commercial law Commercial law, also known as mercantile law or trade law, is the body of law that applies to the rights, relations, and conduct of persons and business engaged in commerce, merchandising, trade, and sales. It is often considered to be a branc ...

, a principal is a person,

legal Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...

natural Nature, in the broadest sense, is the physical world or universe. "Nature" can refer to the phenomena of the physical world, and also to life in general. The study of nature is a large, if not the only, part of science. Although humans are p ...

, who authorizes an

agent Agent may refer to: Espionage, investigation, and law *, spies or intelligence officers * Law of agency, laws involving a person authorized to act on behalf of another ** Agent of record, a person with a contractual agreement with an insuranc ...

to act to create one or more legal relationships with a

third party Third party may refer to: Business * Third-party source, a supplier company not owned by the buyer or seller * Third-party beneficiary, a person who could sue on a contract, despite not being an active party * Third-party insurance, such as a Veh ...

. This branch of law is called

agency Agency may refer to: Organizations * Institution, governmental or others ** Advertising agency or marketing agency, a service business dedicated to creating, planning and handling advertising for its clients ** Employment agency, a business that ...

and relies on the

common law In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...

proposition (from

Latin Latin (, or , ) is a classical language belonging to the Italic branch of the Indo-European languages. Latin was originally a dialect spoken in the lower Tiber area (then known as Latium) around present-day Rome, but through the power of the ...

: "he who acts through another, acts personally"). It is a parallel concept to

vicarious liability Vicarious liability is a form of a strict, secondary liability that arises under the common law doctrine of agency, ''respondeat superior'', the responsibility of the superior for the acts of their subordinate or, in a broader sense, the res ...

(in which one person is held liable for the acts or omissions of another) in

criminal law Criminal law is the body of law that relates to crime. It prescribes conduct perceived as threatening, harmful, or otherwise endangering to the property, health, safety, and moral welfare of people inclusive of one's self. Most criminal law i ...

tort A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with criminal wrongs that are punishable ...

Concepts

In a busy commercial world, the smooth flow of trade depends on the use of agents. This may be because in

business entities In law, a legal person is any person or 'thing' (less ambiguously, any legal entity) that can do the things a human person is usually able to do in law – such as enter into contracts, sue and be sued, own property, and so on. The reason for ...

such as: *

sole trader A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. A sole ...

s, their ability to conduct business will always be limited unless other people are used to work on their behalf; *a

partnership A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments o ...

, the

natural person In jurisprudence, a natural person (also physical person in some Commonwealth countries, or natural entity) is a person (in legal meaning, i.e., one who has its own legal personality) that is an individual human being, distinguished from the bro ...

s who are involved cannot be present to conduct business in multiple locations simultaneously, so they must rely on others to make agreements or deliver services on their behalf; or *a

corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...

is only a

legal entity In law, a legal person is any person or 'thing' (less ambiguously, any legal entity) that can do the things a human person is usually able to do in law – such as enter into contracts, sue and be sued, own property, and so on. The reason for ...

or fictitious legal person and so can only act through the agency of human beings to get anything done. In the majority of cases, it is impossible for agents to seek specific authority for every deal or detail within a deal. Agents must, of necessity, be allowed some degree of discretion in the conduct of routine transactions. But, for the purposes of ascribing legal responsibility to the Principal, when the Agent acts with actual or apparent authority, all the Agent's knowledge will be imputed to the Principal. If Principals were allowed to hide behind their agents' own ignorance, mistakes or failures to communicate, a Principal could, by using an Agent, achieve a better result than if they acted personally. For example, if the particular deal turned out well, the Principal could adopt the transaction. But, if it turned out badly, the Principal could disavow it. Indeed, if not for imputation, there would be a

perverse incentive A perverse incentive is an incentive that has an unintended and undesirable result that is contrary to the intentions of its designers. The cobra effect is the most direct kind of perverse incentive, typically because the incentive unintentional ...

to conduct business through Agents rather than personally. Consequently, the Principal cannot exploit ignorance to their advantage by instructing the Agent to withhold key information or by appointing an Agent known to be secretive. This rule in favour of imputation relates to the duties an Agent owes a Principal, in particular the Agent's duty to communicate material facts to the Principal. Since the purpose of the law is to offer protection to Third Parties who have acted in

good faith In human interactions, good faith ( la, bona fides) is a sincere intention to be fair, open, and honest, regardless of the outcome of the interaction. Some Latin phrases have lost their literal meaning over centuries, but that is not the case ...

