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An agency agreement is an agreement that creates a relationship between two parties — called the principal and the agent — whereby the agent is authorized to act on behalf of the principal. The agreement only requires that there is consent by both the principal and the agent to the terms of the contract and confers certain rights and duties on both parties. Typically, an agency agreement contains specific guidelines that govern where the agent may act on behalf of the principal. If the agent acts outside this authorized scope, the principal may hold the agent liable for any damages incurred stemming from the breach.
Unlike most contracts, an agency agreement does not require a benefit conferred to each party in order for a valid agreement to be formed. The only requirement is that the principal and agent agree to the terms under which the agent is authorized to act on behalf of the principal and compensation is not required. The agent has an implied duty of loyalty as well as a duty of care, which require that he or she always acts in the best interests of the principal.
An agency agreement will usually outline the scope of the authority that the agent has to act on behalf of the principal. Any duties specifically enumerated within the agreement are said to grant “express authority” for the agent to perform the duty. Other actions necessary for the agent to perform his or her duties under the agency agreement are within the scope of the agreement through implied authority.
In the event the agent breaches his or her authority, the principal will still be liable for the action taken on his or her behalf by the agent, but he or she will have a right under the agency agreement to recover damages from the agent. For example, an agent may be sent to an art auction by the principal and authorized to pay up to a certain amount for a certain painting. In the event that the agent bids an amount greater than was authorized and wins the auction, the principal will still be responsible for the purchase. However, he or she may file an action to recover the amount spent over the authorized amount from the agent.
A special kind of breach occurs when the agent uses his or her color of authority under the principal to reap personal benefits. For instance, an agent may be employed by a principal to sell machine parts. If the agent uses his contacts that he or she acquired through fulfilling his or her duties under the agency agreement to sell a product that is not affiliated with the principal for which the principal receives no benefit, the principal may be entitled to restitution. He or she would bring what is called an action for secret profits and would be able to recover any profits realized by the agent through his or her unauthorized sales.