Which of the following statements BEST defines a subagent

What Is the Principal-Agent Relationship?

The principal-agent relationship is an arrangement in which one entity legally appoints another to act on its behalf. In a principal-agent relationship, the agent acts on behalf of the principal and should not 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 establishes guidelines for such a relationship.

Principal-Agent Relationship

Key Takeaways

• A principal appoints an agent to act on their behalf and in their best interest. Examples include an investor picking a fund manager or someone hiring an attorney for legal work. 
• There should be no conflict of interest between the two, if there is, this creates a principal-agent problem. 
• The principal-agent relationship is expressed clearly through a written contract or is implied through actions.

Understanding a Principal-Agent Relationship

A principal-agent relationship is often defined in formal terms described in a contract. For example, when an investor buys shares of an index fund, he is the principal, and the fund manager becomes his agent. As an agent, the index fund manager must manage the fund, which consists of many principals' assets, in a way that will maximize returns for a given level of risk in accordance with the fund's prospectus.

Agents have an obligation to perform tasks with a certain level of skill and care and may not intentionally or negligently complete the task in an improper manner.

The principal-agent relationship can be entered into by any willing and able parties for the purpose of any legal transaction. In simple cases, the principal within the relationship is a sole individual who assigns an agent to carry out a task; however, other relationships under this guise have a principal that is a corporation, a nonprofit organization, a government agency or a partnership.

The agent is most often an individual capable of understanding and ultimately carrying out the task assigned by the principal. Common examples of the principal-agent relationship include hiring a contractor to complete a repair on a home, retaining an attorney to perform legal work, or asking an investment advisor to diversify a portfolio of stocks. In each scenario, the principal is the individual seeking out the service or advice of a professional, while the agent is the professional performing the work.

Special Considerations

Whether the principal-agent relationship is expressed clearly through a written contract or is implied through actions, the principal-agent relationship creates a fiduciary relationship between the parties involved. This means the agent acting on behalf of the principal must carry out the assigned tasks with the principal's best interest as a priority.

The agent is responsible for completing tasks given by the principal so long as the principal provides reasonable instruction. Additionally, the agent has an obligation to perform tasks that will not intentionally harm the principal. A duty of loyalty is also implied within the principal-agent relationship, which requires the agent to refrain from putting himself in a position that creates or encourages conflict between his interest and the interest of the principal, also known as the principal-agent problem.

Answer the following questions and then press 'Submit' to get your score.

Question 1

In a normal agency relationship where the agent acts within his authority, a binding contract is usually created between which parties?

a) The principal and agent

b) The principal and a third party

c) The agent and a third party

d) The principal, agent, and third party

Question 2

Which one of the following statements concerning commercial agents is NOT true?

a) Self-employed agents will not be classified as commercial agents.

b) Agents engaged for a single transaction are unlikely to be classified as commercial agents.

c) Agents involved in the provision of services will not be classified as commercial agents.

d) An agent who does not have the power to negotiate on his principal's behalf will not be classified as a commercial agent.

Question 3

Regarding the capacity of principal and agent, which one of the following statements is NOT true?

a) A minor cannot enter into a normal trading contract simply by employing an adult agent.

b) A mentally disordered person can appoint an agent to purchase necessaries.

c) An agent who lacks full contractual capacity can only be made personally liable on those contracts that he would have had capacity to make on his own behalf.

d) A minor cannot act as an agent in a transaction which he would not have capacity to enter into on his own behalf.

Question 4

In order for apparent authority to arise, a representation must be made by the principal prior to the contract being entered into. True or False?

a) True

b) False

Question 5

Which one of the following statements is true?

a) When determining whether apparent authority exists, the fact that the purported contract is not in the principal's interests is irrelevant.

b) Apparent authority is based on the doctrine of estoppel.

c) In order for apparent authority to arise, the principal's representation must be made by words.

d) Apparent authority may arise even where the third party is not aware of the principal's representation.

Question 6

There are numerous limitations and conditions regarding when agency by ratification can arise. Which one of the following is NOT a valid limitation or condition?

a) Only the principal may ratify the actions of the purported agent.

b) An act that is void in law cannot be ratified.

c) Ratification must take place within a reasonable time.

d) The agent must purport to act as agent for a disclosed principal.

e) The principal must have a choice whether or not to ratify.

f) The principal must exist at the time that the agent purported to act as agent.

g) In order to ratify, the agent must have contractual capacity to enter into the contract on the date which he entered into the contract on the principal's behalf.

h) Ratification will not take place if it would unfairly prejudice a third party.

Question 7

James is appointed by Richard to act as his agent and purchase for him a 1965 Rolls Royce Phantom. Jeremy has such a car. James informs Jeremy that he is an agent, but does not disclose the identity of his principal (Richard). Is Richard a 'disclosed principal?'

a) Yes

b) No

Question 8

Where a third party deals with an agent, but is not aware that he is dealing with an agent, the principal will not normally be contractually bound to the third party. True or False?

a) True

b) False

Question 9

An agent is subject to a number of duties. Which one of the following statements regarding the duties of an agent is NOT true?

a) If an agent appoints a sub-agent, that sub-agent is not normally regarded as an agent of the principal.

b) An agent cannot accept commission from both parties to a transaction without his principals' consent.

c) Where an agent's interests conflict with those of his principal, he must disclose the conflict.

d) The agent is under a duty to keep his own property separate from that of his principal.

e) A secret profit derived from a third party constitutes a bribe, irrespective of the agent's motives.

f) An agent who is a professional is required to display such skill as may reasonably be expected from a member of his profession.

g) An agent can only disobey his principal's instructions if he honestly believes that disobeying those instructions is in his principal's best interests.

h) A gratuitous agent is not under a duty to act.

Question 10

Agents have a number of rights. Which one of the following statements regarding these rights is NOT true?

a) An agent has a lien over any goods lawfully in his possession if the principal has not paid the agent money due.

b) Both commercial and non-commercial agents have a right to be paid.

c) A principal is not obliged to provide non-commercial agents with relevant information.

d) An agent is not entitled to receive commission if the act for which he was engaged to perform was completed without the agent's involvement.

e) An agent who has incurred tortious liability whilst carrying out his principal's instructions is entitled to be indemnified by his principal.

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