Introduction
This checklist provides guidance to in-house counsel and private practitioners on agency agreements and sets out the key commercial and legal issues to consider when drafting an agency agreement.
An agency agreement is a contract between a principal and an agent whereby the principal authorizes an agent to engage third parties in legal relationships on the principal’s behalf. An agency agreement may be exclusive, meaning that the agent may represent only one principal, or non-exclusive, meaning that the agent may represent multiple principals. A non-exclusive agreement may place restrictions on the other principals that may be represented.
While an agency agreement requires an analysis of the specific facts and circumstances of the relationship, this checklist provides an overview of the framework for drafting an agency agreement that can then be adapted to the organization’s individual situation.
This checklist addresses the following steps:
- Introduce the parties and the purpose of the agreement
- Consider specific terms and conditions
- Include miscellaneous provisions
The checklist is presented as a list of requirements that you can check off as they are addressed. There are explanatory notes to assist with drafting and which correspond with each step in the checklist.
This checklist can be used in conjunction with the following How-to guides: How to assess antitrust law risks in agency and distribution agreements, Issues to consider when drafting a franchise agreement, How to terminate a sales representative agreement and How to draft a confidentiality agreement and confidentiality clauses and Checklists: Appointing a local sales or marketing agent, Appointing a local distributor and Termination of a distributorship agreement.
Step 1 – Introduce the parties and the purpose of the agreement
| No. | Requirement |
| 1.1 | Consider whether the correct legal parties are identified |
| 1.2 | Evaluate whether parent companies, subsidiaries, or other entities should be named as parties to the agreement |
| 1.3 | Describe the scope and purpose of the agency agreement |
| 1.4 | Outline the duties and responsibilities of the parties |
Step 2 – Consider specific terms and conditions
| No. | Requirement |
| 2.1 | Determine the term of the agreement |
| 2.2 | Consider exclusivity of representation |
| 2.3 | Determine restrictions on agent activities |
| 2.4 | Identify standards of expected performance |
| 2.5 | Payment of fees and reimbursement of costs |
| 2.6 | Identify termination clauses |
| 2.7 | Competition and non-compete clauses |
| 2.8 | Notice of interaction with third parties |
| 2.9 | Evaluate potential liabilities of the parties |
| 2.10 | Incorporate definitions of key terms |
Step 3 – Include miscellaneous provisions
| No. | Requirement |
| 3.1 | Governing law and jurisdiction |
| 3.2 | Assignment of responsibilities of the parties |
| 3.3 | Confidentiality |
| 3.4 | Policies and procedures of principal to be followed by agent |
Explanatory notes
Overview
An agency agreement sets the terms for the relationship between your organization (the principal) and the person or entity that will represent your organization (the agent). Consequently, the agreement will cover a range of topics – setting out the duties of the agent, the way the agent performs those duties, and the value to be provided to the agent in exchange for their efforts. The precise provisions of the agreement depend on the nature of both your organization and the agent. While some organizations might be content to allow their agents a wide degree of latitude in the performance of their obligations, others prefer to prescribe the standards and requirements for performance with great specificity. The detail you put into an agency agreement depends on the culture of your organization, as well as the character of the agent, the products or services represented by the agent, and the geographic area in which the agent will be working.
Legal framework
The law governing agency relationships is a mix of state and federal law. State law generally governs when a principal-agent relationship is formed and the implications of that relationship. It also is the primary source of further governance of the relationship such as laws governing payment of commissions to sales representatives. Federal and state law both govern employment related issues that stem from agency relationships including whether activity occurred in the scope of employment for liability and workers’ compensation purposes and whether a worker is an employee or independent contractor.
Key considerations
It is assumed, if not expressed, in every agency agreement, that the agent will put forth reasonable, good faith efforts to perform their duties under an agency agreement. See Wood v Lucy, Lady Duff-Gordon, 222 NY 88, 118 NE 214 (1917). Note that unless the contract says so specifically, the agent is not required to use their ‘best’ efforts, but only ‘reasonable’ efforts. See Sharkey v Zimmer USA, Inc, No 20 Civ 8258 (JPC) (SDNY Aug 09, 2021).
