The Restatement of Agency is the American Law Institute’s authoritative summary of the common law rules that govern relationships where one person acts on another’s behalf. The current edition, the Restatement (Third) of Agency, was published in 2006 and replaces the second edition in full.1The American Law Institute. Restatement of the Law Third, Agency Courts and lawyers across the country rely on it to answer the practical questions that come up whenever someone acts for someone else: who authorized what, who can sue whom, and who pays when something goes wrong.
What the Restatement Is and Why Courts Use It
Restatements are not statutes. They are treatises drafted by panels of judges, academics, and practicing lawyers under the ALI’s supervision, and they carry no force on their own. What gives them weight is adoption: when a court decides a question of agency law, it often turns to the Restatement for the governing rule, and once enough courts in a jurisdiction have cited a section with approval, that section functions as the law there. The Third Restatement covers how agency relationships are formed, what each party owes the other, when third parties can hold the principal responsible for what the agent did, and how the relationship terminates.
The Third edition made one structural change worth flagging. It dropped the Second Restatement’s doctrine of “inherent agency power,” which had let courts impose liability on principals in situations that did not fit either actual or apparent authority. Those cases are now handled through a broader treatment of apparent authority and estoppel.
How an Agency Relationship Forms
Section 1.01 defines agency as a fiduciary relationship that arises when the principal manifests assent that an agent will act on the principal’s behalf and subject to the principal’s control, and the agent consents to act.2Open Casebook. Restatement of Agency (Third) Excerpts Three elements have to be present: the principal communicates that the agent should act for them, the agent agrees, and the principal retains the right to control the agent’s actions.
Courts apply this test objectively. They look at what the parties did and said, not what they privately intended. No written contract is required. A label in a document saying “this is not an agency” will not control if the parties’ conduct meets the three elements, and conversely, calling someone your agent does not make them one if the underlying facts are missing. The objective approach protects third parties who reasonably rely on how the relationship appears from the outside.
Employee or Independent Contractor
Not every worker who performs services for another is an agent whose conduct can expose the hiring party to tort liability. The dividing line is control. An employee is someone whose principal controls, or has the right to control, the manner and means by which the work is done. An independent contractor controls the work itself and delivers results.2Open Casebook. Restatement of Agency (Third) Excerpts
Courts weigh several factors to make the call: whether the worker practices a distinct occupation, who supplies the tools and workspace, how long the engagement lasts, whether payment is by the job or by time, and whether the work is part of the hiring party’s regular business. The label in a contract does not settle it. The distinction matters most for tort exposure, because employers answer for employees’ wrongs in ways they generally do not for independent contractors.
The Three Ways an Agent Can Bind a Principal
Authority is the mechanism that lets the agent’s actions reach the principal. The Restatement recognizes three kinds, and knowing which one is at work in a given dispute decides who is bound.
Actual Authority
Under § 2.01, actual authority exists when the agent reasonably believes, based on what the principal has communicated, that the principal wants the agent to act.2Open Casebook. Restatement of Agency (Third) Excerpts It covers both express instructions and the implied steps that go with them. An agent told to sell a house has implied authority to list it with a broker and arrange showings, even if the principal never spelled those steps out.
Apparent Authority
Apparent authority exists to protect third parties. Section 2.03 defines it as the power to affect the principal’s legal relations with a third party when that third party’s reasonable belief in the agent’s authority is traceable to something the principal said or did.2Open Casebook. Restatement of Agency (Third) Excerpts If a company hands someone a title, a business card, and an office, outsiders can reasonably believe that person can do business for the company. The company is bound by what the apparent agent does within that appearance, even if private instructions said otherwise.
Ratification
Section 4.01 lets a principal retroactively authorize an act that was unauthorized when it happened. Once ratified, the law treats the conduct as if the agent had authority from the start.3Open Casebook. Business Associations – Ratification The catch is knowledge: the principal must know the material facts about the transaction before affirming it, and once ratified, the act cannot be undone.
Who Is Liable on the Contract
When an agent signs a contract, whether the agent is personally on the hook depends on what the third party knew about the principal.
If the principal is disclosed, meaning the third party knows both that the agent is acting for someone else and who that someone is, the agent generally drops out. Section 6.01 provides that an agent who contracts on behalf of a disclosed principal is not personally liable unless the agent agrees to be.4Open Casebook. Business Associations – Undisclosed Principal Any breach claim runs against the principal.
If the principal is undisclosed, meaning the third party had no idea anyone else was involved, the agent is personally liable. The third party believed they were dealing with the agent alone, and the agent cannot escape that by revealing a hidden principal later. Once the principal is discovered, the third party can elect to go after either the agent or the principal, but generally not both.
The partially disclosed or “unidentified” principal sits in between. The third party knows the agent is acting for someone but does not know who. The agent is personally liable in that situation too, unless the parties agree otherwise. The lesson is simple. If you sign for someone else, name them clearly, or your own assets go on the line.
What the Agent Owes the Principal
Every agency is a fiduciary relationship. The agent occupies a position of trust and is held to strict standards whether or not those standards appear in any contract.
