|Contract of carriage/Charterparty|
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 third party. This branch of law is called agency and relies on the common law proposition qui facit per alium, facit per se (Latin "he who acts through another, acts personally").
It is a parallel concept to vicarious liability (in which one person is held liable for the acts or omissions of another) in criminal law or torts.
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:
In the majority of cases, it is impossible for agents to seek specific authority for every deal or detail within a deal. Agents must, of necessity, be allowed some degree of discretion in the conduct of routine transactions. But, for the purposes of ascribing legal responsibility to the Principal, when the Agent acts with actual or apparent authority, all the Agent's knowledge will be imputed to the Principal. If Principals were allowed to hide behind their agents' own ignorance, mistakes or failures to communicate, a Principal could, by using an Agent, achieve a better result than if they acted personally. For example, if the particular deal turned out well, the Principal could adopt the transaction. But, if it turned out badly, the Principal could disavow it. Indeed, if not for imputation, there would be a perverse incentive to conduct business through Agents rather than personally. Consequently, the Principal cannot exploit ignorance to their advantage by instructing the Agent to withhold key information or by appointing an Agent known to be secretive.
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.
There are three classes of Principal:
|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.|
For these purposes, the Principal must give, or be deemed to give, the Agent authority to act.
Even if the Agent does act without authority, the Principal may ratify the transaction and accept liability on the transactions as negotiated. This may be express or implied from the Principal's behaviour, e.g. if the Agent has purported to act in a number of situations and the Principal has knowingly acquiesced, the failure to notify all concerned of the Agent's lack of authority is an implied ratification to those transactions and an implied grant of authority for future transactions of a similar nature.
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.
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.
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.
The relationship between a Principal and an Agent is fiduciary which requires the Agent to be loyal to the Principal. This involves duties:
In return, the Principal must make a full disclosure of all information relevant to the transactions that the Agent is authorized to negotiate and pay the Agent either the commission or fee as agreed, or a reasonable fee if none were previously agreed on.
The principal has the following remedies against the agent for breaching his/her fiduciary duty:
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.
The principal can void contracts negotiated by an agent that breached his or her fiduciary duty.
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.
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.
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.
The Principal can terminate an Agent's authority at any time without having to give notice. If the trust between the Agent and Principal has broken down, it is not reasonable to allow the Principal to remain at risk in any transactions that the Agent might conclude during a period of notice.
Main article: Principal–agent problem
The analysis of principal–agent relationships is an important topic in economics. The main focus of analysis is on the information asymmetry between the agent, who is assumed to be well informed, and the principal who may not be.