, it is reasonable to allow them to believe that, in most cases, the Agents have fulfilled this duty. After all, the Principal selects the Agents and has the power to control their actions both through express instructions and incentives intended to influence their behaviour which will include laying down routines for how Agents should handle information, and the extent to which Agents will be rewarded for transmitting information of commercial value. The result is a form of strict liability in which the legal consequences of an Agent's acts or omissions are attributed to a Principal even when the Principal was without fault in appointing or supervising the Agent. Borrowing parallel concepts from Tort and

Equity Equity may refer to: Finance, accounting and ownership * Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the dif ...

, this means that the Principal owes the Third Party a

duty of care In tort law, a duty of care is a legal obligation that is imposed on an individual, requiring adherence to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be establis ...

to ensure that the Agent is honest and efficient, and that a Principal is

estopped Estoppel is a judicial device in common law legal systems whereby a court may prevent or "estop" a person from making assertions or from going back on his or her word; the person being sanctioned is "estopped". Estoppel may prevent someone from ...

from denying that an Agent was authorised to act as they did.

Summary of law

There are three classes of Principal:

Authority

For these purposes, the Principal must give, or be deemed to give, the Agent authority to act. *Actual authority :This arises where the Principal's words or conduct reasonably cause the Agent to believe they have been authorised to act. This may be expressed as a

contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...

or implied because what is said or done make it reasonably necessary for the person to assume the powers of an Agent. If it is clear that the Principal gave actual authority to Agent, all the Agent's actions falling within the scope of the authority given bind the Principal. This results even if, having actual authority, the Agent in fact acts

fraud In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compens ...

ulently for his own benefit, unless the Third Party was aware of the Agent's personal agenda. If there is no contract but the Principal's words or conduct reasonably led the Third Party to believe that the Agent was authorised to act, or if what the Agent proposes to do is incidental and reasonably necessary to accomplish an actually authorised transaction or a transaction that usually accompanies it, then the Principal is bound. *Apparent or

ostensible authority In the United States, the United Kingdom, Australia, Canada and South Africa, apparent authority (also called "ostensible authority") relates to the doctrines of the law of agency. It is relevant particularly in corporate law and constitutiona ...

:If the Principal's words or conduct would lead a reasonable person in the Third Party’s position to believe that the Agent was authorised to act, say by appointing the Agent to a position which carries with it agency-like powers, those who know of the appointment are entitled to assume that there is apparent authority to do the things ordinarily entrusted to one occupying such a position. If a Principal creates the impression that an Agent is authorised but there is no actual authority, Third Parties are protected so long as they have acted reasonably. This is sometimes termed "Agency by

Estoppel Estoppel is a judicial device in common law legal systems whereby a court may prevent or "estop" a person from making assertions or from going back on his or her word; the person being sanctioned is "estopped". Estoppel may prevent someone from ...

" or the "Doctrine of Holding Out", where the Principal is stopped from denying the grant of authority if Third Parties have changed their positions to their detriment in reliance on the representations made. *Authority by virtue of a position held :For example, partners have apparent authority to bind the other partners in the firm, their liability being joint and several, and in a

, all executives and senior employees with decision-making authority by virtue of their declared position have apparent authority to bind the corporation. Even if the Agent does act without authority, the Principal may ratify the transaction and accept liability on the transactions as negotiated. This may be express or implied from the Principal's behaviour, e.g. if the Agent has purported to act in a number of situations and the Principal has knowingly acquiesced, the failure to notify all concerned of the Agent's lack of authority is an implied ratification to those transactions and an implied grant of authority for future transactions of a similar nature.

