Agency agreements: legal structure and rights

Service page: Commercial contracts lawyer: drafting, review and enforcement.

What is an agency agreement, and what legal exposure does it carry?

The agency can be general (the agent has authority for any action within the principal’s business) or specific (the authority is limited to specific transactions). The difference is critical: a general agent can bind you to a large contract, even without your express approval.

• General agency: the authority to commit to all the principal’s transactions
• Specific agency: the authority is limited to transactions of certain types
• Apparent agency: an authorization can also be created by the principal’s notice to the third party or by the principal’s conduct toward them (section 3(a) of the Agency Law), even though it was not given to the agent expressly

What must the agent do, and what do they get in return?

The agent has various rights and duties that arise from being given authority. The agent’s main duty is to act according to the principal’s instructions, faithfully and in good faith. Section 8(1) of the Agency Law, 5725-1965, requires the agent to disclose to the principal any information and to deliver to them any document relating to the subject of the agency, and to account to them for their actions.

The agent is entitled to be paid as agreed, and to reimbursement of reasonable expenses incurred to carry out the agency. If it was agreed that the agent would be paid but the amount was not set, the amount that would have been reasonable to pay in the circumstances at the time the contract was made is paid (section 46 of the Contracts (General Part) Law, 5733-1973); reasonable expenses are reimbursed under section 11 of the Agency Law.

• A duty to inform the principal of significant developments
• A right to payment in accordance with the agreement
• A right to reimbursement of reasonable expenses
• A duty to report profits received

The principal’s liability: when are you bound by what the agent did?

The point that surprises people most: the principal is liable for all the transactions that the agent made within the limits of the agent’s authority, even if the principal did not know of them specifically. If the agent made a commitment in your name, you are bound by that obligation toward the third party. There is no point arguing “I did not authorize him”: an authorization without restriction applies to any action reasonably needed for the proper performance of the subject of the agency; but without an express authorization it does not apply to proceedings before a court, a tribunal or an arbitrator, or to a settlement, a waiver or an action without consideration (section 5(a) of the Agency Law).

The principal is entitled to supervise all the agent’s actions and to demand that the agent follow instructions. The agency can be canceled at any time (section 14(a)), except for an authorization given to secure the right of another person or of the agent themselves (section 14(b)). But a third party who did not know of the cancellation is entitled to treat the agency as continuing (section 15(b)), so a cancellation without notice to third parties does not protect you from transactions made before they learned of it.

• Direct liability: for any action within the limits of the authority given, even without specific approval
• Apparent agency: even when the authority was not given expressly, the principal may be bound if the principal’s notice or conduct toward the third party created an appearance of authority (section 3(a))
• Duty to give notice of cancellation: a third party who did not know, and should not have known, of the cancellation is entitled to treat the agency as continuing (sections 15(b) and 18), so notify them directly
• Duty of good faith toward the agent: the terms of the agreement are binding even when agreed orally (section 23 of the Contracts (General Part) Law), and they may not be changed unilaterally; exercising a right under the agreement, including a right to terminate, must be done in an acceptable manner and in good faith (section 39 of that Law)

How do you end an agency agreement without exposing yourself to a lawsuit?

Agency can end in different ways: naturally, on the date set in the agreement; by cancellation by the principal or the agent; and also by the death of one of them, loss of legal capacity, bankruptcy or the liquidation of a corporation (section 14(a) of the Agency Law). A third party who did not know that the agency ended is entitled to treat it as continuing (section 15(b)), so the principal should notify the end of the agency to every third party who knew the agent.

Cancellation of the agency by the principal or the agent should be documented, and the record of the cancellation is important. If no end date was set in the agreement, each party can cancel the agency by reasonable notice, and with a commercial agent (see below), in writing and with advance notice no shorter than the periods in the law. A cancellation without reasonable notice may make the party that canceled liable for damages, because a right under a contract must be exercised in an acceptable manner and in good faith (section 39 of the Contracts (General Part) Law).

