Legalese: May 2015

These discussions centre around the legal doctrine of agency, and agency can become a very tricky area for your company depending on the circumstances. Agency can potentially affect you and/or your business in many different ways, and I will address some of those potential situations in this article.

Agency is the legal relationship which exists between two people (or companies) when one person, called the agent, is considered in law to represent the other, called the principal. The agent is legally capable of affecting the legal position of the principal with third parties, by making contracts with them or otherwise.

An example of a classic agency situation would be your real estate agent. That person is your agent, and you are the principal. If your realtor tells a prospective third party purchaser something, the purchaser is entitled to treat it as having come from you. It will not be open for you to say later to the third party purchaser that the realtor was wrong or was not entitled to make the statement.

Whether a person is your agent depends on the circumstances. A key factor courts look at, is the degree of control exercised by the alleged principal over the alleged agent and whether the alleged agent must account to the principal for money he or she receives.

It is crucial to note that an agency relationship does not necessarily need to be in writing. Most real estate agents insist on having you sign a listing agreement which details the agency relationship. In that document, it will state the limits of the authourity, payment details, and anything else that the parties deem pertinent. Often the duration of the agency relationship is a critical consideration, and parties will want to stipulate when the relationship will terminate.

In situations where there is no agreement between agent and principal, but the principal permits a person to appear as its agent or otherwise puts someone in a position where a third party could reasonably think that they are dealing with an agent, the courts will create an agency relationship. This is called “apparent authority.”

There is much grey area surrounding apparent authority, however, because the roles of the parties have not been expressly defined. At law, if you put someone in a position where it is reasonable for a third party to believe he or she is your agent, then it is possible for you to be held liable for the action(s) of that person even if his or her conduct was outside the scope of their actual authority.

An example might be if you allow one of your employees to regularly buy products for your company with your suppliers. Let’s say that your employee is only allowed to make purchases of $500 or less (that’s an agreement between you and your employee), but you don’t tell that to your suppliers. If your supplier has been regularly dealing with your employee buying products, and you’ve paid the bills, you will be responsible to pay the bill when your employee makes a purchase of $10,000. It will not be open for you to argue that your employee didn’t have the authority to make the purchase, because you failed to tell the supplier that your agent’s authourity was limited.

This can also become problematic when dealing with other individuals. If you have any doubt whatsoever that the person you are dealing with may not actually have the authority to bind his or her principal, then go directly to the principal and confirm (in writing, preferably) that the agent indeed possesses the authority to make the deal being contemplated.

You must therefore be ever mindful of the positions and responsibilities you grant to your employees and other agents. Are you putting them in a position where, to the outside world, they appear to have more power than they actually possess?