Table of Contents
Whilst running your business, you must wish to give a third-party authority to sell your goods or services, or generally act on your behalf. To do so, you may want to consider forming an agency agreement. This article will detail:
- what agency is;
- how agency works in New Zealand;
- the sources of agency, including an agency agreement; and
- how you can terminate an agency agreement.
What Is Agency?
Agency is a term used to describe the relationship between one individual who has the authority to act on behalf of another when dealing with third parties.
The Principal
The principal is an individual who gives their consent to another person acting on their behalf when dealing with third parties.
The Agent
The agent is the person with the authority to act on the principal’s behalf. An agent will usually affect or alter the principal’s position with third parties or make representations on their behalf. A real estate agent is an example of an agent. They will act on behalf of the potential buyer or buyers who hired them – their principal(s) – whilst engaging in a property sale. In exchange, the agent takes a commission for this sale.
Relationship Between the Principal and the Agent
If an agency relationship exists between two individuals, any actions of an agent acting on the principal’s behalf are seen as if the principal had personally done those acts themselves.
The relationship that exists between a principal and their agent is of a fiduciary nature. This kind of relationship requires trust between the principal and agent. A fiduciary relationship imparts several duties on both parties. For example, the agent has an obligation to:
- act with absolute fairness and openness to the principal;
- keep accurate accounts of all transactions entered into on behalf of the principal; and
- disclose any conflict of interests to the principal.
If an agent fails to meet this standard, the principal may be able to claim from the agent any loss suffered as a result of the agent’s conduct.
There is a range of ways that an agency relationship can develop. These are:
- by an agency agreement;
- through necessity; or
- by ratification.
Agency Agreement
A general agency agreement creates an agency relationship between two individuals. It can be entirely verbal or expressed in a written document. However, there are certain areas of agency that require the agreement to be in writing. For example, real estate agents must be appointed by their principal through a written sole agency agreement.
An agency agreement does not have to amount to a legal contract to be binding on the agent and the principal. The requirements for an enforceable agreement are:
- both the agent and the principal consent to the formation of the agency relationship;
- the principal provides the agent with instructions or tasks; and
- the agent agrees to undertake this duty or task.
Necessity
There may be circumstances where an individual assumes the role of an agent. This circumstance refers to an individual as an agent of necessity.
An agent of necessity assumes this authority when they act to preserve or protect another person’s interests or property. This person is assumed to be the agent’s principal and is bound to honour any contract made or pay any expenses associated with protecting their interests.
This kind of agency can only arise if:
- the assumed agent could not communicate with the principal for instructions;
- the actions taken by the agent were in the interests of the principal; and
- the actions taken were necessary.
Ratification
An agency relationship can also arise if, retrospectively, a person (the principal) declares, or ratifies, that an act undertaken by another (the agent) was on their behalf.
Termination of Agency
You can terminate an agency relationship in a range of ways. This includes:
- on the expiration date specified in the agreement, such as 90 days after the parties entered into it;
- when the agent has completed the task they were given the authority to undertake;
- if both parties agree to the termination of the agency relationship;
- by the principal revoking the agent’s authority; or
- if the agent renounces their authority.
Key Takeaways
An agency agreement is an express or implied agreement that creates an agency relationship between two parties. Under this relationship, the agent has authority to act on behalf of the principal in dealings with third parties. However, an agency relationship can also arise from other sources, such as necessity and ratification.
If you wish to form an agency relationship, it is best to draft an express and written agency agreement. Doing so ensures that both you and your agent know your obligations and responsibilities to each other.
If you need help drafting an agency agreement, contact LegalVision’s contract lawyers on 0800 005 570 or complete the form on this page.
FAQs
An agency agreement is when two individuals agree to enter an agency relationship. In an agency relationship, one party (the agent) will receive the authority to act on behalf of another (their principal) when dealing with third parties. This agreement can be express or implied and can be verbal or in writing.
An agency agreement will usually clarify how long the agency relationship will last. However, it may also end once the agent has completed the designated duty.
The principal can revoke the agent’s authority to cancel the agreement. Alternatively, an agent can renounce their authority. Termination provisions that govern when and how you can cancel an agency agreement are standard clauses in agency contracts.
The purpose of an agency agreement is to create an agency relationship between two individuals.
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