Legal Definitions - Principal

In legal contexts, the term Principal refers to a person or thing that holds primary importance or authority in a specific situation. Its meaning can vary depending on the context:

• 1. The person who grants authority to another to act on their behalf.

  In this sense, the Principal is the individual or entity who authorizes an "agent" to perform actions or make decisions for them. The agent acts under the Principal's direction and in their best interest.

  • Example A: A small business owner, Ms. Chen, needs to travel for an extended period. She grants her trusted operations manager, Mr. Lee, a limited power of attorney to sign contracts and make financial decisions on behalf of her company while she is away.

    Explanation: Ms. Chen is the Principal because she is the one granting the authority to Mr. Lee (her agent) to act in her place for specific business matters.

  • Example B: A homeowner hires a real estate agent to sell their house. The agent lists the property, shows it to potential buyers, and negotiates offers.

    Explanation: The homeowner is the Principal because they have authorized the real estate agent to represent them and act on their behalf in the sale of their property.

• 2. The original sum of money borrowed or invested, excluding any interest or earnings.

  This refers to the core amount of a debt or an investment, separate from any additional charges, profits, or returns that may accrue over time.

  • Example A: When a student takes out a $50,000 loan for tuition, and over time accrues $5,000 in interest.

    Explanation: The $50,000 is the principal amount of the loan. The $5,000 in interest is an additional charge on top of this core amount.

  • Example B: An investor purchases shares in a company for $10,000. Over several years, the shares increase in value and also pay out $500 in dividends.

    Explanation: The initial $10,000 investment is the principal. The increase in share value and the $500 in dividends are earnings separate from this original amount.

• 3. The person who has the primary duty to fulfill an obligation.

  In situations involving a guarantee or surety, the Principal is the individual or entity who is primarily responsible for performing a specific duty or repaying a debt. Another party (the surety) might promise to step in if the Principal fails, but the primary obligation rests with the Principal.

  • Example A: A construction company signs a contract to build a new community center. To secure the project, they obtain a performance bond, where a surety company guarantees the work will be completed.

    Explanation: The construction company is the Principal because they have the primary responsibility to complete the community center project as per the contract.

  • Example B: A young professional applies for an apartment lease, and their parent co-signs the lease agreement to guarantee rent payments.

    Explanation: The young professional is the Principal tenant, as they are primarily responsible for paying the rent. The parent is the co-signer (or surety), who would only be obligated if the professional fails to pay.

• 4. The core assets or property held within a trust.

  In trust law, the Principal (also known as the "corpus" or "res") refers to the actual property, money, or investments that fund the trust. This is distinct from the income generated by these assets, which is often distributed to beneficiaries.

  • Example A: A wealthy individual establishes a trust for their grandchildren, placing a portfolio of stocks, bonds, and a piece of real estate into it.

    Explanation: The stocks, bonds, and real estate collectively form the principal of the trust. Any dividends, interest, or rental income generated by these assets would be considered income from the trust, not the principal itself.

  • Example B: A charitable foundation creates an endowment fund, where a large sum of money is placed into a trust to generate investment returns that will be used for grants.

    Explanation: The initial large sum of money placed into the trust is the principal. The investment returns generated from this principal are used for the foundation's charitable activities.