A Conflict in Principal-Agent Relationships

1 January 2017

Implied agreement created by assumed agent authority to enter into contracts, 4. A Necessity principal/agent relationship a relationship that arises in an emergency situation where agent assumes an authority. The exercise of this assumed authority by the person for the best interest of the principal without any prior agreement. 5. Estopel occurs when the principal creates an impression of an agent where there is no actual principal/agent relationship. In the Principal-agent relationship, the agent acts under the control or direction of the principal.

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However, the principal has to give the agent authority in which the agent must act with in. There are two types of authorities the agent exercises. The first is, an Actual authority that occurs either expressly given by the principal or implied in the agency agreement. The second authority, the Apparent or Ostensible authority is the type of authority that arises when the principal creates an impression of an agent to a third party that possesses to carry out certain actions when such authority does not, in fact, exist.

This type of authority often arises from a principal/agent relationship created by implied agreement2. Agent has also a fiduciary duty, based on contract law. The scope of an agent’s duty to the principal is determined by the terms of the agreement between the parties and the extent of the authority conferred. An agent’s primary duties are to act locally for the principal’s benefit.

The agent must exercise due care, skill and diligence, act in Principal’s interest, must maintain confidentiality of information, must keep separate and proper accounts, must not make a secret profit and must not receive secret commissions2. The principal is responsible for an act committed by an agent while acting within his or her authority during the course of the agent’s employment. Under the doctrine of respondent superior, the principal is liable for any harm caused to a third party by an agent’s Negligence within the scope of employment.

This doctrine imposes vicarious liability, or indirect liability, on the employer that is, liability without regard to the personal faulty of the employer for torts committed by an employee in the course or scope of employment3. While an agent is not personally liable to a third party so long as the agent acted within the scope of given authority and signed the contract as agent for the principal, if the agent exceeded her or his authority, then the agent is financially responsible to the principal for violating fiduciary duty.

In addition, the agent may also be sued by the third party of the contract for Fraud. The principal is generally not bound if the agent was not actually or apparently authorized to enter into the contract3. The agency-principal relationship ends either by actions of the parties up on agreed time frame, when the principal’s goals have been achieved or on mutual agreement basis. The relationship may also end by law on the death of one party, Legal incapacity, Bankruptcy, illegality, or Dissolution of the company4.

A conflict in principal-agent relationships, called an agency problem is known to arise in such cases such as an agent pursuing the principal’s interest. However, Principal-Agent relationship has overall benefits since the agent has an authority to make legal decisions and contracts on the Principal’s behalf, the principal can send an agent to represent him/her somewhere, while the principal can be somewhere else.

This is particularly helpful when an agent is hired that knows more about a particular subject than the principal does. References: 1. Pentony, B. , Graw, S. , Lennard, J. & Parker, D. Understanding Business Law (LexisNexis Butterworths: 4th ed, 2011). 2. Gibson, A. & Fraser, D. Business Law (Pearson Education Australia: 6th ed, 2012). 3. Jeff Fitzpatrick et al, Business and Corporations Law (LexisNexis Chatswood: 4th ed, 2011). 4. Paul Latimer, Australian business law (CCH Australia: 29th Ed, 2010).

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