What is required to form a principal-agent relationship?

An agency relationship is created in the following manners: Express Agreement, Implied from the Situation, Estoppel, by Necessity, or Ratified by the Principal.

What is an Express Agency Agreement?

A principal and agent may expressly agree to form an agency relationship. The agreement can be oral or in writing. The principal must simply confer the authority upon the agent to act on her behalf. The subject matter of the agency relationship must be legal. The agency has the express authority granted in the agency agreement and the implied authority to undertake tasks incidental to that objective.

• Note: If the duties of the agent include executing a contract subject to the statute of frauds, the agency relationship may need to be in writing to be enforceable. An express agency relationship is often created pursuant to a legal document known as a power of attorney. The power of attorney may create a general or special agency relationship.

What is an Implied Agency Relationship?

An agency may be implied from the facts or circumstances surrounding an individual's actions on behalf of another. If the principal acts in a way that demonstrates an intent for an individual to act on her behalf, this may imply an agency relationship. The parties to an agency relationship do not need to understand the law of agency or understand what it means to be a principal or agent.

What is the Ratification of an Agency Relationship?

Ratification is a contract principle. If an individual undertakes actions on behalf of another, these actions may be outside of any express or implied authority. If, however, the principal acknowledges and accepts the agent's actions, this is known as ratification of the agency relationship. The principal ratifies the agent's actions, after the fact.

• Note: Agency by ratification is only possible when the principal is fully disclosed.

What is an Agency Relationship By Estoppel? 

If a third-party reasonably relies on an agent's representation that she has authority to act on behalf of the principal, the principal may be bound by the actions of the agent. Generally, the principal must act or fail to act in a manner that causes a third party to reasonably believe that an agency relationship exists, when in fact there is no agency. Agency by estoppel is based upon principles of fairness. It would be unfair to detriment a third party who reasonably believed that the agent had the authority to act on behalf of the principle, and the principal was the source or cause of that belief.

• Note: Agency by estoppel is only possible with fully-disclosed principals.
• Example: Bill is James's agent. James terminates the agency relationship. Nonetheless, unbeknownst to James, Bill continues to transact with third parties on James's behalf. James fails to notify third parties of Bill's termination. James may be bound to any agreement entered into by Bill.

What is an Agency By Necessity?

Agency by necessity arises when one party makes a decision on behalf of another person who is unable to do so. The decision must be essential in nature and it must be in the interest of the principal in making that decision. As such, the law will impute a de facto agency relationship where no actual agency exists.

• Example: Bill is hired to deliver Tom's goods. He drops the goods off at the fulfillment center. The center says that there is no contract in place and intends to reject the goods. Tom is out of the country and cannot be reached. The goods will spoil if not accepted. Bill signs the warehousing agreement on Tom's behalf.

Related Topics

• Agency Law (Intro)

• What is an Agency relationship?
• What are the types of agents?
• Employee vs. Independent Contractor
• What are the types of principals?
• What is required to form a principal-agent relationship?
• What are the duties of a principal?
• What are the duties of an agent?
• What is the authority of an Agent to Bind Business in Contract?
• When are Agents liable to principals and third parties?
• What is Respondeat Superior?
• What is a Frolic and Detour?
• When does the Agency Relationship Terminate?