Principal-Agent Laws

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 What Is The Scope Of An Agency Relationship?

Agents are individuals who agree to represent other individuals, referred to as the principal. Agents act similarly to employees, with the notable difference that the agent works with the principal by representing them in specific situations and transactions. Additionally, an agent is provided with different types of power and authority in order to act on behalf of another person, or group of people in business settings.

A principal is a person who agrees to have an agent act on their behalf under specific circumstances. The principal has the right to control the agent’s conduct completely, at least as it relates to the duties that are provided to the agent by the principal.

Some of the most common examples of an agency relationship include an attorney and client relationship, and a real estate professional and a home buyer relationship.

Agency relationships are generally formed by agreements between the two parties. Clearly defined relationships between agents and principals are important because agents have the ability to enter into binding contracts on behalf of principals. However, even when a principal-agent relationship exists, an agent is required to first be granted the 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. What this means is that an agent is required to have at least one of the following types of authority in order for a contract to be binding:

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

Express authority is the result of express terms which can be specifically stated in the written contract between the principal and the agent. An example of this would be how the principal may state in the contract that they “authorize (name of agent) to sign all documents which are associated with sales transaction #50.” Alternatively, the terms may expressly limit the authority of the agent in the contract.

Implied authority is associated with 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. This can be identified either through customs or traditions. An example of this would be how an agent who is expressly authorized to work on computers may also be implicitly authorized to purchase the computer parts that are necessary to complete their assigned work.

Agents are given apparent authority when a third party believes that the agent has the authority to act for the principal. Emphasis is placed on whether the third party believes that the agent has the authority to act on behalf of the principal. An example of this would be how 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 could be implied that the agent is acting on the authority of the principal.

Ratification occurs when the 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. An example of this would be if an agent purchases an item which is delivered to the principal. If the principal accepts the shipment of the item and utilizes it, the principal cannot then argue that they did not approve the purchase or the shipment.

What Else Should I Know About The Scope Of An Agency Relationship?

To reiterate, an agency relationship is considerably similar to that of an employment relationship. However, it may not always necessarily involve profit. An example of a principal agent relationship would be when one person authorizes another to sign a document for them, such as in a power of attorney arrangement.

Issues such as agency formation and the termination of an agency relationship are generally implied as well. However, in order to avoid any confusion or legal issues, it is best if the details regarding 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 of the most common questions associated with a principal agent relationship would be who should be held liable if the agent commits a violation. Generally speaking, 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.

There are some circumstances in which it is 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 of the boundaries of the agency relationship. An example of this would be how if they continue to use a company car long after their shift is over, and injure a person with the car, the agent could be held liable as they are no longer acting under the principal’s authority. However, such determinations may be different for each case.

Legal remedies for violations may include a damages award intended to reimburse the plaintiff for injuries caused by the agent. As was previously mentioned, either the principal or the agent may be ordered to the damages award; this is largely dependent upon the agent’s authority at the time of the incident. In some cases, both the principal and the agent can be held jointly liable.

It is considerably common that the agent may also owe damages to the principal if their misconduct has caused the principal any losses. This is because agents always owe a specific duty of loyalty and accountability to the principal.

How Can An Agency Relationship Be Terminated?

Once again, agency relationships are formed when it is legally agreed that the agent is allowed to make decisions on behalf of the principal. It is important to note that this agreement is only valid if no conflict of interest exists, and if the principal will be the party who appoints a person as their agent.

Some of the most common examples of conflicts of interest include:

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

There are some circumstances in which these conflicts may be waived. An agent is a fiduciary, which means that the principal trusts the agent to act as an ordinary principal would when making decisions. For this reason, liability may revert to the principal if something goes wrong.

Agency relationships are governed by both employment law and contract law. Should any legal issues arise, the parties should refer to these laws for legal recourse. It is imperative to be familiar with the methods of termination and penalties for wrongful termination, in order to avoid any additional issues.

Do I Need A Lawyer For Help With Principal-Agent Laws?

Many of the issues associated with an agency relationship can be avoided through the use of a well-written contract. You should hire a contract lawyer for assistance in forming a principal-agent contract, or if you have any disputes associated with your principal-agent relationship.

An attorney can help you draft a legally sound contract, and will help you understand your legal rights and options according to your state’s specific laws. Additionally, an experienced contract attorney will also be able to represent you in court, as needed, should the need for litigation arise.

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