May 23, 2023
Agency Contracts: Writing a Strong Contract to Ensure Smooth Work Between the Two Parties
As an agency owner, you will provide specialized services on a project basis. In such cases, an agency contract is necessary to establish a solid partnership between your business and the client.
A properly-written agency agreement sets out both parties’ roles and obligations, helping to avoid potential legal risks.
In this article, we will explain agency contracts in more detail – what it is, why you should create one, and its essential aspects. We will also share the best practices for creating an agency agreement to help secure your business.
What Is an Agency Contract?
An agency contract is a legal agreement between a company and a third-party agent that outlines the terms and conditions of their working relationship. It defines the scope of services to be provided, the commission rate, the duration of the contract, and other important details.
Why Take Time Drafting an Agency Contract
An agency agreement defines the legal relationship between the agency and its client. It ensures both parties understand their roles and responsibilities in a project, creating mutual awareness that the client should pay compensation in exchange for services provided.
If you’re managing a services-based business like an advertising agency or a web development company, you can benefit from agency agreements to personalize your obligations in different projects.
Additionally, adding specific clauses in agency agreements prepares you for potential legal measures. For instance, your work may expose your agency to legal proceedings for Intellectual Property (IP) infringement or a breach of contract.
This might be especially important if you have recently shifted from a freelancer to an agency owner and have your own employees. In this case, an agency client contract can make every employer responsible for their own projects, establishing ownership.
Also, draft specific clauses to secure your agency from operational or monetary loss, and review the document before signing the contract.
Additionally, we recommend communicating with the client even after signing the agency contract to avoid misunderstandings.
Important! Web design agency owners might already be familiar with a web development proposal. Although it is similar to a contract, note that their purposes are different. A proposal contains an offering for pitching to prospective clients. Meanwhile, an agency contract is a legally-binding document establishing the legal relationship between your company and the client.
What Should You Include in Agency Contracts
This section will cover nine important elements you should include to create an effective agency agreement.
1. Client and Agency Details
Add your agency’s and client’s registered business names and addresses at the start of the contract, as well as legal names representing both parties. Also, don’t forget to include contact information, such as a phone number and a business email address.
Write an executive summary about the client and your agency outlining an overview of the partnership – why the client hires your company and what services you should provide.
This part sets out the main roles of both parties, which will lead to more detail as you go through the agency agreement.
2. Work Duration
Time limit is an essential element in project-based work. Therefore, specify the start and finish date for the work and add deadlines for certain parts of the project if necessary.
If you’re a web development company owner, calculate an estimated timeline which may include the testing, revision, and launching stages.
That way, you can spare more work hours and offer a realistic timeframe to complete the project, setting clear expectations for your client.
Moreover, adding the project timeline lets both parties know when the client should make payment for the completed work.
3. Scope of Work
This part is the core of an agency agreement that should cover the services provided by your company in detail.
Start with adding the agreement between your agency and the client, as mentioned in the executive summary. Then, list all deliverables and services from your side based on the estimated timeline.
We also recommend including the number of revisions your agency is willing to provide for clients without additional charge and how much they will have to pay afterward.
4. Payment Schedule
Once you’ve set the work duration and scope, add a payment plan. Typically, agency pricing includes monthly, hourly, or flat-rate schedules. To avoid confusion, clearly establish which pricing model you will apply.
Mention the total amount the client needs to pay, then define the process. For instance, you may set a 50% down payment upon signing the contract and the rest when you complete the work.
Also, include the supported payment method. This way, each payment will go through the same gateway, making it easier to track. As an example, if you’re allowing a bank transfer, put your correct account details in the contract.
Furthermore, add a condition for possible late payments. Usually, agencies charge a late payment fee. But it is crucial to inform your client in advance to avoid conflicts.
5. Termination Clause
You can terminate the contract before the ending date or when any involved party fails to meet certain terms and conditions. However, you will need to add a clause allowing such action.
Including this clause in an agency agreement mitigates potential legal risks. This way, both parties can obtain their exit rights when they part ways.
Typically, contract termination can happen for the following reasons:
- Mutual agreement. You might find that the agency partnership didn’t add value for both parties. Or, you may encounter a negative work relationship and wish to fire a client ethically.
- Breach of contract. It implies that a party didn’t deliver the agreed terms in the contract, which may include delayed project completion, late payments, and unsatisfactory performance.
- Force majeure. This condition excuses both parties from fulfilling responsibilities due to circumstances beyond their control, such as natural disasters, wars, terrorism, and pandemics.
Ensure you include the termination date and notice period when writing this clause. Also, briefly mention settlement for any damages resulting from the termination – you can add further details in the consequences section.
