One of the most unique legal relationships that exists is that between the principal and the agent. The essence of the agency relationship defies all notions of common sense. An agent is more than just one’s representative, for what characterizes the contract between a principal and an agent is that the agent is actually considered the principal himself. For all intents and purposes of their agreement, the actions of the agent within the scope of his authority are legally equivalent to the actions of the principal. There is no difference between the two in the eyes of the law.
It is because of this fact that the principal-agent relationship is so prevalent, especially in the area of business. One person can constructively establish his presence in countries all over the world by appointing agents. A contract executed and signed in one continent would be binding on a party located in another. By constituting someone as his agent, the principal can effectively extend his actions far beyond his own physical reach.
Agency relationships do not necessarily exist only in the realm of business. One commonplace example of an agency relationship is if one person gives money to another person to buy something for him. The latter would then become an agent for the former. If the agent goes to the store and uses the money to buy an object, it would not legally belong to him. He is obligated to go back to his principal, give him the object and perhaps the change as well.
The law of agency finds its roots in common law, which basically means that its tenets were created through court decisions and practice rather than codified in a single text. The basics of agency have existed since time immemorial and have thus been adopted in American law, but not as a set of codified rules. When the first master-servant relationship was created centuries ago, the fact that the master was responsible for the actions of his servant committed within the scope of his employment was logically inferred. Since then, the common law of agency has been used by courts all over the world.
The creation of an agency relationship does not require any particular form. It can either be express or implied (Mechem, 1952, p. 5). The most important principal in agency law is that the agent’s actions only bind that of his principal’s if the agent acts within the scope of the authority given to him. It is thus important to delineate the scope of the agent’s authority, so a written contract may be used for that purpose.
However, agency can be created verbally or through conduct. For instance, when one person gives another person apparent authority even when he has none, the result is the creation of an agency relationship. The first person would not be allowed to deny the authority of the latter, since the first person had, through his actions, led the world to believe that the latter actually did possess authority.
Another instance is if the purported agent did an unauthorized act behalf of the principal, and the principal approved the act afterwards. This is the principle of ratification, which states that if an agent does something outside of his authority and the principal subsequently ratifies it (either expressly or through his conduct such as by accepting the benefits of the act), then the act is valid from the beginning and the principal would be bound thereby. (Bays, 1935, p. 36)
An agent possesses a lot of power, so much so that his actions are considered that of somebody else’s. The liability for some of his actions actually accrue to another person, his principal. Therefore, the principal must take care in the selection of his agent. Once he has picked somebody he trusts, a fiduciary relationship is created between the two. The principal’s interests must become that of the agent’s as well. (p. 52) Strict duties of loyalty, good faith and care must be followed by the agent. Any violation of this fiduciary relationship would become a violation of the agency relationship itself.
One other unique legal relationship is that of partnership. Unlike agency law, which is based on common law, partnership law has been codified in the Uniform Partnership Act (UPA), which was last revised in 1997 and has been adopted by most states. A partnership is comprised of persons who come together for the purpose of carrying on a business or profession for profit. Each partner shares in the proceeds and, likewise, shares in the liabilities.
A partnership is primarily constituted for the purpose of carrying on business. Section 401 provides that each partner is legally entitled to a share of the partnership profits and is also chargeable with a share of the partnership losses in proportion to his share of the profits. Of course, the amount of his share is determined by the partnership agreement. This is the rule that governs general partnerships. If a partner’s liability is limited to the extent of his investment in the partnership, then what results is a limited partnership. In a limited partnership, there are one or more limited partners and other general partners. This is different from a limited liability partnership, where every single partner has a limited liability. These special kinds of partnership are governed by Section 1001 of the UPA and the Limited Liability Partnerships Act of 2000.
Partnership is essentially a kind of agency, since Section 301 of the UPA states that each partner is considered an agent of the partnership for the purpose of its business. Therefore, any act of a partner within his authority that is meant for carrying on the ordinary course of the partnership’s business binds the partnership as a whole. However, if the partner acted without authority, the partnership would not be bound unless the other partners assented to the act.
A partnership is thus a legal entity with a presence of its own. The partnership, once it is formed, can own property; this property would not belong to any of the partners, but would be under the name of the partnership itself. The partnership can also enter into contracts with third parties, and it would be considered a single entity. However, a partnership is still comprised of different persons who all act on its behalf. Since an agency relationship lies at the core of a partnership, each partner owes to the other partners and to the partnership fiduciary duties as well. A partner cannot keep for himself any profits that should accrue to the partnership, and he must take care of the partnership’s property with good faith and due diligence.
When a partnership is formed, a separate legal entity and a complicated agency relationship are created. Partnerships differ from other entities, like corporations and proprietorships, because of the special law that governs the liabilities of each partners. The question of whether a partnership is the proper vehicle for the conduct of a particular business or profession must take its distinct nature into account. The strict fiduciary duties that must be respected, the fact that each partner’s acts bind the partnership, and the sharing in the profits and losses make a partnership a truly unique entity.
Bays, A. W. (1935). American commercial law series. National textbook series. Chicago: Callaghan.
Hillman, R. W., Vestal, A. W., Weidner, D. J., & Hillman, R. W. (1998). The Revised Uniform Partnership Act. St. Paul, Minn: West Group.
Mechem, F. R. (1952). Outlines of the law of agency. Chicago: Callaghan.