Anatomy of
An Agency Relationship

By

Joseph Valof, Esq.

Introduction:

One of the most common legal relationships in business is that of agency. With many high-tech companies marketing, selling and licensing their products through third party channels of distribution, such as distributors, resellers, VAR's, OEM's, and company and independent sales representatives, the contractual arrangement between these various entities becomes very critical and the agreement between the parties must be very clear, detailed and unambiguous. This 'White' paper examines this relationship, how an agency relationship is created, and the legal authority, obligations, responsibilities and rights of an 'Agent' and the company ['Principal'].

The Agency Relationship:

The two common agency relationships in business are: (1) employer/employee [also legally referred to as 'Master and Servant'], and (2) company and its third party channels for distributing product [the 'Agent']. When a third party deals with a company employee or a company third party [non-employee] agent, he is in fact dealing with the company itself as the principal. Agents have the legal power to commit the company to definite acts with respect to third parties and the company then is legally bound by these acts. An agency relationship encompasses two (2) contracts; the contract of agency between the company and the agent and the contract which the agent makes with the third party for, and on behalf of, the company.

Classification of Agents; Creation:

Agents are generally classified in terms of the extent of the business to be transacted by them as follows:

General Agents - are authorized by the principal to transact all of the affairs in connection with a particular kind of business or trade or to transact all of the company's business, these agents are generally employees of the company.

Special Agents - are authorized by the principal to transact a definite business affair or to do a specific act, these agents are generally third parties hired by the company under an agreement.

An agency relationship is legally created as follows:

Authorization by Appointment [Express Authority]- The usual method of creating an agency relationship is by express authorization; that is, a person is appointed to act for and on behalf of another. No particular form of language is necessary for the appointment of an agent. It is sufficient that the words used indicate that one person wishes another to represent him. In many instances, the authorization of the agent could be oral, or done by a Board of Directors Resolution. In addition to an agents express authority, an agent also has what is called 'incidental/customary' authority to perform any act reasonably necessary to execute the express authority given to him and to do any act which, according to the custom of the trade, usually accompanies the transaction for which he is authorized to act as agent. Here is where many issues can arise if the agreement between the company and the channel partner is not clear regarding the partner's authority and limitations.

Authorization by Principal's Conduct [Apparent Authority], (also legally referred to as: 'Agency of Estoppel') - An agent has apparent authority when the principal, by his words or conduct, reasonably leads a third party to believe that such a person has the authority to bind the principal. Any conduct, including words, that gives the agent reason to believe the principal consents to his acting as agent is sufficient to create an agency. If a person knowingly and without objection permits another to act as his agent, the law will find in this conduct an expression of authorization to the agent, and the principal will not be permitted to deny that the agent was in fact authorized. In other words, the principal is "estopped" from denying the agency, thus protecting the third party who dealt with the agent in good faith.

Commercial [Private] vs. Government Sectors:

Generally the law of agency is applicable in the same manner to the United States Government and state purchasing agencies as in the private sector. It should be noted, however, government contracting officers and state purchasing officers derive their power from the statutes which created their organizations. In most cases, the authority and limits of authority granted to federal and state contracting officers is expressly defined by these statutes. The important exception to this general statement, however, is the law dealing with apparent authority. Corporations, as principals, are bound to the extent of the power they have apparently given their agents, while the United States Government is bound only to the extent of the power it has actually or expressly given its agents, and unauthorized acts of such agents does not stop the Government from asserting their invalidity. Therefore, employees [agents] of the U.S. Government possess only actual authority which includes both express and implied powers. It should also be noted that, while the scope of a contracting officer's authority is commonly limited by the statute conferring the authority, it is not unusual to find that the authority delegated may also be limited by regulations promulgated pursuant to statutes. These regulatory restrictions on the agents authority when published in the Federal Register are binding in transactions even though the other party did not have actual knowledge of the regulations. Therefore, he who deals with an agent of the government must look to his authority, which will not be presumed but must be established. He cannot rely upon the scope of dealing or apparent authority as in the case of a private agent. However, when the Government deals with employees [agents] of bidders or contractors, the Government may rely upon the apparent authority as well as the actual authority of the employee representing the contractor.

In summary, the law of agency is the consensual relationship between two (2) parties (Principal-Agent) by virtue of which one of them is to act for and in behalf of the other. Business need to be aware of these relationships to ensure that their employees and agents do not commit the company to an unauthorized act which will legally and financially bind the company.


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