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What is an Agency Agreement?

An Agency Agreement gives power to one party (the agent) to act on behalf of another party (the principal). For instance you might give an agent the ability to go and sell your products or services in a certain territory for a certain period. Using this example your agent is your ‘salesman’ and is out there trying to generate sales for you (they would then be paid a commission based on the sales they generate) but it would be up to you to actually supply the goods or provide the services.

Agents have a Fiduciary Responsibility

Depending on the nature of the agency agreement, agents have the capacity to make financial decisions on behalf of the principal and enter into or affect legal relationships between the principal and a third party. They also have various responsibilities to the principal in exercising their power. The relationship between an agent and the principal is called a fiduciary relationship.

Responsibilities of Agents

The sorts of responsibilities that come from a fiduciary relationship include that the agent has to always act in the best interests of the principal. This means that they need to avoid conflicts of interest.

Agents are not allowed to secretly profit from their role. This means, for example, that an agent cannot take business or commercial opportunities for themselves that they are offered while acting for the principal.

The agent must not disclose confidential information about the principal. They must also not misuse the principal’s money. This includes keeping the principal’s money separate from their own money. Generally the agent must act in person; they cannot delegate their responsibilities.

Agents must fulfill their duties with care, skill and diligence and they cannot act or make decisions that fall outside the boundaries of the agreed relationship.

All of the fiduciary responsibilities described above are legal requirements that will apply to the agent-principal relationship whether or not they are written down in the agreement. However because the agent has a lot of power to affect the life and finances of the principal, it makes a lot of sense to have a detailed written agreement, rather than a verbal agreement.

Key Requirements
  • What is the agent allowed to do on behalf of the principal
  • What are the limits of the decisions that they can make on behalf of the principal
  • Does the agent need to seek the approval of the principal before making certain decisions
  • The location where the agent will act on behalf of the principal
  • The timeframe over which will the agent act on behalf of the principal
  • What is the fee or commission that the agent charges for their services and how is it calculated
  • When is the fee or commission payable
  • Is the agent acting exclusively or can the principal engage other agents
  • How will the agent manage the accounting of the principal’s finances and how will the principal be able to access and review the accounting records
  • What insurance is needed and who will cover the cost of the insurance What is the process for resolving disputes
  • How and under what circumstances can the agreement be terminated

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