Principal (commercial law)
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 :wikt:third party|third party. This branch of law is called agency and relies on the common law proposition qui facit per alium, facit per se.
It is a parallel concept to vicarious liability and strict liability in criminal law or torts.
Concepts
In a busy commercial world, the smooth flow of trade depends on the use of agents. This may be because in business entities such as:- sole traders, their ability to conduct business will always be limited unless other people are used to work on their behalf;
- a partnership, the natural persons who are involved cannot be present to conduct business in multiple locations simultaneously, so they must rely on others to make agreements or deliver services on their behalf; or
- a corporation is only a legal entity or fictitious legal person and so can only act through the agency of human beings to get anything done.
This rule in favour of imputation relates to the duties an Agent owes a Principal, in particular the Agent's duty to communicate material facts to the Principal. Since the purpose of the law is to offer protection to Third Parties who have acted in good faith, it is reasonable to allow them to believe that, in most cases, the Agents have fulfilled this duty. After all, the Principal selects the Agents and has the power to control their actions both through express instructions and incentives intended to influence their behaviour which will include 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 result is a form of strict liability in which the legal consequences of an Agent's acts or omissions are attributed to a Principal even when the Principal was without fault in appointing or supervising the Agent. Borrowing parallel concepts from Tort and Equity, this means that the Principal owes the Third Party a duty of care to ensure that the Agent is honest and efficient, and that a Principal is estopped from denying that an Agent was authorised to act as they did.
Summary of law
There are three classes of Principal:| Class | Description |
| Disclosed | at the time of the transaction made by the Agent with the Third Party, the latter knows that the person he is dealing with is acting as an Agent and also knows the Principal’s identity. |
| Partially disclosed | at the time of the transaction, the Third Party knows that the person he is dealing with is acting as an Agent but does not know the Principal’s identity. |
| Undisclosed | The person acting as an Agent represents they are acting on their own behalf and does not disclose the existence of the agency relationship. |
Authority
For these purposes, the Principal must give, or be deemed to give, the Agent authority to act.- Actual authority
- Apparent or ostensible authority
- Authority by virtue of a position held
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Liability
Agent to Principal
If the Agent has acted without actual authority, but the Principal is nevertheless bound because the Agent had apparent authority, the Agent is liable to indemnify the Principal for any resulting loss or damage.Principal to Agent
If the Agent has acted within the scope of the actual authority given, the Principal must indemnify the Agent for payments made during the course of the relationship whether the expenditure was expressly authorized or merely necessary in promoting the Principal’s business.Third Party to Principal
The Third Party is liable to the Principal on the terms of the agreement made with the Agent, unless the Principal was undisclosed and there is clear evidence that either the Agent or the Principal knew that the Third Party would not have entered into the agreement if they had known of the Principal's involvement.Duties
The relationship between a Principal and an Agent is fiduciary which requires the Agent to be loyal to the Principal. This involves duties:- not to accept any new obligations that are inconsistent with the duties owed to the Principal. Agents can represent the interests of more than one Principal, conflicting or potentially conflicting, only on the basis of full and timely disclosure or where the different agencies are based on a limited form of authority to prevent a situation where the Agent's loyalty to the any one of the multiple Principals is compromised. For this purpose, express clauses in the agreement signed by each Principal with the Agent may identify specific types or categories of activities that do not breach the duty of loyalty and so long as these exceptions are not unreasonable, they bind the Principals.
- not to make a private profit or unjustly enrich himself from the agency relationship. Principals usually include a power in their contract with the Agents allowing them to inspect the Agents' accounts if reasonable suspicion of improper behavior emerges.
Remedies against agent
The principal has the following remedies against the agent for breaching his/her fiduciary duty:Constructive trust
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 the agent is holding the property on behalf of the principal.Avoidance
The principal can void contracts negotiated by an agent that breached his or her fiduciary duty.Indemnification
The principal can sue the agent for liability caused by the agent's wrongful acts, i.e. if a third party obtained a judgment against the principal for wrongful acts caused by the agent, the principal can sue the agent to recover the loss.Negligence (for not following instructions)
A principal can sue for the negligence of an agent who failed to follow instructions, unless it was simply a failure to follow the principal's advice.Undisclosed principal
An Undisclosed principal is an unrevealed one, in a situation involving an undisclosed agency. It is "a person who uses an agent for his/her negotiations with a third party, often when the agent pretends to be acting for himself/herself." In a real estate transaction, this could be any "major party to a transaction, such as a seller or purchaser of property," who wishes to remain anonymous.Some taxing authorities have created rules regarding tax liability for actions of an undisclosed principal. The undisclosed agency may also affect tort liability.