Principal (law)
Encyclopedia
In commercial law
, a principal is a person, legal or natural
, who authorizes an agent to act to create one or more legal relationships with a third party. This branch of law is called agency
and relies on the common law
proposition qui facit per alium, facit per se (Latin
"he who acts through another, acts personally").
It is a parallel concept to vicarious liability
and strict liability
(in which one person is held liable for the acts or omissions of another) in criminal law
or tort
s.
In the majority of cases, it is impossible for agents to seek specific authority for every deal or detail within a deal. Agents must, of necessity, be allowed some degree of discretion in the conduct of routine transactions. But, for the purposes of ascribing legal responsibility to the Principal, when the Agent acts with actual or apparent authority, all the Agent's knowledge will be imputed
to the Principal. If Principals were allowed to hide behind their agents' own ignorance, mistakes or failures to communicate, a Principal could, by using an Agent, achieve a better result than if they acted personally. For example, if the particular deal turned out well, the Principal could adopt the transaction. But, if it turned out badly, the Principal could disavow it. Indeed, if not for imputation, there would be a perverse incentive
to conduct business through Agents rather than personally. Consequently, the Principal cannot exploit ignorance to their advantage by instructing the Agent to withhold key information or by appointing an Agent known to be secretive.
This rule in favour of imputation relates to the duties an Agent owes a Principal, in particular the Agent's duty to communicate material facts to the Principal. Since the purpose of the law is to offer protection to Third Parties who have acted in good faith
, it is reasonable to allow them to believe that, in most cases, the Agents have fulfilled this duty. After all, the Principal selects the Agents and has the power to control their actions both through express instructions and incentives intended to influence their behaviour which will include laying down routines for how Agents should handle information, and the extent to which Agents will be rewarded for transmitting information of commercial value. The result is a form of strict liability in which the legal consequences of an Agent's acts or omissions are attributed to a Principal even when the Principal was without fault in appointing or supervising the Agent. Borrowing parallel concepts from Tort and Equity, this means that the Principal owes the Third Party a duty of care
to ensure that the Agent is honest and efficient, and that a Principal is estopped
from denying that an Agent was authorised to act as they did.
Even if the Agent does act without authority, the Principal may ratify the transaction and accept liability on the transactions as negotiated. This may be express or implied from the Principal's behaviour, e.g. if the Agent has purported to act in a number of situations and the Principal has knowingly acquiesced, the failure to notify all concerned of the Agent's lack of authority is an implied ratification to those transactions and an implied grant of authority for future transactions of a similar nature.
In return, the Principal must make a full disclosure of all information relevant to the transactions that the Agent is authorized to negotiate and pay the Agent either the commission
or fee as agreed, or a reasonable fee if none were previously agreed on.
. It is "a person who uses an agent for his/her negotiations with a third party, often when the agent pretends to be acting for himself/herself." In a real estate
transaction, this could be any "major party to a transaction, such as a seller or purchaser of property," who wishes to remain anonymous.
Some taxing authorities have created rules
regarding tax liability for actions of an undisclosed principal. The undisclosed agency may also effect tort
liability
.
)
The analysis of principal-agent relationships is an important topic in economics. The main focus of analysis is on the information asymmetry
between the agent, who is assumed to be well informed, and the principal who may not be.
Commercial law
Commercial law is the body of law that governs business and commercial transactions...
, a principal is a person, legal or natural
Natural person
Variously, in jurisprudence, a natural person is a human being, as opposed to an artificial, legal or juristic person, i.e., an organization that the law treats for some purposes as if it were a person distinct from its members or owner...
, who authorizes an agent to act to create one or more legal relationships with a third party. This branch of law is called agency
Agency (law)
The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another to create a legal relationship with a third party...
and relies on the common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
proposition qui facit per alium, facit per se (Latin
Latin
Latin is an Italic language originally spoken in Latium and Ancient Rome. It, along with most European languages, is a descendant of the ancient Proto-Indo-European language. Although it is considered a dead language, a number of scholars and members of the Christian clergy speak it fluently, and...
