The Agency Relationship
Agency is a legal relationship in which one person (the agent) is authorized to act on behalf of another (the principal) and to create, modify, or terminate legal relationships between the principal and third parties. The principal is bound by contracts made by the agent within the scope of the agent's authority as if the principal had made them personally.
Agency arises in a wide range of Ontario commercial relationships: real estate agents and brokers, solicitors and barristers acting for clients, corporate officers and directors acting for corporations, employees acting within the scope of employment, partners acting for a partnership, and independent contractors retained to negotiate on a client's behalf.
Creation of Agency
Express Agency
Express agency is created by the principal expressly authorizing the agent, orally or in writing, to act on their behalf. A power of attorney is the most formal written instrument of agency; it may be general (authorizing the agent to act in all matters) or limited to specific transactions. Ontario'sSubstitute Decisions Act, 1992 governs continuing powers of attorney for property and personal care.
Implied Agency
Implied agency arises from the conduct, circumstances, or relationship of the parties. An agent's implied authority extends to everything reasonably necessary to carry out the express authority — a real estate agent with authority to sell has implied authority to accept deposits and sign contracts of purchase and sale in the normal course. A managing director of a company has implied authority to enter ordinary commercial contracts on the company's behalf by virtue of the position.
Apparent (Ostensible) Authority
Apparent authority arises where the principal represents or holds out to a third party that the agent has authority to act, and the third party relies on that representation. The principal is then estopped from denying the agent's authority as against the third party.
Key requirements for apparent authority:
- A representation by the principal (not merely by the agent) that the agent has authority;
- The third party relies on the representation;
- The third party acts to their detriment in reliance on the representation.
Secret limitations on an agent's authority do not affect apparent authority: a principal who places an agent in a position of apparent authority cannot rely on internal instructions limiting that authority against a third party who had no notice of the limitations.
Ratification
Where an agent acts without authority, the principal may ratify the agent's unauthorized act and adopt it as their own. Ratification requires:
- The agent must purport to act as agent for a named or ascertainable principal;
- The principal must have existed and had capacity at the time of the act;
- The principal must ratify the whole transaction, not just the beneficial parts;
- Ratification must occur before the third party withdraws from the transaction.
Ratification relates back to the date of the original unauthorized act — the contract is treated as if it had been authorized from the start.
Duties of an Agent to the Principal
Fiduciary Duty
An agent is a fiduciary and owes the principal the full range of fiduciary duties:
- Duty to act in the principal's best interests: The agent must subordinate their personal interests to those of the principal and must not allow conflicts between personal and professional duties without disclosure and informed consent.
- Duty of loyalty — no secret profit: An agent must not make a secret profit or receive a commission, gratuity, or kickback from a third party in connection with the agency without the principal's knowledge and consent. Any profit made in breach of fiduciary duty is held on constructive trust for the principal.
- Duty not to act for adverse parties: An agent must not act for both the principal and a third party whose interests conflict with the principal's without the informed consent of both.
Duty to Account
An agent must keep accurate accounts of all transactions carried out on behalf of the principal, and must pay over all money and property received for the principal. The agent must keep the principal's money separate from their own — commingling of funds is a breach of fiduciary duty.
Duty of Care and Skill
An agent must exercise the degree of care and skill that can reasonably be expected in the circumstances — if the agent holds themselves out as having specialist skill (a lawyer, accountant, or real estate agent), the standard is that of a reasonably competent professional in that field.
Duty to Obey Instructions
An agent must carry out the lawful instructions of the principal. An agent who departs from the principal's instructions without justification is personally liable for any resulting loss. An agent is not required to carry out instructions that are unlawful.
The Undisclosed Principal
Where an agent contracts on behalf of a principal but does not disclose the existence of the principal to the third party, the third party contracts with the agent personally. On discovering the existence of the undisclosed principal, the third party may elect to hold either the agent or the principal liable on the contract — but not both. Once the election is made and acted upon, the third party cannot switch.
The undisclosed principal may also intervene and sue the third party directly on the contract, unless the terms of the contract, or the circumstances, indicate that the contract was intended to be personal to the agent.
Agent's Personal Liability to Third Parties
An agent acting within actual authority for a disclosed principal is not personally liable on contracts made on the principal's behalf. Personal liability arises where:
- Agent contracts personally: where the agent signs in their own name, or the contract terms impose personal liability;
- Undisclosed principal: the agent is personally liable until the principal is disclosed and the third party elects to proceed against the principal;
- Breach of warranty of authority: where the agent purports to act for a principal but has no actual authority, the agent is liable to the third party for breach of the implied warranty that they have authority to bind the principal;
- Tortious acts: an agent is always personally liable for their own tortious acts, regardless of whether the principal is also vicariously liable.
Termination of Agency
Agency may be terminated by:
- Agreement between the principal and agent;
- Revocation by the principal — subject to liability for breach of contract if the agency was for a fixed term or supported by consideration;
- Renunciation by the agent;
- Completion of the purpose for which the agency was created;
- Expiry of a fixed term;
- Death, insanity, or bankruptcy of the principal or agent (subject to the protection of third parties who act in good faith without notice).
A power of attorney made irrevocable (usually given as security for a loan or obligation owed to the agent) cannot be revoked by the principal while the underlying obligation subsists. Ontario's Substitute Decisions Act, 1992 governs continuing powers of attorney that survive the grantor's incapacity.
Practice Points for Ontario Business Lawyers
- Where a client acts through agents or directors, confirm actual authority before the transaction closes — resolution of the board or written authorization prevents disputes about apparent authority.
- When acting as solicitor, the lawyer is an agent of the client; the client is bound by contracts entered within the solicitor's actual authority. Exceeding instructions creates personal liability for breach of warranty of authority.
- Identify whether any party is acting as an undisclosed principal at the outset of a transaction — the counterparty's right to elect creates risk that must be disclosed to the client.
- In real estate transactions, confirm the agent's authority to bind the principal and whether a valid signed agreement is required to satisfy the Statute of Frauds requirements under the Statute of Frauds, R.S.O. 1990, c. S.19.
- Corporate law intersects with agency: a director acting beyond the objects of the corporation or without board authorization may bind the corporation under apparent authority but may be personally liable to the corporation for the unauthorized act.