Remember Tom Cruise as a sports agent in Jerry Maguire, or Jeremy Pivens as the Hollywood agent Ari Gold, in Entourage. We know they’re important, but what exactly do these people do? Basically, an agent is authorized to act on behalf of someone else (the “principal”). In return for their deal making, agents usually receive a cut of the money the principal makes on the deal. Because an agent usually has authority to negotiate contracts that are binding on the principal, the agent has a legal duty to be scrupulously loyal and honest to the principal, fully disclosing all of the information the principal needs to make a fully informed decision. (This higher standard is known as a “fiduciary relationship.”) For example, it would be a breach of your agent’s duty if she failed to disclose that she also represented your competitor.
An agent is not the principal’s employee because the principal does not control how the agent performs (a standard requirement for employees). Also, most agents typically represent a number of clients. To ensure that a court does not misinterpret the relationship, agency contracts often contain a clause like the one below. Note, this clause references other relationships besides agent-principal including joint ventures (any joint economic activity between two or more people) and partnerships:
EXAMPLE: No Joint Venturer: Nothing contained in this Agreement shall be deemed to constitute either agent or company as a partner, joint venturer, or employee of the other party for any purpose.
When an agent can bind the principal (“actual authority”). The agent’s power to enter into contracts and make promises that the principal must keep usually happens in one of two ways:
- By contract. The agent and principal sign an agency contract, establishing the agency’s power to bind the principal.
- By law. Either a statute or case law establish the relationship. For example, in a general partnership, any partner can bind the other partners.
When an agent’s power to commit the principal is explicitly spelled out by law or contract, the agent is said to have “actual authority.” This means that the agent and principal both know, and agree to, the agent’s role in acting for the principal.
Apparent authority. In some cases, an agent lacks actual authority but leads someone to reasonably believe that he or she has the power to enter into contracts. This is called “apparent authority.” In order to protect the party that was misled, a court will uphold the agreement if that party reasonably believed that the principal endorsed the deal, because of statements, actions, or even inaction.
EXAMPLE: A former insurance agent, recently fired by SLYCO, arrives at Max’s home. The ex-agent was supposed to turn in his company car (emblazoned with the SLYCO logo) but kept it for an extra week. The ex-agent convinces Max to pay several thousand dollars for a newer policy. The agent pockets Max’s money and disappears, never informing SLYCO. Later, after a car accident, Max asks for repayment under his policy. Max reasonably relied on the fact that the ex-agent had a company car in assuming that he still worked for SLYCO. Because Max’s assumption was reasonable, SLYCO would probably be obliged to provide the coverage purchased by Max. Courts refer to situations like this, in which someone who once had actual authority no longer does, as “lingering apparent authority.”
How to avoid apparent authority problems. To avoid being bound to contracts by someone with apparent authority, the principal should:
- Provide notice. Alert third parties thief an agent no longer has authority. For example, if you’ve switched agents, notify your customers.
- List actual agents. Periodically distribute a statement to customers and clients on company letterhead indicating the agents who have actual authority, and update the last quickly when necessary.
- Keep the agent informed. Let the agent know, in writing, whether or not you have conferred actual authority, and as to which issues.