"Agency" Explained in Plain English

October 20, 2014 - Updated: October 20, 2014

"Agency" and "agent" are common terms that used in modern conversation - we often hear the phrases like "employment agency", "real estate agent" "double agent", to name just a few.

However common these terms may be, few people realize that the concept of "agency" is actually a well-defined legal concept. In fact, there are several different types of agency, and each with its own characteristics. Especially in the context of everyday legal relationships - such as the purchase and sale of a condominium - the distinction can be important.

 

What is an "agent", anyway?

In the plainest terms, an "agent" is someone who has the authority to act on behalf of someone else as their representative. By becoming someone else's agent, that person assumes certain important duties, including the duty to act in good faith and only in the other person's best interests.

Let's use a very simple example: "A" has been authorized by "P" to purchase a sports car. A will go to the dealership, will negotiate the deal, and will sign the contract on P's behalf. In the end, the sports car belongs to P, and P has the obligation to pay for it. A was merely exercising the authority she had been given by P, to conclude P's deal with the car dealership for him.

In this scenario, A is known as the "agent", while P is the "principal". A relationship of "agency" has been established. Moreover, from the legal standpoint, the contract for the sale of the car will be between P and the dealership, rather than between A and the dealership. A merely acted as P's representative.

Now let's complicate the scenario somewhat. Let us imagine that A goes to the dealership to negotiate the deal for P's sports car. However, while A is surveying the sports cars in the lot, she notices a nifty little motorcycle. Rather than purchase a car for P, she decides to purchase a motorcycle for him, thinking it will better suit P's personal style.

In this situation, A has acted beyond the scope of her authority. Her assignment was to purchase a sports car on P's behalf, but she bought a motorcycle instead. Assuming she did not receive P's permission in advance to buy a motorcycle (and despite her good intentions); A cannot ask P to be responsible for the cost of the motorcycle, since P did not authorize its purchase.

In our example, the authority that A has to negotiate and conclude P's deal can come in many different forms, and the law recognizes different nuances between them. For example, A might have express authority - e.g. P's verbal or written permission to buy either a sports car or a motorcycle. Or, A's authority might be implied by the circumstances - for example, P has allowed A the blanket authority to arrange for P's transportation needs. In such cases, A might be authorized to buy a range of things, such as plane tickets, vehicles (including a motorcycle), or skateboard. Alternatively, A might have a certain amount of authority because it is usual or customary (e.g. where she is a particular type of agent, like a real estate agent).

Whether or not an agent has the authority from his or her principal can be a very important issue - it can determine whether the contract made on the principal's behalf is a valid one.

 

"Ratification"

Getting back to our car-purchase scenario, it's important to point out that even if A bought P a motorcycle without his permission, there is a concept known as "ratification" that might save the day. Despite the fact that A failed to adhere to the scope of her authority (i.e. the purchase of a sports car), P may decide that the motorcycle actually suits him better, and may decide to confirm the contract A entered into with the dealership, after-the-fact. In this situation, P's ratification makes the contract with the dealership as good as if A had been authorized to buy a motorcycle in the first place.

 

The "undisclosed principal"

The concept of "undisclosed principal" can also be important - particularly in real estate transactions where the identity of the parties to the deal might matter. Let's say that C owns two condominium units side-by-side, and lives in one of them but decides to put the other one up for sale. Whoever purchases the unit from C will also become his neighbour, so C is hoping to find someone who shares his fondness for peace and quiet.

D, who looks like the quiet type, approaches C with an offer. D leads C to believe that he is interested in the condominium personally, i.e. that D is the potential buyer.

Unbeknownst to C however, the offer put forth by D is actually from H, who is determined (but hopelessly untalented) novice trombone player. In this situation, D is H's agent, and H is what is known as an "undisclosed principal".

If C accepts the offer to purchase, mistakenly believing that it comes from D, is C out of luck'? Generally speaking, there is nothing to prevent an agent from entering into a valid contract on behalf of an undisclosed principal. There is an exception, though, if the true identity of the buyer of the condominium is important to C as seller, or if D the agent exceeded his authority from H somehow. In these instances, there will be no valid contract between C and H at all.

 

Why you need to know

You may be asking yourself "How does all of this apply to me?"

Buyers and sellers of condominiums should become aware of the concept of agency, as a means of protecting themselves from potentially costly legal misunderstandings. True, in most typical real estate transactions there is no confusion as to who a particular real estate agent acts for, usually because the agency arises through the signing of a contract (i.e.. the seller signs an agreement with the listing agent).

But an agency relationship can arise without a written contract being signed - either through the consent between the agent and the seller, or by their mere conduct. This means that two people might be in a principal-agent relationship without necessarily being fully aware of it - or of its potential consequences!


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