Step 1 – Introduce the parties and purpose of the agreement
1.1 Consider whether the correct legal parties are identified
Identifying with clarity the parties to the contract is key to understanding whether the contract is being performed as intended. A contract cannot be enforced against someone who is not a party to the contract, so it is essential to include language in the contract that identifies who is responsible for performance.
1.1.1 Ensure use of specific legal names and accurate identifying information
It is not unusual for business entities to have names similar to others. A corporation may have a name that is nearly the same as that of a formerly related entity. Similarly, many individuals have names that are confusingly similar to other individuals (‘Joe Smith’ may not be the same person as ‘Joseph Smith’). Set out the correct legal names of the parties in the contract. Include other identifying information, such as the address of an individual, to eliminate a possible source of ambiguity.
1.1.2 Verify the legal status of the entity (eg, entity in good standing as listed on state website)
In many US jurisdictions, a corporation or limited liability company (LLC) that is not in good standing for failure to make the required filings has no capacity to make a contract. If a contract is made by an agent that is a corporation that is not in good standing, the other party to the contract might be able to repudiate the agreement at any stage during the duration of the agreement.
You can verify the legal status of an entity by searching on the website of the secretary of state or other official responsible for business entities in the jurisdiction in which the entity is incorporated or organized.
1.2 Evaluate whether parent companies, subsidiaries, or other entities should be parties to the contract
Consider adding a parent or subsidiary company as a co-party to an agency agreement to provide greater accountability by making more parties stakeholders with responsibility for the performance of the contract. On the other hand, increasing the number of parties increases the complexity of the agreement by increasing the number of parties with a role in performance.
1.2.1 Consider the relationship between legal entities and their capabilities to perform
A business entity may have a subsidiary or a parent that would not be able to provide any meaningful performance due to factors such as geographic location or the line of business they are engaged in. The subsidiary may also operate on a largely autonomous basis from the parent company. In these circumstances it would not be sensible to include the subsidiary as a co-party to the agency agreement.
A subsidiary or similar related entity may also have a reputation that means your organization may not want to be associated with it. For example, a corporation could be a ‘joint venturer’ on an unrelated endeavor and has engaged in conduct that has received negative publicity. The advisability of entering into an agency agreement with one of the joint venturers may depend upon how well the agent is able to distance itself from the activities of the other party to the joint venture. It may be necessary for the agent to terminate its relationship with the other party. If the relationship has been widely publicized, a public disclaimer of any further involvement with the other party may be necessary before proceeding with the agency agreement.
1.2.2 Agent third-party support needs and principal approval
The agreement should ideally state that contracts entered into by the agent are not subject to the approval of the agent’s parent company. If, however, the agent will rely on the support of the principal for performance, such a provision may not be something that the principal would allow; therefore, it is necessary to seek express approval within the agreement.
1.3 Describe the scope and purpose of the agency agreement
When interpreting a contract, courts are guided by the intent of the parties. This intent must be expressed in the agreement to provide the needed guidance. Consider the steps listed below.
1.3.1 Outline needs of the principal
The principal should articulate what it hopes to accomplish through the agreement. The needs of the principal will provide some measure for determining whether the agent is performing the agreement in good faith.
Example 1
A musician who was prominent decades ago, but who still receives occasional requests for recordings and sheet music, appoints an agent only ‘to fulfill such orders for products as may be received.’ The agent’s efforts are limited to responding to two or three inquiries per month. A court probably would agree that the agent is performing in full their duties under the agreement.
Example 2
The musician decides that they want to revive their career, so the purpose of the agreement is said to be ‘increasing Musician’s bookings, and sales of recordings and memorabilia.’ The volume of business generated by the agent’s efforts would provide a measure of the agent’s good faith. If there is no increase, the agent would have to show what their efforts were, and why those efforts were ineffectual.
1.3.2 Describe how the agent meets the need
The agent’s expertise and qualifications – the reasons for selecting this particular agent – should be set out to emphasize what the agent is expected to do. An agreement with an agent who is taken on to increase the principal’s online orders should specify that the agent was selected for their expertise in, for example, digital marketing. This will provide another way to set the standard for measuring the agent’s performance.
