Part 2: Agents Aren't Just for Sport Stars

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This post is the second of a two-part series on agency. If you missed the first part where we talked about the basic elements of creating agency and the resulting duties of the agent to the principal, feel free to read it here. This time we will discuss the duties of the principal to the agent and a special legal doctrine called apparent agency or agency by estoppel.

Duties of the Principal to the Agent

The principal-agent relationship is a two-way street. Just as the agent owes duties to the principal, so also the principal has duties to the agent. They typically include duties such as compensation, reimbursement, indemnification, and good faith, though each of these could be modified or struck from a contract.

Compensation, reimbursement, and indemnification all relate mostly to monetary aspects of the relationship. Compensation is the payment the agent receives simply for providing his or her services to the principal. A salary might be one example of such. Note that sometimes the agent could agree to work for free depending on the relevant employment laws.

Reimbursement and indemnification refer to the principal’s obligation to make up to the agent any personal expenditures or losses that arise from the agent’s course of work for the principal.

• For example, if a personal chef must buy saffron with his own money for his boss’s home dinner, the chef would have a right to recoup that money, provided he doesn’t claim ownership of the saffron.

• In another example, imagine that Joe hates the sight of his neighbor Joanna’s vacant and undeveloped lot, so he hires a contractor to plant a row of trees on Joanna’s side of the fence, lying to the contractor that he owns both lots. When Joanna finds out what has been done to her property and sues the contractor for the damage he has done, the contractor can likely turn to Joe to indemnify him for that loss.

Apparent Agency

So far, we have covered most of the basic elements of the principal-agent relationship: what the key terms mean and how they relate to each other.

Duties may be easy to understand when it is clear who is an agent and who is a principal. But what about the situations where it isn’t so clear? Can the unwary employer still be on the hook for something unauthorized an employee did?

Maybe. As it turns out, the law of agency deals with this situation through a concept known as apparent agency or agency by estoppel.

Basically, the doctrine exists to protect people who reasonably think they are dealing with a duly-authorized agent but end up mistaken. If that mistake would cause a third party some serious harm, the doctrine of agency by estoppel steps in to soften the otherwise harsh result that might occur.

First, for agency by estoppel to apply, someone must reasonably believe she is dealing with an agent and justifiably and detrimentally change her position because of that apparent relationship. Let’s dive into this more because it contains a lot of legalese.

What does it mean for the belief to be reasonable? Generally, the belief is considered reasonable if the apparent principal carelessly or intentionally induced a third party to believe that someone else was his or her agent, knew of this belief by the third party, and did nothing reasonable to change it. Basically, you have to be careless enough for a third party to think with good reason that your agent was authorized to do what they did.

Then, if the belief is reasonable, a second question comes into play: did the apparent agency created by the apparent principal lead the third party to make a bad decision that would otherwise have been a good one? If the apparent principal-agent relationship led a third party to do something that hurt him or herself because he or she relied on his or her belief that the principal-agent relationship was actual, then the apparent principal can be liable to the third party for the latter’s loss.

To clarify all this a bit, let’s look at an example from a real case slightly modified for simplicity’s sake.¹ Let’s say that Shelby is an independent contractor working at a hospital as a radiologist. Technically, she’s not an employee or agent of the hospital, since she’s an independent contractor. When Robby comes to the hospital with a swollen ankle, Shelby misreads the x-ray and doesn’t find any breaks, which leads to him not going into a cast, which means that he eventually needs surgery, which he wants the hospital to finance. Could the hospital be held liable?

Probably. Since Shelby’s work location is at the hospital, it was reasonable of Robby to misunderstand that she was an employee of the hospital. This fact creates apparent agency, and based on that, Robby could sue the hospital and not just Shelby. The moral is that if it could appear that you are responsible for someone’s actions, consider whether you need to clarify the relationship, seek additional financial protection, or take other steps.

As you can see, behind all the legalese, serious questions involving hard cash are often involved in agency law. Don’t let the technical language hide from you the real-life practicality of this area of the law.

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¹ Pamperin v. Trinity Memorial Hosp., 423 N.W.2d 848 (Wisc. 1988).