Agency: Scope

So if (1) there is mutual consent between the principal and the agent; (2) the principal controls the direction of the engagement; 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? What are the limits on an agent's scope?

Once an agent obtains authority to act on behalf of a principal, that authority is not absolute. Instead, the agent’s authority is limited to the scope of the agency engagement. This limitation is established in Restatement (Third) of Agency § 2.02, which reads:

(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.

From this we glean several principles. First, 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).

So, 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 continuing the previous example, the agent would not have the authority to purchase a new gaming system because a reasonable person would not consider this an act necessary or incidental to delivering a package crosscountry.

The example of gaming systems, gasoline, and cross-country deliveries is relatively straightforward. Let’s consider some more practical scenarios:

3.2.1. Pat employs Anne as an auctioneer to sell goods owned by Pat. Does Anne have the authority to accept bids on Pat's behalf? Consult Restatement (Third) of Agency § 2.02, illustration 1.

Sample  analysis:  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. Here, Pat employed Anne as an auctioneer, and auctioneers typically sell goods by accepting bids. So a reasonable person would conclude that accepting bids is incidental to Pat's express command to sell the goods. So Anne may accept bids on Pat's behalf. 

3.2.2. Pat, a dealer in antiques, employs Anne to enter into contracts on Pat's behalf for the purchase of antiques. Does Anne have the authority to sign a purchase agreement on behalf of Pat? Restatement (Third) of Agency § 2.02, illustration 2.

3.2.3. Anne, the head of a family each of whose adult members owns an interest in Blackacre, is authorized by the other family members to settle a lawsuit with Tim, a lessee who timbers Blackacre under the lease. Does Anne's authority to settle the lawsuit by itself imply authority to transfer fee-simple interests in Blackacre to Tim on behalf of the other family members? Restatement (Third) of Agency § 2.02, illustration 3.

3.2.4. Pat, a photographer, employs Anne as a business manager. Pat authorizes Anne to endorse and deposit checks Pat receives from publishers of photographs taken by Pat. Based on Pat's statements to Anne, Anne believes her authority is limited to endorsing and depositing checks and does not include entering into agreements that bind Pat in other respects. Anne endorses and deposits a check from Tim, a magazine publisher, made payable to Pat. Printed on the back of the check is a legend: “Endorsement constitutes a release of all claims.” Is it beyond the scope of Anne's actual authority to release claims that Pat has against Tim? Restatement (Third) of Agency § 2.02, illustration 4.