An agent is someone who agrees to represent another person. The person the agent is representing is called a principal. An agency relationship is usually formed by an agreement between the two parties. An agent can only act on behalf of a principal for certain issues (depending on the agreement).
An agent basically acts likes an employee with the difference being the agent works with the principal by representing the principal in specific transactions and situations. The agent is also given different types of power and authority to act on behalf of another person or a group of people in a business setting.
A principal is somebody who agrees to have another person (an agent) act on his/her behalf in certain situations. The principal has the right to completely control the agent’s conduct if it relates to the duties given to the agent by the principal.
Principal-agent relationships are important because agents can enter into binding contracts on behalf of the principal. However, even if a principal-agent relationship exists, the agent must have authority to enter into such contracts for the principal. In order for an agent’s contract to be binding on the principal, the agent must be acting within the scope of an agent’s authority. For the contract to be binding, the agent must have at least one of the following types of authority:
- Express Authority: Express terms may be specifically stated 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 #34”. They may also expressly limit the agent’s authority in the contract as well.
- Implied Authority: Implied authority may result from the agent’s conduct and actions. 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. For instance, an agent expressly authorized to fix computers may be implicitly authorized to purchase computer parts necessary to fix those computers.
- Apparent Authority: An agent has apparent authority when a third party believes the agent has authority to act for the principal. With apparent authority, the focus is on whether the third party believes the agent has authority to act on behalf of the principal. 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.
- Ratification: The principal doesn’t know and didn’t authorize the agent to enter into the contract, but the principal accepts the benefits of the contract upon discovering the agreement. For instance, suppose an agent buys a keg of beer and the keg of beer shows up at that the principal’s door. If the principal accepts the shipment or starts drinking the beer, then the principal cannot argue that he or she never approved the shipment.
An agent has several duties towards the principal. Failure to perform these duties can result in a breach of contract or tort liability. An agent’s duties are very similar to that of an employee. An agent’s duties include:
- Loyalty: An agent must act only for the benefit of the principal and should not act for personal gain. Also, any information regarding the agency relationship should be kept confidential.
- Performance: Obviously, the agent must perform for the principal in an acceptable manner. This means that the agent should perform his/her duties with reasonable skill and responsibility.
- Notification: This is also known as the duty to inform. An agent must inform the principal of all matters concerning the subject matter of the agency relationship. For example, a painter hires an agent to sell his paintings. If the agent learns that a buyer will be unable to pay, the agent must inform the principal of this fact.
- Obedience: An agent must act as the principal instructs and should not act without the principal’s permission. One exception is if a principal asks the agent to violate the law, the agent can refuse without breaching this duty. Another exception is that an agent can deviate from a principal’s instructions during emergency situations.
A principal has duties towards his/her agent. Failure to perform these duties can result in a breach of contract or tort liability. A principal’s duties are very similar to that of an employer. A principal’s duties include:
- Compensation: Since a principal hires an agent, the agent expects payment to be made in a reasonable manner. The situation and the arrangement made between the parties will determine what is "reasonable." A principal must also pay any out-of-pocket expenses that an agent incurs while performing duties for the principal.
- Cooperation: A principal must allow an agent to perform his duties. This being the case, a principal must cooperate with and assist an agent.
- Safe Working Conditions: A principal must provide an agent with safe working conditions. For example, the principal needs to warn an agent about unsafe situations when performing certain duties.
An agency relationship is similar to an employer-employee relationship. An experienced employment lawyer can assist you in issues dealing with agency law. For example, an employment lawyer can help you draft an agency agreement or inform you if any parties have violated their duties.