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Agency By Necessity

Updated on May 9, 2024
Article byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Agency By Necessity?

Agency of necessity refers to a legal relationship that involves a party having the authority to make crucial decisions for another party in the case of unforeseen circumstances. This relationship enables the person or agent acting on behalf of the principal to protect the latter’s interests or prevent losses.

Agency By Necessity

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This concept is often applicable when a person cannot make a vital decision, and the agent does not have sufficient time to get permission. In the world of finance, the decisions are often related to retirement decisions and critical investments. This legal principle is also applicable in the case of healthcare decisions, natural disaster-related decisions, or business transactions.

Key Takeaways

  • Agency by necessity refers to a relationship recognized by the legal system that enables an individual or a particular entity to take action on another person’s behalf when the latter is not in a position to give approval.
  • This legal relationship safeguards the principal’s property and assets. Moreover, it prevents losses.
  • People must meet multiple conditions to implement this concept. For example, they must have tried all the different ways to reach the principal. In addition, they must take action according to the principal’s best interests.  

How Does Agency By Necessity Work?

Agency by necessity refers to a concept whereby a party has the right to establish a relationship and make crucial decisions for the other party in the case of an emergency. It allows the agent to prevent any harm to the principal. The legal system recognizes this type of relationship.

In essence, agency by necessity in contract law enables an individual or (agent) to carry out actions to safeguard the principal’s assets or property during a crisis, especially when the latter cannot give instructions or consent.

The concept of agency by necessity is crucial to business relationships because it minimizes losses and ensures continuity when unanticipated events occur. This concept is also vital in the field of wealth management. For instance, a lot of wealth managers engage in the creation of trusts and wills and manage inheritances of wealth.

Conditions

One must fulfill the following three conditions to establish the legal relationship:

  • Taking the action must be an actual necessity.
  • The agent must carry out actions keeping the principal’s best interests in mind.
  • Communicating with the principal must not be feasible for the agent. In other words, an agent must have tried everything to interact with the principal.

Although explicit authorization is absent, such conditions help maintain goodwill and trust in business relationships.  

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Examples

Let us look at a few examples to understand the concept better.

Example #1

Suppose an individual named Ben Smith, who had a lot of assets, fell seriously ill all of a sudden. As a result of the illness, he could not make any decisions. To make sure that his assets were protected and prevent losses, he appointed John, his lawyer, to make decisions on his behalf without any authorization via agency by necessity. Hence, Ben became the principal, and John became the agent in the legal relationship.

Example #2

Suppose the business operations of Sam (the principal) were severely impacted owing to sudden alterations concerning legislation. John, Sam’s brother and the designated agent, had to take action instantly through the agency by necessity concept to meet the new requirements as Sam was incapacitated and unable to make decisions at that time.

This type of legal relationship may have certain limitations from a legal viewpoint, especially if the agent makes decisions related to substantial amounts. Some common examples are cases about the disposition and distribution of assets among wealthy individuals’ descendants. The distribution of funds or inheritance often leads to much frustration for the family members involved.

When an individual serves as an agent in such a legal relationship, the family members are often unhappy with the decisions made, and they voice their frustrations. In many cases, the public finds out about the family arguments, which often cause irreversible damage to the relationships. The unhappy family members often question the agent’s decisions. Moreover, the agent may even be sued, especially if the amounts involved are considerable.

The issues above-mentioned often arise when a wealthy person becomes incapacitated and cannot make estate planning and financial decisions. The chosen agent becomes responsible for making the decisions regarding the latter’s assets and estate. Note that the decisions include the bequest and distribution of all assets to the heirs, settling estate taxes, writing wills, managing the financial obligations of the principal, and settling off debts.

Importance

This concept is essential in the field of wealth management. For instance, a lot of wealth managers engage in creating trusts and wills and manage the inheritances of wealth. Moreover, it is a crucial concept in finance and business, as it is about a person’s ability to conduct specific actions or make important decisions on another entity or individual’s behalf in case of an unforeseen event.

This legal relationship fosters flexibility in financial management and business operations because rather than requiring the express permission of the principal, it arises from indispensable or urgent situations in which the principal is unable to take any action. Hence, agency by necessity in contract law plays a vital role in ensuring the continuity of risk management, operations, and well-timed decision-making in scenarios where any delay might lead to significant damage or loss.

Frequently Asked Questions (FAQs)

1. What items are necessary to create an agent-principal relationship?

The manifestation of assent by the only thing necessary to establish this kind of legal relationship. The manifestation can either be in writing or oral. An attorney retainer agreement is an example of a written agency agreement. Note that agency relationships may result from scenarios even without any agreement.

2. What are the problems with agent-principal relationship?

Some noteworthy problems are related to the agency costs. If such costs are not per the agency’s requirements, the agent may make poor decisions and avoid responsibilities. Moreover, the agent may carry out actions that do not benefit the principal in any way.

3. What are the other methods of forming principal-agent relationships besides necessity?

Remember that one can form an agent-principal relationship in the following ways:
– By necessity
– Implied from the circumstances
– By estoppel
– Ratified by the principal
– Express agreement

This has been a guide to what is Agency By Necessity. Here, we explain its examples, conditions, importance, and legal issues. You can learn more about it from the following articles –

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