1.4 Outline the duties and responsibilities of the parties
After establishing why the contract is being entered into, the contract must state what is to be done by the parties:
1.4.1 Duties and responsibilities of agent
The duties and responsibilities of the agent are how the agent will accomplish the purpose of the agreement. The detail with which these duties and responsibilities are enumerated will depend on factors such as the particular agent, the market they will be working in, and the need or interest in preserving uniformity among all agents. Some principals will prefer to outline duties and responsibilities in the most general terms possible, to allow the agent wider discretion in adjusting their performance to the realities of their market. Others will prefer to be more specific, to limit the potential liability for unauthorized actions by the agent.
Note
The principal’s liability for the agent’s actions is defined by the doctrine of respondeat superior, which states that the principal is liable for the acts of the agent done within the scope of the agent’s employment. In most jurisdictions, the courts will say that an act is done within the scope of employment if the act is done when performing work assigned by the principal or engaging in a course of conduct subject to the principal’s control. An agent’ s act is not within the scope of employment when it occurs within an independent course of conduct not intended by the agent to serve any purpose of the principal. Restatement of Agency (Third), see section 7.07(2)-(3) (2006).
1.4.2 Duties and responsibilities of principal
Set out in detail the responsibilities of the principal with regard to the agent to eliminate future disputes regarding the support that was or was not provided to the agent in performing the agreement. See Checklist: Appointing a local sales or marketing agent.
Step 2 – Consider specific terms and conditions
The specific terms of an agency agreement are matters for negotiation between the principal and the agent. There are, however, some key areas that should be addressed in order to have an effective agreement. These are set out below.
2.1 Determine the term of the agreement
It is important to specify the beginning and the end of the agency relationship to ensure that both parties are clear when their obligations and liabilities start and, just as importantly, when they are over. While some agreements are terminable at will, most agreements have a definite or an open-ended term, or will end on the happening of a specific event.
2.1.1 Definite term
A definite term, which provides that an agreement will terminate as of a specific date, has the advantage of a definite ending. If your organization prefers flexibility, it is a good idea to include the option to renew. It provides the parties an incentive to re-evaluate the contract and extend by agreement.
2.1.2 Open-ended agreement
An open-ended agreement provides no definite termination date. It is a good idea to include express provisions for termination by either party. The termination may be for cause, meaning for specific reasons delineated in the agreement, or without cause, meaning the agreement may be terminated at the option of either party without giving a reason. In any event, the termination provision should provide that the party who chooses to terminate must provide advance notice before the termination is effective.
For further information, see How-to guide: How to terminate a sales representative agreement.
2.1.3 Termination on a specific event
An agency agreement may specify that it terminates automatically on the happening of a specific event. For example, an organization may hire a project manager as an agent to oversee the renovation of a building that the organization will use to expand into a new area. Once the renovation is complete, the agency will end. Other events outside the control of either party may terminate an agency; for example, an agency agreement to purchase and transport relief supplies to a country at war may end when hostilities cease.
If the agency agreement is to terminate when a particular event occurs, it is important that the agreement describes such event in detail to avoid any misunderstanding. For example, the agency agreement that terminates when the building is renovated should state whether the completion of the renovation is when construction ends or when the building is certified as fit for occupation.
2.2 Consider exclusivity of representation
An agency agreement may be exclusive, meaning that the agent may only represent your organization. Alternately, depending on the business needs of the organization, the agency agreement may be non-exclusive, meaning that the agent is allowed to represent others, some of whom could be your competitors.
Note that the level of business your organization expects to do with an agent will affect their willingness to be exclusive to your organization. If the level of business is relatively small, agents may prefer to have the opportunity to diversify their business. For further information, see How-to guide: How to assess antitrust law risks in agency and distribution agreements.
Exclusivity may also undermine your position that an agent is an independent contractor and not an employee. Independent contractor tests generally consider the degree of control exerted over a worker and the worker’s permanence. Exclusivity ties into a degree of control. See eg, 89 FR 1638, effective March 11, 2024.
However, on May 1, 2025, The Department of Labor’s Wage and Hour Division (WHD) issued Field Assistance Bulletin No. 2025-1, providing additional guidance on applying the March 2024 final rule for determining employee versus independent contractor status under the FLSA. While the 2024 rule formally remains in effect, the WHD instructed its investigators that, for enforcement purposes, they should not apply the 2024 rule’s analysis and should instead continue to follow the longstanding economic-realities framework set out in existing WHD guidance (including Fact Sheet No. 13).
