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Agency Operations

Business Concerns about Agency Operations

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.

Sometimes someone brings a lawsuit based on actions taken within an agency relationship. The courts want to make sure that decisions made within the agency relationship on behalf of the principal were reasonable if there is a dispute. If a third party enters into a contract with an agent with either type of actual authority or with apparent authority, then the principal is liable to the third party for the contract. This is true even if the agent did not have actual authorization to negotiate the contract. Agency law often protects third parties who deal with agents to make sure that these third parties are comfortable conducting business through agents.

Principals must be careful in choosing their agents, since the wrong choice can result in significant liability, or responsibility, for the principal and their business. The nature of the agency relationship is one of trust. The agent has entered into a mutual agreement to work on behalf of the principal, subject to the consent and control of the principal in all decisions. The agency relationship is legally binding in some cases, and the agreement should spell out the specific rules of the agency to prevent confusion and miscommunication. Agents must act only to benefit the principal and cannot receive personal benefit as a result of the agency relationship.

Agency Relationship

The principal is the primary decision maker with respect to the agent. The principal directs the agent, who then works directly with third parties to carry out the principal's orders.
If an agent goes rogue and acts outside of the scope of the agency relationship, the principal can terminate the agency relationship and refuse to ratify the actions of the agent. That type of decision by the principal can cause issues with a third party, so the entire scenario must be evaluated in light of the best decision to be made for the company and one that will bring about the least amount of liability to the principal and the company. Should the principal decide to ratify the rogue acts of the agent, the principal will remain bound by those decisions or acts, and the principal must decide how best to move forward with the agent in future transactions. The agent may be subject to legal liability in both contract and tort law. The principal and the business may be liable, which is why it is so important for principals to make prudent choices of agents and clarify responsibilities and boundaries.

If the contract was made without actual or apparent authority, the principal can ratify—in other words, confirm—an arrangement or contract that the agent makes with a third party after the fact, and contractual liability may arise if the principal ratifies the agent's act. If the principal does not ratify, then the agent will be liable to the third party. Damages include but are not limited to any expenses incurred by the third party as a result of the contract, as well as costs related to the implementation of the contract. Damages are court-imposed upon the losing party, and the court can also assign court fees and costs.