Formation of an Agency
An agency and the resulting authority of an agent can arise in any of the following four ways:
express agency, implied agency, apparent agency, and agency by ratification. These types of
agencies are discussed in the paragraphs that follow.
Express Agency
Express agency is the most common form of agency. In an express agency, the agent has the
authority to contract or otherwise act on the principal’s behalf, as expressly stated in the agency
agreement. Express agency occurs when a principal and an agent expressly agree to enter into an
agency agreement with each other. Express agency contracts can be either oral or written unless
the Statute of Frauds stipulates that they must be written.
express agency
An agency that occurs when a principal and an agent expressly agree to enter into an
agency agreement with each other.
Example
In most states, a real estate broker’s contract to sell real estate must be in writing.
If a principal and an agent enter into an exclusive agency contract, the principal cannot employ
any agent other than the exclusive agent. If the principal does so, the exclusive agent can recover
damages from the principal. If an agency is not an exclusive agency, the principal can employ
more than one agent to try to accomplish a stated purpose.
The following feature describes the creation of a special form of express agency.
Contemporary Environment Power of
Attorney
A power of attorney is one of the most formal types of express agency agreements. It is often
used by a principal to give an agent the power to sign legal documents on behalf of the principal.
The agent is called an attorney-in-fact even though he or she does not have to be a lawyer.
Powers of attorney must be written. Usually, they must also be notarized. There are two kinds of
powers of attorney:
power of attorney
An express agency agreement that is often used to give an agent the power to sign legal
documents on behalf of the principal.
general power of attorney
A power of attorney where a principal confers broad powers on the agent to act in any
matters on the principal’s behalf.
special power of attorney
A power of attorney where a principal confers powers on an agent to act in specified
matters on the principal’s behalf.
1. General power of attorney. A general power of attorney confers broad powers on the
agent to act in any matters on the principal’s behalf.
Example
A person who is going on a long trip gives a general power of attorney to his brother to
make all decisions on his behalf while he is gone. This general power of attorney includes
the power to purchase or sell stocks or real estate, pursue or defend lawsuits, and to make
all other relevant decisions.
2. Special power of attorney. A special power of attorney confers limited powers on an
agent to act on behalf of a principal. The agent is restricted to perform those powers
enumerated by the agreement.
Example
A person who has her house listed for sale but who is going on a trip gives her sister a
special power of attorney to make decisions regarding the selling of her house while she
is gone, including accepting offers to sell the house and signing documents and deeds
necessary to sell the house.
A principal can make a power of attorney a durable power of attorney, which remains effective
even though the principal is incapacitated.
Implied Agency
In many situations, a principal and an agent do not expressly create an agency. Instead, the
agency is implied from the conduct of the parties. This type of agency is referred to as an implied
agency . The extent of the agent’s authority is determined from the facts and circumstances of
the particular situation.
Example
A homeowner employs a real estate broker to sell his house. A water pipe breaks and begins to
leak water into the house. If the homeowner cannot be contacted, the real estate broker has
implied authority to hire a plumber to repair the pipe to stop the water leak. The homeowner is
responsible for paying for the repairs.
Agency by Ratification
Agency by ratification occurs when (1) a person misrepresents him- or herself as another’s agent
when in fact he or she is not and (2) the purported principal ratifies (accepts) the unauthorized
act. In such cases, the principal is bound to perform, and the agent is relieved of any liability for
misrepresentation.
implied agency
An agency that occurs when a principal and an agent do not expressly create an agency,
but it is inferred from the conduct of the parties.
agency by ratification
An agency that occurs when (1) a person misrepresents him- or herself as another’s agent
when in fact he or she is not and (2) the purported principal ratifies the unauthorized act.
Example
Bill Levine sees a house for sale and thinks his friend Sherry Maxwell would want to buy it. Bill
enters into a contract to purchase the house from the seller and signs the contract “Bill Levine,
agent for Sherry Maxwell.” Because Bill is not Sherry Maxwell’s agent, she is not bound to the
contract. If Sherry agrees to purchase the house, however, there is an agency by ratification. On
ratification of the contract, Sherry Maxwell is obligated to purchase the house.
In the following case, the court had to decide if an agency had been created.
