Principal-Agent Problems

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What Are Some Common Principal-Agent Problems?

Principal agent relationships can often be helpful for accomplishing a number of personal or business tasks. Having someone else (i.e. an agent) represent you can free yourself up to do more tasks on your own. However, principal-agent problems can sometimes arise in the course of the arrangement. Issues such as agency formation and the termination of an agency relationship can often arise as well. To avoid any confusion or legal issues, formation and termination of a principal agent relationship should be spelled out clearly in a written contract.

Some common principal-agent problems may include:

There can be many other principal-agent problems, including privacy issues, non-compete issues, and others. These will all depend on the individual contract between principal and agent.

Who Can Be Held Liable In a Principal-Agency Relationship?

When an agent injuries a third person or enters into a contract with a third person, the principal can usually be held liable for the agent’s actions if the agent is acting within the scope of their express or implied authority, and has been specifically instructed to perform the task on the principal’s behalf.

However, an agent may be held personally liable for conduct performed during the agent-principal relationship when there was not such authorization given by the principal and the agent acted in a way that constitutes misconduct, engaged in illegal activity, or violated business standards. This can happen if the agent has stepped outside the boundaries of the agency relationship. 

For instance, suppose an agent uses a company car long after their shift is over, and injures a person with the car. The agent might be held personally liable, as he or she was no longer acting under the principal’s authority. However, such determinations may be different for each case.

What Are Some Ways to Avoid Principal-Agent Problems?

To avoid problems in a principal-agent relationship, the principal needs to have a way of monitoring and controlling the agent so that the agent acts in accordance with the principal’s interests. In most cases, it isn't feasible to monitor the agent directly so the agent should be offered incentives to act in the best interest of the company.

For instance, the agent may be given a bonus based on the financial performance of the company. Alternatively, the agent may be given shares in the company. This aligns his interests with the principal because he becomes a part owner of the company as well.

What Are Some Legal Remedies for Principal Agent Problems?

Legal remedies for principal agent problems can be diverse and will depend on the nature of the conflict. If the principal is suing the agent, the remedy will likely be that the agent will need to pay a monetary damage award to reimburse the principal for any losses. The agent may need to make a lost business reimbursement if their conduct has caused the principal any lost profit or lost business.

In other cases, the principal may become liable to the agent if there has been a breach of contract. A common example of this is where the principal fails to pay the agent for their services.

Lastly, either the principal or the agent (or sometimes both) may be liable to a third party if the agent harms or cause losses to an outside party. This type of conflict can be confusing, since it is not always clear whether the principal or the agent should be held liable. In many cases, the principal can be held liable for conduct that they authorized the agent to do. This will vary with each case, and may require the assistance of a lawyer. 

Do I Need an Attorney for Help With a Principal Agent Problem?

Principal agent relationships can present some serious issues. These types of legal problems generally require the assistance of a qualified attorney. You may need to hire a lawyer if you need to file a lawsuit regarding a principal-agent relationship. Your attorney can represent you in court and advise you on how to proceed, so that your interests are protected during the course of the litigation.

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Last Modified: 08-03-2015 12:22 PM PDT

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