By Jeremy Bradley Updated January 11, 2019
An agency agreement is formed when one person, called the agent, is authorized by another person, called the principal, to act on the principal's behalf. A principal who assigns agency to an agent is creating a legal relationship with the agent. Agency agreements are important for businesses to understand because you may encounter them whenever you ask a vendor, accountant, lawyer or another third-party to conduct business on your behalf.
Tip
Agency agreements may be encountered if you ask a vendor, accountant, lawyer or another third-party to conduct business on your behalf.
Benefits of Agency Agreements
Agency agreements can have many benefits for the principal, especially when that principal happens to be a small-business owner. Few people have all of the specialized skills needed to run a business, so asking a professional to act on your behalf as an agent saves you time and helps you conduct business in a more efficient way. Using an advertising agency is one example, or outsourcing human resources functions.
Besides the convenience of having someone act on your behalf, an agency agreement can also arise out of necessity. If you're facing a legal matter, for instance, you will likely need to have a qualified attorney represent you. Hiring that attorney constitutes an agency agreement between you and the attorney, and it authorizes the attorney to act on your behalf.
Risks of Agency Agreements
For all the convenience and necessity of agency agreements, there can also be some drawbacks. The main risk in the legal relationship between the principal and the agent is that the principal can be held liable for misconduct on the part of the agent. If an agent makes a mistake or performs an illegal activity while representing the principal, the principal may be technically considered to have committed the act, since the agent was essentially acting "as" the principal.
If, for example, you ask an agent to sign a contract on your business's behalf, and you haven't first read the contract, you will still be held liable for all the terms and conditions of the contract. The principal authorizes the agent's acts, and therefore holds ultimate responsibility. The agency agreement between a principal and the agent must always be in writing with clear terms and conditions with explicit language limiting the principal's liability if the agent does something that wasn't authorized. This protects you personally and professionally.
