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Sometimes an entity instructs another to conduct its business transactions. This is common in business and is known as 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.
An agency relationship requires two parties. The first is the principal, which is the party who gives legal authority to another to act on his or her behalf in a business transaction. The second party is an agent, which is the party who is legally authorized to act on behalf of the principal in the principal's business transaction. Agency relationships are known as fiduciary relationships because the agent owes a fiduciary duty to the principal. This means the agent is obligated to act in the best interests of the principal. But the principal owes certain obligations to the agent, too. Let's take a look at the principal's obligations.
A principal can be a person, corporation, partnership, not-for-profit organization, or even a government agency. In any case, once a principal engages an agent, the principal owes four main duties to that agent. If a principal fails to fulfill these duties, it can result in a lawsuit based on breach of contract or tort liability. These duties are:
*Compensation
*Indemnification
*Good faith and fair dealing
*Acting according to contract
Let's separately examine two of these four obligations.
1. Compensation :
The principal's first duty to the agent is compensation. This means the principal must compensate the agent as agreed. Keep in mind that a principal hires an agent, similar to an employer employing an employee.B The principal must therefore pay the agent a reasonable fee. The fee doesn't have to be money, but it has to be something that is of value to the agent, such as stock shares or tangible goods. The reasonableness of the fee is judged according to the facts and circumstances of the agency relationship and agreement.
2. Indemnification:
This means the principal must reimburse the agent for any claims, liabilities, and expenses incurred while performing agency duties. The principal must indemnify the agent for duties performed under the principal's authority and also for duties performed in the reasonable furtherance of agency duties. For example, let's say P. tells A. to pay C. $50. This payment is expressly authorized by P., and P. must reimburse A. Now let's say P. hires A. to handle a business event, and A. finds it necessary to purchase certain supplies for the event. Even though P. didn't expressly authorize a particular purchase, A. made the purchase in the fulfillment of his agency duties. Therefore, P. must still reimburse A.
An agency relationship requires two parties. The first is the principal, which is the party who gives legal authority to another to act on his or her behalf in a business transaction. The second party is an agent, which is the party who is legally authorized to act on behalf of the principal in the principal's business transaction. Agency relationships are known as fiduciary relationships because the agent owes a fiduciary duty to the principal. This means the agent is obligated to act in the best interests of the principal. But the principal owes certain obligations to the agent, too. Let's take a look at the principal's obligations.
A principal can be a person, corporation, partnership, not-for-profit organization, or even a government agency. In any case, once a principal engages an agent, the principal owes four main duties to that agent. If a principal fails to fulfill these duties, it can result in a lawsuit based on breach of contract or tort liability. These duties are:
*Compensation
*Indemnification
*Good faith and fair dealing
*Acting according to contract
Let's separately examine two of these four obligations.
1. Compensation :
The principal's first duty to the agent is compensation. This means the principal must compensate the agent as agreed. Keep in mind that a principal hires an agent, similar to an employer employing an employee.B The principal must therefore pay the agent a reasonable fee. The fee doesn't have to be money, but it has to be something that is of value to the agent, such as stock shares or tangible goods. The reasonableness of the fee is judged according to the facts and circumstances of the agency relationship and agreement.
2. Indemnification:
This means the principal must reimburse the agent for any claims, liabilities, and expenses incurred while performing agency duties. The principal must indemnify the agent for duties performed under the principal's authority and also for duties performed in the reasonable furtherance of agency duties. For example, let's say P. tells A. to pay C. $50. This payment is expressly authorized by P., and P. must reimburse A. Now let's say P. hires A. to handle a business event, and A. finds it necessary to purchase certain supplies for the event. Even though P. didn't expressly authorize a particular purchase, A. made the purchase in the fulfillment of his agency duties. Therefore, P. must still reimburse A.