What is an Agency Agreement?

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An Agency Agreement is a legal contract between “the principal” and “the agent” whereby a fiduciary relationship is created that defines the agent's duties and authority.

The Principal grants the Agent the right to create legal relationships with third parties and to work under the principal’s control and on his behalf. Therefor the principal agrees to be bound by the actions of the agent. For example if the agent negotiates an agreement with one of the principal’s customers, the principal agrees to honour the agreement as if the principal had himself personally made the agreement.

With a sales agency the Agent’s role is to find, negotiate and close sales on behalf of the principal. It’s important to understand the agent only has the authority to negotiate and enter arrangements on the principal’s behalf, to the extent allowed by the terms of the agency agreement. For instance this may mean that a principal reserves the right to approve or decline all sales negotiated by the agent, before a binding contract is entered.

In most cases the sales agent will be rewarded for his/her efforts based upon his performance. This means a well structured agency agreement will provide a win win situation for both parties. Usually the agent assumes all of his or her operating costs so its important to remember this when negotiating your agreement.

Generally an agent will not be required to hold stock of the principal’s products, it’s the principal’s responsibility to ensure he has the resources to deliver the product or service to the customer. Once the product or service is delivered the commission Agent is then entitled to payment from the principal.

Agency agreements also provide flexibility for the parties whereby the Agent may be granted an exclusive or non exclusive territory sometimes called a sole agency. This means the principal is able to ensure if need be all agents acting under his control get a fair share of the market available.

Remember, when negotiating your agency agreement both the agent and the principal will have a legal duty. In particular, the agent is placed in a position where a high-level of responsibility and trust is imposed. This is known as a “fiduciary relationship” and certain obligations are placed on the agent regardless of any contractual responsibilities. The primary responsibility of the agent is to act honestly and in the best interest of the principal.

Agency Agreements can be written, verbal or implied by the conduct of the parties involved. The Law and the Tax office may look at the actions of those involved in deciding if an agency can be inferred. If the parties have acted in a way that reasonably infers the agent is representing the principal with the knowledge and approval of the Principal then an agency arrangement is presumed.

Whatever the situation, it is always better to enter any agreement in writing. A written agreement clarifies the terms, conditions and duties of the parties involved and will provides strong legal protection in the event of a misunderstanding.

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