Principal-Agent Laws

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What Is a Principal-Agent Relationship?

A principal-agent relationship is formed when one person authorizes another to perform some sort of task on their behalf. The person granting the authority is called the “principle”, while the person performing the task is called the “agent”. The entire relationship is usually called an “agency relationship”.

In a principal-agent relationship, the principal can sometimes be a group or an organization, but the agent is usually an individual person. The relationship is very similar to an employment relationship, but may not always necessarily involve profit. An example of a principal agent relationship is where one person authorizes another to sign a document for them (such as in a power of attorney arrangement).

What Is the Scope of an Agency Relationship?

The scope of an agent’s authority may be outlined in two ways:  express terms and implied authority. Express terms may be specifically stated out in a written contract between the principal and agent. For instance, the principal may state in the contract, “I authorize ________ to sign all documents associated with sales transaction #3456”. They may also limit the agent’s authority expressly in the contract as well.

Implied authority may result from the agent’s conduct. For instance, if the agent is performing the specific task at the time specified for the task, while wearing an ID badge and uniform issued by the principal, it may be implied that they are acting on the principal’s authority.  Implied authority can also exist if the agent is performing conduct that is generally identified as authorized by the principal, either traditionally or through custom. 

Issues such as agency formation and the termination of an agency relationship can often be implied as well. However, to avoid any confusion or legal issues, it is best if formation and termination of a principal agent relationship are spelled out clearly in a written contract.

Who Can Be Held Liable in a Principal-Agent Relationship?

One common question in a principal agent relationship is who should be liable if the agent commits a violation. Usually, the principal can be held liable for the agent’s actions if the agent is acting within the scope of their authority, and has been specifically instructed to perform the task on the principal’s behalf.

In some cases, it’s the agent who can be held responsible for misconduct, illegal activity, or violations of business standards. This can happen if the agent has stepped outside the boundaries of the agency relationship. For instance, if they continue to use a company car long after their shift is over, and injure a person with the car, the agent might be held liable, as they are no longer acting under the principal’s authority. However, such determinations may be different for each case.

What Are Some Legal Remedies in Principal-Agent Relationship Conflicts?

Legal remedies for violations may include a damages award to reimburse the plaintiff for injuries caused by the agent. As discussed, either the principal or the agent may have to pay the damages award, depending on the agent’s authority at the time of the incident.  In some cases, both principal and agent can be held jointly liable.

In many cases, the agent may also owe damages to the principal if their misconduct has caused the principal any losses. Agents always owe a certain duty of loyalty and accountability to the principal. 

Do I Need a Lawyer?

Disputes, errors, and conflicts in an agency relationship can be avoided through the use of a well-written contract. You may wish to hire a business lawyer if you need help forming a principal-agent contract, or if you have any disputes over such a relationship. Your attorney can help you draft, review, and negotiate any agency contracts to ensure that the scope of authority is clearly defined. Also, your lawyer can represent you in court if you need assistance filing a lawsuit involving a principal-agent relationship.

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Last Modified: 10-20-2014 12:42 PM PDT

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