What is an agency agreement?

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.

What is a commercial agency contract?

An agent is a person who sells goods or services on behalf, and in the name of, a principal. Essentially the
role of the agent is to facilitate or procure sales on behalf of the principal. Article 7:428 of the Dutch Civil
Code defines a commercial agency contracts as: “a contract whereby one party, the principle,
instructs the other party, the commercial agent, and whereby the latter binds himself, for a fixed or
indeterminate terms and for remuneration, to act as an intermediary in the conclusion of contracts,
and, as the case may be, to enter into such contracts in the same and for the account of the
principal, without being his servant.”
An agency agreement must be distinguished from a distribution agreement. Under a distribution
agreement the distributor enters into contracts with third parties in their own name and for their own
account.
In a commercial agency contract, one party (Principal) asks other party (Agent), either a person or a
company to carry out the promotion of international trade transactions for a continuous period of time as
an independent intermediary without assuming liability for those transactions. The intermediary receives
payment exclusively through commission on transactions which are completed successfully, and in some
cases certain costs may be taken into account, for example trips expenses or promotional activity.

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

1
limiting the principal's liability if the agent does something that wasn't authorized. This protects you
personally and professionally.

What to Include in an Agency Contract?

 Recitals – Also known as the “whereas” clause, recitals provide important background
information about your company and the agency you hire. This section should include a brief
description of your business and the reason you hire the agency.
 Scope of Authority – This is a list of areas and tasks that you only want the agent to be involved
in. The agent's privileges cannot exceed the authority listed in this portion of the contract.
 Territory – There are two options for you to choose from. You can either allow your agent to act
with no geographical restrictions or explain in detail the geographical restrictions you wish to
impose upon your agent.
 Compensation – In this section, you have to describe the payment that your agent will receive in
exchange for the services rendered.
 Amendments – An indication that all amendments to the agency contract must be done in writing
and signed by both parties.
 Representations and Warranties of the Parties – This is a paragraph that lists the assumptions
underlying the contract. It confirms that both parties are entering into the contract based on each
other's statement that the items listed are true.
 Indemnification – A provision that designates responsibilities to the parties if issues arise in the
future and ensures that each party will be protected from the financial consequences of the
harmful or illegal conduct of the other.
 Trademarks – A statement indicating that your agent will not use
your trademarks inappropriately or create a new trademark that is similar to yours.
 Successors and Assigns – This section states whether the rights and obligations of the parties will
be passed on to their heirs or successor organizations.
 Counterparts or Electronic Signatures – Even if you and your agent sign the contract in
different locations or transmit signatures with electronic devices, every separate piece will be
regarded as part of the same agreement.
 Severability – This is a provision that protects the terms of the agency contract as a whole, even if
a part of it is invalidated in the future.
 Headings – The headings of each section of the contract serve to organize the document and are
not meant to be operational parts of the agreement.