Wondering what are the essentials of contract of agency?
Companies regularly operate through agents and you wonder what contract of agency in business law entails.
What types of agencies are there?
In this article, we will cover the concept of the essentials of contract of agency in detail.
Are you ready?
Let’s get started…
Table of Contents
What is a contract of agency
A contract of agency is a contract whereby one party undertakes to act as a representative or “agent” of the other party.
Typically, the agent will be given powers to enter into a binding contractual relationship with a third-party on behalf of the agency creator.
In a contract of agency, the person appointing the agent is called the “principal”.
It’s worth noting that all companies operate through an agent.
The agency relationship is the cornerstone of how organizations are managed on a day-to-day basis and operate in the economy.
A company is a legal person defined by law.
In other words, it’s a fictional person created by the operation of the law requiring a physical person to represent it and act in its name.
Without an agent, the company or corporation will not be able to function and deal with third-parties.
The company officers, directors and employees act as an agent of the company with third-parties.
The agency relationship affects everyone in the business world and we enter into agency relationships very often.
Essentials of contract of agency
An agency contract can be formed when its essential formation requirements are met.
Let’s look at the following factors in the context of an agency contract:
- Agreement
- Consideration
- Intention of the agent
Agency agreement
An agency contract can be formed when there is an agreement between the principal and the agent.
The principal must have the intention to authorize the agent to bind it towards a third-party and the agent must have the intention to act for the principal before a third-party.
For example, Party A asks Party B to go and buy a computer for it.
Party A agrees that Party B will be its agent for the purchase of a computer and Party B agrees to be the agent of Party A and buy a computer from a third-party.
When Party B buys the computer, Party A will be held responsible for the computer and Party B acted as sort of an intermediary.
Consideration
Under contract law, consideration is essential for a valid contract.
However, in an agency agreement, you do not necessarily need to have consideration for the contract to be legally binding.
For example, if you ask your friend to go to the store and buy you something very specific, you are in essence entering into a contract of agency.
This agency agreement is formed without a consideration as your friend will act as your agent without asking for any money or something in return.
When the agency is formed without a consideration, it’s a gratuitous agency.
As a result, the agency contract can be with or without consideration.
Intention of agent
When there is a contract of agency, the agent agrees to act on behalf of the principal in dealing with a third-party.
In essence, if the agent deals with a third-party in his or her name, the agent is not acting as an “agent” but rather for his or her benefit.
The agent must have the intention to enter into a legally binding contract or relationship with a third-party specifically to bind the principal.
Capacity
The parties entering into an agency agreement must have the legal capacity to do so just like any other contract.
Generally, the parties must be of legal age and sound of mind.
If a minor appoints another minor to act on its behalf and enter into a contract with a third-party, there is no doubt that this contract is voidable.
For the agency contract to be duly formed, the parties must have the legal capacity to enter into it.
Agency by operation of the law
An agency can be formed contractually, either in written form or verbal.
Agencies can also be formed by the operation of the law.
Let’s look at:
- Implied agency
- Apparent agency
Implied agency
The implied agency is when the law recognizes a principal-agent relationship between two parties without necessarily requiring an agreement either verbal or contract.
For example, in many jurisdictions, teenagers are authorized to buy some necessities such as food on their parents’ accounts.
By operation of the law, the parents will be held responsible for what their teenager purchases.
Another example is the relationship between married couples.
In some jurisdictions, a spouse making purchases for the current needs of the family will also bind the other spouse with third-parties.
By operation of the law, the spouses will be responsible for third-parties as an agent.
Apparent agency
The apparent agency is when an agent appears to have the authority to bind the principal with the third-party.
An apparent agency can be presumed through the actions of the parties or the circumstances.
For example, if the VP of Operations in a company contacts a third-party to purchase operations management software, the third-party software vendor can consider the VP of Operations to have an apparent authority to bind the company.
If the VP Operations makes a purchase, the third-party will have a legal expectation that the company be responsible for the actions of its VP Operations.
Another example is that a company employee regularly purchasing inventory for large sums of money and his or her company regularly paying for the purchases.
In this case, you have an apparent agency where a specific employee appears to have the authority to make large transactions on behalf of the company.
Types of agency contracts
You can five types of agency contracts:
- General agency
- Special agency
- Agency with interest
- Subagent
- Servant
General agency
A general agency is when the principal awards the agent extensive powers to act on its behalf.
In a general agency, the agent has the powers to make all relevant decisions for the principal unless it’s specifically prohibited.
Special agency
The special agency is when the principal authorizes the agent in a specific way or for a specific purpose.
The agent does not have the power to bind the principal in any other way aside from concluding a specific transaction or carry out a defined mandate.
