The Law of Agency

The Law of Agency is an area of commercial law that deals with fiducial relationship between a person (principal) according authorities, implicitly or expressly, to another person (agent) to act on his behalf to create a legal relations with a third party. The relationship between an agent and a principal maybe contractual, non-contractual or quasi-contractual depending on the job description or service offered (Davant, 2002). The principal is thus bound by the contract agreement between him and the agent as long as the agent acts within the stipulated authorities accorded to him. For any business or corporation to expand, agents are required in dealing with the third party on behalf of the employer (Jennings, 2012). Thus an agent is accorded authority to represent the principal when dealing with a third party. 

In dealing with the third party an agent may be allowed to exercise authorities given to him either expressly (acting on behalf of the principal expressly on the conferred instructions given to him), implicitly (an authority an agent has by reason of being able to exercise his duties, sometimes through position assumed in the organization) or apparent authority an agent may exercise, which may not be necessary conferred to him by the principal (this principle is called apparent authority or law by estoppel and holds principal liable when a third party is made to believe that the principal has an agent). An agent in a higher position in the corporation may act on behalf of the principal, and convince a third party of the apparent authority exercised even without the principal’s consent (Davant, 2002). 

The third party may be wrongly convinced that an agent, though not necessarily expressly or implicitly accorded authorities, has the actual authorities to deal with the third party. The powers and authorities accorded to the agent by the principal to act on his behalf are entirely to benefit the principal and not the agent or third party therein. However, the agent may act implicitly or apparently, and thus the principal is bound to be liable to the agent’s actions and conducts when acted within the authorities accorded to him. The principal may also incur liability when the agent intentionally harms a third party (Jennings, 2012). 

The principal and the agent are liable for any loss or damages caused to the third party if the agent and principal’s identity are partially or fully undisclosed when dealing with the third party. A principal must indemnify the agent for any damages caused to third party if the agent acted within the actual authorities confided to him. The agent though, must indemnify the principal of any payments for any authorities exercised outside the stipulated actual or apparent authorities allowed. Fraud, extortion and other ills though may befall the third party when an agent assumes inherent powers by virtue of agent – third party relations. A popular and good example of this kind of scenario is the Colorado Supreme Court case of Grease Monkey vs. Montoya (Jennings, 2012). 

Grease Monkey Holding Corporation is a Utah based corporation and Grease Monkey International Company is a fully owned subsidiary of Grease Monkey Holding Company. Arthur Sensenig was the President, Chief Operations Officer (COO) and Chairman of the Boards of Grease Monkey International, Inc. on a period between 1983 through 1991. He had broad authorities and acted as agent and chief officer of Grease Monkey. Sensenig was mandated with raising capital from banks and other lenders, up to $500,000 without the Boards approval (Davant, 2002). 

Between 1983 through 1991 Sensenig was able to extort money from Nick and Aver Montoya under the guise that it was an investment to Grease Monkey. Furthermore, Sensenig managed to convince the plaintiff that Grease Monkey was a new and upcoming company without an account hence as President and Chairman of the Boards, all funds were directed to his personal account as corporate account (Miller, 2015). Sensenig went as far as writing promissory notes, mailed respondents with the corporation’s letterheads, calling to inform them of the growth of their investment and giving them promotional items like caps and pens. Sensenig defaulted in paying the Montoyas the principal amounts of these loans and neither did the full payment of the interest due on the loans were settled. 

The Montoyas filed a complaint against Grease Monkey as Sensenig’s employer, for fraud, breach of contract, misrepresentation, breach of duty of good faith and fair dealing, promissory estoppel, extreme and outrageous conduct and negligence hiring and supervision. On trial the court only adopted the fraud and misrepresentation claims andfound out that; the respondents believed they were investing in Grease Monkey, Sensenig’s representation to the respondents was false in which the respondents duly relied on, Sensenig was acting within his apparent authority when he made the false representation concerning the investment and Grease Monkey was thus liable for the investment. The trial court concluded using Section 261 of the Restatement (Second) of Agency principle which states that ‘a principal who puts a servant or other agent in a position which enables the agent, while apparently acting within his authority, to commit fraud to third person is subject to liability to third person for the fraud,’therefore establishing Grease Monkey as liable (Davant, 2002). 

The principal is therefore liable though did not have prior knowledge of the fraud, did not authorize the transaction and did not receive any benefits from the transaction. The principal’s liability lies when the agent acts with intent to serve his employer’s interest and act within his authorized act (Miller, 2015). The court hence established Grease Monkey liable since as its President, Sensenig acted within his apparent authority commonto a person at his position and was granted that position by Grease Monkey. Furthermore, the court found substanciable evidence that Sensenig, as Grease Monkey’s President, was authorized to obtain loans on behalf of the corporation, up to $500,000without the Board’s approval. This research therefore agrees with the court’s decision to grant the Montoyas compensation for the damages incurred. Grease Monkey erred in according extensible authorities to her President and lacked subsequent oversight over his actions. The free will to borrow on the company’s behalf should have been replaced by a mandatory resolution that every act of borrowing be followed by a Board’s approval (Miller, 2015). 

The company should have laid down concise actual mandate and clear job description with which her President, or apparently the agent, was mandated to act within its boundaries. The company also further erred in letting a person mandated with administrative tasks to assume a sales and marketing role, which apparently may not be his job description (Davant, 2002). Furthermore, the company failed to establish a strong legal framework with its clients and borrowers concerning payments made to the company hence Sensenig utilized this loop hole to create a benefit for himself. A clearly written evidence of Board inquiry and oversight would have been important in this case. The Montoyas fell into a cheap trap for avoiding simple but essential steps when dealing with a company concerning financial matters. Because of previous relations between the Montoyas and Sensenig, the previous could have avoided such scenario by employing a legal contract that should have bound their transactions. This could have exposed Sensenig’s scheme since such activity would have to be exposed to the Boards and would require approval from a third party. 

The Montoyas entered into the transaction with Sensenig as a ‘friend’ basis which Sensenig manipulated the chance. The Montoyas could have also sought for more information from the sales and marketing or the legal team behind Grease Monkey in order to establish the corporation President’s claims. The Montoyas, clearly, may not have been aware of the products and services offered by Grease Monkey hence were easily duped, prior information of this would have been important to avoid their loss. 


  1. Davant IV, C. (2002). Employer liability for employee fraud: Apparent authority or respondeat superior. SDL Rev., 47, 554. 
  2. Top of Form Jennings, M. (2012). Business: Its legal, ethical, and global environment. 
  3. Mason, OH: South- Western Cengage Learning. Miller, R. (2015). Business Law Today, Standard: Text & Summarized Cases. Cengage learning. Bottom of Form
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The Law of Agency. (2017, Jun 26). Retrieved December 1, 2021 , from

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