Sometimes in business, or in life, you cannot act on something by yourself. You might be so busy with other business matters that you need an agent to work on your behalf. Or you might be in another country and cannot physically be there to make an important transaction. To take care of this, you would have made an agency agreement. Agency agreements create relationships that allow somebody to act on your behalf and in your interests. Some common agency relationships include:
- Lawyers and clients
- Employers and employees
- Real estate agents and auctioneers
Sometimes this can be tricky, however. You might want somebody to act in a certain way. Or you might want somebody to only do one particular thing. All rights and obligations depend on what kind of agency relationship you have with your agent. So what is agency? And what are the different types of agency relationships? There are lots of different types, but in this article, we will focus on those found in commercial transactions.
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What is ‘Agency’ in Commercial Relationships?
First, it is important to understand two important terms. The individual that agrees to allow somebody else to act on their behalf is the principal. The person acting on the principal’s behalf is the agent.
Interestingly, the law does not provide a concrete definition of agency. What we do know, is what it involves. Agency is inherently a ‘fiduciary’ relationship. This means that an agent has a legal obligation to act in the best interest of the principal. It tends to involve somebody being entrusted to make decisions with respect to money, property or business. The agent has the power to create legal relationships with third parties and can bind the principal. For example, if an agent signed an agreement to buy a car, the principal has been bound to pay for the car.
The most important part of this relationship is that the agent cannot act in their own self-interest. The principal has to have wanted that car the agent bought. In the same way, they cannot make any profits from transactions they are unauthorised to make. The agent, therefore, must act in an ethical way according to the agency agreement.
Commercial Agency Relationships
Brokers
A broker is probably the most simple agency relationship. A broker is an individual, or sometimes a business, that will buy or sell something on the command of the principal. They merely faciliate the trade. The broker will do their best to make you the most profit if you’re selling and get the best deal if you’re buying. You’ll most likely see examples of this in stockbrokers.
If you have a stockbroker, you are the principal and they are the agent. They earn profit through commission, agreed to before they begin their duties. It is the agent’s duty to act in your best interests and to search the market for the best buy/sell prices that benefit you.
Factors
A factor is also known as a mercantile or a commercial agent. They’re a type of agent who plays an important role in the sale and purchase of goods. Their role is defined in the Factors (Mercantile Agents) Act 1923 (NSW).
Their role is a little different from brokers in that they can also hold possession of the goods you wish to buy or sell on your behalf. You are the principal in this relationship, and the factor is the agent.
Del Credere Agents
Del credere agencies are take both of the other relationships a step further. They act as a salesperson, the same as the broker. They can hold and transfer goods, just the same as factors. But they also guarantee the credit extended to the buyer. In this situation, there is such a high level of trust between the principal and the agent, that the agent will personally guarantee the creditworthiness of the principal as well as accepting the seller’s risk.
This is a special type of relationship. If the buyer is unable to pay the bill, the agent can be liable for that amount. The best example of a del credere agent is an auction house. The principal allows their goods to be auctioned. The agent is the auction house selling the item. Because of the risk involved, there are usually some requirements for the bidder. For example, they may ask for a deposit on certain bids.
Conclusion
Knowing what kind of agency relationship exists is important, especially in commercial transactions. The kind of relationship you have determines what rights and obligations parties have to one another. In some circumstances, even if you haven’t physically signed a contract that says a person is an agent for you, the relationship can be implied. If you need any assistance with something in this area, speak with a commercial lawyer to understand what rights and obligations you have.
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