Understanding the Principal-Agent Relationship

Understanding the principal-agent relationship  is critical for all business transactions. The laws of agency govern this relationship, and they establish when an agent can bind a principal to an agreement, how far an agent’s liability extends, and what the fiduciary duties are that arise from the relationship.

The Principal-Agent Relationship

Generally (in terms of an “actual agency”), a principal hires an agent to act on his or her or its behalf.  The principal-agent relationship is not limited, however, to employers and employees. Rather, it is quite broad, incorporating corporations and directors, business partners, and trustees and beneficiaries, to name a few.  Thus, it is not always easy to establish whether an agency relationship has been formed.  For an agency relationship to exist, an agent must consent to do something for the principal, the agent must agree to operate primarily on behalf of the principal, and the principal must exercise control over the agent.

It is important, however, to know whether a principal-agent relationship exists and to define its scope, because failing to do so can pose significant risks to business owners and other principals, particularly because an agent can bind a principal to a contract, principals may be liable for an agent’s torts, and principals and agents have and owe certain fiduciary obligations to one another.  For example, a principal can be bound by a contract that an agent enters if a third party is under the impression that an agent does have signing authority even if the agent does not have the actual (explicit) authority to do so.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

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