Principal agent relationships are common in the business world and are usually helpful for achieving a number of business goals. Having someone else, i.e., an agent, represent a person or a business can free up a person or other staff members to focus on other aspects of the business.
However, principal-agent problems do sometimes arise in the course of the arrangement. Issues such as agency formation and the termination of an agency relationship can be problematic. To avoid any legal issues, formation and termination of principal-agent relationships should be spelled out clearly in a written contract.
Some common principal-agent problems may include the following:
- Breach of authority: The scope of authority of an agent is often limited to what is defined in the contract between the principal and the agent. If an agent steps outside the bounds of their authority, e.g., by making a purchase without consent, it may lead to a lawsuit;
- Vicarious liability: Whether a principal is liable for an agent’s actions is a common legal issue. In some cases, the principal can be held liable; in other cases, the agent may be solely liable. Everything depends on the law of the state in which the relationship operates and the facts of the specific case;
- Breach of the fiduciary duty of loyalty: The agent is also limited in what it can do by state laws, such as those providing that an agent owes a basic fiduciary duty of loyalty to the principal. For instance, they may be required to invest the principal’s money in a prudent and reasonable manner. If they do something that is not consistent with their duty of loyalty, they can be liable to the principal for any harm caused.
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. That is why it is always a good idea to have a clear and complete principal-agent agreement that spells out when the relationship has begun, when it ends, and what the extent of the agent’s authority is.
Who Can Be Held Liable in a Principal-Agency Relationship?
When an agent injures 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 has acted within the scope of their authority, whether express or implied and has been instructed to perform this act on the principal’s behalf.
However, an agent may be held personally liable for actions made in the course of working for the principal if the principal had not authorized the action and the agent acts in one of the following ways:
- The action constitutes misconduct;
- The activity in which the agent engaged is illegal;
- The action violated business standards.
Generally speaking, if an agent acts in any of these three ways, the agent has stepped outside the boundaries of the principal-agency relationship and can be liable for any harm that results. Additionally, the principal would not be liable.
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. Of course, cases such as these would be assessed on the basis of the specific facts of each case.
Is Principal Liable for Agent’s Negligence?
When an agent injures a third person or enters into a contract with a third person, the principal can usually be held liable for the agent’s actions. This is only true if the agent is acting within the scope of their authority, express or implied, 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 no 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 outside of their working hours and injures a person with the car. The agent might be held personally liable, as they were 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 they become part owners 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 sues the agent, the remedy will likely be that the agent pays the principal a monetary damage award to reimburse the principal for any losses. The agent may need to reimburse their principal for business that the principal may have lost 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 the principal has committed a breach of contract. A common example of this is where the principal fails to pay the agent the agreed-upon amount 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 causes losses to a person or entity who is outside the principal-agent relationship. This type of conflict can be confusing since it is not always clear whether the principal or the agent should be held liable. Again, if the principal authorized the agent’s actions, the principal can be held liable for an agent’s actions.
If the agent acted outside the scope of the principal-agent relationship, the agent may very well be liable for any harm caused by their actions. This will vary with each case and the law of the state in which the principal-agent relationship existed.
Do I Need an Attorney for Help With a Principal-Agent Problem?
Principal-agent relationships can require some careful legal analysis. If you have legal issues that relate to a principal-agent contract, you want to consult an experienced employment lawyer. Your lawyer can analyze the facts of your case and apply the law of the state in which you do business. Your attorney can also represent you in negotiations to try to settle any dispute outside of court. Or, if it becomes necessary, they can represent you in court and advise you on how to proceed so that your interests are protected during the course of any lawsuit.