Businesses constantly act through agents, sales reps, brokers, distributors, recruiters, even employees signing contracts. An agency relationship has its own legal rules in England and Wales, and getting them wrong can leave a business bound by deals it never wanted, or in dispute over commission. Here is a plain-English guide.
What is an agency relationship?
An agency arises where one person (the agent) is authorised to act on behalf of another (the principal), usually to create legal relations between the principal and third parties. The classic example is a sales agent who negotiates or concludes contracts in the principal's name.
Authority: when does the agent bind the principal?
This is the crucial issue. An agent can bind the principal where they act within their authority:
- Actual authority, expressly given (in a contract or instructions) or implied from the role.
- Apparent (ostensible) authority (where the principal's conduct leads a third party reasonably to believe the agent is authorised, even if they are not. The principal can be bound to the third party in this situation) which is why businesses must be careful about who they let appear to act for them.
- Ratification, the principal can later approve an unauthorised act, making it binding as if authorised from the start.
The agent's duties to the principal
An agent owes the principal significant duties, including fiduciary ones:
- to act in the principal's best interests and within authority;
- to follow lawful instructions and exercise reasonable care and skill;
- to avoid conflicts of interest and not make a secret profit or take bribes;
- to account to the principal for money and property; and
- to keep the principal's information confidential.
Breach can mean the agent must compensate the principal or account for any secret profit.
The agent's rights against the principal
In return, an agent is generally entitled to:
- remuneration / commission as agreed (or a reasonable sum where the relationship implies payment);
- an indemnity for liabilities properly incurred in carrying out the agency;
- reimbursement of expenses properly incurred; and
- sometimes a lien over the principal's property for sums owed.
Special protection: commercial agents
A particularly important category is the commercial agent (a self-employed intermediary with continuing authority to negotiate (or conclude) the sale or purchase of goods for a principal. The Commercial Agents (Council Directive) Regulations 1993 give such agents extra protection, including rights to commission and, crucially, to a compensation or indemnity payment on termination of the agency. These rights are largely mandatory and cannot simply be excluded) so businesses appointing or ending a goods-sales agent should take advice.
Agent vs distributor vs employee, don't confuse them
- An agent acts for the principal, who contracts with the customer.
- A distributor buys goods and resells them on its own account (not an agent).
- An employee may also be an agent but has employment rights too.
The label matters for liability, tax and termination rights, and the Commercial Agents Regulations only protect true commercial agents, not distributors.
Practical points
- Define authority clearly in a written agency agreement, and tell third parties the limits.
- Be careful about apparent authority, don't let someone appear authorised unless they are.
- For goods-sales agents, factor in the Commercial Agents Regulations (especially termination payments).
- Address commission, termination, confidentiality and post-termination restrictions in the contract.
Key takeaways
- An agent acts for a principal to deal with third parties; the principal is bound where the agent has actual or apparent authority (or the act is ratified).
- Agents owe fiduciary duties (loyalty, no secret profit, account, care) and have rights to remuneration, indemnity and reimbursement.
- Commercial agents (goods) get mandatory protection under the 1993 Regulations, including termination compensation/indemnity.
- Distinguish agent, distributor and employee, and set authority and terms out clearly in writing.
Sources
- Common law of agency (actual and apparent authority; ratification; agents' fiduciary duties and rights to remuneration, indemnity and reimbursement)
- Commercial Agents (Council Directive) Regulations 1993 (protection of commercial agents; termination compensation/indemnity)
- General contract law on the principal's liability to third parties
--- This article is general information about the law of England & Wales as at 2026, not legal advice. For advice on your circumstances, consult a qualified solicitor.