Business Law

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Executive Summary

Various issues in the common law arise when agents make contracts on behalf of principals. Should a principal be bound when his agent makes a contract on his behalf that he would immediately wish to disavow? The tradeoffs resemble those in tort, so the least-cost avoider principle is useful for deciding which agreements are binding and can unify a number of different doctrines in agency law. In particular, an efficiency explanation can be found for the undisclosed-principal rule, under which the agent's agreement binds the principal even when the third party with whom the contract is made is unaware that the agent is acting as an agent. Agency deals with situations in which one person -- the principal-- uses another person -- the agent-- to act on his behalf. Sometimes the acts of the agent are attributed legally to the principal, sometimes not. Clearly, agency is central to business dealings. No owner of a business can do everything himself; he must delegate some things to agents, and this is true not only of large corporations but of sole proprietorships that have employees who work for the owner. In partnerships, the partners act as each other’s agents. And in corporations, the shareholders are completely unable to act on their own behalf; they delegate authority to a board of directors, who in turn delegate authority to the officers of the corporation. In this report we will discuss the formation and types of agencies with a detail analysis of the evident problems between principal-agent relationships. Moreover, a comparative study between Virginia and Pakistan has been done as to what similarities of duties of an agency are pertaining. Lastly, we will propose some recommendations or procedure that can help the agencies work diligently and purposely.

Table of Contents

Executive Summary1
Introduction3
Formation of Agency3
Types of Authority4
Types of Agents6
Duties of an Agent:9
Rights of an Agent:10
Agency Relationships and Examples12
Actual Authority13
Apparent Authority13
Ratification13
Termination of Agency:14
Similarity in Duties Between Pakistan and Virginia16
Duties16
Agency Problems:17
Recommendations:18
Regulatory strategies:18
Governance strategies:18
Conclusion19

Introduction
An ‘agency problem’, in the most general sense of the term, arises whenever the welfare of one party, termed the ‘principal’, depends upon actions taken by another party, termed the ‘agent.’ The problem lies in motivating the agent to act in the principal’s interest rather than simply in the agent’s own interest. Almost any contractual relationship, in which one party (the ‘agent’) promises performance to another (the ‘principal’), is potentially subject to an agency problem. The core of the difficulty is that, because the agent commonly has better information than does the principal about the relevant facts, the principal cannot easily assure himself that the agent’s performance is precisely what was promised. As a consequence, the agent has an incentive to act opportunistically, skimping on the quality of his performance, or even diverting to himself some of what was promised to the principal. This means, in turn, that the value of the agent’s performance to the principal will be reduced, either directly or because, to assure the quality of the agent’s performance, the principal must engage in costly monitoring of the agent. The greater the complexity of the tasks undertaken by the agent, and the greater the discretion the agent must be given, the larger these ‘agency costs’ are likely to be. Formation of Agency

There are six types of ways an agent is formed.
1. Agency by Agreement: An agreement is either expressed in writing/spoken or implied by the conduct of the principle towards the agent. Normally, an agency must be based on an agreement that the agent will act for the principal. Such an agreement can be an express written contract or can...
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