Cecily Zamora
In contract law, a principal refers to a person or entity that authorises an agent to act on their behalf to create a legal relationship with a third party. This relationship is referred to as an agency, and the law of agency establishes guidelines for this relationship. The principal-agent relationship is often contractual, either implicitly or explicitly, and can be expressed in a written contract or implied through duties and actions. The principal must make a full disclosure of all information relevant to the transactions that the agent is authorised to negotiate and must pay the agent a commission, fee, or reasonable fee as agreed. The principal may also provide the agent with authority to act and control their actions through express instructions and incentives.
| Characteristics | Values |
|---|---|
| Definition | A person, legal or natural, who authorizes an agent to act to create one or more legal relationships with a third party |
| Relationship with agent | The relationship between the principal and the agent is referred to as the "agency" and the law of agency establishes guidelines for such a relationship. |
| Powers | The principal selects the agents and has the power to control their actions through express instructions and incentives. |
| Duties | 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. |
| Rights | The principal has the right to supersede the agent and intercept, suspend, or extinguish the right of the agent under the contract. |
| Liability | The principal owes the third party a duty of care to ensure that the agent is honest and efficient. |
| Principal vs. Incident | The incident shall pass by the grant of the principal, but not the principal by the grant of the incident. |
| Principal vs. Agent | The principal is used to denote the prime mover or the more important entity. |
| Principal vs. Interest | The principal is used in opposition to interest; the principal being secured, the interest will follow. |
| Principal vs. Surety | The principal is answerable before the surety. |
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What You'll Learn
Principal-agent relationship
In commercial law, a principal is a person, legal or natural, who appoints an agent to act on their behalf and in their best interest to create one or more legal relationships with a third party. This branch of law is called the law of agency, which establishes guidelines for the principal-agent relationship. The principal-agent relationship is often described as implicitly or explicitly contractual.
The principal selects the agents and has the power to control their actions through express instructions and incentives intended to influence their behaviour. This includes 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 principal must make a full disclosure of all information relevant to the transactions that the agent is authorised to negotiate. The principal must also pay the agent either the agreed-upon commission or fee, or a reasonable fee if none was previously agreed on.
The principal owes the third party a duty of care to ensure that the agent is honest and efficient. If the agent acts fraudulently for their own benefit, the principal is bound by the agent's actions, unless the third party was aware of the agent's personal agenda. The principal can be held strictly liable for the legal consequences of an agent's acts or omissions, even when the principal was without fault in appointing or supervising the agent.
The principal has remedies against the agent for breaching their fiduciary duty. For example, the principal can ask the court to deem a constructive trust, void contracts negotiated by the agent, or sue the agent for liability caused by the agent's wrongful acts. The principal also has the right to supersede their agent and may maintain a suit against a third person by suing in their own name.
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Principal agreement
In commercial law, a principal is a person, legal or natural, who authorises an agent to act on their behalf 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 of "qui facit per alium, facit per se" (Latin for "he who acts through another, acts personally"). The principal-agent relationship is often described as implicitly or explicitly contractual.
A principal agreement, or principal contract, is a legal contract between two or more parties that identifies the fundamental terms of a pending contract. It is legally binding once signed, but contract parties often intend to replace the principal agreement with a longer-form contract at a later date.
The principal must make a full disclosure of all information relevant to the transactions that the agent is authorised to negotiate. The principal must also pay the agent either the commission or fee as agreed, or a reasonable fee if none was previously agreed on.
The principal has several remedies against the agent for breaching their fiduciary duty. If the agent wrongfully holds property that should be owned or entitled to the principal, the principal can ask the court to deem it a constructive trust—that is, for the agent to hold the property on their behalf. The principal can void contracts negotiated by an agent that breached their fiduciary duty. The principal can also sue the agent for liability caused by the agent's wrongful acts, for example, if a third party obtained a judgment against the principal for wrongful acts caused by the agent.
If the principal's words or conduct reasonably led the third party to believe that the agent was authorised to act, then the principal is bound. This is the case even if the agent acts fraudulently for their own benefit, unless the third party was aware of the agent's personal agenda.
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Vicarious liability
In commercial law, a principal is a person, legal or natural, who authorizes an agent to act and create legal relationships with a third party. This branch of law is called agency and is based on the Latin concept of "he who acts through another, acts personally". It is a parallel concept to vicarious liability in criminal law or torts, where one person is held liable for the acts or omissions of another.
