1) An agency relationship is created between a principal and agent through express or implied agreement. The principal must have the legal capacity to enter into a contract. 2) An agent acts on behalf of the principal and their actions can legally bind the principal. The principal maintains control and supervision over the agent. 3) A principal can become liable for unauthorized actions of an agent if the principal's words or conduct led a third party to reasonably believe the agent had authority. Ratification by the principal after the fact can also create an agency relationship retroactively.