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What is law of agency?

Agency law governs the legal relationship between two parties in which one gives the authority to act on behalf of the other. The party who acts for the other is an agent. The party that gives the agent authority is the principal.

Agency law also defines the relationship among agents, principals, and third parties who interact with them. As discussed below, the principal is bound by and liable for the acts of the agent done within the scope of the agent's authority.

Agencies can exist in every type of relationship and business organization. For example, a married person can act as their spouse's agent. A personal representative can act as an agent of a dead person's estate. An employee can act as the agent of their employer, forming an employment relationship. The examples touch on many aspects of employment law and business law.

Agency law is fundamental in business relationships. Here is a closer look at the law of agency and how it affects small businesses and investors.

Examples of Agency

Agency is a common relationship in the business world. Different types of agents include:

  • Sales agents: act on behalf of a business to either sell or buy goods (e.g., pharmaceutical representative, manufacturer's representative, etc.)
  • Insurance agents: act on behalf of an insurance company to sell insurance to the public and help with any insurance claims
  • Real estate agents: act on behalf of a seller or buyer of a home or land
  • Talent agents: act on behalf of artists (including writers, actors, etc.) or athletes to negotiate contracts

The list of possible agency relationships in the business realm continues.

Two Types: Express and Implied

An agency can be created in two ways, either expressed or implied.

  1. Express: This happens when one party, either verbally or in writing, gives another authority to act, often through a power of attorney.
  2. Implied: This happens when one party acts in a legal and fair way to hold them accountable for something another party does.

Express Agency

Express agencies are commonly created with a verbal or written business contract. The agent and principal confirm their intention to enter an agency relationship in the contract. This agreement can be for a specified period of time or open-ended, depending on the parties' needs and objectives.

The contract defines the scope of authority the principal gives the agent. For example, the principal might give the agent control of the company's investment portfolio. Or, in another example, allow them to manage real estate holdings. Similarly, the principal might give the agent the power to enter certain contracts on their behalf.

Express agency means the agent has actual authority to act on the principal's behalf.

Implied Agency

The conduct of the parties creates implied agencies. In an implied agency, the principal's actions give the agent the power to do acts necessary to accomplish the principal's purposes. The scope of the agent's authority to act is inferred from the circumstances. The agent has apparent authority to act on the principal's behalf.

One example of implied agency is the relationship between business partners. Because of implied authority, both partners can perform a variety of tasks. They can make contracts. They can negotiate. They can conduct business activities on behalf of the other partner. If one partner makes an agreement with a third person, the contract is legally binding even though the other partner did not take part in the process. If not fulfilled, a breach of contract could result.

Another example is the relationship between a board of directors and their company. The decisions the board makes on behalf of the business entity are legally binding on the company as a whole.

Thanks to implied agency, third parties who deal with the representatives of a company can be confident the deal they make with such a person is protected by law.

Those with implied agency can legally bind the company to a business deal. As a result, business owners must trust the person with whom such authority is provided.

Agents and Principals

Businesses routinely hire other parties to perform tasks on their behalf as part of their daily business operations. The agent's job is to act on behalf of the principal. When an agent must provide specific services, the obligations of the principal-agent relationship are explained in an agency contract.

For example, the New York Times might hire a logistics company to help distribute its newspapers in New York City. The Times would become the principal; the logistics company would become the agent.

The obligations of the logistics company would be set out in a written contract between the parties. In our example, if the logistics company has agreed to deliver the newspapers by a specific time each day, the contract would so specify. By delivering the papers, the logistics company is acting as an agent of the New York Times.

Fiduciary Duty

Fiduciary duty is an important part of agency relationships. Fiduciary duty means the agent must act in good faith for the principal's interests.

How the Law of Agency Affects Businesses

Agencies are essential for businesses to function. Without them, a company could not take any action. When forming an agency relationship, the hope is that the agency benefits both the principal and the agent, who is typically paid for their work. An agency relationship can also be a way for a business to get the expertise it needs but does not otherwise have.

But, some agency relationships do not work out for the best. An agent may also do something that hurts the principal's brand.

For example, the fashion brand H&M had an agency relationship with various clothing factories in Asia. Investigators found underage workers in the facilities. Although H&M did not operate the factories and took steps to address the problem, it still drew criticism for working with agents that used exploitative practices.

This incident highlights how agents represent principals, for better or worse, and can affect their profits, image, and business operations.

Liability in Agency Relationships

As noted above, agency law governs not just the relationship between the principal and agent but also the relationship among principals, agents, and any third parties they encounter. This is important when determining business liability.

As a general rule, principals are liable for the acts of their agents if the agent is acting within the scope of their authority. For example, suppose you have an employee who hires others and negotiates their contracts. Under agency law, you are responsible for honoring those contracts.

A corollary is that if an agent signs a contract on your behalf, the contract is yours — not the agent's. The agent is not bound by the contract's terms, even if they negotiated and signed it.

So, principals can be liable for their agents' civil wrongs called torts.

Independent Contractors/Subcontractors

An independent contractor is typically not considered an agent of the employer unless the contractor is given the authority to act on behalf of the employer. So, the employer is generally not legally liable for the wrongful acts of an independent contractor as long as those acts are not within the scope of the contractor's duties.

Also, the contractor (the principal) is not generally held responsible for the actions of the subcontractor (the independent contractor/agent) unless the principal exercises considerable control over the subcontractor's means and methods of work or the subcontractor is acting within the scope of duties expressly or impliedly granted by the principal.

But these rules can vary based on state law.

Undisclosed Principal

In some situations, an agent may act on behalf of an undisclosed principal. This means the third party probably doesn't know the principal's identity. Such scenarios are not uncommon in international business transactions. Federal law protects third parties in their transactions with an undisclosed principal.

Public Policy

The law of agency affects public policy. This occurs when agents act on behalf of a principal in various public contexts, executing decisions that shape society's rules and regulations. For instance, federal government officials, as agents, make federal laws and create programs that align with the objectives of the government, their principal. These actions shape public policy, demonstrating how the law of agency affects federal agencies.

Need legal help for an agency relationship?

Suppose you have started a business or are an existing business and are looking for help or expertise. In that case, you must know how agency law will impact your business relationships. You should consider consulting an experienced business lawyer who can give you legal advice about agency relationships and help protect your business interests.

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