What key requirement is essential for a principal in an agency relationship?

In an agency relationship, the principal must possess the legal capacity to enter into contracts, which is the key requirement highlighted in this scenario. This means that the principal must be of a certain age, typically at least 18 years old, and mentally competent to understand the nature of the agency relationship and the implications of the actions being taken on their behalf. If the principal lacks the capacity, any agreements entered into by the agent on their behalf may be voidable.

While aspects such as a written agreement, good faith, and disclosure can play important roles within the agency context, they are not fundamental prerequisites for establishing the principal's authority to create the relationship itself. For instance, an agency can exist even without a written agreement, and good faith obligations typically arise in the context of the agent's performance rather than the principal’s ability to form the relationship. Similarly, disclosure relates more to the agent’s responsibilities regarding the principal's interests rather than the capacity of the principal to act. Therefore, the capacity to contract is a critical and fundamental requirement for a valid agency relationship.