In many day to day transactions, you may hear the term “agency” or that one person is acting as the “agent” of a company or another person or other entity, known as a “principal”. What does this really mean? Furthermore, can an agent be liable for actions it has taken on behalf of a principal?
“Agency” is a fiduciary relationship existing between persons (the term “persons” can be an organization, a corporation or an individual acting on behalf of an organisation or corporation), one of whom expressly or impliedly consents that the other should act on his behalf so as to affect his relations with third parties, and the other consents so to act or so acts. In this scenario, the agent is the representative of the principal and acts for and instead of, the principal.
The relationship between an agent and a principal is a contractual one. Therefore, rights and duties of the agent and principal are in accordance with the agency contract. An agency relationship can be created in many ways – expressly in writing or it can be established orally. It can also be implied from the conduct of the parties or from the nature of the employment relationship between the two parties. For example, a company acting as a principal may ask an agent, such as an employee, to sign documents for the company or speak to vendors or clients on behalf of the company. In some cases, agency can be conferred by a valid ratification by the principal subsequent to actual performance by the agent. However, an agent cannot be said to have authority to act on behalf of a principal only on the basis that he holds himself out as having it.
When does an Agent become liable for actions taken on behalf of a Principal?
If an agent injures another person (referred to as a tortious act), even if on behalf of a principal, that agent is personally liable. A person is liable for his or her own torts (examples of which are assault, battery and damage to personal property), with a few exceptions. If the principal authorised the injury, the principal does not escape liability either.
Generally, an agent is not liable on contracts made on the principal’s contract as the agent is not a party to a contract made by the agent on behalf of the principal. There are exceptions to this general rule. An agent who purports to make a contract on behalf of a principal, but who in fact has no authority to do so or acts outside the scope of that authority is liable to the other party. The scope of the authority extends to all acts which are reasonably necessary to achieve the principal’s purposes for which he granted the authority to the agent. This is unless there are clear signs that the principal intended to grant only a limited authority to the agent.
An agent may enter into a contract and not disclose to that contracting party that he actually acts on behalf of a principal. Under the common law, if the agent had power to make the contract and the other contracting party learns the principal’s identity, the other party to the contract may sue the principal (and not the agent) in cases where there is a legal issue which warrants this. However, if the agent actually has no power to enter into a contract, the principal may escape liability by demonstrating that the scope of agency did not include this power.
As with many other legal relationships, the authority of an agent to act on behalf of a principal can be nuanced. It is important to note that if one holds itself out as an agent of another, there are significant legal consequences which arise from this.