Agency who is legally authorized to act

Agency relationships are fiduciary relationships. This means the agent is obligated to act in the best interests of the principal. This lesson explains the fiduciary duties agents owe to their principals.

Agency

Many business transactions take place using an agency relationship. Agency is a business relationship where a principal gives legal authority to an agent to act on the principal’s behalf when dealing with a third party.Note that the agency relationship is dependent upon a principal. This is the party who gives legal authority to another to act on his or her behalf in business transactions. The agency relationship also requires an agent.

An agent is a party who is legally authorized to act on behalf of another party in business transactions. Principals and agents can be individuals or can be business entities.All agency relationships are fiduciary relationships.

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This means the relationship involves a high level of trust and confidence between the principal and the agent. Because the principal has trusted the agent to supervise or protect the principal’s property, the agent owes a fiduciary duty to the principal. This means the agent is obligated to act in the best interests of the principal.

Fiduciary Duties

Agency allows the agent to work on behalf of the principal as if the principal was present and acting alone.

In an agency relationship, the agent’s actions create legal obligations for the principal. Therefore, the agent is obliged to make business decisions that are conducive to how the principal would act. Consider these common business relationships: attorney and client, broker and client, and trustee and beneficiary. Each of these is an example of a fiduciary relationship.

Note that agency relationships can only be established through consent. The principal must engage the agent, and the agent must agree to represent the principal. When the agent agrees to the agency relationship, the agent is agreeing to uphold certain fiduciary duties.

This means the agent must generally act to benefit the principal while upholding several particular obligations to the principal. The obligations can be remembered as five categories:

  • Loyalty
  • Performance
  • Notification
  • Obedience
  • Accounting

Let’s take a look at each of these five specific duties.

Loyalty and Performance

The first duty is loyalty. The agent has an obligation of loyalty to the principal and must act with allegiance solely to the principal.

Generally speaking, this means the agent must act with the principal’s best interests in mind. The agent can’t act in a way that would disadvantage or harm the principal or the principal’s property and can’t take personal advantage of business opportunities the agent discovers while performing agency duties. The agent can’t individually profit from information gathered through the agency relationship unless the principal specifically grants permission for the agent to do so.The second duty is performance. This is sometimes known as the duty of care.

This means the agent must act prudently and cautiously while performing agency duties. The agent must exercise reasonable care and skill and keep confidential any information obtained while performing agency duties. The agent can’t, intentionally or negligently, act inappropriately in the performance of agency duties.

Notification, Obedience, and Accounting

The third duty is notification. This means the agent must notify the principal of all material facts relating to the business at hand. This duty is sometimes known as the duty of disclosure. The agent must keep the principal well informed as to facts that might reasonably affect the agency relationship and facts that might affect the subject matter of the agency.The fourth duty is obedience. This means the agent must respect the principal and act with deference to the principal’s well-being. The agent must obey the principal and act only within the bounds of authority that the principal conferred.

The agent must follow the principal’s reasonable instructions.The fifth duty is accounting. This means the agent has a duty to keep an accounting of all agency transactions. The agent must keep track of, and make available to the principal, all property exchanged, received, or given on the principal’s behalf.

Lesson Summary

Let’s review. A principal is a party who gives legal authority to another to act on his or her behalf in business transactions. An agent is a party who is legally authorized to act on behalf of another party in business transactions.

The relationship between the two is known as an agency relationship and is very important in business transactions. It’s a business relationship where a principal gives legal authority to an agent to act on the principal’s behalf when dealing with a third party.Agency relationships are fiduciary relationships, meaning the agent owes a fiduciary duty to the principal. In other words, the agent is obligated to act in the best interests of the principal.

Specifically, this means the agent owes five separate responsibilities to the principal. These responsibilities are:

  • Loyalty, or the duty to act with allegiance solely to the principal
  • Performance, or the duty to act prudently and cautiously while performing agency duties
  • Notification, or the duty to notify the principal of all material facts relating to the business at hand
  • Obedience, or the duty to respect the principal and follow his or her reasonable requests
  • Accounting, or the duty to keep, and make available, a record of all agency transactions

Learning Outcomes

Finishing this lesson could enable you to:

  • Highlight the role principal/agent in a fiduciary situation
  • List the five responsibilities of the agent
  • Know what a fiduciary duty is
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