The ABCs of: Agency
Here is a collection of 26 important concepts, from A to Z, you need to know about Agency for the bar exam:
A - Actual Authority: When examining the liability of principals for contracts entered into by agents, first think about actual authority. Generally, an agency relationship is created when one person (the principal) manifests an intent that another person (the agent) act on his behalf and both parties consent to the agreement. A principal is contractually bound to the acts of the agent if the agent acted with actual or apparent authority. Actual authority is authority that the agent reasonably believes he possesses based on the principal’s dealings with him. Actual authority can be express (i.e., contained within the agreement between the parties) or implied from the actions of the principal. (See also “H - Holding Out by Principal” and “R - Ratification")
B - Borrowed Employees: An employer may lend the services of her employee to another. If the employee commits a tort while performing in his loaned role, who is liable—i.e., who is the employer? The key issue in determining liability for the employee’s torts is whether the borrowing principal or the loaning principal has the primary right of control over the employee. In most situations, the employee remains under the right of control of the loaning principal, and thus he is the only one liable for the employee’s torts. However, if the borrowing principal directs the actions of the employee, she will be liable for those actions if they are performed tortiously.
C - Contractual Liability: Most Agency questions test your knowledge of the parties’ liabilities. A party’s liability depends on whether the underlying action is based on Contracts (e.g., did the agent act with the principal’s authority) or Torts (e.g., was the agent an employee or an independent contractor and, if the agent was an employee, was the agent acting within the scope of employment). When it comes to a principal’s liability on contracts entered into by the agent, examine whether the agent acted with the principal’s authority. (See also “L - Liability for Tortious Acts”)
D - Disclosed Principals: A disclosed principal is one whose existence and identity are known to the third party. The rule for liability here is simple: a disclosed principal is always liable on a contract entered into by an authorized agent. You might see related issues involving unidentified and undisclosed principal situations. An unidentified principal is one whose existence, but not identity, is known to the third party. (Historically, an unidentified principal has been referred to as a “partially disclosed principal.”) An undisclosed principal is one whose existence and identity are unknown to the third party. In unidentified and undisclosed principal situations, either the principal or agent may enforce the contract and hold the third party liable. However, if the agent enforces the contract, the principal is entitled to all of the rights and benefits thereunder.
E - Estoppel Theory: Even though no employer-employee relationship actually exists, a principal may still be held liable on an estoppel theory. If the principal creates the appearance that an employer-employee relationship exists (though no such relationship actually exists), and a third person relies upon this appearance, the principal may be estopped from denying the existence of the relationship. If she is so estopped, she can be held liable under respondeat superior.
F - Formation: Formation issues are seldom directly tested on essays, but it’s often a good idea to start out Agency answers with a quick affirmation that you have an Agency issue. An agency is created when one person (the principal) appoints another (the agent) to act on his behalf. Consent is sufficient; the parties need not enter a contract supported by consideration, but they can.
G - Gratuitous Agents: A gratuitous agent is someone who acts as an agent without receiving payment. Typically, the standards of conduct and responsibility for gratuitous agents (unpaid) are the same as for paid agents. This means that being unpaid does not usually affect the expectations and duties of the agent.
H - Holding Out by Principal: Think apparent authority here. Apparent authority is that authority which a third party reasonably believes an agent possesses based on the principal’s holding out the agent as having such authority.
I - Independent Contractor: The test of whether a person is an employee or an independent contractor is whether the person’s physical conduct in the performance of the services is subject to the employer’s control or right to control. The more control that is exerted by the employer, the most likely the individual is an employee rather than an independent contractor. This is generally a question of fact. Keep in mind these important exceptions: A principal may still be held liable for injury caused by an independent contractor when an act to be performed is wrongful or tortious, involves a duty to the public, or is intrinsically dangerous, or when the principal interferes with the contractor’s performance. (See “L - Liability for Tortious Acts”)
J - Joint Liability: The liability of the principal for the torts of her agent is joint and several. This means that the plaintiff may recover her entire amount from either the principal or her agent.
