If you have ever hired someone to negotiate a deal or execute a contract for you, if you have signed a power of attorney or hired a contractor, then you may already have experienced the area of law we are going to discuss: agency. This subset of business law examines the dynamics and rules of the principal-agent relationship.
Defining Terms in the Principal-Agent Relationship
What do these terms even mean? Here are some definitions:
- Principal-Agent Relationship: a legal relationship where two people agree that one of them (the principal) will act as the boss of the other (the agent). In this relationship, the agent acts as a representative of, or otherwise acts on behalf of another person. The agent also has the power to affect the legal rights and duties of that person. For example, generally speaking, if an agent signs a contract on his or her principal’s behalf, then that principal is bound by the terms of the contract.
- Principal: the person who delegates authority to act on his or her behalf
- Agent: the person who receives that authority and acts on the principal’s behalf
Generally, a full agent can exercise on the principal’s behalf all the power that the principal holds. That is, except if the act is too personal. For example, if Andy Warhol promised to do a photo shoot for you, he could not delegate that task to his agent, because the act is so personal that it can’t be passed off to another person.
On the flip side, when long ago Pharaoh made Joseph his second-in-command over all of Egypt, he gave Joseph his signet ring and told him that he could exercise Pharaoh’s authority throughout the land. That was an example of Pharaoh establishing a principal-agent relationship with Joseph. There, Pharaoh was the principal and Joseph was the agent. Even though ancient Egypt did not operate under the United States legal system, issuing decrees is something Pharaoh considered to be an act that he could delegate to Joseph.
Creating a Principal-Agent Relationship
Creation of a principal-agent relationship requires three elements: assent, control, and action. First, there must be mutual assent—or agreement—between the principal and agent as to the creation of such a relationship.
Second, that mutual agreement must involve consent to the principal’s authority to control the actions of the agent on his or her behalf.
Third, the consent must involve the agent’s agreement to act on the principal’s behalf according the principal’s wishes.
Duties between the Principal and Agent
While the specific duties between a principal and agent might vary from relationship to relationship, there are some general principles that will undergird every principal-agent relationship.
Duties of the Agent to the Principal
Essentially, the agent is obligated to the principal to be a good agent. This includes but is not limited to the duties of obedience, good conduct, diligence and loyalty, and duties to inform and provide an accounting.
- The duty of obedience entails what it says. It requires that an agent only act as authorized by his or her principal. It also makes an agent liable to his or her principal for unauthorized acts or committing a misdeed for which the principal is liable.
- The duty of good conduct and diligence and loyalty are self-explanatory. Do things right, be thorough, and show the proper devotion.
- The duty to inform has a bit more detail to explain. The agent must use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know, provided that 1) the agent knows the principal would like to have those facts, or 2) the facts are material to the agent’s duties to the principal. In other words, the agent needs to keep the principal “in the know” when it comes to important matters.
- The duty to provide an accounting simply means the agent has a duty to account for the use of the principal’s assets and property placed at the agent’s disposal.
To tie these all together, if an agent desperately needs to use one of her boss’s private jets for an urgent business trip due to a major crisis, then several things follow. She should have authorization to do so, she should be making a wise decision, she should inform her boss of the nature of the crisis, and she should provide an accounting to her boss of the expenses of the travel.
These are some of the basics of agency law. In the next post, we’ll explore more about this important, and very practical subject, including the duties of the principal to the agent.