Table of Contents
- What is the Meaning of an Agency Relationship?
- Why Do I Need to Understand Agency Relationships?
- What are an Agent’s Obligations?
- What are the Principal’s Obligations to the Agent?
- What is the Extent of the Agent’s Authority?
- What If the Agent Acts Outside of Their Authority?
- How Can I Terminate an Agency Agreement?
- Key Takeaways
- Frequently Asked Questions
As a business owner, entering into an agency relationship may be beneficial and support your commercial interests. This relationship grants a person (or entity) the authority to act on behalf of another. This legal relationship is prevalent within certain industries and carries specific responsibilities for both parties. This article will discuss:
- the nature of agency relationships;
- when they occur; and
- the associated obligations that both parties must uphold.
What is the Meaning of an Agency Relationship?
Agency relationships are a common feature in many transactions and can be tailored to suit various needs. For example, they can be specified to last for a set period of time or for after the agent has performed certain tasks. Alternatively, agency relationships can also be broader and last for an undetermined period of time.
Examples of principal-agent relationships in everyday life include when:
- you sign a power of attorney;
- a real estate agent is hired to find a buyer for a client’s property; or
- a business appoints an agent to sell products in a foreign country.
Other less obvious transactions also give rise to an agency relationship. A good example is if you sell an item on an online marketplace like eBay. Here, the online marketplace may act as your agent to collect payment from the buyer.
Why Do I Need to Understand Agency Relationships?
Agency relationships give rise to additional duties that attach to both the principal and the agent. Agents wield a degree of authority when representing the principal in dealing with third parties. This makes trust a fundamental part of these relationships.
To ensure that the agency relationship remains secure, higher obligations are placed on the parties. This is the case even if those obligations are not specified in a contract between them.
Continue reading this article below the formWhat are an Agent’s Obligations?
Some of the fundamental obligations that may arise in an agency relationship include:
| Care, Skill and Diligence | Generally, an agent cannot acquire profit or gain any benefit from performing their role as an agent unless the principal has knowledge of the profit or benefit and has given their prior consent. For example, a lawyer acting as an agent may sell a certain piece of property to a third party on behalf of the owner (principal). Here, the lawyer cannot receive a commission from the sale price on top of their standard fees unless the principal is aware of this arrangement and consents. |
| Conflicts | Agents must avoid situations where their personal interests conflict with their duties as an agent. They are also prohibited from acting for another principal with interests that conflict with the original principal. For example, a real estate agent cannot represent both the buyer and seller of a property, as those interests would conflict. |
| Acquiring Profit | Generally, an agent cannot acquire profit or gain any benefit from performing their role as an agent unless the principal has knowledge of the profit or benefit and has given their prior consent.For example, a lawyer acting as an agent may sell a certain piece of property to a third party on behalf of the owner (principal). Here, the lawyer cannot receive a commission from the sale price on top of their standard fees unless the principal is aware of this arrangement and consents. |
| Accounting | If the situation requires it, an agent must keep detailed records of their transactions and be ready to show such records to the principal upon request, ensuring transparency and the ability to monitor the agent’s activities. |
| Payments | When obtaining any money on the principal’s behalf, the agent must provide it to the principal when they request it. This might include third-party payments or refunds of expenses paid on the principal’s behalf. |
| Carry-Out Instructions | An agent has a strict obligation to carry out a principal’s instructions. For example, if the principal requires the agent to negotiate a contract with particular terms, they must make reasonable efforts to do so. |
| Best Interests | An agent must exercise their obligations and judgment in the principal’s best interests, even if they do not benefit the agent. |
| Delegation | An agent is usually unable to delegate its power to act on behalf of the principal to another party unless the principal provides authority for the agent to do so. |
What are the Principal’s Obligations to the Agent?
A principal has a duty to:
- reimburse their agent for expenses related to the agency, for example, travel expenses;
- pay any fees;
- compensate the agent for losses that occur as a result of the agency arrangement, including where the agent might incur costs from unforeseen circumstances arising from their role as agent.
What is the Extent of the Agent’s Authority?
An agent may only act within their authority. Acting outside their authority will render any agreements created unenforceable. The two key types of authority are:
- Actual Authority: Authority expressly permitted by the agency agreement; and
- Ostensible Authority: Authority that, although not expressly permitted, would be allowed based on the actions, or lack thereof, by the principal.
What If the Agent Acts Outside of Their Authority?
If an agent acts outside their legal authority, they will have breached their contract with the principal. If this happens, the principal will be entitled to claim to seek compensation from the agent for any loss or damage they have suffered due to the agent’s unauthorised actions. For example, suppose the agent defames a third party whilst negotiating on behalf of the principal. The principal may have grounds to file a claim against the agent.
However, if the principal wishes to do so, they can approve the agent’s unauthorised act. If this happens, the agent is no longer in breach of the agency contract. Additionally, the principal forfeits their right to claim compensation for loss or damage.
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How Can I Terminate an Agency Agreement?
Expiration
An agency relationship set to last for a set period will automatically terminate at the end of the period.
Mutual Agreement
Both parties can mutually agree to end their professional relationship, thus ending an ongoing agency relationship.
Revocation of authority
The agency relationship may also end if the principal informs the agent that they revoke the agent’s authority to represent them.
Renouncement of Authority
The relationship can also end if the agent notifies the principal that they renounce their authority and no longer agree to carry out the mandated duties. If this occurs, the other party will still have an opportunity to claim compensation from the renouncing party for breach of contract.
Key Takeaways
It is essential to understand how an agency relationship works so that you:
- are aware of whether you are in an agency relationship; and
- understand your obligations and duties to the other party.
An agent may have varying authorities. For example, an agent may be entitled to enter a contract with a third party on the principal’s behalf, or it may only be entitled to enter negotiations on the principal’s behalf. Ideally, the authority of an agent should be set out in writing.
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Frequently Asked Questions
An agency relationship is a legal arrangement where one party (the agent) has the authority to act or represent another party (the principal). Here, the agent is an intermediary between the principal and third parties when undertaking specific tasks and duties.
Not necessarily. An agency relationship can be specified to last for a set period of time. Alternatively, it can finish once the agent has performed certain acts or tasks. However, agency relationships can also be specified to be far broader and last for an undetermined period. The exact duration and scope of the agency relationship should be set out in the agency agreement. This will help avoid disputes or potential issues.
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