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Introduction to Agency Law

Agency is of fundamental importance to all business. An agency is a legal relationship in which one person represents another and is authorized to act for him/her. The person who acts is the agent; the person for whom the agent acts is the principal.

Agency laws consist of all the rules, recognized and enforced by society, whereby one person acts for another. Without the body of agency law, every person would have to act directly for him/herself and could not send a representative, a salesman, or a messenger. Since corporations can act only through employees, officers, and agents, corporations could not function at all and would cease to exist.

Without the ability of a principal to act through an agent, business would be severely crippled.

Always remember that Agency is a legal relationship in which one person (the agent) represents another (the principal) and is authorized to act for him/her.

Agency law consists of the rules that society recognized and enforces in regards to situations in which one person acts for another.

Agency and Other Legal Concepts Whereby One Person May or May Not Perform Services for Another.

1-  Agency may include employment
 An agent may or may not be the principal's employee. It depends on whether the agent  meets this definition of "employee": under the control and supervision of his/her employer, who determines not only what is to be done, but also how it is to be done and other details of performance. Some courts and commentators have disagreed - stating that certain types of employees have no power to represent the employer and thus are not agents.

2-  Agency includes and may be created by a power of attorney
 In its broadest sense, the word "attorney" denotes a representative or agent. An attorney at law is a legal representative, employed to represent a client in lawsuits and other legal matters. An attorney in fact may represent another person as an agent for general or special purposed other than legal ones. An attorney in fact is named as representative or agent in a power of attorney a written document setting out the appointment of the attorney. The appointment may be general, that is, for broad agency purposes ("to do any act for me"), or special ("to sell my real estate known as Blackacre") for named and limited purposes.

3-  Agency generally does not include independent contractors
 An independent contractor is hired to achieve a purpose, to do a job, to undertake a contractually defined result. How the contractor achieves the end result and what tools and techniques are used are his/her responsibility. (Only if the independent contractor is a representative does he constitute an agent.). The tort or contractual responsibility of a principal for the acts of his/her agent moves from very great when the agent is an employee to far less in the case of an independent contractor.

4-  Personal service obligations cannot be performed by an agent
 A number of personal service obligations cannot be delegated to another. These non-delegable obligations require the special skill of a designated person who cannot send a representative (agent) to act in his/her place. Thus, without the approval of the benefited third party, a doctor or lawyer, for example, cannot name an agent to act in his/her place. Similarly, a member of a corporation's board of directors, charged with the personal responsibility of a fiduciary (trustee), cannot act through an agent but must discharge his/her board duties in person. What can be delegated to an agent or subagent? Administrative, clerical, or mechanical duties - almost anything in which the delegating party's special skills or judgments are not involved.

5-  It is very important to distinguish between employees (who often are agents) and independent contractors (who rarely are agents)
 There are advantages to using independent contractors instead of employees: no tort liability under respondent superior, less administrative burdens, as much as 40% less in benefit expenses (e.g., no social security tax, no unemployment tax), avoidance of worker discipline and performance evaluations, reduced exposure to potential discrimination or other wrongful treatment liabilities, and far less regulation as to labor, and workers' compensation.

Disadvantages include; less control over a worker's performance and over his use of hirer's proprietary information, potential liability beyond workers' performance and over his use of hirer's proprietary information, potential liability beyond workers' compensation levels, the possibility that misclassification will result in penalties costing far more than simply classifying, initially, someone as an employee.

Is he/she really an independent contractor? Look at the parties' actions, at circumstances, not just what the parties say (e.g., their written agreement), but what is actually done. Is the hired person really "independent"? Does the hirer only determine ultimate goals, while the hired person decides how to do the job?

There are many tests for whether someone is an employee or an independent contractor, with different standards found at many different administrative agencies. The common law approach is to look at how much the hirer has a "right to control" the hired person. The "economic realities": test uses numerous factors, often focusing on this very important question: does the worker depend on the hirer's business for the opportunity to render service (employee) or does the worker depend on his own business (independent contractor)?

Some factors to consider are:
 -  degree of skill (employees often receive training from their employer, while independent contractors already have expertise);
 -  level of supervision (little or non for independent contractors) who supplies the tools, materials and place of performance (an independent contractor tends to supply his own);
 -  is the work part of the hirer's regular business (e.g., waiters and waitresses at a restaurant are employees, while caterers for a business that normally does not dispense food are independent contractors);
 -  the opportunity for profits/losses (e.g., franchisees are usually not employees); and,
 -  the permanency an exclusivity of the work relationship (the more there is, the more likely the relationship is one of employment).