Liability

Agent to Principal

If the Agent has acted without actual authority, but the Principal is nevertheless bound because the Agent had apparent authority, the Agent is liable to indemnify the Principal for any resulting loss or damage.

Principal to Agent

If the Agent has acted within the scope of the actual authority given, the Principal must indemnify the Agent for payments made during the course of the relationship whether the expenditure was expressly authorized or merely necessary in promoting the Principal’s business.

Third Party to Principal

The Third Party is liable to the Principal on the terms of the agreement made with the Agent, unless the Principal was undisclosed and there is clear evidence that either the Agent or the Principal knew that the Third Party would not have entered into the agreement if they had known of the Principal's involvement.

Duties

The relationship between a Principal and an Agent is

fiduciary A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...

which requires the Agent to be loyal to the Principal. This involves duties: *not to accept any new obligations that are inconsistent with the duties owed to the Principal. Agents can represent the interests of more than one Principal, conflicting or potentially conflicting, only on the basis of full and timely disclosure or where the different agencies are based on a limited form of authority to prevent a situation where the Agent's loyalty to the any one of the multiple Principals is compromised. For this purpose, express clauses in the agreement signed by each Principal with the Agent may identify specific types or categories of activities that do not breach the duty of loyalty and so long as these exceptions are not unreasonable, they bind the Principals. *not to make a private profit or unjustly enrich himself from the agency relationship. Principals usually include a power in their contract with the Agents allowing them to inspect the Agents' accounts if reasonable suspicion of improper behavior emerges. In return, the Principal must make a full disclosure of all information relevant to the transactions that the Agent is authorized to negotiate and pay the Agent either the commission or fee as agreed, or a reasonable fee if none were previously agreed on.

Remedies against agent

The principal has the following remedies against the agent for breaching his/her

fiduciary duty A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exampl ...

:Slide 9 o
Chapter 19 Powerpoint
for text

Constructive trust

If the agent wrongfully holds property that should be owned or entitled to the principal, the principal can ask the court to deem it a

constructive trust A constructive trust is an equitable remedy imposed by a court to benefit a party that has been wrongfully deprived of its rights due to either a person obtaining or holding a legal property right which they should not possess due to unjust enri ...

—that the agent is holding the property on behalf of the principal.

Avoidance

The principal can void contracts negotiated by an agent that breached his or her fiduciary duty.

Indemnification

The principal can sue the agent for liability caused by the agent's wrongful acts, i.e. if a third party obtained a judgment against the principal for wrongful acts caused by the agent, the principal can sue the agent to recover the loss.

Negligence (for not following instructions)

A principal can sue for the negligence of an agent who failed to follow instructions, unless it was simply a failure to follow the principal's ''advice''.

Undisclosed principal

An Undisclosed principal is an unrevealed one, in a situation involving an undisclosed

. It is "a person who uses an agent for his/her negotiations with a third party, often when the agent pretends to be acting for himself/herself." In a

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...

transaction, this could be any "major party to a transaction, such as a seller or purchaser of property," who wishes to remain anonymous. Some taxing authorities have created

rules Rule or ruling may refer to: Education * Royal University of Law and Economics (RULE), a university in Cambodia Human activity * The exercise of political or personal control by someone with authority or power * Business rule, a rule pert ...

regarding tax liability for actions of an undisclosed principal. The undisclosed agency may also affect

liability.''Wahab Janitorial Services v. P.M. Group Mgt.'', 161 Ohio App.3d 632, 2007-Ohio-3037 (2005), found a
Pdf file of ''Wahab Janitorial Services'' case

Termination

The Principal can terminate an Agent's authority at any time without having to give notice. If the trust between the Agent and Principal has broken down, it is not reasonable to allow the Principal to remain at risk in any transactions that the Agent might conclude during a period of notice.

Economic analysis

The analysis of principal–agent relationships is an important topic in economics. The main focus of analysis is on the

information asymmetry In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. Information asymmetry creates an imbalance of power in transactions, which ca ...

between the agent, who is assumed to be well informed, and the principal who may not be.

References

{{DEFAULTSORT:Principal (Commercial Law) Business law Asymmetric information Agency law