The principal-agent relationship is formed when one party (the agent) agrees to act on behalf of and subject to the control of the other party (the principal). There are three requirements for forming a principal-agent relationship (which can be remembered by the mnemonic “ABC”): assent, benefit, and control.
● Assent: the principal and agent agree to create this agency relationship.
● Benefit: the agent will act for the benefit of the principal
● Control: the principal has the right to control the ultimate objective of the agent’s work.
Note some important things that are NOT requirements to forming a principal-agent relationship:
● Intent is not required. Two people can enter into a principal-agent relationship without even knowing it.
● Writing: the formation of the principal-agent relationship does not need to be in writing. A simple conversation between two people can give rise to a principal-agent relationship.
● Compensation is also not required. The agent can be gratuitous.
What are the ramifications of the principal-agent relationship? If a principal-agent relationship exists, the principal may be liable for contracts that the agent enters into on behalf of the principal. In addition, a principal may also be liable (vicariously) for tortious misconduct committed by the agent.