I am in the process of revising my Business Organizations casebook for a second edition, and I am integrating insights from the Restatement (Third) of Agency. Deborah DeMott has produced an amazing work, and I find it quite fascinating reading. Seriously.

One of the most noticeable changes in the Restatement as you move from the second to third edition is the purported elimination of "inherent agency power." I always found inherent agency power a useful, if somewhat confusing, concept. It is useful mainly because it makes the notion of "apparent authority" more coherent. The doctrine of apparent authority (and its sibling, estoppel), as articulated by common law judges and the drafters of the Restatement (Second) of Agency, technically required communication between the principal and the third party. In some instances, however, courts have imposed liability on a principal for the acts of an agent, even when the principal and the third party never interact. With respect to such cases, Judge Learned Hand observed that apparent authority "is only a fiction" because the principal "has not communicated with the third person and thus misled him." Kidd v. Thomas A. Edison, Inc., 239 F. 405 (S.D.N.Y. 1917).

Without that connection between principal and third party, why are courts nevertheless willing to hold principals responsible for the acts of their agents? The problem, according to Judge Hand, lies not with the imposition of liability, but rather with the articulation of the doctrines of apparent authority and estoppel. In attempting to base liability in consent of the principal, those doctrines lost the notion that principals could sometimes be held liable merely because of status. In these "cases of customary authority," courts hold principals liable to the extent that custom would justify reliance by a third party. Judge Hand explained the policy rationale underlying this practice as follows:

The considerations which have made the rule survive are apparent. If a man select another to act for him with some discretion, he has by that fact vouched to some extent for his reliability. While it may not be fair to impose upon him the results of a total departure from the general subject of his confidence, the detailed execution of his mandate stands on a different footing. The very purpose of delegated authority is to avoid constant recourse by third persons to the principal, which would be a corollary of denying the agent any latitude beyond his exact instructions. Once a third person has assured himself widely of the character of the agent’s mandate, the very purpose of the relation demands the possibility of the principal’s being bound through the agent’s minor deviations. Thus, as so often happens, archaic ideas continue to serve good, though novel, purposes.

Kidd prompted the drafters of the Restatement (Second) of Agency to add a new section describing an agent's "inherent agency power." Relying on the notion of status, this §8A stated that inherent agency power "is not derived from [actual] authority, apparent authority, or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent." The use of the word "power" rather than "authority" recognizes that the principal has not authorized the agent's action by manifesting consent to either the agent or the third party. Nevertheless, the principal is bound by the agent's action for reasons of "fairness":

It is inevitable that in doing their work, either through negligence or excess of zeal, agents will harm third persons or will deal with them in unauthorized ways. It would be unfair for an enterprise to have the benefit of the work of its agents without making it responsible to some extent for their excesses and failures to act carefully. The answer of the common law has been the creation of special agency powers or, to phrase it otherwise, the imposition of liability upon the principal because of unauthorized or negligent acts of his servants and other agents. Restatement (Second) of Agency §8A, comment a.

Despite the apparent utility of the concept, inherent agency power is infrequently used to decide agency cases and usually surfaces where courts must choose between imposing a loss on an innocent third party and an innocent principal.

Restatement (Third) of Agency abandons inherent agency power, purporting to subsume all of the cases covered thereby with the expanded notion of apparent authority. Nevertheless, the logic of apparent agency does not extend to cases involving so-called "undisclosed principals," which traditionally were decided under the logic of inherent agency power. Courts and the Restatements have long distinguished between "disclosed principals" and "undisclosed principals.^" This distinction is important because "apparent authority is not present when a third party believes that an interaction is with an actor who is a principal." Restatement (Third) of Agency §2.03, comment f. In other words, apparent authority cannot exist in cases involving an undisclosed principal.

The drafters of the Restatement (Third) of Agency plugged the hole left by the absence of inherent agency power by creating a new section with "no precise counterpart" in the Restatement (Second) of Agency. The new section (§ 2.06) would make undisclosed principals liable for the actions of their agents – acting without actual authority – if a third party detrimentally relies on the agent and the principal does not take reasonable steps to notify the third party of the misplaced reliance. This new section also describes something that looks suspiciously like inherent agency power:

An undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent's authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed.

So it seems that inherent agency power still lives, if only in a dimly lit corner of agency law.

Agency Law

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