Agency and Principals - Dull But Important Stuff to Know
So here I am over the Memorial Day weekend, having already played a super round of golf, looking over the course materials for the Business Law I class I am teaching undergraduates at Capital University's School of Management later this Summer. And I realize that in addition to Contracts. Property, and Torts -- which I do sorta know, or at least remember -- I'm probably going to need to teach them a little about the concepts of principal and agent. Which, if recollection serves me correctly, we spent all of about 15 minutes on when I was in law school.
One of the pitfalls of giving yourself a break from your blog (and all that Chrysler /GM bankruptcy nonsense) over a holiday weekend is that you're not exactly sure what to write about next. So guess what? Today we're going to explore the law of agency.
We've all heard about big-time "agents" representing superstar athletes in one sport or another with respect to negotiating their multi-million dollar contracts. But as it turns out, ordinary mortals in the business world are constantly dealing with agency relationships of one kind or another as well.
Agency is primarily a contractual relationship in which the agent has agreed to represent the interests of another person -- known as the principal -- with respect to third parties. It does not require, although it often does include, compensation of the agent for his efforts. Agents owe a fiduciary duty to their principal to exercise ordinary care and keep the principal in the loop on important issues.
Officers and directors are agents of a corporation. Professionals such as attorneys and CPAs typically act as agents in providing their services to clients. In addition, particular empoyees and even independent contractors can be or become agents. Implied authority allows these individuals to undertake particular actions needed to carry out their dutes such as signing a particular document.
In addition, however, there can also be such a thing as implied agency. This typically arises in connection with the conduct of, or relationship between, the two parties deemed to be principal and agent. Here what is important is how third parties are reasonably likely to view the relationship.
With respect to contracts, a principal will be liable for anything to which the agent agreed so long as it is within the agent's actual or apparent authority. In addition, if the principal accepts the benefits of the agreement the agent made, he or she will be said to have 'ratified" the contract. On the flip side, the agent will not be held liable on these agreements as long as he acted within the scope of his authority. The key for the princiipal is to make clear where the authority of the agent ends, esepcially if it is not immediately obvious.
When it comes to crimes or harm cause by negligent acts (called "torts" in the law biz), the agent is always liable for his own personal wrongdoing. However, in many instances a principal may also find themselves held liable for the actions of the agent. Perhaps most familar is the "vicarious liability" that employers have for activities of their employees while acting in the scope of their employment; this might include such commonplace things as a car accident injuring another person not employed by the company. In addition the principal can be held directly liable, even when there is no employer-employee relationship, if it did not exercise proper care iin supervising the agent.
To me, the concepts of principal and agent, and the respective levels of liability we place on eachseem relatively intutive. If the other side knows or should know a person is acting as an agent for someone else, then it makes sense to only hold the principal liable for any resulting contract. Of course when that part gets a little sticky to determine, the cases get a lot harder. So this may be one of those easy to lear, hard to master concepts.
