When to use an agency agreement

Agency agreements are common in the business world when you want someone to act on your behalf. Much like someone with a power of attorney, an agent is in a special type of relationship with you, the principal, because the agent must act in your best interests. While the principal and agent often use an agency agreement to define the terms of the agency, the agreement is also based on trust, as the principal isn't going to hire an agent she doesn't trust.

What constitutes an agency agreement

Because the relationship between principal and agent is based on trust, this type of relationship is known as a fiduciary relationship. In a fiduciary relationship between principal and agent, the agent must act in good faith and in the principal's best interests to achieve the principal's desired goal.

The agent can legally bind the principal for the agent's acts. For example, if you hire someone to act as your accountant, you're giving the accountant the right to act on your behalf for an agreed-upon fee.

An agency agreement details the terms of the agency, such as what the agent can do and the amount of money paid for the agent's work. The contract also gives the agent the authority the principal determines, such as the exclusive right to act on her behalf. An example of this is when you hire a real estate company to sell your home. As principal, you decide whether you want the company to have the exclusive right to sell your property or whether you want multiple companies to have the right to sell it.

Examples of types of agencies

You can hire someone to act as your agent for all sorts of purposes. Some of the more common examples of an agency are for hiring someone to act as:

• Accountant
• Real estate agent
• Attorney
• Advertising agent
• Insurance agent
• Business agent on behalf of an employer
• Stockbroker or financial planner
• Vendor for all types of businesses

An agency can also be created between two private individuals. As principal, you can hire someone to act as your agent to negotiate a deal, bid at an auction, or buy items for you each week. Although the agency agreement can be oral, it's best to put it in writing so that both parties have a record of the terms.

Undisclosed principal agency agreement

One special type of agency agreement is where you are an undisclosed principal, allowing the agent to act on your behalf without anyone knowing who the agent is working for. In this arrangement, the agent negotiates for you without ever disclosing your name and, in most states, any sale resulting from your agent is binding on you. Check with a business attorney to see if an undisclosed principal is legal in your state.

A famous example of an undisclosed agency is when agents acted on behalf of the Walt Disney Company, the undisclosed principal, in Florida in the 1960s. Disney had agents try to acquire land in Orlando for Walt Disney World. The agents' purpose was to convince landowners to sell their property without the landowners knowing why the agent was buying it. After selling their property, the former owners learned that Disney was the undisclosed principal. Had the landowners known that the agents represented Disney, undoubtedly the landowners would have asked for much more money to sell their land or may have even refused to sell until they received more compensation.

Components of an agency agreement

A thorough agency agreement or form is essential. Some of the information the agency agreement should contain are:

• The names of the principal and agent
• A description of the purpose of the agency
• Whether it is an exclusive or nonexclusive agency
• How long the agency lasts
• What the agent can and cannot do for the principal
• The geographic area where the agent can act
• The compensation paid to the agent
• That the agents' acts bind the principal so long as they are in good faith
• That the agent is not an employee of the principal but acts as an independent agent only
• That the agency agreement constitutes the entire agreement between the parties and that no oral agreement can change the agreement
• How to terminate the agency

Businesses and private citizens create agencies for all sorts of purposes.