Business relationships can come in various forms. A common one we see is an Agency Relationship, which involves:
- A principal – the business
- An agent – the party being appointed to represent the principal
Put simply, it involves the agent making decisions and acting on behalf of the principal (so this can include entering into contracts and dealing with third parties for them).
What Are Some Examples Of An Agency?
It’s likely that you’ve come across some examples of an agency relationship, such as a Real Estate Agent having to sell property for a client. Another example would be an agent for an artist in the music industry – they have the power to book interviews, enter into contracts and make important advertising deals on behalf of the artist.
As you can imagine, the agent has the capacity to make some very important decisions on the principal’s part, so it’s important to establish a level of trust before you agree to enter into an agency relationship.
Luckily, an agency relationship comes with a number of important obligations, so you can make sure the agent doesn’t go off doing something they shouldn’t.
I’m An Agent – What Are My Obligations?
The best way to look at an agency relationship is by comparing it to a fiduciary relationship. For example, lawyers have fiduciary duties to their clients. They need to ensure they have their clients’ best interests at heart and that they take all reasonable steps to achieve this. This is very similar to an agent’s fiduciary responsibility to their principal.
Care, Skill and Diligence
This is a relatively broad obligation and one that arises in most business relationships. As an agent, you want to make sure that you have the principal’s best interests at heart at all times.
When dealing with third parties, you always need to consider what would be best to protect the principal’s interests and take reasonable steps to achieve that.
Avoid Any Conflict Of Interest
You might’ve heard of the duty to avoid any conflict of interest in many other legal relationships. Unsurprisingly, the same principle applies in agency relationships.
As an agent, you have a responsibility to ensure that your own personal interests do not clash with those of your duties as an agent. For example, are you also acting for another principal in the same industry? Do your personal interests compromise the interests of the principal you’re acting for?
If you answered yes to these kinds of questions, you may need to make certain arrangements to avoid this conflict, as it will interfere with your fiduciary responsibilities.
Generally speaking, an agent cannot make a profit or any benefit from their duties (unless the principal is aware of or has authorised it). For example, you cannot make a commission out of the tasks you carry out as an agent.
Where money is obtained (or profit), it must be given to the principal when they request it.
An agent also has an obligation to keep all the relevant records of their transactions with third parties. Since you’re making important decisions on their behalf, it’s important that there is something to refer to in case something goes wrong, and this should be made available to the principal as well.
While agents can do a lot of things, they are also limited in some ways. They cannot delegate their authority (as an agent) to a third party unless the principal party authorises it.
An agent can only perform duties or actions that are authorised or instructed by the principal. Anything else will exceed their authority and this will constitute a breach of contract (we’ll discuss this in more detail shortly).
Some agency relationships will have more specific obligations due to the nature of the business they engage in. For example, real estate agents have specific obligations. They cannot:
- Give misleading information
- Lead you to a wrong impression
- Make false or inaccurate claims
- Omit important information
This can get tricky because the agent’s intention is not given much weight. Rather, it is how the client perceived the information and the effect that this has on their decisions.
I’m A Principal – What Are My Obligations?
Now that we’ve gone through everything an agent needs to do, let’s look at what the principal needs to do:
- Compensate the agent for any expenses incurred while carrying out tasks
- Compensate the agent for any losses incurred from the tasks
Generally speaking, the agent may be able to hold onto the principal’s property as security for any outstanding payments on the principal’s part.
Do I Need An Agency Agreement?
Not all agency relationships will require an Agency Agreement. An agency relationship can arise in one of three ways:
- Agreement – this can be express (in writing) or implied (arises from the parties’ conduct or actions). We’ll cover the contents of an Agency Agreement shortly.
- By law – an agency relationship can arise given the circumstances and the concept of necessity. For example, a Power of Attorney or guardianship may give rise to an agency relationship because it is necessary to protect the principal.
- By ratification – this just means that the agent can give consent after the agent has performed certain tasks (which may also fall outside the scope of their responsibilities). This will count as authorisation.
Let’s assume you have an agency relationship that you’d like to have in writing – what do you need?
What Do I Need To Include In My Agency Agreement?
Your Agency Agreement should cover the following things:
- Scope of authorisation (what the agent can and can’t do)
- Any relevant timeframes for which the agent can perform certain tasks
- Where the agent can perform the tasks
- When the agent can or can’t act
Put simply, the Agreement should set out the relationship between the agent and principal, and more specifically, what the agent is allowed to do with the principal’s authority.
What If The Agent Acts Beyond Their Authority?
Like we mentioned, all agency relationships require a high level of trust since you’re appointing a party to make important decisions for you. So, it’s likely that issues may arise here and there. A common one that can come up is, ‘what happens if the agent acts outside of their authority?’
This would usually amount to a breach of contract. When this happens, the principal can make a claim against the agent for any losses or damages incurred in the breach (in other words, they can seek compensation).
Another option for the principal would be to approve the unauthorised act, in which case, there would be no breach. Like we mentioned earlier, an agency relationship can arise through ratification. So, even if an agent goes beyond the scope of their authorised tasks, the principal can ratify it afterwards and there would be no breach.
Actual Authority vs Ostensible Authority
It’s also worth noting the difference between actual authority and ostensible authority in agency relationships.
Actual authority means the principal has authorised the relevant conduct, and this can be express or implied (note that implied authority usually means a custom in that industry or a course of past dealings).
Ostensible or apparent authority, on the other hand, works a little differently. This may arise where the agent has given a third party the impression that they have the authority to do something, even when they actually don’t. Since the third party relied on that representation, this would amount to ostensible authority, and the act that followed would be valid.
Another issue that might arise in an agency relationship is, ‘if the agent does something wrong, who is liable?’
Of course, this depends on whether the agent was acting within their scope of authority. Generally speaking, when an agent signs a contract on behalf of the principal, that agent cannot be personally liable from any losses that stem from that agreement. There are some exceptions, though:
- Where the agent executed a deed in their own name
- It is not sufficiently clear that they are an agent
An agent is also personally liable for the losses or damages caused to a third party if that agent was acting beyond the scope of their authority (unless the principal ratifies this later).
The rules around liability should always be set out in writing to avoid misunderstandings and unexpected issues later down the track.
How To Terminate An Agency Agreement
Usually, your Agency Agreement should specify when the relationship will come to an end. When the time comes, it will terminate automatically. However, there are other ways you can terminate the Agreement:
- The principal can notify the agent that they revoke the authorisation to represent them
- The agent can also notify the principal that they no longer wish to carry out the relevant duties or tasks (in this situation, the principal may be able to seek compensation for breach of contract)
- Both the agent and principal agree to terminate the relationship before the termination date set out in the Agreement
If you’re not sure whether you’re in an Agency Relationship, it’s best to speak to a lawyer about your situation. From here, you can determine whether you need an Agency Agreement or other documents that are required for your specific arrangement.
Agency relationships can get pretty complicated in relation to the scope of authority and the agent’s duties. Luckily, Sprintlaw has a team of qualified lawyers who can help you sort things out before you put anything in writing. You can reach out to us at firstname.lastname@example.org or contact us on 1800 730 617 for an obligation-free chat.
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