"he who acts through another, acts personally").
It is a parallel concept to vicarious liability
Vicarious liability
Vicarious liability is a form of strict, secondary liability that arises under the common law doctrine of agency – respondeat superior – the responsibility of the superior for the acts of their subordinate, or, in a broader sense, the responsibility of any third party that had the "right, ability...
and strict liability
Strict liability
In law, strict liability is a standard for liability which may exist in either a criminal or civil context. A rule specifying strict liability makes a person legally responsible for the damage and loss caused by his or her acts and omissions regardless of culpability...
(in which one person is held liable for the acts or omissions of another) in criminal law
Criminal law
Criminal law, is the body of law that relates to crime. It might be defined as the body of rules that defines conduct that is not allowed because it is held to threaten, harm or endanger the safety and welfare of people, and that sets out the punishment to be imposed on people who do not obey...
or tort
Tort
A tort, in common law jurisdictions, is a wrong that involves a breach of a civil duty owed to someone else. It is differentiated from a crime, which involves a breach of a duty owed to society in general...
s.
Concepts
In a busy commercial world, the smooth flow of trade depends on the use of agents. This may be because in business entities such as:- sole traders, their ability to conduct business will always be limited unless other people are used to work on their behalf;
- a partnershipPartnershipA partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
, the natural personNatural personVariously, in jurisprudence, a natural person is a human being, as opposed to an artificial, legal or juristic person, i.e., an organization that the law treats for some purposes as if it were a person distinct from its members or owner...
s who are involved cannot be present to conduct business in multiple locations simultaneously, so they must rely on others to make agreements or deliver services on their behalf; or - a corporationCorporationA corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
is only a legal entity or fictitious legal person and so can only act through the agency of human beings to get anything done.
In the majority of cases, it is impossible for agents to seek specific authority for every deal or detail within a deal. Agents must, of necessity, be allowed some degree of discretion in the conduct of routine transactions. But, for the purposes of ascribing legal responsibility to the Principal, when the Agent acts with actual or apparent authority, all the Agent's knowledge will be imputed
Imputation (law)
In law, the principle of imputation or attribution underpins the concept that ignorantia juris non excusat—ignorance of the law does not excuse. All laws are published and available for study in all developed states...
to the Principal. If Principals were allowed to hide behind their agents' own ignorance, mistakes or failures to communicate, a Principal could, by using an Agent, achieve a better result than if they acted personally. For example, if the particular deal turned out well, the Principal could adopt the transaction. But, if it turned out badly, the Principal could disavow it. Indeed, if not for imputation, there would be a perverse incentive
Perverse incentive
A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequences.- Examples :...
to conduct business through Agents rather than personally. Consequently, the Principal cannot exploit ignorance to their advantage by instructing the Agent to withhold key information or by appointing an Agent known to be secretive.
This rule in favour of imputation relates to the duties an Agent owes a Principal, in particular the Agent's duty to communicate material facts to the Principal. Since the purpose of the law is to offer protection to Third Parties who have acted in good faith
Good faith
In philosophy, the concept of Good faith—Latin bona fides “good faith”, bona fide “in good faith”—denotes sincere, honest intention or belief, regardless of the outcome of an action; the opposed concepts are bad faith, mala fides and perfidy...
