Scope of an Agent’s Authority

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 What is an Agent?

An agent is an individual who agrees to represent another individual, who is referred to as a principal. Agency relationships are typically formed by an agreement between those two parties.

The agent is only permitted to act on behalf of the principal for certain issues, depending upon the agreement between the parties.

What is the Scope of an Agent’s Authority?

The scope of an agent’s authority will depend upon the agreement that is made between the agent and principal. Generally, there are two ways to determine the scope of the agent’s authority, express or implied.

An agent’s authority may be expressly determined. If the parties enter into an agreement that specifies the agent’s duties, the agent is not permitted to represent the principal beyond those duties.

The authority of an agent may also be implied by custom. Customs are determined by the express duties of other agents in the same position.

For example, suppose a realty company hires a real estate agent. It is implied that the real estate agent has the authority to assist third parties to purchase and sell homes because that is the custom for real estate agents.

Are There Other Ways to Determine an Agent’s Authority?

There are certain situations in which an agent’s authority is created even if the individual is not an agent, including:

  • Apparent authority;
  • Emergency powers; and
  • Ratification.

The principal has a duty not to misrepresent another individual as their agent. If a principal, whether accidentally or purposefully, causes a third party to believe that an individual is an agent, the principal is bound by the actions of the agent even if that individual was not actually their agent.

The third party must have been reasonable in believing that the individual was an agent. This is also referred to as agency by estoppel.

In emergency situations, agents may act beyond their authority even if the principal did not give them permission. For example, an agent may use company funds in order to provide medical attention to an injured employee.

The agent may not have the authority to use those funds in that manner. However, the emergency situation may excuse the actions of the agent.

There are situations in which a principal authorizes an agent to act beyond their authority. So long as the principal is aware of the stretch of authority and ratifies that action ahead of time, the agent has the authority to act.

Why is Agent Authority Important?

Agent authority often determines whether or not a principal or an agent may be held liable in a lawsuit. If an agent acts under the authority of the principal, the then agent was most likely under the control of the principal and, therefore, the principal may be held liable.

In most cases, the principal has more funds than the agent. Because of this, an injured party may want to go after a principal because they may be able to obtain more compensation, although suing the agent may be easier.

What Happens if the Agent was Operating Outside the Scope of Authority?

If an agent acted outside the scope of their authority, the principal will not be liable for any injuries or losses. The only exception to this rule is if a principal ratified an agreement.

If an agent was acting outside of the scope of their authority, the agent can be liable for any breach of contract or injuries.

What Are Some Common Principal-Agent Problems?

A principal-agent relationship may be helpful for accomplishing a number of business or personal tasks. Having another individual, such as an agent, represent a party may free them up to complete more tasks on their own.

Some principal-agent problems may sometimes arise in the course of this type of arrangement. Issues including agency formation as well as the termination of an agency relationship may also arise.

In order to avoid confusion and/or legal issues, formation and termination of a principal agent relationships should be outlined clearly in a written contract. Common principal-agent issues may include:

  • Breach of authority: The scope of authority of an agent is typically limited to what the principal outlines in a contract when one is used. Acting outside the bounds of authority, for example, making a purchase without consent, may result in a lawsuit;
  • Vicarious liability: A common legal dispute is the liability for an agent’s violation. In some cases, the principal can be held liable; in some cases, the agent may be solely liable; and
  • Breach of loyalty: The agent generally owes the principal a basic duty of loyalty. For example, they may be required to invest the principal’s money in a prudent and reasonable manner.

Other principal-agent issues may arise, including:

  • Privacy issues;
  • Non-compete issues; and
  • Other issues.

This will depend upon the individual contract between the agent and the principal.

Who Can be Held Liable in a Principal-Agent Relationship?

If an agent causes injury to a third person or enters into a contract with a third person, the principal typically may be held liable for the actions of the agent if the agent acts within the scope of their express or implied authority and they have been specifically instructed to perform the task on behalf of the principal.

An agent, however, may be held personally liable for conduct they performed during the principal-agent relationship when authorization was not provided by the principal and the agent acted in such a way that their actions constitute:

  • Misconduct;
  • Engaging in illegal activity; or
  • Violating business standards.

This may occur if the agent has stepped outside of the boundaries of their agency relationship.

What Are Some Legal Remedies for Principal-Agent Problems?

The legal remedy for a principal-agent issue will vary depending upon the nature of the conflict that arises. If a principal is suing an agent, the remedy may be that the agent will be required to pay a monetary damages award in order to reimburse the principal for their losses.

The agent may be required to make a lost business reimbursement if their conduct resulted in the principal incurring any lost profit or lost business. In other situations, a principal may be liable to an agent if there was a breach of contract.

One common example of this situation occurs when a principal fails to pay an agent for their services. A principal or an agent, or in some cases, both, may be liable to a third party if they harm or cause losses to an outside party.

This type of conflict may be confusing because it is not always clear whether a principal or the agent should be held liable for the loss. In many instances, a principal may be held liable for conduct which they authorized an agent to do.

This, of course, will vary with each unique case. Some cases may also require the assistance of an attorney.

How Can an Attorney Help Me?

Principal-agency relationships are similar to employer-employee relationships. A contract lawyer can assist you with any issues involving agency law.

Your lawyer can assist you if an issue has already come up. Your attorney can also assist you before an issue ever arises by assisting with drafting an agency agreement or informing you if any of the parties to an agreement have violated their duties.

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