Business Associations


There are three requirements for an agency relationship to exist:

  1. There must be a mutual agreement.
    • Mere assent is enough; no consideration is necessary.
    • It is not controlling whether or not the parties say that they are in an agency relationship.
  2. The agent must be acting on behalf of the principal.
  3. The agent must act subject to the principal's control.
Liability in Contract
Agent Liability to Third Parties

If an agent contracts with a third party on behalf of a disclosed principal, the agent is not liable on the contract absent a contrary agreement. R3A § 6.01(2). However, if the principal is undisclosed or only partially disclosed, the agent is normally liable on the contract. R3A § 6.02, R3A § 6.03.

An agent who purports to act on behalf of a principal impliedly warrants that he has authority unless he disclaims such a warranty or the third party knows he lacks authority. R3A § 6.10.

Third Party Liability to Principals

If an agent acting for a disclosed or partially disclosed principal has authority, the third party is bound as well as the principal unless the contract provides otherwise. R3A § 6.01(1). R3A § 6.02(1).

If the principal is undisclosed and the agent has authority, the third party is bound to a contract unless:

  1. the principal's existence is fraudulently concealed, or
  2. the third party is induced to enter into the contract by a representation that the agent was acting for himself and the agent or principal has notice that third party would not have dealt with the principal.

R3A § 6.11(4).

An undisclosed principal cannot require a third party to accept its performance instead of its agent's or render performance to it instead of its agent if this substitution substantially changes the performance contracted for or the nature of the third party's obligation. R3A § 6.03.

Liability in Tort

An employer is liable for torts committed by employees acting in the scope of their employment. R3A § 2.04.


An employee is an agent whose principal controls or has the right to control the manner and means of his performance or work. R3A § 7.07(3)(a).


Numerous factual indicia are relevant to whether an agent is an employee. These include:

  • the extent of control that the agent and the principal have agreed the principal may exercise over details of the work;
  • whether the agent is engaged in a distinct occupation or business;
  • whether the type of work done by the agent is customarily done under a principal's direction or without supervision;
  • the skill required in the agent's occupation; whether the agent or the principal supplies the tools and other instrumentalities required for the work and the place in which to perform it;
  • the length of time during which the agent is engaged by a principal;
  • whether the agent is paid by the job or by the time worked; whether the agent's work is part of the principal's regular business;
  • whether the principal and the agent believe that they are creating an employment relationship;
  • and whether the principal is or is not in business.

Also relevant is the extent of control that the principal has exercised in practice over the details of the agent's work.

R3A § 7.07.

Scope of Employment

An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer's control. An employee's act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.

R3A § 7.07.


Conduct of a servant is within the scope of employment if:

  1. It is of a kind he is employed to perform;
  2. it occurs substantially within the authorized time and space limits; or
  3. it is actuated, at least in part, by a purpose to serve the master

Some of the factors used when considering whether an employee's acts are within the scope of employment are:

  1. the time, place and purpose of the act;
  2. its similarity to acts which the servant is authorized to perform;
  3. whether the act is commonly performed by servants;
  4. the extent of departure from normal methods; and
  5. whether the master would reasonably expect such act would be performed.

Conduct of a servant is not within the scope of employment if it is different in kind from that authorized, far beyond the authorized time or space limits, or too little actuated by a purpose to serve the master.

Principals and employees are each responsible for their own misconduct.

Direct Liability

A principal is directly liable when its agent acts tortiously with actual authority or if the principal ratifies the conduct. R3A § 7.03, R3A § 7.04.

A principal is directly liable when it is negligent in selecting, supervising, or otherwise controlling the agent. R3A § 7.03, R3A § 7.05.

A principal is directly liable when it delegates performance of a duty to use care to protect others or their property to an agent who fails to perform the duty. R3A § 7.03, R3A § 7.05.

Vicarious Liability

A principal is vicariously liable when its agent commits a tort while in the scope of his employment. R3A § 7.07.

Principals are vicariously liable for torts committed by their agents in communicating with third parties on or purportedly on behalf of the principal when actions taken by the agent with apparent authority constitute the tort or enable the agent to conceal its commission. R3A § 7.08.

  • This is basically only ever relevant in fraud cases.

All employees are agents, but not all independent contractors are.

Independent Contractor

An independent contractor is one who is hired to do a job, but who retains control over the job, as opposed to an employee.

Principals are generally not liable for the torts of their independent contractors, but can be if the job involves abnormally dangerous activities.

An agent is a fiduciary.


A fiduciary has an obligation to act in his principal's best interest rather than his own. R3A § 8.01.

The three major duties being a fiduciary imposes on an agent are loyalty, care, and obedience.

Duty of Loyalty

The duty of loyalty flows from the fiduciary nature of the agency relationship and requires, among other things, that the agent:

  1. Account for all profits not promised to the agent. R3A § 8.02.
  2. Refrain from acting as or for an adverse party. R3A § 8.03.
  3. Refrain from competing with the principal. R3A § 8.04.
  4. Refrain from using the principal's property or confidential information for personal purposes. R3A § 8.05.
  5. Disclose relevant information to the principal. R3A § 8.11.
  6. Segregate the principal's property and keep and render accounts. R3A § 8.12.
  7. Act in accordance with a general duty of good conduct. R3A § 8.10.
Duty of Care

The duty of care flows from the parties' implicit assumption that the agent will carry out his duties with reasonable care. R3A § 8.08.

Duty of Obedience

The duty of obedience flows from the nature of agency, which requires that the agent be subject to the principal's control. Thus, the agent must act only as authorized by the principal and obey his instructions. R3A § 8.09.

An agent is of course also required to perform any contractual duties owed to the principal. R3A § 8.07.

The principal is obviously also required to comply with his contractual obligations to agent. R3A § 8.13.

In addition, the law will imply certain duties that the principal has to the agent, including duties to:

  1. Compensate the agent for services. R3A § 8.13.
  2. Indemnify the agent for expenses. R3A § 8.14.
  3. Provide the agent with information concerning the risks of physical harm or pecuniary loss attendant to his agency. R3A § 8.15.
  4. Refrain from injuring the agent's business reputation or self-respect. R3A § 8.15.
  5. Provide a safe working environment for agents who are servants. R2A § 470.
  6. Deal with the agent fairly and in good faith. R3A § 8.15.

Notification given to an agent is effective as notification to the principal when the agent has actual or apparent authority to receive notification, unless the third party knows or has reason to know that the agent is acting adversely to the principal. R3A § 5.01, R3A § 5.02.

In general, an agent's knowledge is imputed to the principal if that knowledge is material to the agent's duties to the principal or concerns a matter within the scope of the agent's actual authority. R3A § 5.03.

The death, non-existence, or suspension of operation of either principal or agent terminates the agency relationship. R3A § 3.07

A change in circumstances inconsistent with the principal's manifestation to the agent terminates the agency relationship. R3A § 2.01.

The parties may obviously terminate an agency relationship by mutual agreement. R3A § 3.09. Either party may actually terminate it at any time however, even if it would be in violation of a contract. R3A § 3.10.

  • One exception to this is that an agent's authority may not be revoked fi it involves a "power given as security." See Lane Mortg. Co..