Agency and interest
Agency coupled with an interest is when an agent’s ability to get paid depends on its ability to remain an agent.
For example, a literary agent will sell and promote an author’s work in exchange for a commission for the future sale of the book.
The agency coupled with interest allows the agent to continue benefiting from future commissions and prevent the principal from terminating the agency and avoid the commission payout.
Subagent
The subagent is when an agent delegates his or her responsibilities to another agent.
If the subagency is permitted by the principal, then the agent can appoint subagents to get the job done.
The subagent will have an agency contract with the agent defining the powers delegated to it by the agent and how the subagent can bind the principal or the agent.
Servant
The servant is the agent of a master.
Typically, the servant and master relationship will refer to an employee and employer relationship.
The master is the employer who controls the servant’s work or work performed by its employees.
The servant and master terminology are no longer commonly used in modern days.
Agency and delegation of authority
An agency relationship is fundamentally a relationship whereby one party delegates authority to another.
The principal in an agency relationship must conduct a transaction, perform a task or execute an obligation and to achieve that, the principal will appoint an agent, delegate authority to the agent, to get the job done.
The agency relationship will not work if there is no delegation of authority by the principal.
For the agent to have the ability to act on behalf of the principal with third-parties, the agent must have the ability to demonstrate to the third-party that it can bind the principal.
Without a delegation of authority, the agent will transact in his or her name.
Termination of agency
The agency contract can be terminated in several ways.
You can have a termination:
- By mutual consent
- Revocation of agent’s authority
- Revocation by the agent
Mutual consent
The agency can be terminated when the principal and agent agree to terminate it.
In this context, the principal and agent will mutually define the termination logistics and transition the agent’s responsibilities to another agent or back to the principal.
Revocation of agent’s authority
The principal may revoke the agent’s authority to act on its behalf.
An agency relationship is essentially a delegation of authority from the principal to the agent.
When the principal no longer wishes to delegate authority, the principal may revoke the agent’s powers to act on its behalf.
The revocation can be full or partial, it can be for some time or permanent or it can be concerning a specific task or purpose.
Revocation of agent
Similarly, the agent can also decide to no longer represent the principal.
For the agency contract to work, the agent must have the intention to act on behalf of this principal.
Without this element, the principal cannot be represented before third-parties.
The agent can also choose to terminate the agency fully or partially, for some time or definitively or concerning some specific aspects of the agency.
Typically, agents will assume such responsibility for a fee.
If the principal does not pay the agent’s compensation, the agent will end up revoking the agency contract.
Termination of agency by operation of law
The agency agreement can also be terminated by the operation of law.
There are several situations where this can happen:
- When the purpose or objective of the agency contract is accomplished
- When the agency contract expires
- When the principal or agent dies
- When the principal or agent goes bankrupt
- When the purpose or objective of the agency becomes impossible or is destroyed
- When the principal or agency corporate entity is dissolved
- When the object of the agency that was initially legal becomes illegal
In these cases, the contract of agency between the principal and agent will terminate by operation of the law without requiring mutual consent by the parties or some form of revocation.
Personal responsibility of the agent
When the agent acts within the powers conferred to it by the principal, then the agent is legally binding the principal.
In some cases, the agent may act in a way that he or she will end up personally engaging its responsibility.
The agent can be personally held responsible in the following instances:
- When the agent signs a contract with a third-party and expressly assumes personal responsibility
- When the agent acts on behalf of the principal without the power to do so
- When the agent’s actions go beyond the scope of the agency agreement
- When the agent signs an agreement with a third-party in his or her name
- When the agent enters into a transaction where his interests compete with that of the principal
- The agent did not act in a diligent and prudent manner
- The agent did not observer its fiduciary duties
The agent must make sure that he or she acts within the powers granted to it by the agency contract.
If the agent does not act within the powers awarded to it by the principal, the agent will be exposed to personal responsibility towards the principal.
If the agent is not careful in clearly engaging the principal in a contract with a third-party, the agent may be personally held responsible towards the third-party.
Takeaways
In this article, we discussed the essentials of the contract of agency.
The contract of agency is when an agent acts on behalf of the principal.
The agent has the powers given to it by the principal to represent it before third-parties and legally bind the principal.
In most cases, the agency relationship is based on a written contract.
The contract of agency does not necessarily need to be in writing to be valid, it can be verbal as well.
The contract of agency in business law is very often.
Businesses function essentially based on an agency relationship.
Without agents, a corporation would not be able to function or contract with third-parties.
The agent contract can also be implied by law.
Parents are responsible for some transactions performed by their teenage children or spouses may be legally considered agents of one another when contracting with third parties for the current needs of their family.
We hope this article on the essentials of an agency contract was helpful.
Have you ever acted as an agent for another person or company?
How was your experience?
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