8. Labour Law

Labour Law – Agency

An agency relationship is created when one person or entity agrees to perform a task for, and under the direction of, another individual or entity. An agent is the person who is authorized to act in place of another. A principal is the person who authorizes another to act as an agent.

The idea of authorizing someone to do the work of someone else is critical to understanding the difference between agency and employment. Effectively, an agent does work on behalf of a principal. A good example is that of a real-estate agent: (the agent) acts on behalf of the homeowner (the principal).

Types of Principals

There are three types of principals, which are described from the perspective of a third party: disclosed, partially disclosed, and undisclosed:

  • The most common form is that of a disclosed principal a principal whose identity is revealed by the agent to a third party. For example, agents work for a disclosed principal when they are on the employer’s premise, wear a name badge or uniform identifying the employer, or answer the phone by identifying the employer’s name.
  • A partially disclosed principal is a principal whose existence, but not actual identity, is revealed by the agent to a third party. In other words, a third party knows that the agent represents a principal but does not know the identity of the principal. For example, a realtor may represent an owner who does not want their name disclosed publicly.
  • An undisclosed principal is a principal whose identity is kept secret by the agent. Often third parties do not realize that an agency relationship exists and believe that the agent is working on his or her own behalf. Undisclosed principals are typically arranged when the identity of the principal can lead to increased purchase prices, unwanted publicity, and security concerns.

Types of Agents

An agent is someone who is authorized to act on behalf of a principal. Because there are a variety of authorizations that a principal can grant an agent, there are many different types of agents. In general, agents are described as either general or special. General agents have the authority to transact all the principal’s business of a particular kind or in a particular place. General agents often include partners, managers, factors, and brokers. Special agents, in contrast, only have the authority to conduct a particular transaction or to perform a specific act. Special agents often include realtors, athlete’s agents, and employment recruiters.

Some of the most common business agents include:

  • Broker – Receives a commission to make contracts with third parties on behalf of a principal
  • Business Agent – Has general power involving the exercise of judgment and discretion, such as a manager or officer
  • Factor – Receives and sells goods or property for a commission
  • Forwarding Agent – Receives and ships goods for a principal

Types of Authority

Authority is the right or permission to act legally on another’s behalf. In general, authority can be either actual or apparent. Authority is critical in agency as it is the key element that gives an agent the authority to act on behalf of a principal. Agency cannot occur unless authority is given. Authority matters to principals because the moment an agent has the authority to act the principal becomes vicariously liable for the actions of the agent. Therefore, principals should always take care to ensure the authority is granted clearly.

Actual authority, sometimes called real authority, is established when a principal intentionally confers authority on an agent. Actual authority can be either express or implied. Express authority is authority given by an express agreement, either verbally or in writing. For example, a principal clearly states to an agent, ‘I am granting you the authority to sell my house.’

Implied authority is authority granted to the agent as a result of the principal’s conduct. Imagine a principal invites a real estate agent to their property and describes the features of the house, when they want it to go on the market, at what price, and other conditions that a principal would typically share with an agent, but without clearly stating, ‘you will be the agent to sell my house’. In this situation, the principal is acting as if the agent is in fact an agent but has not expressly stated that fact. However, the agent could interpret that they are in fact the agent to sell the house based on the principal’s actions which imply the agent has been given the authority to sell the house.

Apparent authority is authority that a third party reasonably believes an agent has based on the third party’s dealings with the principal. If a principal’s words or actions lead others to believe that authority was given to someone else, then the principal is held accountable for the perceived transfer of authority. For example, if a principal fails to give notice that an agent is no longer working for the principal, the agent may still bind the principal through apparent authority when dealing with third parties. This is important because the agent’s actions could bind the principal to accept a deal when the principal did not necessarily want that deal. It can also open the principal up to third-party liability if a third party was damaged during or by the outcome of the transaction.

Ratification and Authority

Ratification occurs when a disclosed principal adopts or confirms a contract entered into on his or her behalf by an agent. Ratification can be automatic if the agent has been granted signing authority.

The authority to act is critical to a principal and an agent. The agent wants authority so that they can broker a deal in good faith with a third party. A principal wants to grant authority only to those agents who will achieve their desired results and not increase their vicarious liability risk.

Retroactive Ratification and Authority

If an agent does not have the authority to act on behalf of the principal but presents an opportunity for the principal to benefit from the third-party transaction, then the principal has the right to retroactively grant the authority to the agent in order to take advantage of the opportunity.

Imagine, you have a friend who wants to sell their car. You have another friend, who does not know the seller of the car, but you know wants to buy the exact type of the car the first friend is selling. You could approach the potential buyer and say, ‘I might know someone who has the car you want, what price are you willing to pay?’ Once known, you could then go to the seller and say, ‘I have a deal for your car at this price, do you want it? If yes, then I want to be the agent to broker the sale.’ The seller (or principal) could then agree to effectively make you the agent, retroactively, to a time before you asked the buyer so that you can effectively broker the deal acting as an agent with authority.

