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 torts.

Contents
[hide]

• 1 Concepts
• 2 Summary of law
o 2.1 Authority
o 2.2 Liability
 2.2.1 Agent to Principal
 2.2.2 Principal to Agent
 2.2.3 Third Party to Principal
o 2.3 Duties
o 2.4 Undisclosed principal
o 2.5 Termination
• 3 Economic analysis
• 4 See also

• 5 References

[edit] 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 partnership, the natural persons 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 corporation 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 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.

[edit] Summary of law

There are three classes of Principal:

3 classes of principal
Class Description
at the time of the transaction made by the Agent with the Third Party, the
Disclosed latter knows that the person he is dealing with is acting as an Agent and
also knows the Principal’s identity.
at the time of the transaction, the Third Party knows that the person he is
Partially
dealing with is acting as an Agent acting but does not know the Principal’s
disclosed
identity.
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
Undisclosed
is usually because the Principal is wealthy and believes that money can be
saved on the proposed deal if their involvement is hidden.

[edit] 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 contract 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 fraudulently 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 Estoppel" 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, partners have apparent authority to bind the other partners in the
firm, their liability being joint and several, and in a corporation, 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.

[edit] Liability

[edit] 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.

[edit] 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.

[edit] 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.

[edit] 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 or fee as agreed, or a reasonable fee if none were previously agreed on.

[edit] Undisclosed principal

An Undisclosed principal is an unrevealed one, in a situation involving an undisclosed

agency. [1] 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." [2] 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. [3]

Some taxing authorities have created rules regarding tax laibility for actions of an
undisclosed principal. [4] The undisclosed agency may also effect tort liability.[5]

[edit] 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.

[edit] Economic analysis

(main article Principal-Agent problem)

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.