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Introduction to Agencies

Creation of an Agency

How Is an Agency Created?

There does not need to be a formal document to create an agency relationship. Rather, the agent just has to act on behalf of the principal, with the principal's assent, and for the principal's benefit. No compensation is required to create an agency relationship.

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.

Agency Creation

Agency Relationships Method of Creation
Expressed Agreement (oral or in writing)
Implied Formed through circumstances or situations
Ratification When a principal accepts an unauthorized act by an agent
Apparent When a principal leads a third party to believe that an agency exists

Agency relationships include expressed, implied, ratification, and apparent.