Source: Law of Agency Teaching Material
The concept of agency reduces the cost of contracting. Though it increases the number of parties and transactions, it has made possible for individuals to utilize the services of others in accomplishing, for more than could be done by their unaided efforts. By contracting through an agent, the principal may reduce the cost of spatial and cultural distances, the need to acquire expertise, and the inconvenience of having to deal personally with all contracting parties. In the same manner, agency reduces the cost of internal organization and so indirectly the costs of contracting by facilitating specialization of function and expanding the scares resources of time, energy and knowledge available to the principal. In here not only does the principal benefits, but so does his contracting partner (The third party in agency law) who would otherwise bear some of the principals higher contracting costs in a less favorable contract price. In this case, the agent also benefits from the principal through compensation.
In a nutshell, the following points can best elaborate the need for having an agent acting on behalf of someone.
1. The need to overcome time and space limitation
one person may wish to perform several transactions at the same time. However, he could be in a position where he is unable to run these several activities by himself at one instance, for he is at one specific place (space) at one time. He cannot be at different places (spaces) at one instance (time); for this reason, he/she may want another individual to act on his behalf. In this case the concept of representation comes into view. The inability of a person to be at different places at the same time can thus be solved by agency representation.
2. The need to overcome limitations of knowledge and skill
Performing one or more activities may demand certain skills or knowledge. Hence one may lack the required knowledge in performing a certain activity. Hence, another individual who has the required skill may act on behalf of the person who has no such expertise in performing the duty.
3. The need to represent legal persons
Legal personality is endowed to non-living entities. Thus, after acquiring the legal personality these entities will have the right to exercise all activities that a legal person can do. For instance, they can sue and be sued, administer property etc, to conclude a valid contract and to transact with 3rd parties etc. However, these entities don‟t have mental capabilities to analyze the cost and benefit of their transaction because they don‟t have minds like human beings. Hence, they need an agent to act on behalf of them. The manger of a business organization, for example, is considered as an agent through which any dealings with a third party is concluded.
From the above discussion, we can understand that an agent can act on representing legal persons to exercise rights and duties that a certain legal person enjoys. It is through the agent (human being) that a certain legal person enjoys its rights and performs its duties.
4. The Need to overcome incapacities
The Ethiopian civil code provides that capacity is required in order to perform a juridical act. Certain category of people like minors (below the age of 18) and interdicted people can not have the appropriate analytical capacity in order to enter into a juridical act. Hence they may fail to analyze the cost and benefit of the transaction. Hence some one else who can act on behalf of them is appointed.