Agency relationship is a consensual relationship between two parties, where one party, the principal, gives authority to another party, the agent, to act on behalf of and under the control of the principal to deal with a third party, thereby creating a fiduciary relationship. The law of agency allows one person to employ another to do his/her work, sell his/her goods, and acquire property on his/her own behalf. Although a principal-agent relationship can be created by a contract between the parties, a contract is not necessary if it is obvious that the two parties intended to act as principal and agent. The intent of the parties can be expressed with words or implied by their actions. The principal can authorize the agent to perform a variety of tasks or restrict the agent to specific functions, but no matter how much authority is given to the agent, the agent represents the principal and is subject to the principal’s control at all times. More important, the principal is liable for the consequences of the actions that the agent performed, and the actions and words exchanged between an agent and a third party are binding to the principal.
This is known as vicarious liability and it is the reason business owners must be extremely careful of who they hire to represent his/her company. Agency theory is the idea that the agent does not always have the principal’s best interests in mind. A voluntary, good faith relationship of trust, known as a fiduciary relationship, exists between a principal and an agent, and there are four main elements of fiduciary duty that the agent has toward the principal for the principal’s protection. The first requires the agent to exercise a duty of loyalty to the principal. An agent cannot receive outside benefits without the permission of the principal, share confidential information, fraternize with the competition of the principal, work for the principals competition, deal secretly with his/her principal, and must exercise appropriate behavior while representing the principals interests. An agent who acts in his/her own interest violates the fiduciary duty and will be financially liable to the principal for any losses the principal suffers due to the breach of the fiduciary duty.
The Term Paper on Principal Agent Theory
There are many settings in which one economic actor (the principal) delegates authority and/or responsibilities to an agent to act on his behalf. The primary reason for doing so is that the agent has an advantage in terms of expertise or information. This informational advantage, or information asymmetry, poses a problem for the principal—how can the principal be sure that the agent has in fact ...
The second of these duties is the duty to obey instructions. This states that an agent must follow the directions of the principal unless by doing so, the agent would break the law or put himself/herself or others in danger. The third fiduciary duty is the duty of care, which states that an agent must use reasonable care to protect the interests of the principal. And the third of these duties is the duty to provide information. This duty says that an agent must give any and all information to a principal if that information concerns the principal. The duties that a principal has to an agent are the duty to reimburse the agent, and the duty to cooperate with the agent.
