Updated November 16, 2020:

An agency agreement is a legal document that binds two individual partners: the principal and the agent. The principal is the person doing the hiring. The agent is the individual who will complete the tasks on behalf of the principal. The agreement often creates a legal relationship and type of proxy status between two parties.

Agency agreements are often used in the following situations:

  • Outsourcing vendors
  • Hiring legal representation
  • Working with realtors
  • Hiring an accountant
  • Using marketing services
  • Employing investment brokers
  • Business employees making decisions for their employer

Creating an Agency Agreement

The agency agreement created between the two parties should include the following:

Upon completion of the agency agreement contract, both the principal and the agent should sign and print copies of the form. Both parties should have easy access to the agency agreement for the entire duration of the agency partnership.

It is important to understand that an agency agreement is not a form of an employment agreement. The agency agreement does not include traditional aspects of employment including health care, time off, or retirement enrollments. Additionally, the length of the agency agreement is often much shorter than the length of full-time employment.

Understanding the Risks of an Agency Agreement

In most cases, agency agreements are created out of necessity to create a partnership that benefits each party. However, there are a few risks involved with agency agreements that are worth noting.

Liability is one of the biggest risks in an agency agreement. Because the principal is authorizing the agent to act on their behalf, they can also face consequences for the actions taken. If the agent participates in illegal or unethical activities while representing the principal, the principal could essentially be liable.

 The best ways to avoid the potential risks of an agency agreement include the following:

  • Give both parties sufficient time to thoroughly read all contracts.
  • Consider the intended goals of the agreement and ensure they are carefully listed.
  • Aim to be overly inclusive rather than leave out points that might seem otherwise obvious.
  • Include liability limitations of the principal in the agency agreement.
  • Include breach of contract terms.
  • Hire a commercial solicitor to explain the contract.
  • Provide both parties with a signed copy of the contract.
  • Consider notarizing the agency agreement.
  • Have a unique contract drafted for complicated agreements.

Creating an agency agreement is a legal and binding document. It requires careful planning, evaluation, and a full understanding of what it entails.

Forms of Agency Agreements

Agency agreements are useful in many different situations. The specific method in which the agency agreement forms can affect the legalities of the agreement. These are some of the most common forms of agency agreements:

  • Verbal. Verbal agreements are the most common source of agency agreements. Agency agreements are most effective when the verbal agreement is turned into an agreement that is in writing.
  • Statute/common law. Statute or common law agency agreements do not include an actual contract. They arise out of necessity, and the agent is acting in the best interests of another party, usually a party that is unable to give a verbal agency agreement.

Ratification

Ratification occurs when the principal gives consent to an action that has already occurred. This often occurs either when the agent goes beyond the scope of the agency agreement or when the acting party is not yet officially an agent to the principal. The principal can approve the agency agreement at a later date, thus accepting and recognizing the actions of the agent and creating an agency agreement in the process.

Fiduciary Responsibilities

A fiduciary responsibility is a legal responsibility to act in the best interest of the principal. When an agency agreement is created, the agent is agreeing to always act with the principal's best interests in mind. An ethical and legally bound fiduciary relationship includes the following aspects:

  • The agent must avoid dual relationships when possible.
  • The agent must avoid placing prioritizing personal benefits.
  • The agent must keep the principal's information confidential.
  • The property and financial terms of the agreement cannot be misused.

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