• Natural end on the date set
• Unilateral cancellation with reasonable notice
• Immediate cancellation in special cases
• Duty to notify third parties

Ending an agency agreement: a list of actions under the Agency Law

1. Check whether the authorization was given to secure the right of the agent or of another person, where their right depends on carrying out the subject of the agency: in that case, the ending provisions in section 14 do not apply (section 14(b)).
2. Give the agent a cancellation notice, preferably in writing. As long as the agent does not know of the ending, they are entitled, as against you, to treat the agency as continuing (section 15(a)).
3. Notify directly every customer, supplier or third party who worked with the agent: anyone who did not know of the ending is entitled to treat the agency as continuing (section 15(b)).
4. Demand an account and every document relating to the subject of the agency (section 8(1)).
5. Demand the assets and money in the agent’s hands: the agent holds them as your trustee (section 10(a)). The agent has a lien on them until they are paid their fee and the amounts owed to them because of the agency (section 12).
6. Settle accounts: reimbursement of reasonable expenses the agent incurred (section 11), and set-off of mutual debts that arose because of the agency (section 13).

Commercial agent: advance notice and compensation under the 2012 Law

When the agent finds customers for a supplier of goods (tangible assets that are not real estate), under a continuing authorization and for payment, without an employer-employee relationship and without a partnership, the Agency Contract (Commercial Agent and Supplier) Law, 5772-2012 (חוק חוזה סוכנות (סוכן מסחרי וספק), התשע״ב-2012), also applies (sections 1–2). The Law does not detract from the provisions of any other law, among them the Agency Law (section 7).

In a contract for an unlimited period, advance notice of termination is given in writing and may not be shorter than the following: two weeks in the first six months; one month until the end of the first year; two months in the second year; and another month for each year after that, up to six months from the sixth year onward (section 4(a)).

A fixed-term contract that was extended without an end date is regarded as being for an unlimited period, and the period is counted from its start (section 4(d)). A supplier that instructs the agent to stop working immediately pays the agent payment in lieu of advance notice according to the agent’s average earnings (section 4(c)).

When the contract ends, an agent is entitled to compensation when three conditions are met: the contract was in force for at least one year; the agent was the effective cause of engagements with new customers or of a significant increase in business with existing customers; and these continue to bring the supplier revenue after the end. The compensation is the average monthly earnings for each year, up to 12 months (section 5(a)–(b)). There is no compensation if the supplier lawfully canceled because of the agent’s breach, and the court may reduce or deny it (section 5(c)–(d)).

The Law cannot be contracted out of, except in the agent’s favor (section 6).

What happens when an agent goes beyond their authority under an agency agreement?

If the agent goes beyond the limits of their authority, the transaction does not bind the principal, unless the principal ratified it afterwards (section 6(a) of the Agency Law) or the principal’s notice or conduct toward the third party created an authorization (section 3(a)). A third party who did not know about the excess of authority may, as long as they have not learned of a ratification, treat the agent personally as the other party, or withdraw from the transaction and claim their damage from the agent (section 6(b)).

Another important issue is the principal’s liability for the agent’s statements: the agent’s knowledge and intention bind the principal (section 2 of the Agency Law). If the agent gave wrong information or made a wrong commitment, the principal may be liable. The Law also allows the agent to take an urgent action that was not foreseeable in advance and that is reasonably needed to protect the principal’s affairs, even if it goes beyond the authorization (section 5(b)).

• The principal’s liability for transactions made within the limits of the authority
• The effect of an outward representation on the validity of the agency
• The principal’s ability to deny an agency it did not approve
• An agency conferred by the principal’s notice to the third party or by the principal’s conduct toward them (section 3(a))

When do you use agency agreements, and what must they include?

In commercial practice, agency agreements are used for a range of purposes: appointing sales agents, legal representation (a power of attorney), property management, investment management, and more. Each of these requires a precise definition of the scope of the authority.

When putting together a commercial agency agreement, it is important to define clearly the purpose of the agency, the scope of the authority, the payment terms and the term of the agreement. In addition, add clauses on confidentiality, termination without cause and dispute resolution: these are the clauses that will save you the next round of litigation.

• Sales agencies: broad authority in the area of sales
• Legal agencies: granting special legal powers
• Investment agencies: managing assets on the principal’s behalf
• Representation agencies: presenting the principal in its business affairs