By Express Contract or Consensual Agreement
 The agency relationship is always consensual. It usually is created by contract, oral or written. Sometimes, though, the contract element of consideration is lacking. For example, the power of attorney creates a consensual, but often non-contractual agency. The attorney in fact makes no promise to act, nor does the power granted necessarily provide for his/her payment or compensation. In some states, the power of attorney to sell real estate must be in writing, signed by the principal.

When an agency is not contractual, either party can terminate it at any time without liability to the offer for failure to continue performance of the agency. However, there is responsibility for tasks completed, undertaken or underway. Even if there is no contract, the parties are bound by all of the general duties and responsibilities of principal and agent.

By the Conduct of the Parties
 Implied contracts of agency may be judicially determined because the words or actions of the parties would lead other to believe that an agency existed, that one party was acting for another. This is the test for implied contracts, generally. Indeed, because of the way persons act, third parties may depend upon there being an agency relationship even though the parties, as between themselves, may deny the existence of an agency.

By Ratification of an Unauthorized Act
 Even though there was no agency when an "agent" performed a valid act ostensibly on behalf of another person, that person may ratify the act by accepting its results after the fact. There is no ratification unless the party that supposedly ratified: 
 was in existence when the "agent" acted;
 had full knowledge of all material facts before it ratified, and,
 ratified the entire act of a would be agent, not simply the favorable parts.

By Estoppel
 Estoppel is conduct by one person that causes another person, reasonably relying on this conduct, to act to his/her detriment or to change his/her position. An agent cannot give himself apparent authority; instead, he acquires apparent authority form his/her principal if the principal, by his/her conduct, leads another to reasonably believe that the agent is in fact authorized to act on the principal's behalf. If a corporation permits an office manager toe exercise general supervision over office employees, the office manager may have apparent authority to discipline these employees or to increase their compensation, even though secret or confidential limitation may have been placed upon this authority.

By Necessity
 There are a few special situations in which one person, for example, a parent, is responsible for the necessities of another, a child. In such a case, the parent may be responsible as a principal for a contract made by the child for his/her necessities (e.g. for medical treatment when away from home). The contract, of course, must be reasonable, and the provider of the service will be liable to the parent (principal) for failure to perform the contract with proper care.

Always remember that Agency can be created by contract (express or implied, oral or written), by ratification (assent is given either to an act done by someone who had no previous authority to act or to an act that exceeded the authority granted to an agent), by estoppel (a person allows another to act for him/her to such an extent that a third party reasonably believes that an agency relationship exists), or necessity (a person acts for another in an emergency situation without express authority to do so).


Duties of the Agent to the Principal
 When the agent is appointed by contract, the terms of the contract determine the duties of each party to the other. However, the duties of an agent may be modified by express agreement. In the absence of specific terms or modifications by contract, these duties are as described in this section.

The law considers that an agent acts in a fiduciary capacity to his/her principal. The obligations of a fiduciary are very strict; failure of the fiduciary to account for monies collected for his/her principal, commingling of such monies with the fiduciary's own, or appropriation of the principal's property to the fiduciary's own use may be not only a breach of the agency contract, but also a criminal act (embezzlement, larceny after trust).

In keeping with this high degree of fidelity, the following duties are required of the agent (unless modified by contract):

(1)   Duty to obey instructions
 This duty is self-evident; it involves no more than might be expected from any contract obligation. Bear in mind, however, that the agent may be undertaking duties of the highest and most complex nature: buying and selling, entering into contracts, and the like, all as an alter ego (other self) causes the principal. The agent is personally liable to the principal if he/she:
causes the principal to become responsible for unauthorized contracts;
improperly delegates his/her duties to another; or,
commits torts for which his/her principal may be responsible.

(2)   Duty to act with skill
 An agent undertakes to act with the degree of skill ordinarily expected from others undertaking such employment. A business agent, a stockbroker; a manufacturer's representative - all undertake their agencies with the understanding that they will perform with skill. Any case for breach of contract requires proof of: 
 the proper standard of care of skill; and,
 failure of the agent's performance to rise to that level.

