The Concept of Agency in Business Law

The clerk sells a bag full of groceries to the hassled mother. A car dealer lowers the price of the car he is selling a retiree. A moving truck carrying a households goods makes its way down the interstate. In each of these situations, someone (the clerk, the car dealer and the truck driver) acts on behalf of a company or other person (grocery store, dealership or the family that is moving). The relationship between that acting party and the person they are working for falls under a special area of law called agency. 

Agency is defined by the legal profession as “A relation, created either by express or implied contract or by law, whereby one party (called the principal or constituent) delegates the transaction of some lawful business or the authority to do certain acts for him or in relation to his rights or property, with more or less discretionary power, to another person (called the agent, attorney, proxy, or delegate) who undertakes to manage the affair and render him an account thereof.  By separating out the various parts of this definition it is easy to understand the concept of agency and notice when and where it happens in the business world.  The major ideas hidden in the legal language above are principal, agent, relationship, representation and actual delegation. 


The principal is the person or business with a job to do. Two examples of a principal are a person who wants to move their belongings from New York to Florida or a company that wants to sell groceries. Each of these principals are not able to do the job themselves. The company is not a person so it cannot suddenly appear on each street corner, and the person who is moving does not own a big enough truck. Each of them must find someone else to act on their behalf to accomplish the job they want to do. 


The agent is the person who agrees to do that job. An agent might be a store clerk who works the check out line at a grocery store. It might also be a person who owns a moving truck. These people speak with the principal and agree to accept some form of relationship. 


When the principal and agent sit down and agree on what the principal wants done and what the agent will do for the principal, a relationship is formed. This relationship can be based on a written contract, the behavior of the two parties following the conversation, or an already existing legally defined job. These three separate styles of relationships are referred to as express contract, implied contracts or by law, respectively. In business, express contracts are the easiest to spot because there is a document at the back of each one. Some express contracts that create agency relationships are the papers a person signs agreeing to let a Realtor sell their house, or the paperwork that is signed by a business when they hire an employee that outlines the employees job. Implied contracts are harder to spot. An implied contract exists when a two parties act like a principal and agent even though there is not written document outlining their relationship. The final type of relationship is by law. A relationship defined by law would be like the one that exists between a sales person and the company whose products they sell.  


While the definition of agency limits the ability of an agent to act for the principal to the agreed upon relationship, there is another side to the principal of agency, and that is the third parties. Like the customer at the grocery store, the third party must deal with the agent or clerk to transact business with the principal or grocery chain. The agent and principal must represent to these third parties what sort of relationship exists, usually with papers, words or actions. Sometimes this is done with papers that may be shown to individuals. A truck driver usually carries papers showing that the cargo their truck is carrying belongs to a specific company and that the driver is employed as an agent of that company to move the goods.  Words are often used to show agency. A Realtor will tell a home owner that they represent an interested buyer. Sometimes actions represent agency. In a grocery store, the person standing at the cash register wearing a store name tag is safely assumed to be an agent of the store. 

Actual Delegation

Another difficulty of agency lies in what is actually delegated between the principal and agent instead of what is represented to the public. Sometimes the agent is allowed to represent what the relationship means and that agent gets it wrong. A store clerk who suddenly offers a 10% discount for using their check out lane is overstepping the bounds of the relationship that they (the agent) and the store (the principal) actually have. While some examples of this seem silly, it can become a serious complication for businesses.  When a large store sells a buyer to China trying to get beach balls for their stores. That buyer could buy lead weights from a foundry instead. What happens to the contract between the foundry and the large store once the buyers actual relationship is revealed has created many messy legal battles for companies.

While the concept of agency seems confusing, it can be easily broken down into five main parts. Agency starts with a principal who wants to get a specific job done. He finds someone to do that job, the agent. The two of them decide on a relationship which gives the agent the authority to act for the principal, and limits that authority by a contract or law. The principal and agent represent to third parties that their relationship exists in a way that allows the agent to accomplish his or her task. The agent can then go out and do business with third parties on behalf of the principal, but the agent should stick o the actual delegation of the job. The intricate workings of each agency agreement or situation are as varied as the forms of business conducted in this world, but they can all be reduced to these few points.