, it is reasonable to allow them to believe that, in most cases, the Agents have fulfilled this duty. After all, the Principal selects the Agents and has the power to control their actions both through express instructions and incentives intended to influence their behaviour which will include laying down routines for how Agents should handle information, and the extent to which Agents will be rewarded for transmitting information of commercial value. The result is a form of strict liability in which the legal consequences of an Agent's acts or omissions are attributed to a Principal even when the Principal was without fault in appointing or supervising the Agent. Borrowing parallel concepts from Tort and Equity, this means that the Principal owes the Third Party a duty of care
Duty of care
In tort law, a duty of care is a legal obligation imposed on an individual requiring that they adhere to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be established to proceed with an action in negligence. The claimant...
to ensure that the Agent is honest and efficient, and that a Principal is estopped
Estoppel
Estoppel in its broadest sense is a legal term referring to a series of legal and equitable doctrines that preclude "a person from denying or asserting anything to the contrary of that which has, in contemplation of law, been established as the truth, either by the acts of judicial or legislative...
from denying that an Agent was authorised to act as they did.
Summary of law
There are three classes of Principal:| Class | Description |
|---|---|
| Disclosed | at the time of the transaction made by the Agent with the Third Party, the latter knows that the person he is dealing with is acting as an Agent and also knows the Principal’s identity. |
| Partially disclosed | at the time of the transaction, the Third Party knows that the person he is dealing with is acting as an Agent but does not know the Principal’s identity. |
| Undisclosed | The person acting as an Agent represents they are acting on their own behalf and does not disclose the existence of the agency relationship. This is usually because the Principal is wealthy and believes that money can be saved on the proposed deal if their involvement is hidden. |
Authority
For these purposes, the Principal must give, or be deemed to give, the Agent authority to act.- Actual authority
- This arises where the Principal's words or conduct reasonably cause the Agent to believe they have been authorised to act. This may be expressed as a contractContractA contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
or implied because what is said or done make it reasonably necessary for the person to assume the powers of an Agent. If it is clear that the Principal gave actual authority to Agent, all the Agent's actions falling within the scope of the authority given bind the Principal. This results even if, having actual authority, the Agent in fact acts fraudFraudIn criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
ulently for his own benefit, unless the Third Party was aware of the Agent's personal agenda. If there is no contract but the Principal's words or conduct reasonably led the Third Party to believe that the Agent was authorised to act, or if what the Agent proposes to do is incidental and reasonably necessary to accomplish an actually authorised transaction or a transaction that usually accompanies it, then the Principal is bound.- Apparent or ostensible authority
- If the Principal's words or conduct would lead a reasonable person in the Third Party’s position to believe that the Agent was authorised to act, say by appointing the Agent to a position which carries with it agency-like powers, those who know of the appointment are entitled to assume that there is apparent authority to do the things ordinarily entrusted to one occupying such a position. If a Principal creates the impression that an Agent is authorised but there is no actual authority, Third Parties are protected so long as they have acted reasonably. This is sometimes termed "Agency by EstoppelEstoppelEstoppel in its broadest sense is a legal term referring to a series of legal and equitable doctrines that preclude "a person from denying or asserting anything to the contrary of that which has, in contemplation of law, been established as the truth, either by the acts of judicial or legislative...
" or the "Doctrine of Holding Out", where the Principal is stopped from denying the grant of authority if Third Parties have changed their positions to their detriment in reliance on the representations made.- Authority by virtue of a position held
- For example, partnersPartnershipA partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
have apparent authority to bind the other partners in the firm, their liability being joint and several, and in a corporationCorporationA corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
, all executives and senior employees with decision-making authority by virtue of their declared position have apparent authority to bind the corporation.
Even if the Agent does act without authority, the Principal may ratify the transaction and accept liability on the transactions as negotiated. This may be express or implied from the Principal's behaviour, e.g. if the Agent has purported to act in a number of situations and the Principal has knowingly acquiesced, the failure to notify all concerned of the Agent's lack of authority is an implied ratification to those transactions and an implied grant of authority for future transactions of a similar nature.
