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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 their behalf to the other. The party who acts for the other is called an agent. The party who gives the agent authority is called the principal.

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

Agencies can exist in virtually every type of relationship. For example, a spouse can act as their spouse's agent. A personal representative can act as an agent of a deceased person's estate. An employee can act as the agent of their employer. The examples are numerous.

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

Examples of Agency

Agency is a common relationship in the business world:

  • 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 assist 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 goes on and on.

Two Types: Express and Implied

An agency can be created in two ways. They can be express, such as when one party gives another authority to act verbally or in writing. Or they can be implied, such as when one party acts in a way such that it is legal and fair to hold them accountable for something another party does.

Express Agency

Express agencies are commonly created with a verbal or written business contract. In such a contract, both the agent and principal confirm their intention to enter into an agency relationship.

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

Implied Agency

Implied agencies are created by the conduct of the parties. In an implied agency, the conduct of the principal gives the agent the power to do acts reasonably necessary to accomplish the principal's purposes. The scope of the agent's authority to act is implied (more properly, inferred) from the circumstances.

One example of implied agency is the relationship between business partnerships. Both partners can enter into contracts, as well as perform negotiations and regular business activities on behalf of the other partner. If one partner makes an agreement with a third party, the contract is legally binding even though the other partner did not take part in the process.

Another example is the relationship between a board of directors and their company. The decisions the board makes on behalf of the company 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 that the deal they make is protected by law.

Agents and Principals

As part of their daily business operations, businesses routinely hire or designate (lawyers might say, “appoint) other parties to perform tasks on their behalf. The agent's job is to represent the interests of the principal. When an agent is required to provide specific services, these requirements are often set out in a 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 is supposed to deliver the newspapers by a specific time each day, the contract would so specify.

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 is responsible for hiring others and negotiating 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.

How 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 in a business context 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.

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

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

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

Need Legal Help Regarding an Agency Relationship?

If you have started a business or are an existing business and are looking for help or expertise, you need to be aware of 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.

Next Steps: Talk to a Business Lawyer

Contact a qualified business attorney to help you negotiate and craft airtight contracts.

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