(3)   Duty to avoid conflict of interest (duty of loyalty)
 An agent who is acting for a principal cannot act for him/herself with respect to the same matter. An agent buying property for a principal cannot purchase property in which he/she has some personal or private interest; an agent selling the principal's goods cannot sell to him/herself or to friends or relatives at a special or lower price. An attorney cannot act for conflicting parties in a lawsuit, or represent conflicting interests in any business transaction. On occasion a conflict, or possibility of conflict, can be resolved by full disclosure of all facts to both principals, followed by their fully informed consent to such double representation. The disclosure of conflict or possible conflict must be complete, and the consent of the principal must be given with realization of all consequences.

(4)   Duty to protect confidential information
 Obviously, the principal must be free to disclose all necessary information to his/her agent, including trade secrets and proprietary information. The agent must protect this property form the general public, third persons, and the principal's competitors. Also, such proprietary and confidential information must be restored to the principal upon termination of the agency.

(5)   Duty to notify
 Since the agent is, in some respects, an extension of the principal, he/she is, by this extension, the eyes and ears of the principal. Consequently, the agent, must notify the principal of all information that is or may useful to the principal in evaluating the matter at hand. In this way, the principal can make further choices with respect to his/her business and continue to give the agent proper guidance.

(6)   Duty to account
 The contract of agency will specify times and manner of accounting. In all cases, the agent must maintain "an open book" for the principal so that the principal may assess the progress of the work. At termination of the agency, all property must be accounted for and all income turned over to the principal in accord with the agency agreement. Commingling of funds is a violation of the agent's duty of fidelity. Failure to account and breach of the relation of trust may be criminal.

Duties of the Principal to the Agent

The duties of the principal to the agent are governed by the contract of agency. The primary duty is to compensate the agent for his/her services. If the contract is implied, the compensation is the agent's fee as understood, or generally understood. If there is no contract, express or implied, the agent is entitled to compensation is quasi contract calculated at the reasonable value (quantum meruit) of the services performed. If however, the agent agreed to perform the agency gratuitously, no compensation is due.

The principal must:
 -  pay all expenses the agent reasonably incurred in furtherance of the principal's business; and,
 -  inform the agent of dangerous risks the principal has reason to know exist.

If the agent is an employee, he/she is entitled to a place to work and to the equipment, supplies, and accessories necessary to perform the employment.

Always remember that an Agent is a trustee, and this trust relation requires a high degree of loyalty. The law implies a number of duties of performance, but these may be modified by contract.

The primary duty of the principal to the agent is to compensate the agent according to the terms of the agency agreement or, if no agreement exists, at the reasonable value of the services performed.


Liability of the Principal for Contracts Made by the Agent
 Concerning the principal's business, the agent is an extension of the principal, an alter ego. Thus, when an agent is acting within the authority granted by the principal, he/she can bind the principal to the deal; otherwise, creation of agents (representatives) would serve no purpose, would make no sense, Justinian's code stated it this way: Qui facet per alium, facet per se, that is, "Who acts through another, acts himself".

The principal is bound contractually if the agent has the actual authority to make a contract for the principal or has the apparent authority to do so.

Actual authority is either (based on oral or written words to the agent) or implied (inferred form words or conduct manifested by the principal to the agent). Implied authority to make contracts for the principal is a common sense fulfillment of the agent's job, a going forward with the purposes of the principal's business.

If the agent can buy goods, manage real estate, or set up a branch office, he/she has the implied authority to make contracts to achieve these purposes. Remember that almost every business transaction involves a contract, and the authority to transact the principal's business usually carries with it the authority to make contracts infurtherance of that business.

Apparent authority is a communication or signal directly from the principal to a third party.

Apparent authority, unlike implied authority, arises out of actions or conduct of the principal which causes a third party to reasonably believe that the agent has the authority to make contracts for the principal. Lawyers and judges sometimes say that an agent is "clothed" with apparent authority, that is, the principal has "dressed" the agent in such a way as to lead others to reply on his/her authority. If the agent is given an office, a title, and a staff, third parties may reasonably believe the agent can bind his/her employer or principal. Indeed, any trappings or other evidence of agency may create apparent authority.

Actually, unknown to the third party, there may be a private order or memo to the agent that he/she is not to bind the principal, that the agent has no authority. Even, so, if the third party relies on the appearance of authority, the principal is bound by the agent's contracts and is precluded from denying the agent's authority.

Liability of the Principal for Torts of the Agent
(1)   Direct Liability
      A principal is directly responsible for his/her agent's torts under any of the following circumstances: 
 -  The principal gave the agent improper orders or instructions that caused the tort to occur;
 -  The agent was improperly or negligently chosen or employed; and,
 -  The principal failed properly to supervise or oversee the work when he had a duty to do so.

