8.3 Agency Law

An agency is a fiduciary relationship in which one person (the agent) agrees to act on behalf of and subject to the control of another (the principal). Agency law determines when the principal is bound by the agent's contracts and liable for the agent's torts — a core topic in the Corporate/Commercial Law portion of the NALA Certified Paralegal (CP) Knowledge Exam.

Creating the Agency Relationship

Formation requires three elements: consent of both parties, the agent's acting on behalf of the principal, and the principal's control over the agent. Two common exam points:

• No consideration is required — a gratuitous (unpaid) agent is still an agent and still owes fiduciary duties.
• No writing is generally required — but under the equal dignity rule, followed in many states, the agent's appointment must be in writing when the agent will execute a contract that itself must be in writing under the Statute of Frauds (for example, signing a land sale contract).

Principals are classified by what the third party knows: disclosed (third party knows the agent acts for a principal and knows the principal's identity), partially disclosed (third party knows of the agency but not the principal's identity), and undisclosed (third party believes the agent acts alone). An agent who contracts for an undisclosed or partially disclosed principal may be personally liable on the contract; an agent for a disclosed principal generally is not.

The Three Types of Authority

Apparent authority arises from what the principal says or does as perceived by the third party — it can never be created by the agent's own representations alone. Terminated agents can leave behind lingering apparent authority, which is why prudent principals notify known customers and vendors when an agent is discharged. Some courts also recognize inherent authority — power flowing from the agent's position itself, protecting third parties even when the agent exceeded instructions, particularly for an undisclosed principal.

Ratification

A principal can become bound by an agent's unauthorized act through ratification, which requires:

1. the agent purported to act on behalf of the principal (a wholly undisclosed principal cannot ratify);
2. the principal has full knowledge of all material facts;
3. the principal affirms the entire transaction — partial ratification is not permitted;
4. the principal existed and had capacity at the time of the act (a corporation cannot ratify pre-incorporation contracts; it adopts them).

Ratification may be express or implied — for example, knowingly accepting the benefits of the unauthorized deal — and it relates back to the time of the agent's act.

Duties of the Agent

Agents owe fiduciary duties: loyalty (no self-dealing, no competing, no usurping the principal's opportunities, no dual agency without consent), obedience to lawful instructions, reasonable care, accounting for all money and property, and notification of material information. Knowledge the agent receives within the scope of the agency is generally imputed to the principal.

Respondeat Superior and Vicarious Liability

Under respondeat superior ("let the master answer"), an employer is vicariously liable — liable without personal fault — for torts an employee commits within the scope of employment:

• A detour is a minor deviation from assigned work — a delivery driver stopping for coffee on the route. The employee remains within the scope; the employer is liable.
• A frolic is a substantial, independent departure — the driver crossing town to attend a friend's party. The employee is outside the scope; the employer is not liable.
• Intentional torts are usually outside the scope, with exceptions where the job involves force (a nightclub bouncer) or the employee was motivated, at least in part, to serve the employer.

The employee remains personally liable for the tort as well; vicarious liability adds a deep-pocketed defendant rather than replacing the tortfeasor.

Independent Contractors vs. Employees

Principals are generally not vicariously liable for the torts of independent contractors, because the principal controls the result, not the manner and means of the work. Labels in a contract do not control — courts weigh the actual factors:

Exceptions where the principal is liable for a contractor's torts: inherently dangerous activities (blasting, demolition), non-delegable duties (such as a business's duty to keep its premises safe for customers), and apparent agency (estoppel) when the principal holds the contractor out as its agent.

Paralegal Applications

Agency issues surface constantly in practice: confirming a signatory's authority before a closing, drafting powers of attorney, assembling facts on control and payment method for employee-versus-contractor disputes, and analyzing whether an on-the-job accident triggers employer liability.

Exam trap: apparent authority cannot rest on the agent's own statements, and ratification requires knowledge of all material facts plus affirmation of the entire transaction.