If you are looking to give a third party authorisation to sell you goods or services, or otherwise act on your behalf, you may want to consider entering into an agency agreement. This article explains the:

  • operations and functionalities of an agency agreement; and 
  • circumstances in which you may wish to draft one.

An agency relationship is a relationship between one party (‘the principal’) who authorises another party (‘the agent’) to engage third parties in legal relationships. 

Relationship Between Agent and Principal

An agent is not to be confused with a: 

  • contractor who is engaged to provide services on behalf of the principal; or 
  • party who acts in an administrative role between the principal and the third party. 

Rather, an agency relationship permits an agent to create legal relations or representations on behalf of the principal. There are several means by which an agency relationship can come into existence, and this will usually impact the legal relationship between the parties. 

An agency relationship can develop:

  • from an agreement;
  • from the law; or 
  • by ratification.

Agreement 

An agency relationship may exist through an express or implied agreement where the agent consents to act on behalf of the principal. Agency by express agreement requires the principal to expressly appoint the agent. This may be: 

  • in writing; or 
  • by verbal agreement. 

The agreement will usually provide a detailed explanation of the scope of the agency arrangement. This will include: 

  • what the agent has authority to do on behalf of the principal;
  • where the agent can perform such acts; and 
  • in what timeframe the agent must perform such acts. 

Sometimes an agency relationship may be implied from the conduct of the parties towards each other. This will be the case where the parties’ conduct reasonably infers consent to the agency relationship. However, there are sometimes legal requirements for the appointment of an agent to be in writing. 

From Law 

Agency relationships that arise from the law usually develop because there is some necessity for the agent to protect the interest or property of the principal. In order for an agency relationship to exist because of necessity, the circumstances must meet certain 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 is outside the scope of the authority of 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 actions of the agent, this will count as authorisation. 

Responsibilities of Each Party

The primary duty of the agent is to carry out the business he or she has undertaken to perform on behalf of the principal. So long as they are lawful, the agent must follow any instructions given by the principal. A relationship that is established through an agency agreement will detail the obligations and rights of each party. Where the agency relationship is not created by some agreement between the parties, the agent’s responsibility will depend on the conduct of the agent. There are also certain obligations under the law. 

A Fiduciary Relationship

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 a number of 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 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

An agency relationship may be terminated in a number of ways.

For example, the relationship may end when a certain act is complete.

An agency agreement may stipulate how the relationship will come to an end. Where an agency agreement does not contain an express provision for termination, it is not usually presumed that the relationship will endure forever. Rather, either the principal or the agent may terminate the relationship by reasonable notice. If this occurs, the other party will still have an opportunity to claim compensation from the renouncing party for breach of contract.

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. Each party to the agreement will have certain obligations. You should ensure your agreement is drafted effectively and is legally binding on all parties. If you need help with drafting an agency agreement, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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