This direct liability of the principal for tort does not derive from the agency relation. Rather, it is the very act of the principal that is negligent.

(2)   Indirect Liability
 Even though the principal has committed no act of negligence, the agent's negligence is imputed (charged) to the principal if the agent is acting for the principal in the scope of his/her employment.

This liability is founded on the common law doctrine of respondeat superior: "Let the superior respond".

The key requirement of indirect liability, respondeat superior, is that the agent be acting in the scope of his/her employment. The expression "scope of employment" is a technical legal phrase, and the concept must meet four tests:

Tests for Respondeat Superior:
 -  The conduct must be of the kind the agent was employed to perform;
 -  The conduct must occur at the authorized place and time of employment;
 -  The conduct must be motivated, at least in part, by service to the principal (rather than the agent's self-interest); and,
 -  The use of means employed by the agent could have been anticipated by the principal.

If a night club "bouncer" evicts a drunken patron with such force as to cause death, the club owner is indirectly liable under the doctrine of respondeat superior. If, however, an elevator operator pulls a knife form his/her jacket and seeks to carve up a passenger, this tort would not be imputed to the building owner, the principal, under the doctrine of respondeat superior since the first, third and fourth tests above are not met. (However, the negligent employment of this operator might give rise to direct tort responsibility.)

The principal is responsible for such torts as fraud and misrepresentation since they clearly meet the respondeat superior tests. Note that liability for fraud and misrepresentation is present notwithstanding the fact that the agent has no authority to misrepresent the product he/she is selling.

The vicarious responsibility of the principal arises out of the fact that the agent is an extension of the principal. The agent was chosen by the principal; and it is the action of making the choice, holding the agent out to the public as the transactor of the principal's business, that creates liability for the principal.

Torts of Independent Contractors

An independent contractor does not act under the supervision and control of the person who hired him/her. The contractor is chosen to accomplish a result by his/her own means. Consequently, the doctrine of respondeat superior does not apply to the torts of an independent contractor.

It is not always possible, however, to avoid liability by delegating work to an independent contractor. Under the law of torts, strict liability is imposed in regard to certain "ultra-hazardous activities," such as blasting and the transport of volatile chemicals or wild animals. Responsibility for mishaps arising from such activities cannot be delegated to an independent contractor.

The person hiring the independent contract may be directly responsible, however, if the contractor is negligently chose, or if other conditions of direct liability are present.

Personal Liability of the Agent for the Principal's Contract.
(1)   Disclosed Principal
 If the third party knows, or should know, that the agent is acting for a principal and if the third party knows the identity of this principal, the principal is a disclosed principal

If these conditions are met, the agent has no personal responsibility for a contract made on behalf of this principal.

The fact of the agency and the identity of the principal are usually disclosed in any contract with a third party. If the contract is between P, the principal, and T.P., third party, A, the agent who negotiates the contract and signs P's name, is obviously the agent. Nevertheless, some word of agency should be used when A signs; such words as "by" or "for" or "agent for", or, if A signs in her employment capacity, "President", "Sales Manager", or "Secretary" - all of these indicate the representative capacity and bind the principal, not the agent.

Failure to identify the principal and to use agency words upon signing may create personal liability for the agent.

Even if a principal is disclosed, however, the agent may have personal liability if, in fact, he/she had no authority. Obviously, if agent A merely claims to act for principal P, but P has not given her authority or clothed her with any appearance of authority, A is on her own and is bound by the contract, not P. indeed, such a case gives rise to a tort by A (fraud and misrepresentation) and possibly a crime.

On the other hand, if A, the agent, frequently acts for P and has the apparent authority to do so, but in fact P has either not given authority or has withdrawn it, both A and P may be liable to the third party. If the third party sues P and recovers, P may in turn recover from A, who had no authority in fact. In all cases where an agent discloses a principal, the agent is deemed to make an implied warranty that he/she has the authority to make a contract for that principal.

(2)   Partially Disclosed Principal
 In this case the third party knows that the agent is acting for a principal but does not know the identity of the principal. This partially disclosed principal situation occurs when a principal wishes privacy or seeks for financial reasons to conceal his/her identity. For example, a wealthy developer, seeking to accumulate a large commercial tract of land from a number of small landowners, may send his agent to obtain contracts with these owners. The fact of the agency is disclosed but not the name or identity of the principal. In such a situation the agent is liable on the contract. If the principal's identity can be determined and the agent cannot satisfy the contract, the principal may be liable on the contract also.

