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A consensual relationship created by contract or by law where one party, the principal, grants authority for another party, the agent, to
Also found in: Dictionary, Thesaurus, Medical, Financial, Acronyms, Encyclopedia, Wikipedia.
A consensual relationship created by contract or by law where one party, the principal, grants authority for another party, the agent, to act on behalf of and under the control of the principal to deal with a third party. An agency relationship is fiduciary in nature, and the actions and words of an agent exchanged with a third party bind the principal.
An agreement creating an agency relationship may be express or implied, and both the agent and principal may be either an individual or an entity, such as a corporation or partnership.
Under the law of agency, if a person is injured in a traffic accident with a delivery truck, the truck driver's employer may be liable to the injured person even if the employer was not directly responsible for the accident. That is because the employer and the driver are in a relationship known as principal-agent, in which the driver, as the agent, is authorized to act on behalf of the employer, who is the principal.
The law of agency allows one person to employ another to do her or his work, sell her or his goods, and acquire property on her or his behalf as if the employer were present and acting in person. The principal may authorize the agent to perform a variety of tasks or may restrict the agent to specific functions, but regardless of the amount, or scope, of authority given to the agent, the agent represents the principal and is subject to the principal's control. More important, the principal is liable for the consequences of acts that the agent has been directed to perform.
A voluntary, Good Faith relationship of trust, known as a fiduciary relationship, exists between a principal and an agent for the benefit of the principal. This relationship requires the agent to exercise a duty of loyalty to the principal and to use reasonable care to serve and protect the interests of the principal. An agent who acts in his or her own interest violates the fiduciary duty and will be financially liable to the principal for any losses the principal incurs because of that breach of the fiduciary duty. For example, an agent who accepts a bribe to purchase only the goods from a particular seller breaches his fiduciary duty by taking the money, since it is the agent's duty to work only for the best interests of the principal.
An agency relationship is created by the consent of both the agent and the principal; no one can unwittingly become an agent for another. Although a principal-agent relationship can be created by a contract between the parties, a contract is not necessary if it is clear that the parties intend to act as principal and agent. The intent of the parties can be expressed by their words or implied by their conduct.
Perhaps the most important element of a principal-agent relationship is the concept of control: the agent agrees to act under the control or direction of the principal. The extent of the principal's control over the agent distinguishes an agent from an Independent Contractor, over whom control and supervision by the principal may be relatively remote. An independent contractor is subject to the control of an employer only to the extent that she or he must produce the final work product that she or he has agreed to provide. Independent contractors have the freedom to use whatever means they choose to achieve that final product. When the employer provides more specific directions, or exerts more control, as to the means and methods of doing the job—by providing specific instructions as to how goods are to be sold or marketed, for example—then an agency relationship may exist.
The agent's authority may be actual or apparent. If the principal intentionally confers express and implied powers to the agent to act for him or her, the agent possesses actual authority. When the agent exercises actual authority, it is as if the principal is acting, and the principal is bound by the agent's acts and is liable for them. For example, if an owner of an apartment building names a person as agent to lease apartments and collect rents, those functions are express powers, since they are specifically stated. To perform these functions, the agent must also be able to issue receipts for rent collected and to show apartments to prospective tenants. These powers, since they are a necessary part of the express duties of the agent, are implied powers. When the agent performs any or all of these duties, whether express or implied, it is as if the owner has done so.
A more complicated situation arises when the agent possesses apparent authority. In this case, the principal, either knowingly or even mistakenly, permits the agent or others to assume that the agent possesses authority to carry out certain actions when such authority does not, in fact, exist. If other persons believe in good faith that such authority exists, the principal remains liable for the agent's actions and cannot rely on the defense that no actual authority was granted. For instance, suppose the owner of a building offers it for sale and tells prospective buyers to talk to the rental agent. If a buyer enters into a purchase agreement with the agent, the owner may be liable for breaching that contract if she later agrees to sell the building to someone else. The first purchaser relied on the apparent authority of the agent and will not be penalized even if the owner maintains that no authority was ever given to the agent to enter into the contract. The owner remains responsible for acts done by an agent who was exercising apparent authority.
The scope of an agent's authority, whether apparent or actual, is considered in determining an agent's liability for her or his actions. An agent is not pe