What is the purpose of an agency agreement?

An agency agreement serves the crucial role of binding the principal, which is the party granting authority, and defining the scope of the agent's authority to act on behalf of the principal. This agreement is essential for ensuring that both parties understand their rights and responsibilities within the agency relationship. It delineates what the agent can and cannot do, thereby reducing the risk of misunderstandings or disputes that could arise from ambiguous roles.

Furthermore, the agency agreement typically includes important details such as the nature of the relationship, the duration of the agency, and any specific powers that are granted to the agent, which provides clarity and legal protection for both parties. Having this formal document helps to clarify expectations and ensures that the agent represents the principal in a manner that aligns with the principal's interests and legal obligations.

Other options, while they may touch on aspects related to agency, do not capture the essential function of the agreement as well. For example, limiting financial liability or conducting training protocols is secondary to the core purpose of defining authority within the agency context.