Don't Forget About Agency Law When Entering Into Commercial Contracts
Yesterday, when teaching business law concepts to a group of 60, we delved into a topic that many business owners are unfamiliar with...Agency Law. As a result, I thought I write a short piece about this vital area of commercial contract law. In agency law, an agent (third party) is authorized to act on behalf of a principal (primary party) to create a legal relationship with another individual or business. Common agency relationships include:
Employment (employer, employees);Real estate (real estate agents);Financial services (stock brokers, insurance agents); andPromotion (modeling, acting, music, publishing, and sports agents)
Agency law is the branch of legal activity that addresses relationships between each party in a situation where one individual or company is authorized to work on behalf of another.
Businesses commonly rely on agents to conduct their affairs, although they are not always perceived as such. Employees are agents of their employers. All individuals carrying out the work of a corporation are agents, because a corporation is a legal entity (person). The principal in an agency relationship (company or person) is contractually bound by any agreement entered into by the agent, as long as the agent is operating within his authority.
This is particularly important for entrepreneurs to understand. When you authorize others to act for you, you can be legally bound by their actions—for better or worse. Authority can be granted, or perceived to have been granted, by several means:
Contractually, through a written contract;Words or conduct, if the principals’ actions or words would make it so that a reasonable person would assume authority (you say or do something that implies it);Ostensible authority, if the principal makes it appear to the third party that the agent is authorized, such as putting the agent in a position of authority (manager, supervisor, or sales representative); orImplied—the level of authority, is considered necessary to fulfill the agent’s job, such as a partner or senior executive in a business (responsibility and authority are the norm in certain positions).
The area of agency law is quite complex—and significant to the entrepreneur. If you are in a partnership, any partner is presumed to have the authority to enter into agreements that bind the other partners (agency power). This could lead to financial disaster. Or, consider a salesperson attempting to close a sale. This individual could commit to giving discounts without your knowledge or approval.
As far as the customer is concerned, your company has made the offer. If the offer is not satisfactory to you, as the owner, you are in the awkward position of either doing as promised to keep the customer happy or attempting to renege and alienating the customer, with perhaps further consequences to follow. The law of agency sets parameters for the liability of each party.
Remember be aware of the ramifications of the principal/agent relationship and how it may affect how you operate your business. If you are interested in a consultation on how you can mitigate your risks, feel free to contact me at www.kmpbusinessconsulting.com.
Disclaimer: Articles are made available for educational purposes only as well as to give you general information and a general understanding of the legal concepts, not to provide legal advice. By reading this article you understand that there is no attorney-client relationship created between you and KMP Business Consulting Services. The information provided in this article is not legal advice. You should not act upon this information without seeking advice from a lawyer licensed in your own state or jurisdiction.