This framework assesses multiple factors, including the worker’s opportunity for profit or loss, investments, permanence of the relationship, degree of control, whether the work is integral to the business, and the worker’s skill or initiative. The WHD emphasised that no single factor is determinative and that the totality of the circumstances must be considered when assessing economic dependence. The bulletin encourages employers to review contracts, working arrangements and supporting documentation to ensure compliance.
Having regard to the considerations below will help you decide whether an agency agreement should be exclusive or non-exclusive.
2.2.1 Is this the sole agent acting in this capacity?
If an organization has only one agent performing a particular set of duties, that organization may prefer that the agent focus all their effort on working for that organization.
2.2.2 Multiple agents acting in same or similar capacity
Multiple agents will often engage in some level of competition with one another, depending on the terms of their agreements. Non-exclusive arrangements add another dimension to that competition.
2.3 Determine restrictions on agent activities
The restrictions placed on the activities of agents need to be detailed clearly, along with the consequences for violating those restrictions, for example:
2.3.1 Specific geographic areas
An agency agreement can say that the agent is appointed agent only for certain areas. The consequences for violating the restriction could include measures such as sharing sales commissions with the agent in whose territory the transactions took place. Note that a principal who accepts the benefit of a transaction conducted outside of the agent’s territory will be liable for any damages due to that transaction.
2.3.2 Customer specific
An agent may be limited to dealing with only certain named customers, or a certain class of customers. For example, the agent for a company that sells office equipment may be limited to dealing with county governments in a state, while other agents are allowed to handle only private business accounts.
2.3.3 Limit to size of organization agent interacts with
There are reasons why an agent would be permitted to deal only with customers of a certain size. The principal may prefer to handle larger accounts on its own, leaving the agent to build strong personal relationships with other customers. It is possible that the agent may not lack the capacity to manage larger accounts. Conversely, another agent might bring a higher level of sophistication and experience, making them a more suitable choice than the company handling these larger accounts on their own. Determining the best relationship with any agent requires a thorough review of the objectives of the company and the qualifications of any agent being considered to represent the company.
2.4 Identify standards of expected performance
While every agent is expected to exercise their good faith efforts to perform a contract, setting standards for performance will provide a metric for deciding whether those efforts are sufficient for your organization’s needs.
2.4.1 Incorporate goals into the contract
Incorporate specific goals, such as sales quotas, into the contract. It is best practice to include the consequences for not meeting those goals, such as coaching, additional training, or even termination.
If specific goals are set, consider including an incentive for exceeding goals, such as a bonus if sales quotas are exceeded by a certain percentage.
2.4.2 Establish requirements and procedure to report progress against standards
It is best practice to include regular reporting on performance. This will help determine if the agent needs additional support. It may also help in deciding whether to renew an agent’s contract.
2.5 Payment of fees and reimbursement of costs
An agent performs their duties for payment. How and when that payment will be made is a crucial term.
2.5.1 Basis of compensation (eg, hourly, commission, etc)
An agent who is not an employee will often be compensated by commission, rather than by a fixed salary. The basis for the compensation must be made clear at the outset of the relationship.
2.5.2 Timing of payment of fees or reimbursement of costs
Payment or reimbursement may be made at scheduled intervals or may be made upon the request of the agent.
Paying a worker a regular amount at fixed intervals is an indication that the worker is an employee, rather than an independent contractor under most classification tests.
For further information on the distinction between employees and independent contractors see the IRS webpage, Independent Contractor (Self-Employed) or Employee? (classification for tax purposes) and the Department of Labor webpage, Misclassification of Employees as Independent Contractors. Information on state laws governing the distinction, review state labor or employment law websites and state tax authority websites.
2.5.3 Internal process of reporting by agent to determine fees or reimbursements
Payment on an hourly or commission basis requires some basis for calculating the amount due. Regular reports by the agent will provide such a basis. Consider also including an audit provision, to verify claims for payment, if necessary.
2.6 Identify termination clauses
A termination clause should address not only termination, but should discuss post-termination obligations, if any, and the ‘wrapping up’ obligations of the parties.
