What is agency and why is it important to your business.

Agency is the fiduciary relationship that is formed as a result of the following:

1) the manifestation of consent by one person to another that the other shall

2) act on his behalf and
3) subject to his control, and consent by the other to so act.
Agency must be created by an agreement, but not necessarily by a contract between those parties.  An agreement may result from an agency relationship even if the parties did not intend for the legal consequences to follow.
Imagine if Jane runs her own business as a local grain purchaser from local farmers, and then sells grain to larger purchasers.  John is the owner of a larger grain intermediary company that buys grain from smaller businesses like Jane’s and invests in them.  If John invests in Jane’s company and gives her a credit line, he possibly would require Jane to give him the first right of refusal to buy grain from her before she sells it to the open market.
If, because of bad weather or sour markets, Jane’s business takes a turn for the worst, some people in John’s position might want to have more of a say in Jane’s business in order to protect their capital investment in the company and require that certain things take place in order for credit lines to stay open and to make sure the business runs profitably.  This type of a move could potentially have dire consequences for John’s business.  If Jane’s business continues to worsen, her creditors may choose to come after her for the debts they are owed, and potentially come after John because of the agency relationship that has been formed between them.
Factors that would affect the finding of an agency relationship between John and Jane, and ultimately John’s liability for Jane’s debts would include (but not exclusively) the following:
1) The type and number of business recommendations made by principal to the agent;
2) the principal’s first right of refusal to buy product from the agent, at the price for which it was purchased;
3) the agent’s ability to enter into mortgages, purchase stock, or pay dividends without the principal’s authorization;
4) the principal’s right to enter the agent’s business and perform periodic checks and audits;
5) the principal’s input and recommendations regarding the agent’s finances, officer’s salaries, and inventory;
6) common letter head between the parties;
7) determinations in writing, or otherwise, made by the principle which suggests or requires close or intimate guidance of the agent by the principle;
8) the extent of the principal’s financing of the agent’s operations;
9) the power of the principal to discontinue the financing of the agent’s operations.
If some or most of these factors are found to have occurred in the relationship between Jane and John, John likely could be held liable for Jane’s debts, despite not having an official agreement that made Jane an agent for John.
Someone in John’s position should either not allow themselves to become so highly invested in Jane’s business that they can’t cut her off once her business fails, or they should choose to make her an agent or take over her business in such a way that they have a better ability turn it around and consciously choose to be liable for her debts.
If John wanted to make sure that Jane was just a supplier and not his agent he should do the following:
1) In the contract, the supplier (here Jane) should receive a fixed price for the property irrespective of the price she has paid for it. (Probably the most important factor.)
2) The supplier should act in their own name and receive title to the property which thereafter will be transferred to the buyer.
3) The supplier should have an independent business in buying and selling the property they supply.
Photo By: Galt Museum