Duties of Agents

Agents are fiduciaries of principals and so they are required to act with the highest duty of care. Fundamentally, agency is a fiduciary relationship created by express contract or implied actions in which the agent has the authority to act on behalf of the principal and legally bind the principal to third parties.

A fiduciary relationship is a relationship in which one person is under a duty to act for the benefit of another on matters within the scope of the relationship. Fiduciary relationships require trust, good faith, and acting in the best interest of the other. In fiduciary relationships, the law requires the fiduciary to act with the highest duty of care. This means that the fiduciary must put the interests of the other party before their own. Examples of fiduciary relationships include doctor-patient, attorney-client, accountant-client, trustee beneficiary, and guardian-child. An agent is also a fiduciary of a principal.

Beyond a fiduciary duty, an agent is required to provide:

  • Duty Description Account – An agent must keep proper records to account for all the principal’s money and property given to the agent. An agent must act reasonably, in good faith, and always avoid negligence
  • Disclosure – An agent must inform the principal of all material facts that affect the principal’s interests.
  • Loyalty – An agent cannot engage in any dealings that compete or interfere with the principal’s business or interests.
  • Obedience – an agent must obey all the principal’s instructions within scope of agency unless they are illegal or unethical
  • Protect Confidential Information – An agent cannot use or disclose a principal’s confidential information
  • Delegate – An agent cannot normally delegate their authority to a ‘sub-agent’

Duties of Principals

Principals also owe duties to agents as part of the fiduciary relationship. These duties include:

  • Compensation – A principal must pay agent for work performed
  • Honesty – Principals cannot deceive agents about the nature and scope of the work they are to perform
  • Indemnification – A principal must hold agent harmless and free from legal liability for actions properly taken on the principal’s behalf
  • Loyalty – A principal cannot engage in any dealings that prevent an agent from performing agency tasks
  • Reimbursement – A principal must reimburse an agent for money reasonably expended on behalf of the principal

An agency relationship affects liability to third parties. The scope of liability depends on the type of principal involved, the type of authority involved, and the nature of the dispute.

Contractual Liability

A principal is always liable on a contract if the agent has authority. However, the agent’s liability on a contract depends on how much the third party knows about the principal. Disclosure, when allowed by the principal, is the agent’s best protection against legal liability.

An agent is not liable for any contracts made with authority on behalf of a fully disclosed

principal. Therefore, if a third party knows the existence and identity of the principal, then all legal liability rests with the principal. The only exception to this is when an agent exceeds his or her authority. In that case, the agent has not acted with authority and becomes personally responsible to the third party. If the agent did not have authority, but the principal later ratifies the contract, then the principal will be liable for the contract.

If a principal is partially disclosed, then the third party may recover from either the principal or agent. In this situation, the principal and agent are jointly and severally liable, and the third party may sue either or both to recover the full amount of damages owed. However, the third party cannot seek “double damages” and recover more than the total amount owed for the contractual breach.

In the event of an undisclosed principal, a third party may recover from either the agent or the principal. The fact that a principal’s existence or identity is hidden from third parties does not change the nature of the agent-principal relationship. Therefore, an undisclosed principal may become liable for contracts entered into by an agent acting with actual authority. An undisclosed principal has no liability to an agent or third party when the agent exceeds the actual authority granted by the principal. In addition, the type of contract must be the type that can be assigned to the undisclosed principal. If the contract is for personal services, then liability cannot be assigned to the principal in case of a breach.

Termination of Agency Relationship

Agents and principals may end their agency relationship in various ways, but the most common way is through mutual agreement. Additionally, there are some events that will terminate an agency relationship as a matter of law. Death of a principal or agent automatically terminates the agency agreement, even if the other party is unaware of the death. Once the time of death is established, any transactions afterward are deemed void.

Mental incapacity of a principal or agent also terminates an agency relationship. It is often hard to determine the precise time someone loses mental capacity. Therefore, courts often hold that an agent’s contract with a third party is binding on the principal unless the third party was aware of the principal’s incapacity.

Bankruptcy terminates an agency relationship when the bankruptcy affects the subject matter of the agency agreement. For example, if a principal declares bankruptcy and the real property that an agent is authorized to sell is part of the bankruptcy estate, then the bankruptcy will automatically terminate the agency relationship.

Finally, the destruction or illegality of the subject matter will terminate the agency relationship. For example, if Parliament passes a law making it illegal for private parties to sell specific types polluting vehicles, then the agency relationship between a principal / car manufacturer and the agent / dealer selling those types of cars will automatically end.

Concluding Thoughts

Agency relationships are flexible and varied depending on the needs and interests of the principals and agents. Because the agency relationship is fiduciary in nature, agents and principals owe each other certain duties. Third parties may hold principals legally liable for the actions of their agents. Therefore, it is important for businesses to select their agents carefully to minimize their risk of liability.


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Business Law and Ethics Canadian Edition Copyright © 2023 by Craig Ervine is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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