Agent and Principal Relationship

When one party delegates some authority to another party, the latter carrying out its activities in a more or less independent manner on behalf of the first party, the relationship between them is called agency. All corporations, large or small, do their work through an agency. Principal-agent relationships involve three main parties: the principal, the agent, and a third party.

Who is Agent?

An agent is a person or entity who acts on behalf of another person or entity (usually the principal), with the principal's authority and consent. Agents can be individuals, companies, or other types of organizations.

Further, such agents can be appointed through a formal agreement or contract, or they can be implied through the conduct of the parties involved. The scope of an agent's authority and power can be limited or broad, depending on the agreement between the agent and the principal.

Who is Principal?

A principal is a person or entity who hires or/and authorizes another person or entity, known as an agent, to act on their behalf. In other words, the principal is the party for whom the agent is acting, and the agent's actions are attributed to the principal.

Likewise, principals can be individuals, companies, or other types of organizations. They can appoint agents through a formal agreement or contract. The agency relationship can be implied through the conduct of the parties involved.

What is Relationship between them?

It is essential for both the agent and principal to understand their roles and responsibilities in the relationship to ensure that it is mutually beneficial and legal in nature. Any actions taken by the agent within the scope of their authority can bind the principal, and any breaches of duty by the agent can result in liability for both the agent and the principal.

Illustrations

Following are the major examples of agent principal relationship −

• A real estate agent acting on behalf of a homeowner or other such property owner to sell their property.

• An attorney or advocate representing a client in a legal matter.

• A financial advisor managing investments on behalf of a client.

• An employee carrying out tasks on behalf of their employer.

Roles of Agent

Major roles of an agent are −

• Fiduciary Duty − fiduciary duty is one of the most essential elements of agent principal relationship under which agents have to act in the best interests of their principal. This includes the duty to act with loyalty, honesty, and care in all dealings related to the agency relationship.

• Authority − Agents have the authority to act on behalf of the principal within the scope of their agency relationship (as per the agreement). This means that the agent can enter into contracts, make decisions, and take actions that bind the principal.

• Communication − Agents have a duty to keep the principal informed of all material matters related to the agency relationship or concerned affairs. This includes providing regular updates, disclosing all relevant information, and seeking approval before taking certain actions.

• Record Keeping − Agents have a duty to keep accurate records of all transactions and dealings related to the agency relationship. This includes maintaining financial records, contracts, and correspondence.

• Confidentiality − Another sensitive duty is, agents have a duty to maintain the confidentiality of all information related to the agency relationship. This includes keeping sensitive information private and only sharing it with those who have a need to know.

• Performance − Agents have to perform their duties with utmost care and skill. This includes meeting deadlines, providing quality work, and fulfilling all obligations under the agency relationship.

Principal’s Roles and Responsibilities

Though the roles and responsibilities of a principal can vary depending on the type of agency relationship and the agreement between the principal and agent; however, some general roles and responsibilities of a principal are −

• Appointing an Agent − Prima facie, the principal has the responsibility of appointing an agent to act on their behalf. This includes determining the scope of the agency relationship, defining the agent's authority, and establishing any limitations or conditions.

• Communication − The principal has a duty to communicate with the agent and to provide all essential information to enable the agent to fulfil their duties. This includes providing instructions, providing access to relevant information, and responding promptly to requests for information or guidance.

• Oversight − The principal has the responsibility of overseeing the actions of the agent and ensuring that they are acting in accordance with their duties and obligations. This includes monitoring the agent's performance, reviewing any contracts or agreements, and providing feedback or guidance as needed.

• Compensation − The principal has the responsibility of compensating the agent for their services. This includes establishing the compensation structure, paying any fees or commissions owed, and reimbursing the agent for any expenses incurred in fulfilling their duties.

• Liability − The principal is ultimately responsible for any actions taken by the agent within the scope of the agency relationship. This includes any liability for breach of contract, negligence, or other legal claims arising from the agent's actions.

Conclusion

In this growing business world, the practice of agent and principal relationship is expanding like anything. Likewise, the contracts establishing a fiduciary relationship between agent and principal are very common in business law. An agency is established when a person delegates his power and authority to another person, with the expectation that the agent will perform his duty as per the agreement and with honesty and also maintain the integrity of the agency.

Likewise, establishment of a Principal-Agent relationship confers rights and duties upon both the agent as well as principal. There are various examples of such a relationship, such as: Insurance agency, advertising agency, travel agency, real estate agency, attorney or advocate-client, etc.

Frequently Asked Questions

Q1. How agency is terminated?

Ans. An agency can be dissolved or terminated in the following circumstances −

• The purpose of agency is completed and there is no future plan to extend it;

• The principal revoking his authority, or by the agent renouncing the business of the agency;

• Either the principal or agent dying or becoming of unsound mind;

• The principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors.

Q2. What are the types of agents?

Ans. Following are the major types of agents −

• General Agent

• Special Agent

• Mercantile Agent

• Sub-agent

• Broker

• Auctioneer

Q3. Who is general agent?

Ans. A general agent has the authority to act on behalf of the principal in a specific area or industry. For example, a real estate agent is a type of general agent who has the authority to act on behalf of a property owner in selling or renting their property.

Q4. What is principal and agent relationship in contract?

Ans. As per the contract law, the principal-agent relationship is a sort of legal relationship and responsibility that arises when one party (the principal) hires another party (the agent) to act on their behalf in a legal or business matter. The principal-agent relationship is typically established through a contract that outlines the duties and obligations of both parties.

Q5. Who can appoint an Agent?

Ans. According to Section 183 of contract act, any person who has attained the age of majority and has a sound mind can appoint an agent. In other words, any person capable of contracting can legally appoint an agent. Minors and persons of unsound mind cannot appoint an agent.