CASE 18.1 STATE COURT CASE Agency
Eco-Clean, Inc. v. Brown
749 S.E.2d 4, 2013 Ga. App. Lexis 913 (2013) Court of Appeals of Georgia
“The board of regents argues that it should not be held responsible for ‘bad decisions made
by its students.’ ”
—Barnes, Presiding Judge
Facts
Nicholas Brown was a student at Georgia Tech University and a member of the Ramblin’ Reck
spirit club. The board of regents of the University System of Georgia (University) owns a Model
A automobile called the Ramblin’ Reck which is the mascot of Georgia Tech University.
Members of the club are responsible for driving the car at athletic games, parades and campussponsored events and throughout campus to raise school spirit. During its use, several club
members drive and sit in the car, while two other members stand on the running boards of the
vehicle. When the vehicle needed some repairs, Eco-Clean, Inc. installed new handles on the
vehicle’s doors using wood screws one-half to three-quarters of an inch long.
One day when the club members drove the Model T from a fraternity house, Brown stood on the
passenger side running board, grasping an interior handle with one hand and the exterior handle
with the other. After the car had gone one block, the driver turned left onto Ferst Avenue. When
the driver took the turn, the handle Brown was holding onto snapped off, and he fell from the
running board. Brown struck his head on the road and blacked out. Eyewitnesses testified that
the car accelerated through a red light and that the car was turning at an unusually high rate of
speed at the time of the accident. Brown fractured his right temporal bone and was hospitalized
for four days. Brown permanently lost his sense of taste and smell, as well as his hearing in one
ear.
Brown sued the university and Eco-Clean to recover damages for negligence. Brown asserted
that the university negligently promoted the unsafe use of the car by students on public roads and
that the university is vicariously liable for the negligence of its agents, including the driver who
was driving the Ramblin’ Reck on the university’s behalf at the time of the accident. The jury
found that Eco-Clean was negligent for installing the door handles with short wood screws rather
than stronger bolts. The jury also found that the student driver was an agent of the university and
that the university was vicariously liable for the driver’s negligence. The jury awarded Brown
$680,000 against each defendant. The university appealed the decision, alleging that the driver of
the Model T was not its agent.
Issue
Was the driver of the car an agent of Georgia Tech University?
Language of the Court
The board of regents argues that it should not be held responsible for “bad decisions made by its
students.” The parties deposed an eyewitness to the incident who testified that the driver of the
Georgia Tech car sped up and ran a red light before making the turn where Brown fell off.
Because some evidence introduced at trial authorized the jury to determine that the board of
regents was liable under an agency theory for the negligence of the driver, the trial court did not
err in denying the board of regents’ motion for a directed verdict of liability.
Decision
The court of appeals held that the student driver was an agent of Georgia Tech University and
upheld the trial court’s award of damages to Brown.
Ethics Questions
1. Did Georgia Tech University act ethically in denying liability? To view the Ramblin’
Reck vehicle, go to www.reckclub.org.
Apparent Agency
Apparent agency (or agency by estoppel) arises when a principal creates the appearance of an
agency that in actuality does not exist. Where an apparent agency is established, the principal is
estopped (stopped) from denying the agency relationship and is bound to contracts entered into
by the apparent agent while acting within the scope of the apparent agency. Note that the
principal’s actions—not the agent’s—create an apparent agency.
apparent agency (agency by estoppel)
Agency that arises when a principal creates the appearance of an agency that in actuality
does not exist.
Example
Georgia Pacific, Inc., interviews Albert Iorio for a sales representative position. Iorio,
accompanied by Jane Franklin, the national sales manager, visits retail stores located in the open
sales territory. While visiting one store, Franklin tells the store manager, “I wish I had more sales
reps like Albert.” Nevertheless, Iorio is not hired. If Iorio later enters into contracts with the store
on behalf of Georgia Pacific and Franklin has not controverted the impression of Iorio that she
left with the store manager, the company will be bound to the contract.
CONCEPT SUMMARY Formation of
Agency Relationships
Type of
Agency
Express
Formation
Authority is expressly given to the agent by
the principal.
Implied
Authority is implied from the conduct of the
parties, custom and usage of trade, or act
incidental to carrying out the agent’s duties.
By
Acts of the agent are committed outside the
ratification scope of his or her authority.
Apparent
Authority is created when the principal leads
a third party to believe that the agent has
Enforcement of the Contract
Principal and third party are bound
to the contract.
Principal and third party are bound
to the contract.
Principal and third party are not
bound to the contract unless the
principal ratifies the contract.
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