What are the legal risks of an unclear scope of authority in an agency agreement?

An unclear scope of authority may lead to ultra vires acts by the agent. Under Article 171 of the Civil Code, such acts are void unless ratified by the principal, and the agent may be held personally liable. Vague authority also increases the risk of disputes over the validity of the agent's actions.

How should returns and bad debts be addressed in commission clauses?

It is advisable to specify that the agent must refund commissions for returned goods, and that commissions for bad debts are either forfeited or deducted from future payments. A common condition is that commission is payable only after the principal actually receives payment from the customer.

Is the agent still entitled to commission after termination of the agreement?

Generally, the agent retains the right to commission for transactions completed before termination (e.g., signed contracts or delivered goods). However, if termination results from the agent's breach, the agreement may forfeit such rights. It is essential to clearly define post-termination commission terms in the agreement.

Agency Agreement Essentials: A Practical Guide to Key Clauses from Scope of Authority to Liability Allocation

2/21/2026 · 3 min

1. Scope of Authority: Defining the Boundaries of Agency

The scope of authority clause is the foundation of any agency agreement, determining the extent to which the agent can legally bind the principal. Key elements include:

Matters Authorized: Specific tasks the agent may handle, such as sales, procurement, bidding, or contract execution.
Geographic Limits: The territory within which the agent may operate, preventing cross-border conflicts.
Duration: The start and end dates of the agency relationship, avoiding indefinite authority.
Exclusivity: Whether the agent holds exclusive rights, often tied to minimum performance targets.

Drafting Tip: Use precise language and avoid vague terms like "etc." For high-stakes matters (e.g., real estate transactions, litigation), require separate written authorization.

2. Agency Powers and Restrictions: Preventing Ultra Vires Acts

This clause defines the agent's decision-making boundaries:

General Powers: Routine matters the agent can decide independently, such as standard contract negotiations.
Special Powers: Actions requiring prior written consent from the principal, e.g., price adjustments, asset sales, or legal proceedings.
Prohibited Acts: Self-dealing, conflicts of interest, or signing contracts beyond the scope of authority.

Legal Risk: Under Article 171 of the Civil Code, unauthorized acts by the agent are void unless ratified by the principal. The agreement should specify the agent's liability for ultra vires acts.

3. Commission and Expense Settlement: Avoiding Financial Disputes

Commission clauses must clearly address:

Calculation Basis: Percentage of sales, profit, or fixed fee; whether taxes are included.
Payment Conditions: Whether commission is due only after the principal receives payment from the customer, and the impact of returns or bad debts.
Settlement Cycle: Monthly, quarterly, or per project; invoicing requirements.
Expense Reimbursement: Which costs (travel, entertainment) are reimbursable, and the approval process.

Best Practice: Consider a commission cap or tiered rates to prevent the agent from prioritizing volume over profitability. Include an audit right for the principal.

4. Confidentiality and Intellectual Property: Protecting Trade Secrets

Agents often access sensitive information like customer lists or technical data. The confidentiality clause should cover:

Definition of Confidential Information: A combination of listing and general description, excluding public information.
Duration: Typically during the agreement and for 2-5 years after termination.
Exceptions: Disclosures required by law, information entering the public domain, or independently developed by the agent.
IP Ownership: Any work product created by the agent (e.g., marketing plans, customer data) belongs to the principal.

5. Liability Allocation and Indemnification: Mitigating Legal Risks

Liability clauses balance risks between parties:

Agent's Liability: Full indemnification for losses caused by the agent's fault (e.g., ultra vires acts, fraud, breach of confidentiality).
Principal's Liability: Compensation to the agent for losses arising from product defects or misrepresentations by the principal.
Third-Party Claims: Obligations to notify, cooperate in defense, and share costs.
Liability Cap: Often limited to the total commission earned during the agreement, except for willful misconduct or gross negligence.

6. Termination and Post-Termination Obligations

Termination clauses should specify:

Grounds for Termination: Expiration, mutual agreement, breach, bankruptcy, or dissolution.
Notice Period: For indefinite terms, typically 30-90 days' written notice.
Post-Termination Duties: Return of documents, cessation of trademark use, and handover of customer information.
Commission Entitlement: The agent retains the right to commission for transactions completed before termination.