For further information, see, How-to guide: How to terminate a sales representative agreement and Checklist: What to consider when terminating a contract.
2.6.1 Time-specific termination
A contract that has a definite time duration should state the day and time of termination, rather than just saying that the contract is for a given amount of time (eg, ‘ends at 11.59 pm on December 31, 2025,’ instead of ‘for one calendar year’). This will eliminate ambiguities surrounding the end of the arrangement.
2.6.2 Termination for cause
Every agency agreement should contain a provision allowing termination of the agreement for cause. Common causes include criminal behavior by the agent, conduct deleterious to the principal, or breach of contract with the principal or customers. A termination for cause provision may also allow for termination for failure to meet quotas or economic goals.
2.6.3 Termination without cause
A clause allowing termination without cause should include an adequate notice period to allow for winding up the affairs of the agent and for procuring a substitute agent, if necessary. Common periods range from 15-days to 60-days, depending on the circumstances.
2.7 Competition and non-compete clauses
When an agency agreement comes to an end, the typical rule is that neither party will have any formal obligations towards the other. This rule, however, means that the former agent is free to compete with the former principal, either by starting a competing business, or by going to work for a competitor.
Many agency agreements contain clauses that bar such competition. However, not every jurisdiction recognizes these clauses as valid and there is a trend against such restraints on trade. For example, California broadly prohibits restraints on trade, including non-compete agreements and enforces its restrictions stringently. Cal Bus & Prof Code section 16600, et seq. Additionally, the FTC has adopted a rule that would ban noncompete provisions in employment contracts. See, FTC Non-Compete Clause Rulemaking. The final rule, which had been set to go into effect on September 4, 2024, has been challenged in federal court. Two courts have issued injunctions against the final rule (see Ryan et al v FTC (No. 3:2024-cv-00986, N.D. Tex.), and US Chamber of Commerce, et al v Federal Trade Commission (No. 6:24-cv-00148, E.D. Tex.), while one court has declined to issue a preliminary injunction (see, ATS Tree Services, LLC v FTC (No. 2:24-cv-01743, E.D. Pa.)). In Ryan, the court held that the FTC exceeded its statutory authority in promulgating the rule and that the rule is arbitrary and capricious. While not revoking the rule, the FTC is taking an alternative approach and has stated as its official position that ‘The FTC appealed that [Ryan] decision. The district court’s decision does not prevent the FTC from addressing non-competes through case-by-case enforcement actions.’ On September 5, 2025 the US Court of Appeals for the Fifth Circuit dismissed the appeal after the FTC moved to voluntarily withdraw it. This means the FTC’s nationwide non-compete rule is vacated and unenforceable. On the same day, the FTC officially abandonedthis nationwide rule. Instead, the FTC will now challenge non-compete agreements on a more targeted, case-by-case basis, as evidenced by a recent enforcement action against one company, the issuance of warning letters to health care companies, and a Request for Information (RFI) seeking public input. The FTC also held a workshop on the subject October 8, 2025. This approach from the FTC as well as actions that may be taken by any of the separate states, gives rise to an air of caution when drafting and implementing non-compete clauses.
From a state perspective, even in jurisdictions that do allow enforcement, the non-compete clauses are generally subject to a ‘reasonableness’ requirement. Courts may rewrite the clause to make them ‘reasonable.’ A non-compete agreement must be drafted in accordance with the laws of the jurisdiction in which the principal and agent are doing business.
2.8 Notice of interaction with third parties
An agent is appointed to interact with third parties on behalf of the principal. Address the scope of that interaction in the agency agreement.
2.8.1 Limitations
Unless the agent is to have complete discretion in their dealings with third parties, include any limitations on that interaction in the agreement. These limitations may be geographic or may depend on the size of the business. The products or services offered may be limited by agreement.
2.8.2 Approval of third party
Transactions with an agent may be subject to further approval. For example, an equipment lease may be subject to approval by a lender who will finance the transaction. If approval will or may be required, the party responsible for obtaining that approval must be specified.
2.9 Evaluate potential liabilities of the parties
As a rule, a principal will be liable for the actions of the agent done within the scope of that agency. While liability cannot be completely avoided, it can be anticipated to some extent, by understanding the full range of activities that may be included within that scope. If the risk is unacceptable, the scope of the agent’s duties can be limited accordingly.
