Business Law: The Principal Agent Relationship

Business owners often delegate tasks to others, establishing an agency relationship. Agency law outlines the rules that govern this delegation process, ensuring clarity and legality in these interactions. Understanding agency is crucial for effective management and compliance within business operations.

An agency relationship is a fiduciary bond where a principal authorizes an agent to act on their behalf, with the agent being under the principal's control and required to follow instructions. Common examples include employer-employee, lawyer-client, and corporate officer relationships. Establishing this relationship requires mutual consent from both parties, which can be communicated verbally or in writing through agreements like attorney retainer contracts. Additionally, agency relationships may emerge from circumstances without explicit agreement; determining if such implied agencies exist often falls to jury evaluation.

Agents operate under two types of authority: actual and apparent. Actual Authority occurs when an agent acts on behalf of a principal, believing the action aligns with the principal's wishes; it can be further divided into Express Authority, where instructions are clearly given, and Implied Authority, which covers actions necessary to fulfill agency objectives. Principals have the power to limit or revoke this authority at any time. Apparent Authority arises when third parties believe an agent has more power than they actually do based on the principal’s representations; for instance, if a vendor perceives that an agent can make unlimited purchases due to prior communications from the principal.

Agents must prioritize their principal's interests, adhering to a duty of loyalty that prohibits conflicts of interest. For instance, an employee bidding for construction projects breached this duty by working with a competitor without disclosure. Agents are also required to follow explicit and implied contractual terms while exercising care and diligence in their actions. They should avoid any conduct that could harm the principal’s business or misappropriate property entrusted to them. Additionally, principals have obligations towards agents including honoring contract terms, indemnifying against liabilities incurred during duties performed on behalf of the principal, and ensuring fair dealings.

A principal is liable for contracts made by an agent if the agent has authority, whether expressed, implied, or apparent. Additionally, a principal can be directly responsible for torts committed by an agent if directed to do so. Vicarious liability applies when an employee acts within their employment scope; for instance, if a delivery driver causes an accident while working on behalf of the principal.

Agents typically do not work for free, and compensation is governed by the terms of their contract. If compensation details are unclear, courts can determine reasonable payment based on circumstances. In Howard v. Goble, a dispute arose over whether an agent overseeing construction was entitled to predetermined or reasonable post-project compensation; the court ruled in favor of reasonable pay due to lack of clarity in the agreement. Agency law intersects with business torts and contracts, defining a relationship where one party acts on behalf of another.