Mutual Agreement in an Agency Relationship

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 What Is An Agency Relationship?

In legal terms agents are persons who agree to represent another person or persons, who are known as the principal. In this respect agents operate similarly to employees, with the notable difference being that an agent works with the principal by representing them in a specific capacity. Further, agents are granted certain authority and power to act on behalf of the principal that they represent.

A principal is a person who agrees to have an agent act on their behalf in a specified capacity. Importantly, the principal has the right to control the agent’s conduct completely through the agreement executed by the principal and agent. Therefore, it is important that a principal be careful in delegating powers to an agent, as the agreement will serve as the framework in which the agent will operate.

Examples of common agency relationships include:

  • An attorney and client relationship;
  • A real estate professional and a home buyer relationship; and
  • An employee employer relationship.

How Are Agency Relationships Formed?

Once again, principal agency relationships are formed by agreements between two parties. Agency relationships are most often formed through the execution of a legal contract between the agent and the principal. Therefore, clearly defining the relationship between the agents and principals is important because agents have the ability to operate within the framework of the relationship.

For example, agents often have the ability to enter into binding contracts on behalf of principals. However, even when an agency relationship exists, an agent is first required to be granted the authority to enter into the binding contracts on behalf of the principal.

In order for the actions of an agent to be binding on the principal, an agent must act within the scope of their authority. This means that an agent is required to have at least one of the following types of authority in order for their actions to be binding:

  • Express Authority: Express authority is authority that is granted by the express terms of the written contract between the principal and the agent. For example, a principal may state expressly in the contract “I authorize (name of agent) to sign all legal documents on my behalf involving the sale of goods associated with my business”;
  • Implied Authority: Implied authority is authority associated with the conduct or actions of the agent. The most common example of implied authority is the employer employee relationship. For example, an agent who is expressly authorized to do home theater installations may also be implicitly authorized to buy the supplies necessary to perform the service;
  • Apparent Authority: An agent is granted apparent authority when a third party believes that the agent has the authority to act on behalf of the principal. Importantly, the third party must actually believe that the agent has the authority. The most common example of apparent authority occurs within the employer employee relationship. For example, if the agent employee is performing a task, and they are wearing a company uniform and identification badge that was issued by the principal employer, it could be implied that the agent is acting on the authority of the principal; and/or
  • Ratification: Ratification occurs when the agent initially acts without the authority of the principal, but the principal accepts the benefits of the actions of the agent upon discovering the actions.
    • For example, if an agent entered into a contract for the sale of goods, but the principal was unaware of the contract and did not authorize the contract, the principal could ratify the actions of the agent by accepting the benefits of that contract. For instance, if an agent purchases an item, and the principal accepts that item and utilizes it, then the principal cannot later argue that they did not approve the purchase of that item by the agent.

What Is Mutual Agreement in an Agency Relationship?

The phrase “mutual agreement” in an agency relationship typically refers to the way in which an agency relationship can be terminated. Once again, agency relationships occur when a principal legally agrees to let an agent make decisions on their behalf. The relationship itself is fiduciary in nature, meaning the principal is entrusting the agent to act as they would when the agent makes decisions.

Thus, if something goes wrong based on the actions of the agent, liability can fall back on the principal. Thus, if either party subject to the principal agent agreement believes that the arrangement is not working out, they can seek to terminate the agreement by mutual agreement.

It is important to note that the agency relationship and principal agent contracts are governed by employment and contract law. Thus, if any legal issues arise surrounding the contract or relationship, those sets of laws will govern any resulting legal actions. One way to ensure that an agency relationship does not result in legal actions against the principal, is for the principal to closely monitor any designated agents, as well as ensure the terms of the principal agent contract are clear.

If the relationship between the principal and agent is going awry, then the parties can choose to terminate the relationship at any time through mutual agreement. In order for the termination of the agency relationship to take effect, both parties will be required to take action. For example, both parties can sign a termination agreement that legally terminates the relationship.

However, if the parties have a valid principal agent contract in place, it may be difficult for one party to unilaterally terminate the contract. Therefore, mutual agreement is often required for the termination of the relationship, unless the principal agent contract specifies other forms of termination.

Another way that one party that is seeking to terminate the relationship may be able to terminate the relationship is if that party is able to terminate the relationship based on the wrongdoing of the other party. For example, the party seeking to terminate the relationship could demonstrate that the other party breached the contract.

How Can a Party Prove Mutual Agreement?

The best way to prove mutual agreement is through the direct conduct and actions of the party. The clearest way of proving mutual agreement is by both parties signing a termination agreement that specifies that the existing principal agent relationship is terminated. Oral agreements can also provide proof of mutual agreement to terminate an agency relationship, however it is hard to later rely on the oral agreement unless it was witnessed or recorded.

Additionally, there are some instances in which a mutual agreement can be inferred by a party’s actions. For example, if both the principal and agent stop performing their duties as principal and agent, it may be implied by such actions that they mutually wished to terminate the relationship. Once again, a written mutual agreement to terminate the principal agent relationship will be the best evidence in proving the relationship ended.

Do I Need a Lawyer for Help with a Mutual Agreement in an Agency Relationship?

As can be seen, there are numerous reasons in which a principal agent relationship may be terminated. However, it is important to terminate an agency relationship as clearly as possible in order to ensure there is no further liability down the line.

Thus, if you are involved in an agency relationship and wish to terminate it, you should consult with an experienced contract attorney. An experienced contract attorney will be able to draft a proper termination agreement. An attorney can also represent your interests in court, should legal action become necessary.

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