Agency: Formation, Actual and Apparent Authority, and Ratification

Formation of the Agency Relationship

Agency is the fiduciary relationship that results from (1) the manifestation of assent by one person (the principal) that another person (the agent) shall act on the principal's behalf and subject to the principal's control, and (2) the agent's manifestation of consent to so act (Restatement (Third) of Agency §1.01). Three elements recur on the bar: assent, benefit, and control. The principal must intend the agent to act for the principal's benefit, and crucially the principal must retain a right of control over the agent's work.

The relationship is consensual but not contractual — no consideration is required, so a gratuitous agent (one who acts without pay) is still a true agent who owes fiduciary duties and can bind the principal.

No particular formalities are required to create an agency. There is generally no writing requirement, with one classic exception tested on the bar: the equal dignities rule, which provides that if the underlying transaction the agent is authorized to perform must itself be in writing under the Statute of Frauds (e.g., a contract for the sale of land), then the agent's authority must also be in writing. California follows the equal dignities rule in Civil Code §2309.

Capacity matters on both sides. The principal must have contractual capacity because the agent's acts bind the principal as if the principal had acted personally; a minor or mentally incompetent person generally cannot be a principal. The agent, by contrast, needs only minimal capacity — an agent need not have contractual capacity because the agent is merely a conduit. Thus a minor can serve as an agent and bind a competent adult principal. Determining whether an agency exists is the threshold question; only after establishing the relationship does the analysis move to the agent's authority to bind the principal in contract.

Actual Authority: Express and Implied

Once an agency exists, the agent's power to bind the principal in contract flows from one of several sources of authority. Actual authority is authority the agent reasonably believes she possesses based on the principal's manifestations to the agent. The decisive viewpoint is the agent's reasonable interpretation of what the principal communicated. Actual authority subdivides into express and implied.

Express actual authority is conveyed in the principal's words, whether oral or written — "Sell my car for at least $10,000." Express authority is construed narrowly but is the cleanest basis for binding the principal. A wrinkle: express authority obtained by the agent's fraud or misrepresentation is still effective to bind the principal as to innocent third parties, though the principal may have remedies against the agent.

Implied actual authority is authority the agent reasonably believes she has as a result of the principal's conduct. It includes authority that is incidental to express authority (reasonably necessary to accomplish the authorized task), authority arising from custom in the trade or industry, and authority arising from prior dealings or acquiescence — where the principal has previously allowed the agent to act in a certain way and said nothing, the agent reasonably infers continued authority.

For example, a manager expressly authorized to run a store has implied authority to buy inventory, hire clerks, and pay suppliers, because those acts are reasonably necessary to operate the store. Title or position can itself confer implied authority — naming someone "president" or "general manager" implies authority to do the things such officers customarily do. When the principal's instructions are ambiguous, the agent has actual authority if she adopts a reasonable interpretation of the instruction, even if it later proves to be the interpretation the principal did not intend.

Apparent Authority and Agency by Estoppel

Apparent authority exists when a third party reasonably believes the actor has authority to act on behalf of the principal, and that belief is traceable to a manifestation of the principal. The pivotal contrast with actual authority is viewpoint: apparent authority is judged from the third party's reasonable belief, and that belief must be grounded in something the principal said or did — not merely in the agent's own representations.

The classic recurring example is lingering apparent authority: after a principal terminates an agent's actual authority, the agent may still bind the principal to third parties who dealt with the agent before and were not notified of the termination, because the principal's prior manifestation (holding the agent out) continues to operate until the principal gives notice.

Apparent authority also arises through title or position: by placing an agent in a position that customarily carries certain powers, the principal manifests to the world that the agent has those powers. A person dealing with a corporate treasurer may reasonably believe the treasurer has authority to do what treasurers ordinarily do. Importantly, an agent who has no actual authority can still bind the principal under apparent authority — the doctrines are independent, and a single set of facts can produce apparent authority even where actual authority was expressly withheld.

Closely related is agency by estoppel, which binds a person who is not even a principal. If a person intentionally or carelessly causes a third party to believe another is his agent, or knowingly permits the appearance of authority and the third party justifiably and detrimentally relies, the purported principal is estopped to deny the agency. Estoppel requires detrimental reliance, distinguishing it from apparent authority, which does not.

Finally, inherent agency power is a residual category (Restatement (Second)) that binds a principal — even an undisclosed one — based on the agent's position, to protect third parties who reasonably deal with an agent acting within the usual scope of such an agency.

Ratification and the Disclosed/Undisclosed Principal

Ratification allows a principal to become bound by an unauthorized act performed on the principal's behalf. To ratify, the principal must: (1) have knowledge of all material facts at the time of ratification; (2) accept the entire transaction (a principal cannot ratify only the favorable parts — ratification must be of the whole or nothing); and (3) have capacity both at the time of the original act (the act must have been done on the principal's behalf) and at the time of ratification.

Ratification may be express (affirming the act) or implied (accepting the benefits of the transaction with knowledge of the material facts, or suing on the contract). Once made, ratification relates back to the time of the original unauthorized act, but it cannot cut off intervening rights that third parties acquired before ratification, and it cannot be used if the third party has already withdrawn.

The agent's personal liability on a contract depends on how much the third party knew about the principal. With a disclosed principal (the third party knows the principal exists and the principal's identity), the agent is not personally liable on the contract; only the principal is bound.

With a partially disclosed (unidentified) principal (the third party knows an agent acts for some principal but does not know the principal's identity) or an undisclosed principal (the third party does not even know a principal exists), the agent is personally liable on the contract, and the third party may elect to hold either the agent or the later-revealed principal. An undisclosed principal can sue and be sued on the contract unless the contract excludes that result or the agent's personality was material to the deal.