Agency: Scope

If (1) there is mutual consent between the principal and the agent; (2) the principal has the right to control the agent's actions; and (3) the agent acts on the principal's behalf, then we have an “agency relationship.” More specially, this type of agency relationship confers actual authority, because it meets all three elements. 

But, practically, what does this mean? Can the agent do anything it wants on behalf of the principal? Can the agent only do things the principal directly tells it to do? To our earlier example, if I ask you to repair the brakes, do I need to expressly authorize you to use the 1/2 inch socket and turn it counterclockwise? On the other extreme, would directing you to fix the brakes authorize you to open a research and development lab to develop new braking technology? Would it authorize you to order the necessary brake parts?

When an agent obtains authority to act on behalf of a principal that authority is limited to the scope of the agency engagement. Restatement (Third) of Agency § 2.02 clarifies:

(1) An agent has actual authority to take action designated or implied in the principal's manifestations to the agent and acts necessary or incidental to achieving the principal's objectives, as the agent reasonably understands the principal's manifestations and objectives when the agent determines how to act.

(2) An agent's interpretation of the principal's manifestations is reasonable if it reflects any meaning known by the agent to be ascribed by the principal and, in the absence of any meaning known to the agent, as a reasonable person in the agent's position would interpret the manifestations in light of the context, including circumstances of which the agent has notice and the agent's fiduciary duty to the principal.

(3) An agent's understanding of the principal's objectives is reasonable if it accords with the principal's manifestations and the inferences that a reasonable person in the agent's position would draw from the circumstances creating the agency.

So when an agent obtains authority to act on behalf of a principal that authority includes all acts "necessary or incidental to achieving the principal’s objectives." For example, if a principal instructs an agent to drive a package crosscounty for the principal, then the agent may purchase gasoline on behalf of the principal because this is necessary or incidental to achieving the principal’s purpose (i.e., delivering the package cross country).

This means we can break actual authority down into two concepts. Express authority is the authority to do things the principal expressly directed. Implied authority is the authority to do things necessary or incidental to the things the principal expressly directed. Express authority and implied authority are types of actual authority.

Second, what constitutes an act “necessary and incidental to achieving the principal’s objectives” is determined from the perspective of a reasonable person. So in the previous example an agent tasked with transporting a package would not have the authority to sell the agent's home because a reasonable person would not consider this an act necessary or incidental to delivering the package.

Test Drive Questions

Let’s test drive these concepts:

3.2.1. Paul's wife is tired of the house being cluttered with Paul's hand-painted figurines. Adam agrees to act as Paul's agent and serve as an auctioneer to sell the figurines. Assume the agency relationship is properly formed, does Adam have the authority to accept bids on Paul's behalf? See Restatement (Third) of Agency § 2.02, illustration 1.

Sample  analysis:  Adam is Paul's agent, so the question is solely whether this is within the scope of the agency relationship. Adam has express authority for any "action designated or implied" in Paul's manifestations to Adam. Adam also has implied authroity for any action "necessary or incidental to achieving the principal's objectives, as the agent reasonably understands the principal's manifestations and objectives when the agent determines how to act." Paul told Adam to sell the miniature figurines. Adam should reasonably understand that accepting bids is incidental to auctioning the goods. So Adam has authority to accept bids on Paul's behalf. 

3.2.2. Seeing the new space created by selling the figurines, Paul hires Adam to enter into contracts on Paul's behalf to purchase several first edition gaming books. Does Adam have the authority to sign a purchase agreement on Paul's behalf? Restatement (Third) of Agency § 2.02, illustration 2.

3.2.3.Suppose that unknown to Paul, the seller is Paul's nemesis from junior high. The nemesis sees an opportunity and includes a clause in the agreement that requires arbitration for all tort claims for the bullying Paul received in junior high. Does Adam have authority to sign the purchase agreement?Restatement (Third) of Agency § 2.02, illustration 3.

3.2.4. Same as 3.2.3, but assume Adam is Paul's attorney, assisting him with tax and estate planning. 

Test Drive Answers

3.2.2. A reasonable person would believe that Paul's manifestation to Adam to purchase the books authorizes Adam to enter a contract to purchase the books. So Adam has authority.

3.2.3. A reasonable person would not believe that Paul's manifestation to Adam to purchase the books authorizes Adam to waive his rights to a trial for unrelated conduct. So Adam lacks authority for this contract. It would not be enforceable against Paul. We'll discuss later what remedies this may create for the nemesis to sue Adam.

3.2.4. Same result as 3.2.3. These facts come from Yazedjian v. ARC Santa Catalina, Inc., in which a tax and estate planning attorney signed an arbitration agreement included in a hospital admission form. 2018 WL 615106 (Jan. 29, 2018). The court held the attorney lacked authority.