Principal-Agent Relationship
What Is the Principal-Agent Relationship?
The principal-agent relationship is an arrangement wherein one entity legally selects one more to act for its sake. In a principal-agent relationship, the agent acts for the benefit of the principal and shouldn't have a conflict of interest in carrying out the act. The relationship between the principal and the agent is called the "agency," and the law of agency lays out rules for such a relationship.
Grasping a Principal-Agent Relationship
A principal-agent relationship is in many cases defined in proper terms depicted in a contract. For instance, when an investor purchases shares of an index fund, he is the principal, and the fund manager turns into his agent. As an agent, the index fund manager must deal with the fund, which comprises of many principals' assets, such that will expand returns for a given level of risk as per the fund's prospectus.
Agents have an obligation to perform tasks with a certain level of expertise and care and may not intentionally or carelessly complete the task in an ill-advised way.
The principal-agent relationship can be placed into by any willing and able gatherings with the end goal of any legal transaction. In simple cases, the principal inside the relationship is a sole individual who doles out an agent to carry out a task; notwithstanding, different relationships under this pretense have a principal that is a corporation, a nonprofit organization, a government agency or a partnership.
The agent is most frequently an individual capable of understanding and at last carrying out the task assigned by the principal. Common instances of the principal-agent relationship incorporate hiring a contractor to complete a repair on a home, holding an attorney to perform legal work, or requesting that an investment advisor broaden a portfolio of stocks. In every scenario, the principal is the individual seeking out the service or guidance of a professional, while the agent is the professional performing the work.
Special Considerations
Whether the principal-agent relationship is communicated plainly through a written contract or is implied through actions, the principal-agent relationship makes a fiduciary relationship between the gatherings in question. This means the agent acting for the benefit of the principal must carry out the assigned tasks with the principal's best interest as a priority.
The agent is responsible for getting done with jobs given by the principal inasmuch as the principal gives reasonable guidance. Also, the agent has an obligation to perform tasks that won't intentionally hurt the principal. A duty of loyalty is likewise implied inside the principal-agent relationship, which requires the agent to forgo setting himself in a position that makes or energizes conflict between his interest and the interest of the principal, otherwise called the principal-agent problem.
Features
- A principal designates an agent to act for their sake and to their greatest advantage. Models incorporate an investor picking a fund manager or somebody hiring an attorney for legal work.
- There ought to be no conflict of interest between the two, on the off chance that there is, this makes a principal-agent problem.
- The principal-agent relationship is communicated plainly through a written contract or is implied through actions.
