When most people think of an “agent,” they immediately think of a realtor or a franchise office. Similarly, most businesspersons don’t consider how “agency” exposes them to being blindsided for liability acts they themselves did not commit.
And when it does it costs. Hundreds to find out what is going on, thousands to try to get the case dismissed, and many thousands to defend the case. It also leads to lost productivity where you and your employees are working on a lawsuit instead of making profit, increased stress due to the increased workload and uncertain liability, and increased insurance premiums.
A few real-world examples:
- You get a past-due bill from someone you never met for something you never bought.
- You get served with a lawsuit for breach of contract by someone you never met for something you never agreed to.
- You get served with a lawsuit for damages for a car accident by someone you never met for something you did not do.
- You get a letter saying “I bought your company and your house for pennies on the dollar. Now get out or I’ll have you thrown out.”
- You get a court order that your business partner’s wife went on a spending spree and your interest in the company will be sold in 30 days to pay off her debt.
- You get a court order that the son of your old HR manager (that you fired 1 year ago) couldn’t make his car payments and your check will be garnished to pay off the debt.
- You get served with a lawsuit for damages for a car accident by someone you never met for something you did not do.
How does this happen? “Vicarious Liability” or “They are your Agent”
Agency happens when a “principal” manifests an intent that someone can act on his behalf. This comes in three forms:
1) Express Agency when the principal expressly does something to create an agency, like a partnership, or hiring someone to have authority;
2) Implied Agency due to the conduct of the parties, like office sharing or car/logo sharing; and
3) Residual Authority when a past agent still has authority.
Best practices are to carefully consider who you delegate power to and to clearly specify what is the scope and limitations of that power, as the lawyers at Pope and Edgar Law Firm can explain.
Address the Express Authority problem by drafting written personnel policies and reviewing them with your business partners and employees periodically. Address the Implied Authority problem by establishing who can communicate with clients and vendors, who and where can associates drive company cars or wear company clothes, and what are the employees titles on their letterhead. Address the Residual Authority problem by conducting exit conferences, drafting letters to vendors when there is a change of authority, restrict use of company cars and resources, and changing passwords often.