The Principle of Limited Liability

This act was of the parliament of the United Kingdom and was aimed at incorporations of joint-stock companies in the United Kingdom. Prior to the joint-stock companies act of 1984 incorporations were only possible through two ways either private act or royal charters. Therefore businesses were usually being operated as unincorporated associations with members in thousands. This led to the problems of liability in case of litigations. All the people under the rule were equally responsible therefore it was impossible to sue so many people at the same time.

In a typical agent-principal relationship, the agents are given the power to manage the affairs of the principal. This would, therefore, give them complete legal authority to enter into agreements and legal contracts on behalf of the principal. On a smaller scale, this model would be without flaw or very little flaw for that matter. Examples of such everyday affairs are seen everywhere in day to day life, where principals pass on legal powers to agents on limited matters. In most cases usually little is at stake or the principal has personal ties with the agents and therefore can assure that a moral hazard has little chance of arising. In modern companies, however, the situations have changed. The structure of corporations tie thousands of different principals into relationships with agents they have not met ever. This creates a level of uncertainty for the principals as they are in ordinary circumstances totally liable for any actions being taken by agents. There are two different methods to cater to this problem. The first method is to use insurance to safeguard the principal against any moral hazards of agents. The more common method however is as mentioned above, to formulate a&nbsp.limited liability contract.