Agency Relationship: Definition, Principles & Problems

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  • 0:05 Principal and Agent
  • 1:08 Agency
  • 2:14 Express and Implied Agency
  • 3:36 Estoppel and Ratification
  • 6:08 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley has a JD degree and is an attorney. She has taught and written various law courses.

Agency relationships always involve an agent and a principal, though the agency relationship can arise in various ways. This lesson explains agency relationships.

Principal and Agent

Wilma works for me at my pet grooming business, Barks and Bubbles. I'm the owner and in the process of restocking my inventory in my pet supply department, so I send Wilma to order some products for my store.

This means Wilma is an agent, or a party who is legally authorized to act on behalf of another party in business transactions. I, on the other hand, am a principal. A principal is a party who gives legal authority to another to act on his or her behalf in business transactions. Both principals and agents can be individuals or can be business entities.

Wilma and I have an agency relationship. This is a business relationship where a principal gives legal authority to an agent to act on the principal's behalf when dealing with a third party. When Wilma places orders for my store, I am the principal and Wilma is working as my agent.


All agency relationships are fiduciary relationships. This means the relationship involves a certain level of trust and confidence. The agent is obligated to act in the best interests of the principal because the agent's actions will create legal obligations for the principal. The agency relationship allows the agent to work on behalf of the principal as if the principal was present and acting alone.

For example, let's say Wilma contracts with Rusty's Rawhide to buy 500 rawhide bones. Rusty's delivers the bones, but Barks and Bubbles fails to pay the bill. As the principal, I'm legally responsible for Rusty's bill even though I never personally made this business deal. If Rusty's decides to sue for collection of the bill, they'll likely sue Barks and Bubbles and me, rather than Wilma. As long as Wilma was properly acting as my agent when she made this deal, she's not legally responsible.

Express and Implied Agency

Wilma and I have an express agreement, which means that both the principal and agent agreed to the agency relationship through a written or oral agreement. I asked Wilma to purchase supplies on my behalf, and Wilma agreed to do so. All agency agreements are created through the intent of the parties, and we clearly intend to act in an agency relationship.

However, not all agency agreements are express agreements. Agency can also be created through an implied agreement. This means that the conduct of both parties expresses an intent to create an agency relationship. The agent works on the principal's behalf through implied authority, rather than a stated agreement.

For example, let's say that I always do the inventory buying for Barks and Bubbles. However, I'm out of the country when our supply of rawhide bones runs out. I left Wilma in charge of the store but never told her to purchase inventory. Wilma places an order for more bones through Rusty's Rawhide even though I didn't specifically tell her to do so. This is an implied agency because Wilma is acting with my implied authority as the person in charge of the store.

Estoppel and Ratification

Agency relationships can also be based on apparent authority. This type of agency is neither express nor implied. Instead, apparent authority is when a third party reasonably assumes that the principal granted authority to the agent. Apparent authority is assumed to exist by the third party through observing the principal's conduct. If the principal acts as though he or she has an agency relationship with the agent, then the principal will be legally bound by the agent's actions.

For example, let's say that I'm in town and in charge of my store. While at work one day, Wilma orders 500 rawhide bones from Rusty's Rawhide. I haven't authorized Wilma to make orders. Rusty's produces and delivers the bones, and I accept them. I can't refuse to pay for the order since I've acted as if Wilma had the authority to place the order for me.

Apparent authority protects Rusty's from losing money on the business deal as long as Rusty's has good reason to believe that Wilma is my agent. In this particular scenario, I've ratified Wilma's act of agency. This means that the principal accepted and recognized an invalid act of agency. An act of ratification by the principal makes the invalid act of agency become legally valid.

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