Agency as business organization. Definition of Agency. Agent Duty. Agency Relationship.

Agency as business organization. Definition of Agency. Agent Duty. Principal-Agent Relationship.
Since majority of the world's work is done by person acting as representative of another person, the ruling of agency is among the most fundamental. If you understand the act of agency, you will understand how business organization works.

The agency describes an agreement between two people where one will be a representative of another - the principal and the agent. In other words, the principal is a person who wants to achieve something and he/she hires an agent to help him/her to achieve it. The principal-agent relationship means, that both parties agree, that agent will represent the principal in doing business. A typical example of agent is the salesperson in a department store. The salesperson is an agent (and a department store employee) and he/she represents a department store - the principal.

An agency relationship is based on agreement between parties. No written contract is required to form an agency relationship, but it is still wise to spell out the details in writing to prevent misunderstanding between parties. For example, the power of attorney is the formal written authorization given by principal to an agent. In case of employment, the agreement must be a legally enforced contract.

There are two type of relationship between employer and employee: master-servant relationship and employer-independent contractor relationship. The employee is an agent with respect to business transaction and a servant or independent contractor with respect to perform physical tasks. One of the most important duty an agent owes to principal is loyalty. Principal hires an agent to serve the principal's interest, not the agent's own interest. Agent should perform the duty to avoid the conflict of interests. For example, principal A hires agent B to buy goods. Agent B should not buy good for principal A from himself.



In principal-agent relationship, each party owes the other a duty act in good faith. The principal owes agent a compensation, reimbursement for the expenses, and comply with the terms of the agreement. The agent owes principal the loyalty, must obey the instructions, reasonably care for the business and the principal's money.

The agency relationship eventually will come to the end. Many agency relationship are formed to accomplish certain task. As soon as goal is achieved, the agency is terminated. It can be mutual agreement between the parties to terminate the partnership or one party decision. Since the agency relationship is consensual, it can be terminated, if either party no longer wants to continue the relationship. Unless employment contract exists, there is no liability by this action. If employment contract exists, the termination of relationship must be justified. In this case the party initiated the termination may be responsible to the other for damage caused by the breach of the contract. Death or insanity of the agent immediately terminate an agency relationship. Bankruptcy, in another hand may not always terminate an agency relationship.

Liability of the Principal: The principal is liable to the agent, if he/she breaches a valid employment contract. The principal's liability to the third party is determine by agent's level of authority to make a  contract with the third party. The conflict between third party and the principal is usually resolved in court.

Express Authority: Express Authority is directly generated by the principal to the agent. For example, the principal authorizes the agent to sell the piece of land for $30,000 The Agent is authorized to sell the land for this price or higher price. The agent is not authorized to sell the land for less, than $30,000

Implied Authority: Implied Authority is a matter of customary. In this case, the principal does not specify the agent's authority for each particular case. Agents authority depends on the authority of person in similar position. The principal still has final wards.

Liability of the agent: Agent is liable to the principal, if he/she violate the duty owed to the principal and causes damage by the breach. Another samples of agent liability are: exceeding authority, nondisclosure of principal, assuming liability, commission of a Tort.