(3)   Undisclosed Principal
 If neither the fact of agency not the identity of the principal is disclosed (undisclosed principal), the agent is liable on the contract since the third party was led to believe that the agent was the real party on the contract.

An agent may recover from the undisclosed or partially disclosed principal for any costs it incurred as an agent, including a third party's breach of contract claims. If the third party learns of the agency, he/she, too, may recover directly form the principal, not just the agent.

Tort Liability of Agents

 An agent who commits a tort, whether acting within the scope of his/her employment or not, is personally liable for the tort. If the agent is acting within the scope of employment, both he/she and the principal are simultaneously liable for the tort. Incases of such joint and several liability, the injured party may sue either principal or agent, or both. Of course, the victim may not have a double recovery, and any recovery form one party is deducted from the recovery form the other. The agent, the party who actually committed the tort, is liable to indemnify the principal for the latter's loss to third parties because for the agent's tort.

Example: Joint and Several Liability
 Charlies Careless, a truck driver for the XYZ Hauling Co., while hauling a load of goods for the company, negligently runs over a child riding her bicycle. Both the principal (XYZ Hauling Co.) and the agent (Charlie Careless) are liable to the child for the tort. Technically, Charlie is liable to XYZ Hauling Co. for any judgment obtained by the child or her parents.

Liability for Crimes

 If a principal directs, approves, or participates in a crime of his/her agent, the principal is criminally liable, as is the agent. An employer whose employees are violating criminal statues in futherance of their employment may be liable if the employer knows, or should know, of the criminal acts. Employees who violate pollution laws or antitrust laws create criminal liability both for themselves and for their employers if the employers fail adequately to supervise their job performance or negligently delegate work that the employees perform in a criminal manner.

Scienter, knowledge, is imputed to the employer if the employer fails to learn what he/she has a duty to know.

Always remember that the agent may have actual authority or apparent authority to make contracts for the principal. Actual authority is either express or implied. Apparent authority arises from a signal to a third party that the agent is clothed with authority to bind the principal in contract.

The principal has direct or indirect responsibility for the torts of an agent. Direct responsibility involves a negligent act of the principal hi/herself, including negligent in the choice of agents. Indirect responsibility arises form torts committed by the agent while acting within the scope of his/her employment.

The agent has no personal responsibility for contracts made for his/her principal if the principal is fully disclosed, provided of course, the agent has authority to make the contract. If the principal is undisclosed or partially disclosed, the agent is responsible (and, once discovered, the principal is, also).

An employer who knows, or should know, of criminal acts by his/her employees is jointly responsible with the employees for these acts.


By Acts of the Parties 
 The parties may terminate the agency by act that would terminate a simple contract. If the agency was created for a specified time or for a specified purpose, it terminates upon the passage of that time or the accomplishment of that purpose. If no time is specified, the agency is terminated by the passage of a reasonable time.

The agency can also be terminated by mutual rescission, by revocation of authority by the principal, or by renunciation by the agent. Both revocation and renunciation are achieved by a simple communication, oral or written, manifesting withdrawal of consent. (Remember that agency is consensual; in the absence of a contractual obligation to continue the agency, the consent may be freely withdrawn by either party.)

To assure that there is no lingering apparent authority, the principal generally must give actual notice of termination to third persons who previously dealt with the agent; for other third parties, the former agent's apparent authority may arise only if there was not even constructive notice on the termination (e.g., an announcement in a trade publication that the agency had ceased would suffice as notice to these third parties, whether they actually read it or not).

By Operation of Law
 The agency relation is terminated by any of the following:
 -  The death or permanent incapacity of either the principal or the agent;
 -  The bankruptcy of either party;
 -  Frustration of the purpose of the agency. This frustration may occur because of the destruction of the subject matter (e.g., fire damage or loss to goods or property being bought or sold), changes in business conditions, or changes in the value of property being bough or sold;
 -  Subsequent illegality of the business or of the business venture. This would occur, for example, if the business were prohibited, or if the agent were required to have a license which he/she could not reasonably obtain, or if the property were rezoned so as to prevent the legal operation of the business;
 -  Impossibility of performance by either principal or agent; and,
 -  Material breach of the agency contract by either principal or agent.

Always remember that an agency may be terminated by acts of the parties (any act that would terminate a simple contract) or by operation of law (e.g., death, permanent incapacity, or bankruptcy of either party; material breach of the agency contract by either party).