Agents are individuals who agree to represent other individuals. The individual who an agent represents is called the principal.

Agency relationships are typically formed by agreements between the two parties. Agents can only act on behalf of the principal for specific issues, depending upon the agreement.

Agents act similarly to employees with the difference being that the agent works with the principal by representing them in specific situations and transactions. An agent is also provided with different types of power and authority to act on behalf of another individual or group of individuals in business settings.

What is a Principal?

A principal is an individual who agrees to have another individual, an agent, act on their behalf in certain situations. The principal has the right to control the agent’s conduct completely as it relates to the duties that are provided to the agent by the principal.

What is the Scope of an Agency Relationship?

Relationships between agents and principals are important because agents have the ability to enter into binding contracts on behalf of principals. Even if a principal-agent relationship exists, however, an agent is required to have authority to enter into the contracts for the principal.

In order for the contract of an agent to be binding on the principal, an agent must be acting within the scope of their authority. An agent is required to have at least one of the following types of authority in order for a contract to be binding, including:

  • Express authority;
  • Implied authority;
  • Apparently authority; or
  • Ratification.

Express authority comes from express terms which can be specifically stated in the written contract between the principal and the agent. For example, the principal may state in the contract that they “authorize (name of agent) to sign all documents which are associated with sales transaction #50.” The terms may also expressly limit the authority of the agent in the contract.

Implied authority can result from the conduct or actions of the agent. Implied authority may also exist if the agent is performing conduct which is generally identified as authorized by the principal, either through customs or traditions. For example, an agent who is expressly authorized to work on computers may also be implicitly authorized to purchase the computer parts necessary to do their work.

Agents have apparent authority when a third party believes that the agents have the authority to act for the principals. The focus of apparent authority is on whether the third party believes that the agent has the authority to act on behalf of the principal. For example, if the agent is performing a specific task at the time which is specified for that task while wearing an identification badge and uniform which was issued by the principal, it may be implied that the agent is acting on the authority of the principal.

Ratification occurs when a principal accepts the benefits of a contract upon discovering the agreement but the principal was not aware of the contract and did not authorize the agent to enter into it on their behalf.

For example, suppose an agent purchases a sports car which is delivered to the principal. If the principal accepts the shipment of the car and drives it, the principal cannot then argue that they did not approve the purchase or shipment.

What Are the Duties of an Agent to the Principal?

Agents have several duties towards principals. The failure to perform these duties may result in a breach of contract or in tort liability. The duties of an agent are very similar to the duties of an employee and include:

  • Loyalty: Agents must only act for the benefit of the principal and cannot act for their personal gain. In addition, any information regarding the agency relationship is to be kept confidential;
  • Performance: An agent is required to perform for the principal in an acceptable manner, meaning that the agent should perform their duties with reasonable skill and responsibility;
  • Notification: Notification is also referred to as the duty to inform. Agents are required to inform principals of all matters which concern the subject matter of the agency relationship. For example, if a painter hires an agent to sell their paintings and the agent learns a buyer will not be able to pay, the agent must inform the principal of this fact; and
  • Obedience: Agents are required to act as the principal instructs and should not act without the permission of the principal, with certain exceptions, including:
    • If the principal asks the agent to violate the law and the agent can refuse without breaching this duty; and
    • An agent can deviate from the instructions of the principal during emergency situations.

What Are the Duties of a Principal to an Agent?

The principal also has duties towards their agent. Similar to the agent, the principal’s failure to perform those duties may result in a breach of contract or tort liability. The principal’s duties are very similar to those of an employer, including:

  • Compensation: Because principals hire agents, agents expect to be paid in a reasonable manner. The circumstances and arrangement between the parties will determine what is considered reasonable. In addition, the principal must pay out-of-pocket expenses that an agent incurs while performing their duties;
  • Cooperation: Principals must allow agents to perform their duties and are required to cooperate with and assist agents; and
  • Safe working conditions: Principals must provide agents with safe working conditions. For example, principals should warn agents regarding unsafe situations when performing certain duties.

How Can an Agency Relationship be Terminated?

Agency relationships are formed when a party legally agrees that one party, the principal, legally agrees that the other party, the agent, is allowed to make decisions on their behalf. This agreement is only valid if no conflict of interest exists and if the principal will be the party who appoints an individual as their agent.

Conflicts of interest may include:

  • Familial relationships;
  • Having a direct stake in a pending deal; and
  • Noncompete agreements.

In some situations, these conflicts may be waived. An agent is a fiduciary, which means that the principal trusts the agent to act as the principal would when making decisions.

For this reason, liability may fall back on the principal if something goes wrong. Common examples of an agency relationship include attorney and client relationships and real estate professional and a home buyer relationship.

Agency relationships are governed by employment law and contract law. Therefore, if any issues arise, a party should refer to these laws for legal recourse. It is important to be familiar with the methods of termination and penalties for wrongful termination in order to avoid any issues.

How Can an Attorney Help Me?

Agency relationships are similar to employer-employee relationships. A contract lawyer will be able to assist you with issues, questions, or concerns related to principal-agency relationships.

If you are considering entering into a principal-agency relationship, your lawyer can advise you of your potential rights and duties. If you are currently involved in a principal-agency relationship and wish to terminate that relationship, your attorney can advise you how to end the relationship without issue.

It is important to consult with an attorney prior to taking action to ensure that the appropriate steps are taken.