Define Agency in Business Law: Everything You Need to Know
To define agency in business law, it is important to look at the common relationships found in a business setting.3 min read updated on January 01, 2024
To define agency in business law, it is important to look at the common relationships found in a business setting. A principal or agent is the legal agreement when one party acts on the behalf of the other. Other terms that might be used include a guardian, ward, administrator, executor, or employee.
The law of agency is defined as the ability to act through another. In most cases, this applies to commercial relationships or contractual agreements. The most common example of this is in the employer-employee relationship. The employer is authorizing the employee to complete work on their behalf.
The employee is representing the employer in this relationship. This also means that the employer is liable for any inabilities to complete work. If the employee acts in a way that is poorly representative of the business, it is possible that the principal could be liable for the actions because they agreed to the agency agreement.
Define Agency in Business Law
The agency is the agreement in which one party entrusts another party to conduct business on their behalf. The agency agreement comes in the following forms:
- Express agreement (both oral and written)
- Conduct of the principal
A true agency is approved before the actions begin. One person cannot become the agent of the other without their approval. This creates a contract of agency. This contract of agency approves one party to represent the other in the intended tasks. Some agency agreements are verbally expressed or based on intentions. Others, however, are in the form of a legal entity, such as with a corporation or legal partnership.
It is also possible to have a fiduciary relationship. This is also known as a relationship of trust. It is expected that the agent is that act in the best interests of the principal. If they do not, they might be financially liable for any damages caused.
One of the most important factors to consider with an agency in business law is the element of control. The agent is agreeing to act under the control of the principal, while the principal is agreeing to give up control and allow the agent to act on their behalf. The authority of the agent can be in the form of an actual direction or apparent and intended direction.
Determining an Agent's Liability
The agent has two types of control:
- Express powers: These are the actions of the agent that are specifically stated by the principal.
- Implied powers: These are additional actions taken by the agent that also achieve the specific orders but in an implied way.
Implied powers are tricky because the agent is assuming the needs of the principal. If their actions are not approved by the principal but are in line with implied powers, the principal may still be liable for the agent's actions. Additionally, if the agent participates in illegal or unethical actions with the principal's knowledge, the principal may have exposure to liability. However, if the principal can provide evidence that the agent acted in a way that was outside of their scope of expected powers, the agent instead might be liable for any damages.
Terminating an Agent's Authority
It is important to take the appropriate steps when terminating an agent's authority. If there is no evidence that the agent's authority was revoked and they act in an illegal or unethical way, the principal could still be liable for their actions. When terminating an agent's authority, it is important to follow the terms of the initial contract.
The principal must stay within the terms agreed to in the contract. For this reason, it is necessary to have a clause on the process of terminating the agent agreement. There are some situations in which the agent's authority gets terminated without additional documentation:
- The principal or agent's insanity
- The bankruptcy of the principal
- Death of the principal or the agent
However, even with these rare situations, there are some cases in which the agent is still bound to the principal. Always follow the termination clauses set out in the initial agency agreement.
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