Loyalty
Section 8.01 states the core duty: the agent must act solely for the principal’s benefit in matters connected with the agency.2Open Casebook. Restatement of Agency (Third) Excerpts The agent cannot compete with the principal, use the principal’s resources for personal gain, or secretly profit from the relationship. Under § 8.02, any material benefit the agent receives from a third party in connection with the agency belongs to the principal, so kickbacks and secret commissions have to be handed over. Self-dealing is barred too. An agent cannot buy the principal’s property at a bargain price or route the principal’s business to a company the agent quietly owns.
Section 8.06 allows the principal to consent to conduct that would otherwise breach loyalty, but only if the agent discloses all material facts in good faith and deals fairly, and only for a specific transaction or a defined type of transaction.2Open Casebook. Restatement of Agency (Third) Excerpts Dual agency, where one agent represents both sides, works under the same framework: full disclosure to each principal and fair dealing with both.
Care and Disclosure
Section 8.08 requires the agent to perform with the skill, competence, and diligence that a reasonable person in a similar position would bring. An agent holding out specialized expertise is held to the higher standard that goes with that claim. Section 8.11 adds a duty to keep the principal informed, meaning the agent must share information that could affect the principal’s decisions. Hiding bad news, concealing a conflict, or sitting on a problem can itself be a breach.
Remedies When the Agent Breaches
A principal whose agent violated these duties has several options. Compensatory damages cover financial losses caused by the breach. Disgorgement strips the agent of any profits made through disloyal conduct. Fee forfeiture requires the agent to return some or all of the compensation earned during the period of disloyalty.5American Bar Association. Tips for Determining Damages for Breach of Fiduciary Duty Punitive damages are available in some jurisdictions for particularly egregious conduct, though this varies.
What the Principal Owes the Agent
Section 8.14 obligates the principal to reimburse payments the agent made within the scope of the agency and to indemnify the agent against losses sustained while carrying out authorized tasks.6Open Casebook. Business Associations – Duties the Principal Owes to the Agent Travel costs, legal fees, and settlement payments incurred in authorized work generally fall on the principal.
The principal must also honor any contractual promise to the agent, particularly compensation, and must deal with the agent in good faith. Cooperating with the agent’s work rather than undermining it is part of that. An employer who tells a salesperson to close deals and then sabotages every negotiation has breached this obligation.
When the Agent’s Knowledge Is Treated as the Principal’s
Section 5.03 provides that when an agent learns a fact material to the agent’s duties, that knowledge is imputed to the principal for purposes of the principal’s legal relations with third parties.7The American Law Institute. 11th Circuit Court of Appeals Cites Restatement 3rd of Agency A principal cannot plead ignorance of contract terms, safety hazards, or other material facts the agent picked up while working within the agency.
Two exceptions apply. Under § 5.04, knowledge is not imputed when the agent is acting entirely adversely to the principal, as with an agent embezzling from them. Knowledge is also not imputed when the agent owes another party a duty of nondisclosure. Both exceptions are narrow, and the imputation rule catches principals off guard more often than most other agency doctrines.
When the Principal Is Liable for the Agent’s Torts
Agency law makes employers answer for employees’ wrongful acts through respondeat superior. Section 2.04 states the rule directly: an employer is subject to liability for torts committed by employees acting within the scope of their employment.2Open Casebook. Restatement of Agency (Third) Excerpts
Section 7.07 defines “scope of employment.” An employee acts within the scope when performing assigned work or engaging in conduct subject to the employer’s control. Conduct falls outside the scope when the employee pursues an independent course not intended to serve any purpose of the employer.2Open Casebook. Restatement of Agency (Third) Excerpts A delivery driver who causes an accident while making scheduled stops is within the scope. The same driver who takes an hour-long detour for a personal errand likely is not.
Respondeat superior is not the only route to liability. Section 7.05 holds principals directly liable for their own negligence in selecting, training, or supervising an agent. Section 7.08 holds a principal responsible when apparent authority supplied the means for the agent to commit or conceal a tort.8Open Casebook. Tort Liability – Principal and Agent These independent routes are why the employee/independent-contractor line matters less than hiring parties sometimes assume.
How the Relationship Ends
The simplest termination is deliberate. The principal revokes authority, the agent resigns, or the two agree to part ways. Under § 3.06, any action by the principal that the agent should reasonably understand as ending the relationship terminates actual authority.9Open Casebook. Business Associations – Actual Termination An agency created for a fixed period expires when the period runs.
Some events terminate actual authority automatically. Section 3.07 ends the agency on the death of either the principal or the agent, and the principal’s loss of capacity to perform the act ends the agent’s authority to perform it.2Open Casebook. Restatement of Agency (Third) Excerpts Apparent authority can outlast actual authority, though. A third party who does not know the agency has ended and who reasonably relies on the continuing appearance can still bind the principal, until notice reaches them.
Powers That Cannot Be Revoked
Section 3.12 carves out an exception for a “power given as security.” That exists when the agent holds authority not to serve the principal but to protect the agent’s own legal or financial interest in the subject matter, as with a lender authorized to sell collateral if the borrower defaults.2Open Casebook. Restatement of Agency (Third) Excerpts The principal cannot revoke it, death or loss of capacity does not terminate it, and it lasts until the underlying obligation is discharged. Durable powers of attorney, which continue after the principal becomes incapacitated, rely on a related but distinct mechanism under § 3.08(2).