Understand Agency and Contractual Relationships

Agency refers to a type of relationship under law in which one party, the agent, is a representative of another party, the principal, and is allowed to perform some kind of transaction or make some kind of contract with a third party. The agent is authorized by the principal to perform actions in the principal's name. For the most part, unless there are exceptional circumstances involved, when an agent acts in a given way or performs a certain function, the principal will be held accountable and liable for the agent's action. For example, if an agent were to withdraw some amount of money from a banking institution on behalf of the principal, then that principal would be held accountable for the withdrawal of the agent.

The exact contract giving an agent power to act on behalf of the principal will determine exactly how much power that agent has at any given time, and in turn, will determine where the liability of a given transaction may fall. Keeping the banking example, if the agent were to obtain a loan from a banking institution on the behalf of the principal, then depending on the authority of the agent, the agent himself might be held accountable to the banking institution.

The three types of agent are universal agents, general agents, and special agents. A universal agent would be able to act in almost any fashion on behalf of his or her principal. They may be slightly restricted, but in general, their actions will hold the principal, and not themselves, liable. Thus, if the universal agent were to perform some banking on the behalf of the principal, it would likely of necessity have to be accepted.

The next type of agent is a general agent. This type of agent would hold a significantly more restricted amount of authority in terms of the principal than the universal agent. The general agent is authorized with the ability to make decisions and take actions on behalf of the principal likely in certain areas or domains, but not in all. The general agent might have been authorized for all dealings with a specific banking institution, and thus, would have no liability for any actions he took with that banking institution on behalf of his or her client.

The third type of agent is a special agent, who is not authorized to exert even as much power as the general agent. The special agent is authorized only to use his power for one purpose, as designated in the initial formation of agent-principal contract. His actions regarding the banking institution, if outside of his specific duties as a special agent, would hold him liable, if not to external users, then to the principal, who could seek to obtain damages from the agent.

The relationship between agent and principal is often best codified in a contract so as to avoid any problems in which, for instance, the agent opens an account in the principal's name at a banking institution, purportedly under the principal's orders. Many discrepancies involving agency and contractual obligations involve a misunderstanding, as the agent sets up the new banking account for his or her principal only find out that the principal did not intend for the agent to do so. In such a case, the only real way to determine who is in the right and who is in the wrong would be to examine exactly how much authority the agent had at the time of his acting.

So long as the agent was acting within the authority granted to him by the principal and was not acting against his principal's best interests, then the principal will be held liable to the agent's actions. This would also include an instance in which, for instance, the agent withdrew money from his or her own banking account in order to make a payment on behalf of the principal. In such a case, the principal would actually be held liable to the agent and would have to repay the agent for legitimately acting on the principal's behalf.

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