Businesses that operate as intermediaries between two parties should understand the importance of their role in these transactions. Acting as an intermediary involves taking payment from one party on behalf of the other. While this process occurs in various business models, it is becoming more popular in online businesses, such as marketplaces. This article provides an overview of the considerations you need to make when considering whether you will be operating a business under a limited payment agent arrangement.
What Are the Characteristics of a Limited Payment Agent?
The limited payment agent is an entity that obtains money from a party for the payment of goods or services for another party. The entity, therefore, acts as an intermediary between the two parties and is the ‘agent’ of the goods or services provider.
What is an Agency Arrangement?
Agency is a legal relationship between the agent and another party, the ‘principal’. In an agency relationship, the agent has the authority to create a legal relationship between the principal and a third party. If there is an agreement between the agent and the principal, the agreement should set out what types of legal relationships the agent can enter into on the principal’s behalf.
The limited payment agent arrangement allows the agent to act on a principal’s behalf only when obtaining and transferring payment from its customers. The agent does not have unlimited powers when acting for the principal.
It is essential to understand that a limited payment agent is based on the agency relationship. An agent owes fiduciary duties to the principal, including the duty to:
- act in the principal’s best interest;
- not allow a conflict of interest; and
- keep property and assets separate.
Where Do You Use a Limited Payment Agent?
Due to the increase of online businesses, many are looking at operating under a limited payment agent arrangement. This arrangement is distinct from other agency arrangements, such as travel agents. This is because businesses such as travel agencies usually have more authority in their relationship with the principal.
What Are the Risks?
A limited payment agent needs to comply with its fiduciary obligations. This means ensuring that:
- the proper practices and processes are in place to obtain and transfer money; and
- you keep and maintain adequate records to prove this.
Further, once the agent receives the payment, the payment is viewed as having been made directly to the principal. This involves less risk for the party making the payment. Instead, the limited payment agent takes the risk of ensuring that the money is transferred to the principal promptly.
The limited payment agent may need to set up separate bank accounts and understand any regulatory requirements for accepting payments.
For example, it may need to consider whether it is necessary to comply with the Australian Privacy Principles. If the agent also accepts payments by credit or debit card, the Payment Card Industry Data Security Standards (PCI DSS) will likely apply, and the agent will need to ensure that customer information is adequately protected.
What Should I Include in My Agreement?
If you plan to operate as a limited payment agent, it is important to have the appropriate clauses in your agreement. This will help ensure that you have the correct authority to act as an agent. Some clauses you may wish to include are:
- purpose and duties: a clause detailing what you are entitled to do as a limited payment agent, for example, that you will only accept money, but not act on the principal’s behalf for other matters;
- accounts: a clause setting out whether you will need to set up separate an account;
- refunds: a clause setting out how you will deal with refunds;
- transferred funds: a clause setting out when and how funds are transferred to the principal; and
- limitation of liability: a clause noting that you will not be liable for the payment/transfer of funds to the principal if the third party has not received it.
When acting as a limited payment agent for businesses, it is vital to understand that limited payment agents are:
- able to take payment of money for goods and services from one party on behalf of another;
- created under the legal principle of agency, and therefore will owe fiduciary duties to the principal who they are acting for; and
- common in online marketplaces as it allows an intermediary to process payments.
If you plan to act as or engage a limited payment agent, it is necessary to understand the scope of the engagement and to consider including the relevant clauses in your agreement. If you have any questions, contact LegalVision’s e-commerce lawyers on 1300 544 755 or fill out the form on this page.
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