Agency agreements – what are they and how are they used?

We are often asked to draft agency agreements for clients who wish to appoint a third party to sell their goods or service.

What is an agency?

Agency is defined as a relationship involving authority or capacity in a person (Agent) to create or affect legal relations between another person (Principal) and third parties (Third Party).

What is the legal relationship between the Agent and Principal?

The legal relationship between the Agent and Principal will depend on how the agency came into existence. An agency may come into existence in a number of ways:

  • by agreement;
  • by operations of law; or
  • by ratification

Agreement

Where an agency is created by agreement, it is the agreement that sets out the relationship between the Principal and Agent. The agreement will typically set out what the Agent is authorised to do, the location that the Agent is authorised to act in, and when the Agent is allowed to act.

Operation of Law

An agency created by operation of law usually arises where for some reason it is necessary for the Agent to preserve the Principal’s property or safeguard the Principal’s interests. For this form of Agency to exist the goods or interests must be in danger of destruction and the Agent must not be able to obtain instructions from the Principal. The act by the Agent must also have been an honest endeavour by the Agent to act in the Principal’s best interests.

Ratification

The general rule is that where an Agent acts outside their authority, any agreement entered into on behalf of the Principal is not binding. An exception to this rule is when the conduct of the Agent is ratified at a later date by the Principal as having been done with the Principal’s authority.

Who is responsible for what?

If the agency is created by agreement, the agreement must set out the responsibilities of each party.

Where the agency is created by operation of law or by ratification, the responsibility of the Agent will depend on the Agent’s conduct.

An Agent will have also responsibilities to the Principal that are created by common law and equity.

Fiduciary Duty

An Agent owes their Principal a fiduciary duty. A fiduciary duty is broadly defined as one of loyalty and trust.

Fiduciary duties of an Agent include:

  • acting in the best interest of the Principal;
  • not placing the Agent’s interest in conflict with the Principal’s interest;
  • keeping confidential information regarding the Principal confidential; and
  • keeping the Agent’s money and property separate from the Principal’s money and property.

How does an agency agreement differ from a resellers agreement?

What is a reseller’s agreement?

A reseller’s agreement is an agreement where one party (Reseller) agrees to sell, market, distribute, or lease a product on behalf of the other (Wholesaler).

A reseller’s agreement will often state the nature of the relationship between the Wholesaler and Reseller, and also what the relationship is not. For example the agreement may state that the relationship is that of Wholesaler and Reseller, and not that of Principal and Agent.

The legal distinction

The key difference is that the Reseller does not have the right to enter contracts that bind the Wholesaler at law.

If the nature of the relationship comes into dispute, the courts will look at the actual relationship, rather than what any agreement says. In some cases where a reseller’s agreement has said that the relationship is not that of Principal and Agent, the court has found that the conduct of the parties binds the Wholesaler, regardless of what the reseller’s agreement says.

Where can it go wrong?

A Principal will be bound to a contract with a Third Party entered into by an Agent, regardless of whether the Principal wishes to enter the contract or not. If the Principal is unable to perform their side of the contract, they may be liable to face a range of legal remedies, including damages and specific performance.

Generally, a Wholesaler will not be bound by a contract entered into by a Reseller on its behalf. However, where a dispute about the nature of the relationship arises, and a court finds that the Reseller is an Agent of the Wholesaler, an agreement entered into by the Reseller on behalf of the Wholesaler will be binding. If the Wholesaler is unable to complete the contract they may be liable for damages or specific performance.

In the case that the Principal or Wholesaler is a company and is unable to pay moneys owing due to the contract, they may face a statutory demand for payment of debt, which if they can’t pay may result in the company being wound up.

In the case that the Principal or Wholesaler is a person, they may face bankruptcy.

Takeaways

A reseller’s agreement should authorise a Reseller to sell, market, distribute, or lease a product on behalf of the Wholesaler. It should not authorise a Reseller to bind a Wholesaler to a contract with a Third Party.

If the relationship of a Reseller and Wholesaler in fact reflects that of Agent and Principal, a court may find that a contract entered into by the Reseller is binding on the Wholesaler regardless of the terms of a reseller’s agreement.

Links and further references

Useful cases

Colbron v St Bees Island Pty Ltd & Ors [1995] FCA 1107

Further information

If you need advice on drafting agency or reseller agreements, either in order to draft them, negotiate the terms, or because you are engaged in a dispute, please feel free to contact us for an obligation free and confidential discussion.

Malcolm Burrows Lawyer

 

 

 

 

 

 

Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.

Legal Practice Director

Telephone: (07) 3221 0013

Mobile: 0419 726 535

e: mburrows@dundaslawyers.com.au

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

Dundas Lawyers
Street Address Suite 12, Level 9, 320 Adelaide Street Brisbane QLD 4001

Tel: 07 3221 0013

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