Introduction to Agencies

Parties in an Agency Relationship

Agency exists so that one person may legally act on behalf of another. Agency law establishes who is responsible for harms arising from the agency in various situations. The parties in an agency relationship are a principal, an agent, and third parties who interact with the agent.
Agency relationships are crucial to conducting business because of the time and money that can be saved by a company. Often the decision makers within the company are preoccupied with other major duties, and an independent agent can handle special projects on behalf a principal in an agency relationship. Also, the independent agents are not part of the full-time company payroll and are paid by the job. The parties in an agency relationship are the principal, the agent, and third parties that deal directly with the agent who is acting on behalf of the principal. The principal grants authority to the agent to conduct business on their behalf, usually with the understanding that the principal will compensate the agent accordingly. However, compensation is not required to create an agency relationship. Typically, the agents enter into other agreements and contracts with third parties, acting as a representative of the principal.

Agency Relationships

In an agency relationship, the principal gives the orders, and the agent follows them. The agent may interact with third parties on behalf of the principal.
For example, Mr. Jones, who is the CEO of his company, appoints Karla Smith, an independent contractor who works on special projects and is not a regular employee—someone who works for another person or company for wages, salary, or other forms of compensation—to enter into contracts for advertising to benefit the company. Karla Smith then works directly with marketing and advertising companies to negotiate and eventually agree on a campaign for the company. Mr. Jones is the principal, Karla Smith is the agent, and the advertising company that signed on becomes the third party in the agency relationship.

The agent has entered into an agreement to work on behalf of the principal, subject to the consent and control of the principal. The agency relationship consists of the principal and the agent, and clarity about the expectations from each party is critical to prevent miscommunication, which often results in liability.

The agent has a duty of loyalty to the principal. An agent must act only for the benefit of the principal in connection with the agency relationship and can receive personal benefit only with the full knowledge and consent of the principal. The agent must not divulge sensitive information such as trade secrets without the consent and approval of the principal.

The agent's behavior directly reflects on the principal, so the agent's actions, behaviors, conversations, and other activities may have an impact on the principal. Should there be anything that would harm the agency relationship, the agent must immediately stop serving as an agent to protect the principal's reputation.

Accurate reporting of information is vital to the agency relationship, so the agent has a duty to notify—that is, an obligation to pass along any information they receive in the context of the agency relationship to the principal—as part of the duty of reasonable care. The agent must exercise reasonable care and obey the principal's instructions unless those instructions are illegal or unethical.

A breach of these duties may cause the principal to terminate the agency relationship. A court may award damages to the principal for the actions of the agent.

The agent is not the only party with duties. If the agency relationship includes compensation, then the principal must compensate the agent as agreed upon. The principal must also reimburse the agent for any expenses related to the agency agreement.