Principal-Agent Relationship

Who can be a Principal?

Any person who has the legal capacity (meaning that they are not insane, or in certain circumstances a minor) to perform an act may be a principal and empower an agent to carry out that act. Persons, corporations, partnerships, not-for-profit organizations, and government agencies may all be principals and appoint agents.

Who can be an Agent?

Any individual capable of comprehending the act to be undertaken is qualified to serve as an agent.

What is the purpose of this relationship (called “Agency”)?

A contract to be made by an agent on behalf of a principal is considered to be the contract of the principal and not that of the agent. It allows the principal to authorize somebody to carry out her duties, either for a specific purpose (i.e., purchasing a house) or generally (i.e., to conduct many transactions). The agency relationship is usually entered into by informal agreement, but also can occur by formal agreement (in certain cases, the agency relationship must be specified in writing). The acts must be legal (i.e., principal can not hire agent to kill the professor).

What is the basis of the Agency relationship?

Inherent in the Principal-Agent (P-A) relationship is the understanding that the agent will act for and on behalf of the principal. The agent assumes an obligation of loyalty to the principal that she will follow the principal’s instructions and will neither intentionally nor negligently act improperly in the performance of the act. An agent cannot take personal advantage of the business opportunities the agency position uncovers. A principal, in turn, reposes trust and confidence in the agent. These obligations bring forth a fiduciary relationship of trust and confidence between P and A.

What are the obligations of the Agent to the Principal?

An agent must obey reasonable instructions given by the P. The A must not do acts that have not been expressly or impliedly authorized by the P. The A must use reasonable care and skill in performing the duties. Most importantly, the A must be loyal to the P. The A must refrain from putting herself in a position that would ordinarily encourage a conflict between the agent’s own interests and those of the principal (note: one might reflect on the role of certain Enron executives on “outside” limited partnerships that did business with Enron in the early 2000s). The A must keep the P informed as to all facts that materially affect the agency relationship.

Copyright 2002, Doug Schuler

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