In Short
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An agency agreement establishes a relationship where one party (the agent) acts on behalf of another (the principal).
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It can be formed by agreement, law, or ratification, and it provides flexibility for business growth but comes with risks.
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Clear communication and defined roles are crucial, with legal obligations including fiduciary duties and the right to terminate the agreement.
Tips for Businesses
When creating an agency agreement, ensure it clearly defines the agent’s authority, timelines, and payment terms. Regularly review and update the agreement to match business needs, and include provisions for dispute resolution and termination. This helps protect your interests while fostering a positive working relationship with your agent.
An agency relationship is where one party (‘the principal’) authorises another party (‘the agent’) to perform specific actions, such as engaging third parties in legal relationships. You may want to consider entering into an agency agreement if you wish to grant a third party the authority to act on your behalf or sell your goods or services.
You should consider entering an agency agreement if you want to authorise a third party to act on your behalf or sell your goods or services. Agency agreements provide flexibility and can expand your business reach, but they also come with risks and responsibilities that you must carefully consider. This article will explain the circumstances in which you may wish to draft an agency agreement and its operations and functionalities.
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Relationship Between Agent and Principal
An agent differs from a contractor or administrative party. Agents have the power to create legal relationships or make representations on behalf of the principal. This authority can significantly impact your business, so it is essential to clearly define and understand the scope of the agent’s powers.
An agency relationship can arise in several ways, which will usually impact the legal relationship between the parties. An agency relationship can develop:
- from an agreement;
- from law; or
- by ratification.
Agreement
You can create an agency relationship through an express or implied agreement. Express agreements provide more clarity and protection for both parties. When drafting an express agreement, include specific details about:
- the authority of the agent;
- where the agent can perform such acts;
- the timeframe the agent must perform such acts; and
- the principal’s obligations, such as payment terms.
From Law
Agency relationships that arise from the law typically develop because there is a necessity for the agent to protect the principal’s interest or property. For an agency relationship to exist by necessity, the circumstances must meet specific conditions.
For example, an agency relationship may be necessary if:
- the agent could not communicate with the principal;
- the action that the agent took was necessary for the benefit of the principal;
- it was a reasonable and prudent course of action; and
- the agent acted in the genuine interests of the parties concerned.
Ratification
‘Ratification’ simply means giving retrospective consent to an act.
For example, an agent may perform an act that falls outside the scope of the agency’s authority as outlined in the agency agreement. Typically, this would not bind the principal. However, if an agent performs an act and the principal later decides to ‘ratify’ the agent’s actions, this will count as authorisation.
Responsibilities of Each Party
Clear communication of responsibilities forms the foundation of a successful agency relationship. As a principal, you must provide clear instructions and necessary resources to your agent. As an agent, you must carry out your duties diligently and in accordance with the principal’s instructions.
The agent’s primary duty is to carry out the business they agreed to perform on behalf of the principal. So long as they are lawful, the agent must follow the principal’s instructions.
A relationship established through an agency agreement will detail the obligations and rights of each party. Where no agreement exists which creates an agency relationship, the agent’s responsibility will depend on the conduct of the agent. There are also certain obligations under the law.
Continue reading this article below the formA Fiduciary Relationship
The fiduciary nature of an agency relationship imposes high standards of loyalty and care. As a principal, you can expect your agent to act in your best interests at all times. As an agent, you must prioritise your principal’s interests over your own.
A fiduciary relationship is a legal or ethical relationship based on the trust of two or more parties. An agency relationship is generally a fiduciary relationship. This means that the agent and the principal have several specific duties. For example, the agent must not:
- fail to act in the ‘best interests’ of the principal at all times;
- prioritise its interests over those of the principal and must avoid conflicts of interest when possible;
- acquire any profit from the agency relationship without the informed consent of the principal;
- disclose any confidential information about the principal, unless otherwise authorised to do so; and
- misuse any of the principal’s money or property in its capacity as an agent.
If an agent breaches a duty, the principal may have a claim against the agent for any loss or damage suffered as a consequence of the agent’s breach.
Termination of an Agency Relationship
You can terminate an agency relationship in several ways.
Generally, an agency agreement may stipulate the terms under which the relationship will come to an end. For example, the relationship may end when a certain act is complete. Where an agency agreement does not contain an express provision for termination, it is generally not presumed that the relationship will endure indefinitely. Rather, the principal or agent may terminate the relationship with reasonable notice. If this occurs, the other party will still have an opportunity to claim compensation from the renouncing party for breach of contract.
As with all commercial contracts, it is essential to clearly outline the terms of the agency agreement, including the rights each party has to terminate the agreement and any consequences of termination.
Key Takeaways
An agency agreement is a relationship between a principal and an agent where the principal authorises the agent to engage third parties in legal relationships. These agreements can significantly expand your business capabilities, but they also come with risks. To protect your interests:
- clearly define the scope of the agent’s authority;
- outline specific performance expectations and timelines;
- include provisions for dispute resolution and termination; and
- regularly review and update the agreement as your business needs change.
By carefully crafting your agency agreements, you can maximise the benefits while minimising potential risks to your business.
If you need help drafting an agency agreement, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
What is an agency agreement?
An agency agreement is an agreement under which one party, the agent, will act on behalf of another party, the principal.
How is an agent appointed?
An agent may be appointed by agreement between the agent and the principal, through the operation of the law, where there is a necessity or by ratification through giving retrospective consent to an act.
How does an agency agreement terminate?
An agency agreement terminates when each party fulfils their obligations or on a set date agreed on by both parties. In your agency agreement, you should expressly outline how the agreement will terminate.
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