Key Takeaways

  • An agency agreement defines the scope of an agent's authority and the terms of representation between the principal and agent.
  • There are multiple types of agency agreements, including exclusive, non-exclusive, and irrevocable agency arrangements.
  • The termination of an agency agreement can occur in several ways, such as expiration, mutual consent, or breach.
  • Legal implications, including duties of care, indemnification, and confidentiality, are central to effective agency relationships.
  • Dispute resolution clauses and governing law provisions are essential in preventing litigation or jurisdictional conflicts.

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:

  • Expectations of the agency agreement
  • Specific services of the agent
  • Geographical location of the agreement
  • Payment amount and terms
  • The process of dispute resolution
  • An agreement on governing law
  • Duration of the partnership agreement

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.

Types of Agency Relationships

Agency relationships can be structured in several formats depending on the intended level of control and exclusivity:

  • Exclusive Agency Agreement: Grants a single agent the right to act on behalf of the principal within a specified scope or territory. The principal cannot appoint another agent for the same scope but retains the right to act on their own behalf.
  • Non-Exclusive Agency Agreement: Allows the principal to appoint multiple agents. The agent’s rights are not exclusive, and the principal may also conduct the activities independently.
  • Sole Agency Agreement: Similar to an exclusive agency, but the principal typically agrees not to appoint other agents, although the principal can still perform the acts themselves.
  • Irrevocable Agency Agreement: Cannot be terminated by the principal without the agent’s consent for a defined period. This is often used when the agent has a financial interest in the subject matter of the agency.

Each type should be clearly stated in the agreement to avoid future conflicts.

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.

Terminating an Agency Agreement

An agency agreement may terminate through:

  • Expiration of the Agreement Term: Most agreements are for a fixed duration.
  • Mutual Agreement: Both the agent and principal may agree to end the relationship early.
  • Breach of Terms: Material breach by either party can justify termination.
  • Revocation by Principal or Renunciation by Agent: Either party may unilaterally end the agreement, provided it's not irrevocable.
  • Operation of Law: Bankruptcy, death, or incapacity of either party may automatically terminate the agreement.

It’s critical for the agreement to outline specific termination procedures and post-termination obligations such as return of property and final accounting.

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.

Key Legal Clauses to Include

A well-drafted agency agreement should incorporate the following legal clauses:

  • Scope of Authority: Defines what actions the agent is permitted to take.
  • Compensation and Expenses: Clearly state how and when the agent will be paid, and whether expenses are reimbursable.
  • Indemnification: The agent may be indemnified for actions taken within the scope of authority, provided they acted in good faith.
  • Confidentiality: Obligates the agent to protect sensitive information learned through the relationship.
  • Intellectual Property Rights: Clarifies who owns any creations or developments made during the agency term.
  • Governing Law and Jurisdiction: Specifies the applicable state law and where disputes will be adjudicated.
  • Dispute Resolution: Include arbitration or mediation clauses to streamline conflict resolution.

These provisions help mitigate risks and clarify expectations.

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.

Duties of the Principal

While agents owe fiduciary duties to principals, principals also have obligations, including:

  • Duty to Compensate: Paying the agent as agreed in the contract.
  • Duty to Indemnify: Covering expenses or losses incurred while acting lawfully within the agent’s authority.
  • Duty to Cooperate: Not interfering with the agent’s ability to perform their duties.

Failure to meet these duties can result in breach of contract claims or early termination of the agency relationship.

Frequently Asked Questions

  1. What is an agency agreement used for?
    An agency agreement authorizes one party (the agent) to act on behalf of another (the principal) in specific business, legal, or personal matters.
  2. Is an agency agreement legally binding?
    Yes, once signed by both parties, an agency agreement is legally enforceable and subject to contract law principles.
  3. Can an agency agreement be verbal?
    Yes, but it is advisable to put it in writing to prevent disputes and clarify roles, responsibilities, and compensation.
  4. Who can enter into an agency agreement?
    Any individual or business entity with legal capacity can form an agency relationship, provided both parties consent.
  5. How can an agency agreement be terminated early?
    Early termination can occur through mutual agreement, breach of contract, or revocation—unless the agreement is designated as irrevocable.

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