Categories: Law

What is Agency and Why is it Important to Businesses?

Question

Why is the relationship of agency important and how does it facilitate business activity?

Answer

It has been stated that ‘commerce would grind to a halt’ if businesses were unable to employ an agent and were expected to do everything themselves (Markesinis & Munday, 1998). Agency is a fiduciary relationship which arises when one individual (a ‘principal’) authorises another person (an ‘agent’) to act on their behalf.

The significance of this relationship in a business context of this can clearly be identified by considering a large corporation, such as Nike, who make sales worldwide via hundreds of different distributors. Essentially, without agency, the only entity that can authorise such transactions is Nike itself. If agency did not exist, it would be a logistical impossibility for the entity to authorise each and every sale.

Nike, therefore, would act as ‘principal’ and authorise an ‘agent’ to act on their behalf. For example, the directors of the company. The directors of the company could then create a relationship of sub-agency and give authority to the regional managers, who would give authority to each store manager and so on, until the authority reaches employees of the store selling the goods.

It is important to note that each relationship of agency will not result in unfettered authority to do absolutely anything for the principal. The agent may have three types of authority (Baskind et al, 2016):

• Express actual authority – where the principal has explicitly told the agent their powers
• Implied actual authority – authority presumed on the basis of the relationship between the principal and the agent, for example, an employee who works in a shop would have implied actual authority to authorise sales of goods.

This is important for facilitating business as principals can be confident an agent is making appropriate deals for them within the parameters of their agreement, and can seek legal recourse if they are not.