Agency

In contracting the legal concept of agency comes into play in several areas so you should have a general understanding of the types of agency relationships that may exist, the type of authority an agent may have.

An agent is someone that has the authority to act on behalf of another party. The party they act on behalf of is called the “principal”. There are three types of agency that may be created – actual authority, apparent authority and implied authority.  For agents that have actual authority that has been granted to them, the degree of that agency can range from very broad to limited. For example:

• Universal agents hold broad authority to act on behalf of the principal. An example of a universal agency would be a power of attorney.
• General agents may have authority to conduct transactions over time.
• Special agents may be authorized to conduct a single transaction or transactions or over a limited period of time.

Actual authority exists where the principal's words or conduct reasonably cause the agent to believe that he or she has been authorized to act. If the principal gives actual authority to an agent, all the agent's actions falling within the scope of the authority given will bind the principal. Apparent authority is created when the principal's words or conduct create the situation where a reasonable person would believe that the agent was authorized to act. Implied authority is created by position held by an agent. For example, officers of a company would have implied authority to act on behalf of that company. Procurement people, by their position may be considered to have authority to act and bind the corporation.

In Procurement the concept of agency becomes important in two areas. The first is enforceability. For you to have a binding contract with the Supplier, that contract needs to be signed by someone that has the authority to bind the Supplier.  If an officer of the Supplier’s company is signing the contract, they will be deemed to have implied authority. If you want to ensure that they have actual authority you can ask the Supplier to provide you with a secretary’s certificate in which the Secretary of the Corporation represents that the authority has been granted which usually occurs through a vote of the Board of Directors or by an authorized delegation of the authority.  If you deal with someone outside of the Supplier to ensure that you have enforceability of your contract you would want to see the document that grants that party the authority to verify both that they are authorized to act and verify that the act is within the scope of what they have been authorized to do as an agent of the Supplier.

The other aspect of agency that is important in procurement is created because

Buyer / Supplier relationship can be interpreted under the law as a form of agency.  Since under the Law of Agency the Principal may be held liable for the acts of their Agent, they Buyer’s contracts need to protect the Buyer against that potential liability. So most contracts will include a general indemnification or hold harmless and indemnification provision that requires the Supplier to “defend, indemnify, and hold the Buyer harmless against any third party claims for personal injury or property damage caused by the Supplier to a third party. This is done to help shield the Buyer from both the costs of defending against those third party claims and also the cost of any damages that may be awarded. To ensure that there is substance behind that Supplier’s promise, most contracts also include requirements for the Supplier to carry certain to insurances that would be used to protect against the financial losses of such claims.

If the Buyer is Purchasing the Supplier’s product with the intent to resell that product as part of the Buyer’s product, that also puts the Buyer into the liability chain where the Buyer could be sued for product liability injuries incurred from the Supplier’s product. The same indemnifications and insurance requirements are intended to protect against these potential claims.

If the Supplier sold a product or service to the Buyer and that product or service infringed upon the intellectual property rights of third party, the Buyer could be sued for damages resulting from the infringement and the third party could seek an injunction preventing further use of the product by the Buyer. To protect against these types of claims, contracts will generally include an intellectual property indemnification, which requires them to once again “defend, indemnify and hold harmless”, the Buyer from such claims. The intellectual property indemnification terms will also include certain additional remedies that the Supplier must provide in the event of a claim, such as get a license to use the IP, redesign their product or service so that it non-infringing, etc.    

The laws of agency and the responsibilities that the Buyer assumes as part of reselling the Supplier’s product or service are why the Buyer needs to be concerned about the actions or inaction of the Suppliers and the Buyer can wind up being liable for those Supplier actions.