Concepts
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:
- sole traders, their ability to conduct business will always be limited unless other people are used to work on their behalf;
- a partnership, the natural persons who are involved cannot be present to conduct business in multiple locations simultaneously, so they must rely on others to make agreements or deliver services on their behalf; or
- a corporation is only a legal entity or fictitious legal person and so can only act through the agency of human beings to get anything done.
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.
Read more about this topic: Principal (commercial Law)
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