2.9.1 Indemnification clauses
An indemnification clause in favor of the principal, if lawful in the jurisdiction, may provide protection to the principal. If the agent is not financially able to provide the full indemnity, the clause may be virtually meaningless.
For further information, see How-to guide: How to draft and negotiate limitation of liability clauses.
2.9.2 Consider antitrust implications
Agency agreements – particularly exclusive agency agreements – may pose antitrust issues. For further information, see How-to guide: How to assess antitrust law risks in agency and distribution agreements.
2.10 Incorporate definitions of key terms
When interpreting a contract, courts look at the ordinary meanings of terms. If a term is used in the agreement in a way that differs from the most common dictionary usage of the term, then set out the meaning assigned to the term for the purposes of the contract. If there is no one accepted definition, include the intended meaning of the term.
Example
An agency agreement granting the agent the exclusive right to make sales for the principal in the ‘Chicago area’ may define that term as including only the city of Chicago, or it may include surrounding communities or counties.
Step 3 – Include miscellaneous provisions
Agency contracts are governed by the same rules as all contracts. There are, however, some points that bear special mention in the context of an agency contract.
For further information, see Checklist: What to consider to ensure a contract is valid.
3.1 Governing law and jurisdiction
While the common law of agency contracts is largely uniform between US jurisdictions, there is still enough variance to mean that it is advantageous to set out the jurisdiction for which law is to govern the agreement. The main restriction on such a clause is that the chosen forum should bear some relationship to the transaction in the contract. A contract may be governed by the laws of the state of incorporation or organization of the principal, the principal’s main place of business, or the place where the contract is to be performed.
Many agency contracts will be between parties located in different jurisdictions. Determining in advance which law will apply to a dispute helps to avoid adding a dispute about the applicable law to any other dispute.
Example
Acme Manufacturing is incorporated in Delaware but has its sole manufacturing facility and corporate offices in Pennsylvania. An agency agreement with a sales representative in Arizona could state that the contract is governed by either the laws of Delaware, Pennsylvania, or Arizona. Any of these choices would probably be enforced by a court.
For further information see Checklist: What to consider to ensure a contract is valid.
3.2 Assignment of responsibilities of the parties
The obligations under a contract may be assigned to another unless the contract prohibits assignment, or unless the contract is made with reference to the individual skill of the agent.
Example 1
N is appointed the agent of the T Milling Company to buy wheat at market prices on the Commodity Exchange. In the absence of a contractual prohibition, N probably would be within their rights to assign this contract to another.
Example 2
C is a tailor, and is made the agent of the F Clothing Company to take orders for semi-custom suits sold by F Clothing Company. Taking the orders involves measuring the customer, and making minor alterations when the suit is delivered. Because the agreement is relying on C’s skill, the contract probably could not be assigned.
3.3 Confidentiality
The nature of an agency agreement means that the agent will often be privy to information that the principal would prefer to keep confidential. The agent’s confidentiality obligations should be spelled out with specificity. A specific agreement is also important to protecting the principal’s trade secrets. Do not assume that the agent will know what their obligations in this regard are. See How-to guide: How to draft a confidentiality agreement and confidentiality clauses.
3.4 Policies and procedures of principal to be followed by agent
If there are certain procedures and policies that the principal expects the agent to follow, those should be specified in the agreement. In the absence of specific requirements, an agent will often be assumed to have discretion in determining how to perform its duties. At the same time, the principal should be aware that the degree of control exercised over an agent will be one factor determining the principal’s responsibility for the agent’s actions and may also be a factor in determining whether the agent is an employee of the principal or an independent contractor.
Additional resources
Small Business, Chron.com, ‘What Is an Agency Agreement?’
Related Lexology Pro content
How-to guides:
How to assess antitrust law risks in agency and distribution agreements
Issues to consider when drafting a franchise agreement
How to terminate a sales representative agreement
How to draft a confidentiality agreement and confidentiality clauses
Checklists:
Appointing a local sales or marketing agent
Appointing a local distributor
Termination of a distributorship agreement
Clauses:
Term
Fees
Termination
Effect of termination
Liability
Governing law and jurisdiction
Confidentiality
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