Agency Law: Corporate Application And Its Legal Implications

does agency law apply to corporations

Agency law refers to the relationship between a person, or agent, who acts on behalf of another person, company, or government, usually called the principal. This form of agency is often enforced by written agreements made through a power of attorney. In the case of a corporation, since a corporation can only act through natural person agents, the principal is bound by the contract entered into by the agent, as long as the agent acts within the scope of their authority. Corporate employees, especially officers, are generally regarded as agents of the corporation.

Characteristics Values
Agency law definition The law of agency is an area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual fiduciary relationships that involve a person, called the agent, who is authorized to act on behalf of another (called the principal) to create legal relations with a third party.
Agency relationship creation An agency relationship is generated by the consent of both the agent and the principal. A written contract is common, but not always necessary. The intent of the parties can be inferred from their words or actions.
Agency relationship termination The agency relationship must be terminated in accordance with the agency contract. A principal can retract an agent's authority at any time, but may be liable for damages if the termination violates the contract.
Agency types Universal, general, and special agents.
Agent authority types Actual, apparent, and ratified authority.
Agent authority An agent may have either actual, apparent, or inherent authority to enter into contracts on behalf of the corporate principal.
Agent liability An agent will be liable to a third party for a contract entered into outside the scope of their authority.
Principal liability A principal is bound by the contract entered into by the agent, as long as the agent performs within the scope of the agency.
Principal-agent relationship The agent agrees to act under the direction of the principal.
Corporations and agency Corporations must act by agents, either employees, officers, or directors. Corporate employees, especially officers, are agents of the corporation.

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Officers are agents of the corporation

Officers are responsible for the corporation's day-to-day operations and administration. They are tasked with executing the decisions made by the board of directors and turning them into actionable policies and strategies. Officers are also responsible for ensuring that the corporation complies with all relevant laws and regulations. This includes federal securities laws, such as the Securities Act of 1933 and the Securities Exchange Act of 1934.

Officers, like directors, owe duties of loyalty, care, competence, and diligence to the corporation. They have a duty to act in the best interests of the corporation and its shareholders. This includes a duty to comply with reasonable instructions from the board of directors and a duty to share material information with the board. Officers also have a duty to exercise their powers in good faith and with the care of an ordinarily prudent person in a similar position.

Officers can be held personally liable for their actions in certain circumstances. For example, if an officer commits fraud or engages in other illegal activities, they can be held personally liable. Officers may also be held liable if they negligently perform their duties or if they personally guarantee a loan or line of credit given to the corporation. However, in most cases, officers are protected from personal liability for performing their corporate duties.

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Directors are not agents of the corporation

The question of whether directors are agents of a corporation is a complex one and depends on the specific context and jurisdiction. While some sources suggest that directors are not agents, others argue that they can be considered agents in certain situations. Let's explore the perspective that "Directors are not agents of the corporation" in more detail.

The argument that directors are not agents of the corporation stems from the distinction between the roles and responsibilities of directors and officers. In a corporate structure, directors are typically responsible for high-level decision-making and overseeing the overall direction of the company. On the other hand, officers are tasked with executing the decisions made by the directors and managing the day-to-day operations.

According to this perspective, directors, in their standalone capacity, do not act as agents of the corporation. This is because directors do not have the authority to act on behalf of the corporation in the same way that officers do. Directors make strategic decisions and set the course for the company, but they do not typically have the power to bind the corporation in legal relationships with third parties.

For example, in the United States, the Model Business Corporation Act (MBCA) suggests that directors are not agents of the corporation. This is based on the understanding that directors do not have the same authority as officers to act on behalf of the corporation and enter into contracts or transactions.

Additionally, some legal scholars differentiate between directors and officers by anchoring officers within the common law of agency. In this context, officers are considered agents of the corporation, owing specific duties of loyalty, care, competence, and diligence to the corporation. On the other hand, directors are viewed as occupying a different position, with their primary duty being to act in the best interests of the corporation and its shareholders.

Furthermore, the agency status of directors has been a subject of debate in court cases. For instance, in the case of Wadler v. Bio-Rad Laboratories, Inc., the plaintiff argued that directors are agents for the purposes of a specific statute, while the defendants countered that individual directors cannot act for or bind the corporation in their individual capacity. This case highlights the ongoing discussion surrounding the agency status of directors.

While the specific legal framework may vary across jurisdictions, the perspective that "Directors are not agents of the corporation" emphasizes the distinction between the roles of directors and officers. Directors are responsible for strategic decision-making, while officers execute those decisions and manage daily operations. Ultimately, the relationship between directors and corporations is complex and may depend on the specific circumstances and legal context.

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Agency law and the authority of agents

Agency law is a branch of commercial law that deals with the relationships between agents and principals. It establishes the rights and liabilities of both parties and outlines the different types of authority an agent may have.

Types of Authority

Express Authority

An agent with express authority has been explicitly told they may act on behalf of the principal and take any actions necessary to fulfil the principal's requests.

Implied Authority

Implied authority is when an agent takes any action that the principal's conduct indicates they should do. If the principal fails to object to the agent's prior actions, this can create implied authority for the agent to repeat those actions. However, an agent does not have implied authority to do anything expressly prohibited by the principal.

