Creation of an Agency

There are different ways to create an agency relationship: by the actions of parties or by the operation of law. Anyone who has the legal competency to contract may enter into a contract, either individually or through another person. If the person enters into the contract through another person, then agency may exist. The agent represents the principal in the dealings with third parties, and the principal controls and compensates the agent for their work.

An agency can exist when two parties expressly agree to create one, via an oral or written understanding. Agency by ratification is when the principal later affirms or adopts the previously unauthorized action of someone who was not an agent at the time. Even if it is unclear whether the agent had the authority to enter into a third-party agreement or transaction, the principal can still ratify the agreement or transaction after the fact. For example, an agent enters into a contract with a third party for services, but the agent did not have actual (expressly given) or apparent (reasonably assumed) authority from the principal to make the contract. The principal can accept the contract after review. The principal's acceptance of the contract is considered a ratification of the original contract between the third party and the agent.

Agencies can also exist through operation of law, which means that a right or liability has been created, regardless of the intention of the party, because of existing legal principles. For example, if someone dies without a will, the existing framework of the law, or the operation of law, dictates the hierarchy of heirs. In agency law, this also refers to implied agency.

Estoppel is the principle that prevents someone from making an allegation or denial of something contrary to what is perceived and believed, where this perception has been allowed because of some action, statement, or omission of the principal. In the context of agency, it is a relationship without a formal agency agreement, but it still creates the liability of an agency relationship because of the actions or inactions of the estopped principal.

Agency can also be created because of the relationship between parties or their conduct. Agency by necessity is when a person must act as an agent to the other person. For instance, necessity can be as a result of an emergency, such as a woman whose spouse abandoned her and who needs financial help. This can create a necessity for an agent to act without the authorization of the principal—in this example, the spouse.

Agency by estoppel is when a third party relies on representation by the principal of an agency relationship. For example, the principal may have provided business cards or letterhead to another person. Based on this, a third party may assume that the person with the cards and letterhead is an agent of the principal, even if there was never an agreed-on agency relationship.

There may arise certain situations that require an agency, such as taking over a person's decisions when the person is called out of the country, or when one person needs the help of another due to inability or even physical incapacity.

The principal usually enters into an agreement with the agent. The agreement between a principal and an agent can be written or verbal. It can even be just an understanding—a principal, agent, or both may not realize that the law considers them to have an agency relationship. However, it is a good and prudent business practice to put agreements in writing since parties may have conflicting recollections of the verbal agreements.

Typically, agents deal with third parties and enter into other agreements and contracts with those third parties as a representative of the principal. If there is a dispute, the courts ensure that the decisions that principals, agents, and third parties made are reasonable, or fair.

Third parties can be left unprotected if they do not exercise due diligence, reasonable care, and prudent steps to ensure they are dealing with someone who has the authority to act on behalf of the principal.

As long as the agent is acting within the scope of the agency agreement, understanding of the agreement, what is customary for agents in their position or industry, and the overall scope of what is expected of the agent by the principal, then no challenge of the relationship should emerge. If the agent acts outside the scope, then the principal will not be liable, or legally accountable, to the third party. The agent will most likely be liable to the third party, depending on the circumstances of the transaction and agreement.