Agency By Estoppel (What It Means And Why It’s Important)

What is agency by estoppel?

How do you legally define it?

What are the important elements you should know!

Keep reading as we have gathered exactly the information that you need!

Let’s dig into our legal knowledge!

Are you ready?

Let’s get started!

What is agency by estoppel

Agency by estoppel means that a defendant in a lawsuit recognizes that a third party acted as its agent causing the plaintiff to deal with the third party relying on the belief of the existence of an agency relationship.

When we say agency by “estoppel”, we are essentially referring to the fact that the defendant is “estopped” or “prevented” from legally denying the third party acted as its agent.

Agency by estoppel definition

An agency by estoppel is a legal term used to refer to a situation when someone gives the impression to legally act on behalf of someone else.

In this context, the agent is not truly authorized to act on behalf of the principal.

However, reasonable third parties in good faith, believe the agent is an authorized person and is acting within the scope of its authority.

In other words, a person or company cannot have another person “unofficially” represent them and reap the benefits but when something goes wrong, claim that there was no agency relationship to disown the apparent agent’s actions or commitments. 

An unauthorized agent 

An agent is a person who acts on behalf of someone else.

In most cases, an agent is a person expressly authorized to represent another like an employee of a company representing the company, a real estate agent representing a client or a commercial agent representing a commercial entity.

In an agency relationship, an agent is a person who acts and represents the principal before another person.

This relationship can exist between individuals, corporations or individuals and corporations.

Typically, the agent will have the legal authority to bind its principal and make decisions on behalf of the principal in relation to a third party.

For example:

A company CEO is an agent of the company when he or she deals with a client of the company.

The CEO will have the ability to bind the company in a transaction or in a legally binding contract.
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A real estate agent representing the seller of a property is the seller’s agent.

The real estate agent will have the ability to legally bind the seller in a contract or make representations about the property on the seller’s behalf.
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An insurance agent can represent a client.

By representing a client, the insurance agent will speak and act on your behalf with insurance carriers.

The insurance agent is legally considered to be your “agent”.
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In the case of an agency by estoppel, a person (the eventual plaintiff) relies on the commitments, statements and representations of another person (the alleged agent) to bind another person (the alleged principal).

Regardless of whether a true relationship of agency existed between the agent and principal and due to the principal’s negligence or carelessness leading the plaintiff to believe that the alleged agent was acting on its behalf, the principal (or defendant) will be legally prevented from arguing that the agent was not its agent.

That’s what we mean by agency by estoppel.

Principal’s negligence 

In the context of agency estoppel, the principal will legally be barred from taking the position that another person was acting as its agent in most cases due to the principals’ negligence or carelessness.

Let us explain.

Imagine that you go to the hospital to get treated.

Upon your arrival, you are greeted by a person claiming to be a physician who can evaluate your condition and provide you with the necessary remedy or prescription.

In this context, since you are in the hospital, you are greeted by someone who purports to be a doctor and uses the hospital facilities just like all other staff working at the hospital, you can assume that the doctor is an agent of the hospital.

However, imagine that the person claiming to be a physician was not the hospital’s agent but the hospital management was negligent in getting rid of that person.

The courts may consider that an agency relationship was created between the unauthorized physician and the hospital.

In other words, if you relied on things the physician told you to do and that may have caused damages, the hospital (as the principal) will be held responsible.

By estoppel, the hospital will be prevented from arguing the unauthorized physician was not its agent.

Apparent authority 

In most cases, to invoke the agency by estoppel legal theory, there must be a good faith reliance on the agent’s apparent authority.

Let’s look at an example of an agency by estoppel to further illustrate the concept.

Apparent authority is when someone (a third party) reasonably believes that a person (the agent) is acting on behalf of another (the principal) and within the scope of the authority given.

For example, imagine you walk into a retail store and you see a person having a uniform similar to the other staff along with a tag bearing his or her name and the title “manager”.

As a third party customer, you can reasonably rely on the fact that this person is a manager of the store and has the authority to bind the store owner.

There is apparent authority.

Now, let’s take this one step further…

Imagine this store manager was not an employee of the retail store and was never truly an agent of the store owner.

In this case, if you relied on the manager’s statements, commitments, conduct or behavior, you can invoke the agency by estoppel argument to say that the store owner cannot argue that the “fake” manager was not its agent.

This is the case as the store owner did not take any measures to remove this unauthorized person from the store premises, tolerated that this individual claimed to be a store manager, allowed the person to wear the uniform and tag and speak on behalf of the store to customers.

Example 

There are many examples of how an agency relationship can be legally created between one person and another.

An agency by estoppel is an agency relationship created by law when the principal does nothing to prevent an unauthorized agent from making statements or representations on its behalf.

Let’s take a scenario of agency by estoppel in case law.

Imagine that a building owner hires a manager to ensure the building remains clean.

Even though the manager’s authority is strictly limited to keeping the building clean and in good share, if he or she were to negotiate a lease agreement with a tenant, the tenant may reasonably rely on the manager to bind the building owner.

If a tenant signs a lease with the building manager, the building owner will be held responsible to go through with the lease.

In this context, the building owner will be estopped from arguing that the building manager did not have the authority to sign the lease with the tenant.

Takeaways 

So how do you define agency by estoppel?

Let’s look at a summary of our findings.

Agency by estoppel

  • Agency by estoppel is a legal term referred to a situation when a person assumes that another person is acting as the agent of another
  • An agency relationship is legally created between the unauthorized agent and principal 
  • The principle was careless or negligence in preventing the unauthorized agent from acting on its behalf 
  • The principal will be “estopped” from invoking that the apparent agent could not legally bind it with a reasonable third party acting in good faith 
Agency agreement
Agency by ratification 
Agency coupled with an interest 
Agency relationship 
Apparent authority 
Breach of contract 
Express authority 
Good faith 
Implied authority 
Legal purpose 
Motion 
Ostensible authority 
Power of attorney 
Summary judgment
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