6. Consequences of Contract Breach
The objective of this clause is to resolve a contract breach dispute and ensure the innocent party gets legal remedies for the damage.
This term should further explain what will happen if any of the parties breach the agency agreement. Therefore, be exact when stating the consequences to ensure your company and the client comply with the legal obligations.
Usually, a party violating the contract should pay compensation for any financial loss. Besides money, other types of consequences can apply, such as material compensation. In this case, the violating party will need to deliver certain products or services as agreed in advance.
7. Legal Ownership
Intellectual Property (IP) is an essential element in agency contracts. As the partnership involves creative works that could contain copyright, trademarks, patents, and trade secrets, you should pay attention to IP ownership.
Adding an IP clause lets involved parties set general rules on who will get the ownership upon completion of work.
In general, the ownership will directly go to the author – which is the agency. However, if your agency allows IP ownership transfer to other parties, you should include more information about the processes in the contract.
Ensure that the agency agreement covers the following elements to avoid potential issues from the IP assignment:
- Description of IP to transfer
- The parties involved in the process
- The IP assignment contract price
- The time IP transfer takes place
With multiple parties signing the agency contract, creating an agreement on licensing is also important – define who can use the IP and on what occasions.
This non-disclosure term prohibits involved companies from sharing confidential business information with third parties. The confidential data may include payment policy, pricing strategies, financial information, and IP.
The confidentiality agreement clause adds a trustworthy value for your agency as the client know their information will be safe. Also, it can prevent the client from misusing your data.
For instance, a client may distribute your copyrighted designs to other agencies during the partnership. To avoid this risk, you can add a clause to prevent clients from sharing your designs and working with other agencies during the partnership.
If such a situation occurs, your agency can take legal action for confidentiality clause violations related to IP.
9. Indemnity Clause
An indemnification clause in an agency agreement implies that a party will defend the other if a lawsuit occurs in the future. Therefore, you may face huge monetary loss if you don’t set a release of liability.
For example, your client gets sued for copyright violations on your web design work. If your company agrees to assist with an IP lawsuit, you will go under the litigation process. Thus, you may need to pay legal fees if the case doesn’t settle.
The indemnity clause might be confusing, but it is a preventive measure you’ll need to consider seriously. We recommend you consult with your legal team or reach out to a lawyer experienced in drafting an indemnification clause.
Best Practices for Drafting Agency Contracts
Now that you’ve learned the key aspects of an agency agreement, here are some useful tips to help you create a strong one.
Always Ask for Legal Help When Creating Contracts
Understanding complex legal terms can be daunting. You surely don’t want to incorporate wrong terminology and clauses that may lead you to issues. Therefore, seek assistance from legal professionals to get advice on highlighting each party’s legal responsibilities in the contract. Also, you can tailor specific industry-based clauses for better protection.
Make a List of Your Conditions to Avoid Scope Creep
Always write a specific scope of work to avoid getting additional tasks from clients without further payment. For instance, you can include a clause for additional payment for any request for changes not defined in the contract.
Make Timely Payments a Habit
Avoid late payments from clients by stating payment deadlines in the agency agreement. Sometimes you may work with companies with payment terms that take days. The faster you invoice them, the sooner they can start processing and making payments on time. Therefore, it is important to adjust the payment schedule for different clients.
Always Include a Disclosure
It is essential to add detailed disclosure penalties in the agency agreement. That way, your agency can save up more time and money in the event of a breach of contract. For example, you won’t need to create a separate agreement to settle late payments when you’ve included specific processes in the consequences clause.
Make Flexible Contracts
Although you should be strict with most clauses, like the scope of work and consequences in agency agreements, adding some flexibility for supporting terms will be great. For example, instead of adding fixed deadlines for all tangible deliverables, you may set a monthly-based schedule for each project stage to send completed works to clients.
An agency agreement is a legal document that covers ground rules between an agency and its clients. Writing strong agency agreements can help avoid losses from breach of contract and potential litigation risks.
When drafting agency agreements, pay attention to the following elements:
- Add details on the registered business names and addresses, along with an executive summary.
- Set the starting and ending dates for each project.
- Write a specific scope of work clause to avoid additional work requests without getting paid.
- Make a clear payment schedule for your clients.
- Include a termination clause with information on the effective date and notice period.
- State detailed consequences due to avoid a breach of contract.
- Explain legal ownership procedures in agency agreements.
- Include a detailed confidentiality clause.
- Write a proper indemnity clause with help from legal experts.
We hope this article helps you understand the importance of creating agency agreements for your business. Make sure to consult with legal professionals to create an effective client contract.
If you have any questions about agency agreements, leave a comment below.