When to use an Agency Agreement

You should use an Agency Agreement when you are considering marketing the products of another company or you would like to expand a current distribution network.

When deciding whether you should use an Agency Agreement - think about whether you will be acting as an Agent or a Distributor.

The primary difference between an Agent and a Distributor is stock holding.

An agent acting for a company that sells widgets - will market, present and represent the widget manufacturer in the marketplace. Whereas a Distributor buys the widgets or stock from the manufacturer, and re-sells the product to the end user.

An agent, is a person who has authority, expressly or implied, to create legal relationships between another, known as a "principal" (in this case the manufacturer) and third parties.

An agent’s main role is usually to find, negotiate and close sales for the principal’s product or service. It’s important to understand the agent only has the authority to negotiate and enter arrangements on the principal’s behalf, to the extent allowed by the terms of the agency agreement. For instance this may mean that a principal reserves the right to approve or decline all sales negotiated by the agent, before a binding contract is entered.

In some cases the product involved may be a service, where the agent finds and negotiates the sale of the principal's service.

For instance a company that sells advertising, real estate or insurance has no stockholding. These businesses provide a service. Traditionally agency agreements have worked well in these industries.

Where a tangible product is involved, the agent is seldom required to hold stock, as it is the Principal who holds and delivers the stock to the customer.

Agency agreements can be a win - win proposition for both parties because they are generally performance based. That is, the agent is paid only for sales produced.

It's important to note the agent is responsible for all overhead costs, such as running a motor car, office, secretary, telephone and power. When negotiating the agents commission it’s important to take these expenses into account.

Occasionally the principal and the agent will share some expenses. Take the example of an insurance agent. The agent may spend time prospecting for new clients using the telephone, and in the case of a new agent, an office and phone may be provided.

Agency agreements can be written, verbal or implied by the conduct of the parties involved. The Law and the Tax office may look at the actions of those involved in deciding if an agency can be inferred. If the parties have acted in a way that reasonably infers the agent is representing the principal with the knowledge and approval of the Principal then an agency arrangement is presumed.

Remember, when negotiating your agency agreement both the agent and the principal will have a legal duty. In particular, the agent is placed in a position where a high-level of responsibility and trust is imposed. This is known as a “fiduciary relationship” and certain obligations are placed on the agent regardless of any contractual responsibilities. The primary responsibility of the agent is to act honestly and in the best interest of the principal.

Whatever the situation, it is always better to enter any agreement in writing. A written agreement clarifies the terms, conditions and duties of the parties involved and if necessary provides strong legal protection in the event of a misunderstanding.

Agency Agreement

Distribution Agreement