Definition: Mutual agency is the legal relationship between partners in a partnership where each partner has authorization powers and the ability enter the partnership into business contracts. In other words, each partner in the partnership is an agent in the business and the authority to make business decisions that commit or bind the partnership, as a whole, to a business agreement with a third party or entity.
What Does Mutual Agency Mean?
Mutual agency only exists for partners acting within the scope of normal business operations and dealings. For example, a retailer apparel partner with agency would not be able to contract the other partners into a deal to purchase a piece of investment real estate because this would be outside the normal operations of the business.
One of the retail partners can, on the other hand, purchase goods from a vendor and require the partnership pay for the goods. This transaction is within the normal course of operations of the business.
Mutual agency has several advantages and disadvantages for the partnership. It’s advantageous to have multiple partners with agency because they are authorized to make deals and transactions for the partnership. This arrangement splits up the duties and responsibilities among multiple partners, so the company can expand and grow.
The main disadvantage of having multiple agents is that all the partners can be encumbered and legally contracted by the actions of one partner. This means that if one partner makes a few bad business decisions, all of the partners will have to pay for it.
Mutual agency is a risk that partners have to weight before starting the company. The contracts entered into by agents are binding to the partnership and the third party that has knowledge of the agency. This is why the partners have the option to negotiate different levels of agency for each partner and even restrict authorization powers to select individuals for the protection of the company.