What is Agency in Business Law?

What is Agency in Business Law?

Most corporate attorneys are familiar with the concept of agency. Agency relationships are everywhere in commercial law. Maybe you’ve heard someone discussing being an agent of another. Anytime a person or organization acts through another, agency concepts are probably involved.

The Agency Relationship

So what is agency exactly? When is someone an agent of another? The first major point is that agency law is going to primarily be based on State law. Due to this, you’ll need to speak with a local business lawyer in order to fully analyze any agency problems. For purposes of this article, however, we’ll discuss agency more generally.

Agency is a fiduciary relationship where the parties involved have mutually consented that one person (the agent) will act on behalf of the other person (the principal) but will be subject to the principal’s control. In most cases, the principal has asked someone to act on their behalf (subject to some degree of control) and that creates an agency relationship between them. When it has been determined that someone was legally the agent of another, a variety of obligations arise between the parties themselves and third parties as well.

Who Can Be An Agent?

It seems pretty intuitive that an individual can be an agent (and usually, that is the case). An individual, however, is not the only possible agent. In fact, an organization can be an agent and even a principal. It’s even possible to have two organizations as the principal and agent. That means you can have individuals, for profit corporations non-profit corporations, partnerships, and LLCs all involved in agency relationships.

Mutual Consent

The first thing we must consider in determining whether or not an agency relationship exists is consent. Both the principal and the agent just have given informed consent to enter the agency relationship. This can usually take place explicitly or implicitly depending on the jurisdiction. In the clear cut cases, there will be some written agreement or clear understanding between the parties as to what the role of the agent will be this agreement will both govern the scope of the agency and be used to clearly show it was entered into by two informed parties. You don’t need a contract, however, to establish agency.

As with many areas of the law, it’s not always that clear. In ambiguous cases, actions or statements that indicate knowledge and consent regarding the agent’s authority to act on behalf of the principal is probably enough. Most jurisdictions are going to apply an objective standard to determine if a reasonable person under the circumstance would have given informed consent and understood the implications of the relationship. That is to say, if the issue is before a court, there will often be an analysis of what the parties said and how they acted. Even if they claim there was no agency relationship, one could be found if they acted as such. It can be a complicated exercise which is why we recommend always utilizing a clear and unambiguous contract when dealing with a potential agency relationship. It is also important to consider that some jurisdictions may require an agency relationship be set forth in writing so consult with your local business attorney to make sure everything is covered for your desired arrangement. 

Control

Aside from consent, the other major element is control. The key aspect of agency is that the principal must be in control of the relationship. The purpose of the relationship ultimately should be to effectuate the wishes of the principal. This is the major differentiating factor between an agent and an independent contractor. If the principal is in control, it’s more likely to be an agency relationship. The control analysis can get very complicated so it’s best to speak with a business attorney as opposed to trying to outline all the possible ways a principal can control the agent.

State Laws

Most of what we’ve covered here is common law agency and principles that generally apply irrespective of jurisdiction. That being said, agency is highly dependent on State law. Statutory rules either supplement the common law or change certain facets of it entirely. There could be considerable court precedent in a given jurisdiction providing color to the agency analysis. If you are in Ohio, Michigan or Florida, give our team of corporate attorneys a call today at 419-469-5002 to discuss your case. For other states, we encourage you to reach out to local counsel sooner rather than later if you are facing a potential agency problem.

Contact A Business Attorney to Discuss Your Business

There’s certainly quite a few more important aspects where agency can affect your business. It often depends on the type of business you are in and the unique relationship between the partners, potential agents and third parties. If you’d like to find out more and have a business lawyer from our team provide more narrowly tailored insight based on your business, give us a cal today at 419-469-5002.