K - Knowing Selection: If a principal who hires an incompetent independent contractor has knowledge of his incompetence, she will be liable for the contractor’s negligence. This is an exception to the general rule that principals are not liable for the actions of independent contractors. (Another exception when a principal may be liable for the actions of independent contractors is when the independent contractor is engaged in an inherently dangerous activity.) (See also "N - Negligent Selection")
L - Liability for Tortious Acts: Under the doctrine of respondeat superior, a principal is liable only for those torts committed by a certain kind of agent—an “employee” or “servant.” The principal isn’t generally liable for torts committed by an agent functioning as an independent contractor. Therefore, the first determination to be made in each case is whether, in fact, an employer-employee relationship did exist. (See “I – Independent Contractor”)
M – Method and Manner of Work: In determining whether an individual is an employee or an independent contractor, the primary issue is whether the principal has the right to control the individual’s method and manner of work. (See “I - Independent Contractor”)
N - Negligent Selection: If a principal negligently selects an incompetent independent contractor, she will be liable to the injured party for her own negligence in selection. (See also "K - Knowing Selection")
O - Operation of Law: An agency relationship may be created by an act of the parties or by operation of law (i.e., through estoppel or by statute).
P - Principals: Generally, any person (including entities) having capacity to contract may appoint an agent. As a result, minors and most unincorporated organizations (e.g., clubs) cannot be principals, and thus cannot appoint agents. (See also “Y- Young Agents”)
Questions of Fact: An employer is not liable for the torts of her employee unless the tort occurred within the scope of the employee’s employment. Whether the employee was acting within her scope of employment is a question of fact. Small or minor deviations from an employer’s directions (detour) fall within the scope of employment, while major deviations (frolic) fall outside the scope.
R - Ratification: Authority by ratification in agency law occurs when a principal retrospectively approves a contract entered into by an agent who initially lacked authority. For ratification to be valid, the principal must first have full knowledge of all material facts of the contract. Secondly, the principal must accept the entire transaction as it is, without modifying any part of it. Lastly, this ratification should not adversely affect the rights of intervening third parties. If these conditions are met and the principal ratifies the contract before the third party withdraws, the principal becomes bound by the agent's actions as if they had initially granted authority, thereby creating a legally binding agreement between the principal and the third party. This concept ensures that principals cannot selectively endorse advantageous aspects of an unauthorized act while discarding the rest, maintaining fairness in business transactions.
S - Subagents: If a subagent has been appointed by an agent with authority to appoint subagents, the subagent owes both the principal and the agent the same duties. If the subagent was appointed without authority, the subagent doesn’t owe the principal any duties but still owes the agent duties. In either case, only the agent owes a duty to compensate the subagent; the principal doesn’t owe the subagent this duty.
T - Termination of Authority: Authority can be terminated in various ways. Actual authority generally may be terminated at any time by either the principal or the agent, even if the contract between the two says that the relationship will continue. In such a case, damages arising from a breach of contract between the principal and agent are recoverable. Apparent authority may also be terminated. The principal must notify the third party of the termination of authority and retrieve any documents from the agent that might lead a third party to believe that the agent has authority. Death, incapacity, and the like usually terminate actual and apparent authority immediately.
U - Undisclosed Principal: An undisclosed principal is one whose existence and identity are unknown to the third party. An unidentified principal is one whose existence, but not identity, is known to the third party. (Historically, an unidentified principal has been referred to as a “partially disclosed principal.”) In unidentified and undisclosed principal situations, either the principal or agent may enforce the contract and hold the third party liable. However, if the agent enforces the contract, the principal is entitled to all of the rights and benefits thereunder. (See also D - Disclosed Principals")
V - Vicarious Liability: Vicarious liability arises when a principal is held liable for the torts committed by their agent. The most common basis for this liability is the doctrine of respondeat superior. However, when respondeat superior is inapplicable, either due to the absence of an employer-employee relationship or because the act was outside the employment scope, a principal may still face vicarious liability under the theory of apparent authority.
W - Writing: Generally, absent an express statutory provision to the contrary, the existence of an agency does not have to be evidenced by a writing. This is true even when the Statute of Frauds requires a writing for the agreement that the agent is entering into on behalf of the principal.
X - eXpress Actual Authority: See “A - Actual Authority.”
Y - Young Agents: Any person may be an agent, even if she has no contractual capacity herself. Thus, young agents (e.g., minors) may be appointed as agents, as may incompetents. Nonetheless, a minimal mental capacity is usually required.
Z - Zero Liability: The employer is usually not liable for the intentional torts of her employee on the simple ground that an intentional tort is clearly outside the scope of employment. An employee is not, after all, hired to commit intentional torts. However, where the intentional tort occurs as a natural incident to the carrying out of the employer’s business, or if any benefit may be found running to the employer, courts tend to hold the employer liable.