Agent to Principal
If the Agent has acted without actual authority, but the Principal is nevertheless bound because the Agent had apparent authority, the Agent is liable to indemnify the Principal for any resulting loss or damage.Principal to Agent
If the Agent has acted within the scope of the actual authority given, the Principal must indemnify the Agent for payments made during the course of the relationship whether the expenditure was expressly authorised or merely necessary in promoting the Principal’s business.Third Party to Principal
The Third Person is liable to the Principal on the terms of the agreement made with the Agent unless the Principal was undisclosed and there is clear evidence that either the Agent or the Principal knew that the Third Party would not have entered into the agreement if they had known of the Principal's involvement.Duties
The relationship between a Principal and an Agent is fiduciary which requires the Agent to be loyal to the Principal. This involves duties:- not to accept any new obligations that are inconsistent with the duties owed to the Principal. Agents can represent the interests of more than one Principal, conflicting or potentially conflicting, only on the basis of full and timely disclosure or where the different agencies are based on a limited form of authority to prevent a situation where the Agent's loyalty to the any one of the multiple Principals is compromised. For this purpose, express clauses in the agreement signed by each Principal with the Agent may identify specific types or categories of activities that do not breach the duty of loyalty and so long as these exceptions are not unreasonable, they bind the Principals.
- not to make a private profit or unjustly enrich himself from the agency relationship. Principals usually include a power in their contract with the Agents allowing them to inspect the Agents' accounts if reasonable suspicion of improper behavior emerges.
In return, the Principal must make a full disclosure of all information relevant to the transactions that the Agent is authorized to negotiate and pay the Agent either the commission
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
or fee as agreed, or a reasonable fee if none were previously agreed on.
Undisclosed principal
An Undisclosed principal is an unrevealed one, in a situation involving an undisclosed agencyAgency (law)
The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another to create a legal relationship with a third party...
. It is "a person who uses an agent for his/her negotiations with a third party, often when the agent pretends to be acting for himself/herself." In a real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
transaction, this could be any "major party to a transaction, such as a seller or purchaser of property," who wishes to remain anonymous.
Some taxing authorities have created rules
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
regarding tax liability for actions of an undisclosed principal. The undisclosed agency may also effect tort
Tort
A tort, in common law jurisdictions, is a wrong that involves a breach of a civil duty owed to someone else. It is differentiated from a crime, which involves a breach of a duty owed to society in general...
liability
Legal liability
Legal liability is the legal bound obligation to pay debts.* In law a person is said to be legally liable when they are financially and legally responsible for something. Legal liability concerns both civil law and criminal law. See Strict liability. Under English law, with the passing of the Theft...
.
Termination
The Principal can terminate an Agent's authority at any time without having to give notice. If the trust between the Agent and Principal has broken down, it is not reasonable to allow the Principal to remain at risk in any transactions that the Agent might conclude during a period of notice.Economic analysis
(main article Principal-Agent problemPrincipal-agent problem
In political science and economics, the principal–agent problem or agency dilemma treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent, such as the problem of potential moral hazard and conflict of interest, in as much as the...
)
The analysis of principal-agent relationships is an important topic in economics. The main focus of analysis is on the information asymmetry
Information asymmetry
In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure...
between the agent, who is assumed to be well informed, and the principal who may not be.
See also
- Agency (law)Agency (law)The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another to create a legal relationship with a third party...
- Agent (law)
- CommissionaireCommissionaireIn mainland Europe, a commissionaire is an attendant, messenger or subordinate employed in hotels, whose chief duty is to attend at railway stations, secure customers, take charge of their luggage, carry out the necessary formalities with respect to it and have it sent on to the hotel...
- Corporate officer
- Employee
- Independent contractorIndependent contractorAn independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when...
- Insider tradingInsider tradingInsider trading is the trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company...
- Principal (criminal law)Principal (criminal law)Under criminal law, a principal is any actor who is primarily responsible for a criminal offense. Such an actor is distinguished from others who may also be subject to criminal liability as accomplices, accessories or conspirators....
- Seal (contract law)Seal (contract law)In the law, a seal affixed to a contract or other legal instrument has had special legal significance at various times in the jurisdictions that recognise it...