Every New York business needs to understand the basics of conferring legally binding authority within an agency relationship.
Agency law deals with the relationship between an “agent,” a person that acts on behalf of another person, company, or government, usually called the “master” or “principal.” An agency relationship forms when a principal asks an individual to act with authority on behalf of the principal that binds the principal in some way.
Agency is a fiduciary relationship resulting from:
- Consent by a principal to another that the other;
- Shall act on behalf of the principal; and
- Shall act subject to the control of the principal; and
- Consent by the other to act as agent for the principal.
Under these circumstances, a principal will be liable for contracts entered into by agents when (1) the fiduciary relationship outlined above is established, (2) the agent acted with some kind of authority, and (3) a contractual obligation is created between the agent and a third party.
The idea of authority can be a tricky one to nail down.
An agency relationship can be, and often is, enforced by written agreements made through a power of attorney that grants “actual authority” that is printed in black and white. A power of attorney, or a real estate agency agreement are prime examples of principals granting actual authority.
However, where an agent lacks actual authority or the issue is in doubt, s/he may nonetheless bind a principal to a contract if the principal has created the appearance of authority, also referred to as “apparent authority,” leading the other contracting party to reasonably believe that actual authority existed. This exists to protect third parties who would otherwise incur losses.
Agents may also possess “inherent authority,” which is derived solely from the agency relationship itself and exists for the protection of persons harmed by or dealing with the agent. This power arises only if required for the agent to exercise some actual authority granted by the principal. For example, if a principal grants power to do some action, but doing that action requires doing something related or conditional to that action, then the agent acquires inherent authority to the related or conditioned action on behalf of the principal.
New York small business owners cannot be everywhere and do everything. Understanding agency relationships, and making the right choices as to who one grants authority will allow your business to run efficiently and smoothly.
*Gene Berardelli may be contacted at: GeneBerardelli@ipglegal.com.
Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.
- Those Corporate Records Actually Mean Something
- Partition Actions in New York: NY Real Estate Law Basics
- Definition of a Franchise in New York State: New York Franchise Law Basics
- NY’s Highest Court Rejects Expansion of Common-Interest Doctrine: NY Legal New Updates
- A Chapter 11 Bankruptcy May Save Your NY Business
- How Businesses Properly Use A Cease And Desist Letter