In the context of principals and agents, vicarious liability can occur when the principal is bound by the actions of the agent. If the principal gives actual authority to the agent, all the agent's actions within the scope of that authority bind the principal. This includes situations where the agent acts fraudulently for personal benefit, unless the third party was aware of the agent's intentions. The principal may then be liable for the legal consequences of the agent's acts or omissions, even if the principal was not at fault in appointing or supervising the agent.
To avoid vicarious liability, employers and principals should actively monitor their employees or agents, respond to complaints, and establish clear methods for registering grievances. Creating employee manuals with detailed rules and expected conduct, as well as providing training programs on safety protocols and proper conduct, can also help prevent vicarious liability.
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Third-party duty of care
In commercial law, a principal is a person, legal or natural, who selects and authorises an agent to act on their behalf and create legal relationships with a third party. The principal has the power to control the agent's actions through express instructions and incentives, and they are bound by the agent's actions within the scope of the authority given. This means that the principal owes a duty of care to a third party to ensure the agent is honest and efficient.
The concept of a third-party duty of care in contract law refers to the obligations of a principal towards a third party when a contractual relationship exists between them. This duty of care may arise even in the absence of a direct contractual relationship, as demonstrated in cases involving construction professionals. Courts are generally cautious about imposing duties of care for economic loss when there is no contractual relationship between the parties involved. However, they may consider factors such as the assumption of responsibility and the reasonable reliance of the third party on the principal's actions or representations.
For example, in a Scottish case, an architect was engaged to provide architectural services to apartment developers. The owners of the apartments (the third party) alleged that the architect had issued professional consultants certificates (PCCs) falsely certifying that the flats were constructed to a satisfactory standard. The owners argued that they relied on this misrepresentation when purchasing the flats and that the architect was liable for their loss.
In another case, a main contractor, Multiplex, sub-contracted the design and construction of certain works to Bathgate/Dunne, who further sub-contracted the design to BRM. Bathgate then engaged RNP to act as a consultant to check BRM's design. Multiplex argued that RNP owed them a duty of care in checking the rig design and issuing certificates. The court considered the contractual relationships between the parties and whether RNP had assumed responsibility towards Multiplex, ultimately holding that it would not be fair, just, and reasonable to impose a duty of care on RNP in this case.
Establishing a third-party duty of care can be complex, especially when there is no direct contractual relationship between the parties. It often requires demonstrating an assumption of responsibility by the principal or that denying such a duty would lead to a lack of accountability on their part. The courts are generally reluctant to impose duties of care that conflict with accessory liability requirements, such as in cases involving breaches of fiduciary duty.
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Agent authorisation
In commercial law, a principal is a person, legal or natural, who authorises an agent to act and create one or more legal relationships with a third party. The relationship between a principal and an agent is a contractual one, and the principal must give the agent the authority to act. This authority can be granted explicitly, implicitly, or apparently.
Explicit authority, also known as express actual authority, is granted when specific authorisation is provided in writing or verbally. For example, a written or oral statement from a principal to an agent, such as "I authorise you to enter into all supply agreements with a value of less than £10,000", would constitute express actual authority.
Implied authority, or implied actual authority, is inferred through the position of the agent or their course of conduct. For instance, a managing director of a company will have the implied authority to perform tasks that are usual for someone in that position.
Apparent authority is based on the reasonable inferences of a third party. It is meant to protect those who enter into contracts with agents who might not have been explicitly granted the power to enter binding contracts but hold themselves out to have such authority. For example, a sales manager may have the apparent authority to enter into purchase contracts with potential clients, but it would be outside the scope of their authority to unilaterally sign someone to an employment contract with their principal.
It is important to note that a principal may be bound by the actions of their agent, even if those actions exceed the scope of the agent's authority. This is known as strict liability, where the legal consequences of an agent's acts or omissions are attributed to the principal.
In the context of agent authorisation, the principal has certain remedies against the agent for breaching their fiduciary duty. For instance, the principal can void contracts negotiated by the agent that breached their fiduciary duty and sue the agent for liability caused by their wrongful acts.
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Frequently asked questions
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.
The principal-agent relationship refers to an arrangement in which one entity legally appoints another to act on its behalf. The relationship between the principal and the agent is referred to as the "agency", and the law of agency establishes guidelines for such a relationship.
A principal contract is a legal contract between two or more parties that identifies the fundamental terms of a pending contract. It is legally binding once signed. The meaning of "principal contract" differs based on the context. It can mean the main agreement between the involved parties, a contract that isn't traded on a board of trade, or the primary written agreement concerning the provision of specific goods or services.
