What Is an Agency Relationship?

Agency relationship refers to a consensual relationship between two parties, where one person or entity authorizes the other to act on his, her or its behalf. Agency relationships exist as mutual agreements between individuals, small firms and large organizations. They establish a system of control and conduct where one party gives up control to the other, letting the second party make decisions and take actions.

In an agency relationship, one party acts as the agent while the other assumes position of principal. The agent provides and performs services on behalf of the principal, with the principal’s full knowledge and authorization. The agency and principal engage in a binding partnership, benefiting from each other’s engagement in the relationship. Agency relationships function as fiduciary partnerships, giving the agency responsibility for acting in manners benefiting the principal.

Agents and principals may initiate agency relationships in several ways. These relationships primarily arise through contractual agreements. These agreements exist as written and legally binding documents outlining and enforcing, through signatures of all parties, terms of the contract. Ratification, which uses written or verbal verification, confirms the intent of principals for acting on behalf of agents. Relationships form through estoppel as well, which involves the discretion of a third party, and by operation of law, where courts and judges administer control.