inaction by the principal’s agent. The liability of the principal to a third person upon a transaction conducted by an agent is based upon facts such as:
- the agent was authorized;
- the agent was apparently authorized; or
- the agent had a power arising from the agency relation and not dependent upon authority or apparent authority.
A principal may be liable to a third person on account of a transaction with an agent because of the principles of estoppel, restitution, or reasonable reliance, although he/she may not be subject to liability based on principles of agency. Unless a person has expressly or impliedly made such other his/her representative, no person is liable for the acts of another who assumes to represent him/her. Moreover, a person dealing with an agent cannot hold the principal liable for any act or transaction of the agent not within the scope of his/her actual or apparent authority.
However, unless the limitations of the agency are known or can be readily ascertained, the principal may be bound by unauthorized acts of an agent through which a third party has sustained a loss if reasonable reliance on the agent’s authority is demonstrated.
The principal will no longer be liable for a particular act after the third person has notice of the principal’s repudiation of the agent’s authority to do such an act. After the termination of an agency for a particular purpose and notice of the revocation of the agency, the act of an agent will normally not bind the principal. Often, a principal is liable for the tortuous acts of an agent within the course and scope of the agent’s employment. However, it must be emphasized that unless the principal commands or directs the act, a principal is not liable for the torts committed by an agent while acting adversely to the principal or outside the scope of the agent’s employment.
The principal is bound by the knowledge of or notice to an agent received while the agent is acting within the scope of his/her authority. The agent’s knowledge or notice is imputed to the principal and is constructive notice. The liability of a principal is affected by the knowledge of an agent concerning a matter as to which he acts within his/her power to bind the principal or upon which it is his/her duty to give the principal information that:
- except where the agent is acting contrary to the principal’s interests or where knowledge as distinguished from reason to know is important, the principal is bound by the knowledge which an agent has a duty to disclose to the principal or to another agent of the principal to the same extent as if the principal had the information; and
- except where there is reliance upon the appearance of agency, a principal is not bound by knowledge of an agent concerning matters as to which he has only apparent authority.
Unless the notifier has notice that the agent has an interest adverse to the principal, a notification given to an agent is notice to the principal if it is given:
- to an agent authorized to receive it,
- to an agent apparently authorized to receive it,
- to an agent authorized to conduct a transaction, with respect to matters connected with it as to which notice is usually given to such an agent, unless the one giving the notification has notice that the agent is not authorized to receive it,
- to an agent to whom by the terms of a contract notification is to be given, with reference to matters in connection with the contract, or
- to the agent of an unidentified or undisclosed principal with reference to transactions entered into by such agent within his/her powers, until discovery of the identity of the principal; thereafter as in the case of a disclosed principal.
The doctrine of imputed knowledge is a rule of public policy based upon the necessities of general commercial relationships. But note that the knowledge of an agent may be imputed to the principal only where it is relevant to the agency and to the matters entrusted to the agent. If the knowledge acquired or notice received by an agent:
- does not pertain to the duties of the agent,
- does not relate to the subject matter of the employment, or
- affects matters outside the scope of the agency, it is not binding on the principal unless actually communicated to him/her.
Further note that the rule charging the principal with an agent’s knowledge is not necessarily restricted to matters of which the agent has actual knowledge but may be enlarged based on the duty of the principal. The principal is not affected by knowledge which the agent should have acquired in the performance of his/her duties unless the principal has a duty to others that care will be exercised in obtaining information. Moreover, the principal is not affected by the knowledge which an agent should have acquired in the performance of the agent’s duties to the principal or to others, except where the principal or master has a duty to others that care shall be exercised in obtaining information.
Note that a principal is not bound by the knowledge of an agent in a transaction in which the agent secretly is acting adversely to the principal and entirely for his/her own or another’s purposes, except where the principal is affected by the knowledge of an agent who acts adversely to the principal if the failure of the agent to act upon or to reveal the information results in a violation of a contractual or relational duty of the principal to a person harmed thereby, if:
- the agent enters into negotiations within the scope of his/her powers and the person with whom he/she deals reasonably believes him/her to be authorized to conduct the transaction; or
- before he/she has changed his/her position, the principal knowingly retains a benefit through the act of the agent which otherwise s/he would not have received.
Where a third person perpetrates a fraud upon an agent, either by misrepresentation or by silence, the fraud is considered as worked upon the principal. The principal has a right of action against the third person for redress. A person who fraudulently obtains a contract through an agent acting within the scope of his/her power to bind the principal, or who by fraud causes the agent to do what would be a violation of his/her duty to the principal if the agent knew the facts, is subject to liability to the principal whether the fraud is committed against the agent or the principal directly.
