Agency Agreement – Components, Benefits and Risks

What Is an Agency Agreement?

An agency agreement is a written document that recognizes the relationship between an agent and principal. Agents may be business owners, employees of businesses, or even other individuals. Agency agreements create a legal framework within which services, products, or money may be received or paid for by the principal. 

One of the important business relationships you will have is an agency agreement. This type of contract allows one business to share a portion of their revenue with a third party to conduct business on your behalf.

When to Use an Agency Agreement?

The Agency Agreement is a binding contract between a principal and an agent and defines and details the working relationship between the two parties. It is based on the principal’s trust in the agent, which gives the agent legal rights to represent and act on behalf of the principal.

An agency agreement is made mainly because both parties feel the business should work together. A good agent will have your best interest at heart, and they will do everything in their power to make sure that the services you purchase are created with your wishes in mind. Before you even meet with an agency, it’s best to understand what services you need.

What Constitutes an Agency Agreement?

When these trust-based relationships are established between principals and agents, even the most mundane undertakings can occur. The creation and maintenance of a fiduciary relationship are best achieved when all parties concerned understand their role. Both parties within a fiduciary relationship must recognize their obligations and limitations.

An agency agreement creates a legal responsibility for the principal to pay or be responsible for amounts payable to an agent or freelance worker without regard to who initially hired them. 

An agency agreement typically contains the following elements: (1) an assignment of rights, (2) the agent’s compensation for services provided and a description of fees, and (3) an assignee’s right of first refusal on any advances. An assignment of rights is an agreement by one party to provide or perform a specific service for another party for a particular sum if basic terms are met. 

Components of  Agency Agreement

An agency agreement generally contains the following elements

  • The principal’s name
  • The address or place of business for the principal
  • The services or products to be provided by the principal
  • The name and address of the agent responsible for delivering the goods or performing the services
  • The signature of the agent

The terms and conditions must be set out on both sides of the contract. You can have many different contracts with different people. Still, if any imbalance or confusion arises between you and the other party, then confusion will lead to problems – sometimes very serious problems.

Benefits of Agency Agreements

The benefits of an agency agreement are

  1. Agency agreements may reduce or eliminate the need for a third party in certain situations.
  2. Agreements can also make it easier to set up credit accounts for customers in the future.
  3. Many small businesses, particularly those with large marketing budgets, rely on debt and credit cards to finance their day-to-day operations. 
  4. Agency agreements can cut down on heavy reliance on these sources of financing.
  5. An agreement can increase the speed at which a business can obtain banking services and the flexibility to manage your finances with a less formal process.

Few other benefits include

  1. Time-saving
  2. efficiency in scheduling and billing
  3. more information about what is happening with your business
  4. assistance in determining whether your marketing materials are working properly
  5. help in deciding how best to market your products and services
  6. reputation for quality work as indicated by the results obtained

Risks of Agency Agreements

The key risk in agency agreements is that agents can make mistakes or engage in illegal activities. For example, if an agent argues with a rival agent over the phone, the principal may be held liable for this argument. This is because the agent was essentially acting “on behalf of” the principal.