An agency relationship is formed between two parties when one party (the agent) agrees to represent the other party (the principal). A principal-agent relationship is fiduciary, meaning it is based on trust. Normally, all employees who deal with third parties are considered agents. As such, an agency relationship is governed by employment law.
An agent is basically an employee. The key difference is that an agent and principal make an agreement that the agent will represent the principal in specific transactions or situations. An agent can only act on behalf of a principal for certain issues (depending on the agreement). For example, an NBA player hires an agent. An agreement between the two may only give the agent power and authority to negotiate contracts.
The principal can control an agents conduct for any duties specified in the agreement. Though an agent can represent a principal in anything, many principals limit the scope of an agent’s representation. For example, if you were selling your house, you might hire an agent. The agent only represents you in selling your house.
An agency relationship is formed when two parties agree that one will represent the other in certain situations. There are four general ways an agency relationship is formed:
- Agency by agreement: This is the most common way. Both sides agree on certain conditions. This agreement can be formed by either an express contract or by a simple conversation and handshake.
- Agency by ratification: A party can agree to be an agent through a third party. As long as the principal is then notified and approves the agreement, an agency relationship is formed.
- Agency by estoppel: There are times when your actions represent to a third party that another person is your agent (when in fact the person is not). If the third party reasonably believes this is true, a court will prevent you from denying that the agency exists. Estoppel is also known as detrimental reliance.
- Agency by operation of law: Sometimes courts will step in and deem a person to be an agent even if there was no agency agreement. Courts only do this to prevent a party from suffering injustice.
An agency relationship is terminated depending on what the termination date of the agency relationship was according to the agency contract that was initially formed when entering in the principal-agency relationship. A principal or agent may be liable for damages if they terminate the contract in violation of the contract agreement. A principal agency can also be terminated in the following ways:
- end of the agency relationship in accordance to the contract
- death of either principal or agent
- mental impairment by either party
- bankruptcy of the principal
- operation of law
Agents and principals have duties to one another. Consult an employment attorney if you are planning to enter into an agency relationship to learn more about your rights and duties. If you believe your agency agreement has been breached, contact an experienced attorney to discuss the situation.