Business Associations: Agency

Agency is one of the most practical building blocks in business law because it explains how organizations and individuals act through other people. Companies do not sign documents with their own hands, negotiate face-to-face in every deal, or personally deliver every representation to customers. Instead, they act through employees, officers, managers, and outside representatives. Agency law supplies the rules that determine when those actions bind the business, who bears the risk of misconduct, and what duties the representative owes.

At its core, agency is about relationships and consequences. When a person (the agent) is empowered to act for another (the principal), the law often treats the agent’s acts as the principal’s acts. That simple idea becomes complex in real transactions where authority is unclear, third parties rely on appearances, and incentives tempt agents to put their own interests first.

What Is an Agency Relationship?

An agency relationship arises when:

• A principal manifests assent that an agent will act on the principal’s behalf and subject to the principal’s control, and
• The agent consents to do so.

The relationship can be formal (an employment contract, a board resolution, a written power of attorney) or informal (a pattern of conduct where one party regularly negotiates deals for another). The label the parties use matters less than how the relationship actually functions.

The Key Roles: Principal, Agent, and Third Party

Most agency problems involve three actors:

• Principal: the person or business on whose behalf action is taken.
• Agent: the representative who interacts with the outside world.
• Third party: the customer, vendor, lender, or other counterparty dealing with the agent.

Agency law balances their interests. Principals need the ability to operate through others without constant oversight. Third parties need predictable rules so that they can rely on the representations and commitments made by someone who appears authorized. Agents need guidance on what they can do and what they must not do.

Authority: The Heart of Agency

Whether a principal is bound by an agent’s acts usually turns on authority. Authority is the agent’s power to affect the principal’s legal relations with third parties.

Actual Authority

Actual authority exists when the principal’s manifestations to the agent reasonably indicate the agent is authorized to act.

• Express actual authority is clearly granted, often in writing or direct instruction. Example: a CEO tells the procurement manager, “You can sign supply contracts up to $250,000.”
• Implied actual authority covers what is reasonably necessary to carry out express authority. If a manager is authorized to run a retail store, it is usually implied they can hire staff, order routine inventory, and handle customer refunds within ordinary limits.

Actual authority is an internal question: what the principal communicated to the agent and what the agent reasonably understood.

Apparent Authority

Apparent authority exists when the principal’s manifestations to the third party lead the third party to reasonably believe the agent is authorized, even if the agent lacks actual authority.

This is why titles, business cards, email domains, and customary roles matter. If a company holds someone out as “Director of Sales,” third parties may reasonably assume that person can negotiate pricing and execute standard sales agreements. If the principal created the appearance of authority, the principal may be bound.

A common pitfall is failing to update external signals. If an employee is terminated but still appears on the website, retains branded materials, or continues to email customers from a company address, a third party’s reliance may be deemed reasonable.

Special Limits and “Red Flags”

Even where apparent authority is possible, third parties cannot ignore obvious warning signs. Unusual transactions can require extra diligence. For instance, a mid-level employee attempting to sell major corporate assets at a steep discount may trigger a duty to verify authority.

Practical takeaway: principals should clearly define approval thresholds and communicate them both internally and, when appropriate, to counterparties.

Liability: Who Pays for What?

Agency law answers two big liability questions:

1. When is the principal bound to a contract made by an agent?
2. When is the principal responsible for an agent’s wrongful acts?

Contract Liability

If an agent acts with actual or apparent authority, the principal is typically bound by the agreement. The agent may or may not be personally liable depending on disclosure:

• Disclosed principal: the third party knows the principal’s identity. The agent usually is not liable if acting within authority.
• Partially disclosed (unidentified) principal: the third party knows the agent is acting for someone but does not know who. The agent may face liability because the third party did not knowingly rely solely on the principal.
• Undisclosed principal: the third party believes the agent is acting on their own behalf. The agent is generally liable, and the principal may also be liable if the agent acted with actual authority.

These categories matter in commercial settings like brokerage arrangements, purchasing agents, and intermediated deals.

Tort Liability and the Scope of Employment

Principals can be liable for an agent’s torts under doctrines that depend heavily on the nature of the relationship.

• Employees (agents under the principal’s control) can trigger principal liability for torts committed within the “scope of employment.” A delivery driver who negligently causes an accident while making deliveries is a classic example.
• Independent contractors are generally treated differently; principals are less likely to be liable because control is limited. However, labels do not control. If the principal exercises substantial control over the manner and means of work, the “contractor” may effectively be an employee for liability purposes.

The scope-of-employment analysis often turns on whether the conduct was related to assigned work, occurred substantially within authorized time and space limits, and was motivated at least in part by a purpose to serve the principal.

Fiduciary Duties: The Agent’s Obligations

Agency is not just about power; it is also about trust. Agents owe fiduciary duties to principals. These duties are foundational to governance in partnerships, corporations, and LLCs because decision-makers routinely act as agents for the entity.

Duty of Loyalty

The duty of loyalty requires the agent to put the principal’s interests ahead of the agent’s own interests in matters connected to the agency. Common loyalty issues include:

• Self-dealing: the agent causes the principal to enter a transaction benefiting the agent, such as steering contracts to a company the agent owns.
• Conflicts of interest: the agent represents multiple parties with adverse interests without informed consent.
• Corporate opportunities: the agent takes for themselves a business opportunity that properly belongs to the principal.

Loyalty problems are often less about outright fraud and more about undisclosed incentives. Commissions, side arrangements, and “referral fees” can create misaligned motivations if not transparently handled.

Duty of Care

Agents must act with reasonable care, competence, and diligence. In business settings, this translates into:

• Staying within authority and following reasonable instructions
• Exercising appropriate diligence in negotiations
• Keeping adequate records and communicating material information

Care is context-specific. A specialized agent, such as an accountant or investment adviser, may be held to a higher professional standard than a general employee.

Duty to Inform and Account

Agents generally must keep the principal informed about matters relevant to the agency and account for money or property handled on the principal’s behalf. That includes accurate reporting, segregation of funds where appropriate, and timely disclosure of key developments in a negotiation.

Managing Agency Risk in Real Businesses

Agency issues often surface when something goes wrong: a contract signed without approval, an employee’s misrepresentation, or a manager’s conflicted transaction. Preventing those problems is largely operational.

Practical Controls That Support Clear Authority

• Defined delegation: written approval limits tied to roles, not people.
• Consistent external messaging: align titles and public-facing authority with internal policy.
• Signature policies: who can bind the entity, and on what types of agreements.
• Training: agents need clarity on promises they can make and language they must avoid.
• Offboarding discipline: revoke access, recover credentials, and update public directories promptly.

Governance Context: Entities Act Through Agents

In most business associations, the entity’s decisions are carried out by people:

• Corporate officers and employees act as agents of the corporation.
• Partners can act as agents of the partnership in the ordinary course of business.
• Managers or members can act as agents of an LLC, depending on the management structure.

Understanding agency clarifies why internal governance documents matter: they allocate authority and define duties, but they do not automatically protect the business from apparent authority created in the marketplace.

Why Agency Matters

Agency is the legal mechanism that lets modern commerce move at speed. It enables delegation, specialization, and scale. It also creates predictable rules for when businesses are bound, when they are liable, and what standards of conduct are expected from those who act in their name.

For anyone studying or operating a business entity, agency is not a side topic. It is the foundation beneath everyday decisions, from who can sign a lease to how a company is held responsible when its representatives overstep. Understanding principal-agent relationships, authority, liability, and fiduciary duties is the difference between running an organization by assumption and running it with legal clarity.