Creating and Terminating an Agency Relationship

Agency is a legal concept whereby one person—the principal—provides authority to another person—the agent—to act on his behalf.

Creating an Agency Relationship

There are no formal requirements to create an agency relationship. Such a relationship can be created verbally, by practice, or even by simple inference. Creating them is therefore generally quite simple and easy to do—and in fact, it can be done unintentionally if the principal’s behavior would lead a third party to reasonably conclude that such a relationship exists (see apparent authority).

Equal Dignities Rule

An exception to the general rule that a writing is not required to create an agency relationship is known as the Equal Dignities Rule. This rule states that if the Statute of Frauds requires a contract to be in writing, then the authority to allow an agent to enter into that contract on the principal’s behalf must also be in writing.

Terminating an Agency Relationship

Terminating an agency is generally simple, though not often as simple as creating one in the first place.

Where the agency came into existence by virtue of the expressed or implied authority provided by the principal (see actual authority), the agency terminates upon the occurrence of any of the following:

1. The agent’s death, or in the case of an artificial entity, the cessation of its existence.
2. Notice to the agent or to applicable third parties that the principal has died or ceased to exist.
3. Notice to the agent or to applicable third parties that the principal has lost legal capacity to have an agent.
4. An agreement between the agent and the principal to terminate the agency.
5. A manifestation of revocation of the agency relationship by the principal to the agent.
6. A manifestation of renunciation of the agency relationship by the agent.

Where apparent authority gives rise to an agency relationship, as discussed above, such a relationship ends when it is no longer reasonable for a third party to believe that the agent has the authority to act on the principal’s behalf.

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Frequently Asked Questions

Do you need a written contract to create an agency relationship?

Usually not. An agency can be formed verbally, in writing, or simply by conduct. The main exception is the Equal Dignities Rule: if the underlying transaction must be in writing under the Statute of Frauds, then the agent’s authority to carry it out must also be in writing.

Can someone become my agent without my knowledge?

In a sense, yes. If your conduct or statements lead a third party to reasonably believe that another person is authorized to act for you, that person may have apparent authority even though you never formally appointed them. This is one reason it is wise to be careful about how you describe relationships with employees, contractors, and others who deal with the public on your behalf.

How do I terminate an agency relationship?

You can end an agency relationship by revoking the agent’s authority, reaching an agreement with the agent to terminate it, or in most cases by dying or losing legal capacity. To cut off apparent authority, you may also need to notify third parties who have dealt with the agent that the relationship has ended.

What is the difference between actual and apparent authority?

Actual authority comes from what the principal says or does toward the agent. Apparent authority comes from what the principal says or does toward third parties. Both can create binding obligations, but they end in different ways. See Authority in Agency Law for more detail.

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See Also:

Agency Relationships

Agent Liability to a Third Party