Agency is the legal relationship that arises when one party is authorized to act on behalf of another party in business transactions with third parties. The person acting is the agent, and the person the agent acts for is the principal. The principal's ability to control the agent is critical to the existence of the agency relationship; without it, there is no agency. The principal should always manage liability, which means legal responsibility. The principal also should ensure compliance with the terms of any contract entered into by the agent. In order to manage liability, the principal should monitor compliance with contracts entered into by the agent, and monitor the agent’s actions to help avoid harmful acts, called torts. The agent must act for the benefit of the principal. The agent has the responsibility to negotiate and enter into the contracts, and the principal is bound by those contracts. For this reason, the correct choice of agent is essential. Regardless of any liability the principal may have for their agent’s torts, the agent is always responsible for their own torts. The principal and agent should understand how to terminate the agency when necessary.
At A Glance
The principal is responsible for any torts (harmful civil acts) that the agent committed with the principal's authority. An agent is always responsible for their own torts. The principal is also responsible for any contracts that the agent made with the principal's authority.
- Principals need to choose their agents wisely. The wrong choice of agent can create significant liability for a business, since the business or owner will be financially responsible for contracts the agent entered into and torts the agent committed, if the torts were committed at the direction of and for the benefit of the principal.
- Agents are not generally responsible for contracts they make on behalf of a principal if the existence and identity of a principal is disclosed when the contract is made.
- The duration of an agency is often governed by the agency agreement. If the agreement doesn’t otherwise control termination, then the agent, the principal, or both parties may terminate the relationship. The relationship ends when a set time limit for the agency relationship expires. It can end through revocation, renunciation, or cancellation. Agency relationships can also end through operation of law.