LEGAL VIEWPOINT: The legal concept of agency relationship

By Dr AbdelGadir Warsama, Legal Counsel

Dr AbdelGadir Warsama, Legal Counsel
Asia 728x90

Many points were raised and many questions were asked by many concerned entities regarding the agency relationship (alwakala) between the agent (alwakeel) and the principal      (alaseel), particularly the concept of agency in general and the duties of the appointed agent in particular. Many other issues were also raised due to the problems that relate to the agency transactions taking place every day in different fields of business \ trade activites.

To begin with, in an attempt to explain the legal concept and meaning of agency relationship and the limits conferred on the agent, we say that an agency relationship is the fiduciary relationship which results from the manifestation of a consent by one person (who is the principal – alaseel) to another person (who is the agent – alwakeel) wherein the other i.e. the principal to appoint an agent who shall act on his behalf and subject to his control and consent to the acts taken by the other party  i.e. the agent .

In other words, to create an agency relationship there must be a principal and an agent who mutually consent that the agent will act on behalf of the principal and be subject to his control. By this mutual agreement they are giving their consent to create a fiduciary relationship.

Based on the above, it is clear that consent, control and a fiduciary relationship are necessary to establish an agency relationship between any interested parties.

To establish consent, legally speaking, the principal must ask the agent to do something and likewise the agent must agree to do what he has been asked to do. Without or in the absence of such process of consent there will be no agency relationship.

Control of the principal is required and based on this the principals are liable for the acts of their agents because they exercise control over their agents. If principals direct their agents to commit an act, it seems fair to hold the principal liable when that act causes harm or damage to another person.  

This point of control is very crucial to determine the legal status of the agency and the liability of the principal who will be of no liability unless there is agency relationship conferring a certain degree of control from him regarding the acts of his agent. In other words, an agent and principal must not only consent to an agency relationship, but the principal must also have control over the agent.

As explained above an agency relationship between the two parties is a form of a fiduciary relationship which constitutes a certain type of special relationship with high standards. The beneficiary places special confidence in the fiduciary who, in turn, is obligated to act in good faith and perform his duty in every aspect in good faith.

This high standard of duty and good faith requires that the agent works for the interest of the principal and the interest of the agency relationship and, in this respect, to put his own personal needs second in line. This is basically because the purpose of the fiduciary relationship is for one person to benefit another. Agents have, and are required to have, a fiduciary duty to their principals. They have already accepted to undertake this special duty by giving their consent to form the agency relationship with the principal.

All three elements i.e., the consent, the control and the fiduciary duty are necessary to form or create an agency relationship. However, we need to mention that in some relationships, for example, there might be a fiduciary duty but no control. A trustee of a trust must act for the benefit of the beneficiaries, but the beneficiaries have no right to control the trustee. Therefore, a trustee even though he is doing fiduciary duty but he is not an agent for the beneficiaries.

Consent, in real terms, is actually present in every contractual relationship, but this does not necessarily mean that the two parties are agent and principal in every contract. The contractual relationships cover many other issues apart from and in addition to the agency relationship. For example, if A sells his car to B, they both expect to benefit under this contract but neither of them, in this contract, has a fiduciary duty to the other and also neither controls the other, so there is no agency relationship based on the consent of A & B to form this contract.         

The above highlights the concept of agency relationship and the legal requirements needed to form this type of contractual relationship. This background is very necessary to clearly understand the extent of the legal duties of the agent and the principal, based on this each party must understand his part and perform it as required by the law and the terms of the agency contract.

The agency relationship, nowadays, plays a very crucial role in promoting trade and all types of business activities at both the internal and external ends. The agency relationship connects parties from different parts of the world and opens the doors of the globe to every corner in any place. What is really good about agency relationship, it could help you a lot in extending your trade limits through exporting or importing your products or services to all parts of the world without going there. Above points shall be taken in consideration, however, we need to say that some laws governing agency, are giving more details & requirements. You need to know the law, local or foreign, to be aware of all areas.