Agency is the relationship between two persons that permits one person, the agent, to affect the legal relationships of another, known in law as the principal. Agency: a relationship that exists when one party represents another party in the formation of legal relations. Agent: a person who is authorized to act on behalf of another. Principal: a person who has permitted another to act on her behalf. The fact that parties use agents instead of dealing with each other face to face can result in complications and questions. There are two key relationships at play in an agency situation. The first is the relationship between the agent and the principal. The second relationship in agency is between the principal and the party with whom the agent does business. Such parties are known as outsiders because they are outside the agency relationship between principal and agent. The outsider is also sometimes called the third party.