Businesses enter into numerous contractual relationships. One type of contractual relationship that arises between two parties is an agency relationship. This relationship involves one person providing the other with authority to act on their behalf. This type of legal relationship is prevalent within certain industries and involves essential responsibilities for both parties. This article will discuss: 

  • what agency relationships are;
  • when they occur; and 
  • the associated obligations that arise for both parties.

What Is the Meaning of an Agency Relationship?

An agency relationship involves one party (the agent) who has the authority to act or represent another party (the principal). Here, the agent acts as an intermediary between the principal and third parties when undertaking specific tasks.

Agency relationships are common in many transactions. They can be specified to last for a set period of time, or for after the agent has performed certain acts. Agency relationships can also be specified to be far broader and last for an undetermined period of time.

Examples of agency relationships include when:

  • signing 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 another country.

Other less obvious transactions also give rise to an agency relationship. 

For example, if you sell an item on an online marketplace, like eBay, the online marketplace may act as your agent to collect money from the purchaser.

Why Do I Need to Understand Agency Relationships?

You need to be aware of agency relationships as they give rise to additional duties that attach to both the principal and the agent. This is because agents have a level of authority when dealing with third parties on behalf of the principal. For this reason, agency relationships are based on an element of trust. 

To ensure that the agency relationship remains secure, higher obligations are placed on the parties, even if those obligations are not specified in a contract between them.

What Are an Agent’s Obligations?

Some of the fundamental obligations that may arise in an agency relationship include:

Care, Skill and Diligence

In performing their actions as an agent, the agent must exercise care, skill and diligence.

For example, if an agent were to enter a contract with a third party, they must take all steps to protect the principal’s interests.


An agent is not able to place their duties as an agent in conflict with their own interests. 

The agent may also be prohibited from acting for another principal that has a competing interest with the original principal.

Acquiring Profit

Generally, an agent is not able to acquire profit or gain any benefit from performing their role as an agent. This is 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 any of their standard fees.

Accounting If the situation requires it, an agent must keep records of their transactions and be ready to show such records to the principal. 
Payments When obtaining any money on the principal’s behalf, the agent must provide the money to the principle when they request it.
Carry Out Instructions An agent has a strict obligation to carry out the instructions of a principal.
Best Interests An agent is required to exercise their obligations and judgment in the best interests of the principal.
Delegation An agent is normally unable to delegate its power to act on behalf of the principal to another party. This is 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;
  • pay any fees; 
  • compensate the agent for losses that occur as a result of the agency arrangement.

To secure payment of any amount that the principal owes to the agent, the agent will have a right to keep any property that the principal owns until they pay the debt.

What if the Agent Acts Outside of Their Authority?

If an agent acts outside of their authority, they will have breached their contract with the principal. If this happens, then the principal will be entitled to make a claim against the agent for any loss or damage which they have suffered in consequence of the agent’s unauthorised act.

However, if the principal wishes to do so, they can approve the unauthorised act of the agent. If this happens, then the agent is no longer in breach of the agency contract, and the principal has no claim for loss or damage.

How Can an Agency Be Terminated?

An agency relationship that is set to last for a set period will automatically terminate at the end of the period. However, an ongoing agency relationship can be terminated if both parties agree to end the relationship.

The agency relationship may also end if the principal gives notice to the agent that they revoke the agent’s authority to represent them. It can also come to an 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 different 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 clearly set out in writing. If you have any questions about entering into an agency relationship, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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