Apparent Authority

Apparent authority exists when a third party reasonably believes that an agent is authorised to act on the principal's behalf due to the principal's conduct, even if no such authority exists. A principal can be bound by the agent's acts made with apparent authority, even if they had explicitly stated otherwise.

Agency Relationships

Agency relationships can be seen in various contexts, including:

  • Financial advice (insurance, stock brokerage, accountancy)
  • Contract negotiation and promotion (business management, publishing, entertainment)
  • Real estate transactions (buyer's and seller's agents)
  • Employment and contractors

Corporations and Agency Law

Agency law applies to corporations, as they can only act through natural person agents. Officers of a corporation are considered agents, but directors and shareholders are not unless they are acting as officers.

Termination of Agency

The relationship between a principal and an agent can be terminated by the act or agreement of both parties or by operation of law, such as the death or bankruptcy of either party.

Duties and Liabilities

Agents and principals owe certain duties to each other and may be held liable for their actions. Agents have a duty to act on behalf of and be subject to the control of the principal, within the scope of their authority. They must also avoid conflicts of interest and accept new obligations that are inconsistent with their duties to the principal.

Principals are responsible for compensating the agent as agreed and indemnifying them against claims and expenses arising from correctly discharging their duties. They must also make a full disclosure of all relevant information to the agent.

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The liability of a principal to a third person

Contractual Liability

A principal is liable on a contract if the agent had authority to make it. However, the agent's liability depends on how much the third party knows about the principal. Disclosure is the agent's best protection against legal liability.

If the principal is fully disclosed, the agent is not liable for any contracts made with authority on behalf of the principal. The third party can only recover damages from the principal. An exception to this is when the agent exceeds their authority, in which case the agent becomes personally liable.

If the principal is partially disclosed, the third party may recover damages from either the principal or the agent, as they are jointly and severally liable.

If the principal is undisclosed, the third party may recover damages from either the agent or the principal. The undisclosed principal is liable for contracts entered into by agents acting with actual authority, but not if the agent exceeds their authority.

Tort Liability

Agents, employees, and independent contractors are personally liable for their own torts. However, they are not liable for the torts of the principal or employer.

An employer is liable for the torts of an employee if the employee is acting within the scope of their employment. This is called the doctrine of respondeat superior and imposes vicarious liability on employers as a matter of public policy. The employer is usually in a better position to pay damages, and there is a strong public policy consideration to not allow employers to turn a blind eye to an employee's bad behavior.

A principal is generally not liable for the torts of an independent contractor. Independent contractors have the power to control the details of their work and are only responsible to the principal for the results. Therefore, independent contractors are not directed and controlled by a principal as employees are. As a result, the doctrine of respondeat superior does not apply to independent contractors.

Two exceptions exist that may impose liability on a principal for the work of an independent contractor. The first exception is when the work is inherently dangerous. Public policy prevents principals from insulating themselves from liability by hiring an independent contractor instead of an employee to perform dangerous work. The second exception is when the work is illegal. Public policy also prevents principals from hiring independent contractors to perform illegal tasks.

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The termination of an agency

Termination by Mutual Agreement

The agency relationship requires the mutual assent of both parties, and both have the power to withdraw their consent. This can be done through an express contract or a simple conversation and handshake. It is important to terminate the relationship in writing and have it signed by both parties to provide legal protection.

Termination by Lapse of Time

If the agency relationship is set for a specific period, it will naturally terminate once that time has passed. However, if the relationship continues beyond the specified time, a court may presume that the parties intended to renew the contract for a similar period.

Termination by Completed Purpose

Some agencies, like real estate agents, are hired for a specific purpose. Once that purpose is achieved, the agency relationship automatically ends. If either party wishes to extend the relationship, it can be done so in writing.

Termination by Operation of Law

An agency relationship can also be terminated by operation of law, such as the death or bankruptcy of either party, or the occurrence of a specified event that makes the agency's purpose impossible to fulfil. For example, a natural disaster or a change in legal identity of the principal.

Termination by Principal's Will

The principal can usually revoke the agency at will when it is not coupled with an interest and no third-party rights are involved. However, this cannot be done if it would prejudice the agent, such as in distributorship or sales agency contracts of indefinite duration, where the distributor has made substantial investments.

Termination by Agent's Renunciation

An agent may renounce the relationship by expressly notifying the principal, either orally or in writing. Cessation of all relations with the principal and abandonment by the agent may also be treated as a renunciation, but mere violation of instructions will not.

It is important to note that the termination of an agency relationship should be communicated to all relevant third parties to avoid any legal issues. Additionally, if the agency relationship is governed by a contract, terminating it without a valid reason may result in legal penalties and civil liability.

Frequently asked questions

The law of agency is an area of commercial law that deals with the contractual, quasi-contractual, and non-contractual fiduciary relationships between a person (the agent) and the person they represent (the principal).

Any person who is capable of suing or being sued in a legal proceeding in their own name can be an agent. This includes organisations, corporations, and LLCs.

An agency is created by the consent of both the agent and the principal. This consent can be implied rather than expressly stated.

Actual authority is express or implied authority given to the agent by the principal. Apparent authority exists when the words or conduct of the principal lead a third party to reasonably believe that the agent has authority to act.

An agency can be terminated by the act or agreement of the parties, or by operation of law. For example, the death or bankruptcy of the principal will usually terminate the agency.

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