A person who intentionally causes or assists an agent to violate a duty to the principal is subject to liability in tort for the harm such person has caused the principal or in a restitutional action for any profit such person derived from the transaction. This type of conduct is essentially a conspiracy to defraud the principal and actionable. Unless a person reasonably believes that the principal acquiesces in the double employment, the person who, knowing that the other party to a transaction has employed an agent to conduct a transaction for him/her, employs the agent on his/her own account in such transaction is subject to liability to the other principal. See our article on unfair business practices. However, the third person is not liable to the principal for the agent’s breach of duty if he/she did not knowingly participate in the agent’s wrongful act. Put simply, a principal may not recover from another on the basis of a misrepresentation made by the principal’s own agent.
If a third person has no knowledge about the fact that the agent is acting for a principal, then both the agency and the principal is “undisclosed.” The agent of an undisclosed principal can be held liable on the contract as the real obligor as s/he contracted in that capacity. Similarly, an undisclosed principal can also be held liable as s/he must also assume its burdens.
The liability of an undisclosed principal and the agent is normally an alternative liability. It means that the third party can only make either the principal or the agent liable and not both of them together. A third party can decide whether to make the principal or the agent responsible only after discovery of the principal and opportunity to make an intelligent choice. However, once an election is made by a third party, it is generally irrevocable.
If an agent acts in his/her own name without disclosing the principal this will not preclude liability of the principal. Note that if there is no proof of an actual agency relationship, there can be no reliance on the doctrine of undisclosed principals. Also, the principal is not liable where the contract provides that an undisclosed principal is not a party to it.
Similarly, an agent will be held liable if s/he fails to disclose the agency and the identity of the principal while making the contract. In such case, the agent will be subject to all the liabilities created by the contract, in the same way as if the agent were the principal in interest.
Likewise, in order to avoid personal liability of the agent, disclosure of the principal must normally be made at the time of contract. After the principal is disclosed, the agent will not be liable for subsequent authorized acts between the third person and the principal.
When an agent makes a contract for the principal concealing the fact that s/he is an agent, the principal can claim all the benefits of the contract from the other contracting party, so far as the principal does not cause any injury to the other party. However, a third person will not be liable to an undisclosed principal, if the specific terms of the contract exclude liability to any undisclosed principal or to the particular principal. There is nothing “illegal” or “unethical” about an undisclosed agency…it is done often…so long as fraud and injury to the third party is not caused by the undisclosed agency and the agreement does not prohibit it.
Undisclosed agents are often used to avoid negotiations that would otherwise be biased or tainted. Thus, if I am selling a building to a very rich buyer, I may negotiate a much higher price assuming I can do so. That buyer may use an undisclosed agent until the deal is signed to avoid that type of bias on my part. The way to avoid that danger if you are a third party is to simply put into the agreement the fact that no undisclosed principals are involved.
A subagent is a person to whom the agent delegates authority as his/her agent. Through a subagent, the agent can perform an act for the principal. If an agent feels that the appointment of subagents are necessary to the proper transaction and carrying on of the business committed to the agent, then the agent has an implied authority to make such appointments absent contrary provisions in the agreement. Generally, if an agent employs a subagent, then the agent is the employing person and the principal is not a party to the contract of employment.
If an agent employs a subagent for his/her principal, and by his/her authority, then the subagent is the agent of the principal and is directly responsible to the principal for his/her conduct, and if damage results from the conduct of such subagent, the agent is only responsible in case s/he has not exercised due care in the selection of the subagent.
But if the agent employs a subagent on his/her own account to assist him/her in the work at his/her own risk, then there is no agreement between such subagent and the principal. Under this circumstance, a subagent is only responsible to the agent, while the agent is responsible to the principal for the actions done by him/her and the actions by the subagent.
An agent is responsible to the principle for the conduct of a subagent with reference to the affairs of the principal entrusted to the subagent. However, a subagency cannot give more power to the subagency than the agency has and when that general agency ceases to exist, it will automatically dissolve the subagency.
An agent is not liable to third persons for the misfeasance or malfeasance of a subagent employed by him/her in the service of his/her principal, unless s/he is guilty of negligence in the appointment of such subagent or improperly co operates in the acts or omissions of the subagent. Baisley v. Henry, 55 Cal. App. 760 (Cal. App. 1921).
This is a mere introduction to the extensive jurisprudence concerning agency and even the cursory review above demonstrates that the reason there is so much law on the subject is the pervasiveness of agency in both the business and personal world in all aspects of life, from commercial to family decisions. Every employee, every realtor, every contractor, and anyone one asks to perform a task is an agent and given the inevitable problems that relationships entail, litigation concerning agency is endemic.
Like most things one confronts day to day, it becomes so common that one fails to notice its complexity. But for anyone engaged in any business, agency is as central a part of their business legal life as contracts or employment law and a good working knowledge of its requirements is necessary.