Brokerage Agreement Definition
Financial companies often engage in agreements that define the terms of their relationships. Although brokerage agreements can be agreed to between any two firms not involved in financial services, the majority of the brokerage agreements are executed between financial services companies. This article discusses the brokerage agreements and their purposes.
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What Is a Brokerage Agreement?
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A brokerage agreement is usually a written agreement between two firms, detailing and describing the basis and terms of their business relationship. It is a legal document also referred to as a broker/dealer agreement. Once signed by both parties, the brokerage agreement becomes the working document by which both parties must abide. Failure of either party to comply with its terms often kills the agreement, or may result in an action where the courts could determine appropriate fines or actions against one or the other company.
What Issues Are Covered in Brokerage Agreements?
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The brokerage agreement covers the areas where the involved companies seek cooperation. For instance, for investment and brokerage companies, a typical brokerage agreement would cover typical issues such as proprietary investment opportunities, mergers, recapitalizations, acquisitions, management buyouts, sale, financing or other typical business issues of interest to both companies. The agreement would clearly state what services were to be performed by whom and what appropriate service fees would be paid in return for such services.
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Fee Payment Schedule
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Brokerage agreements have a schedule describing in detail the duties or services and the expected fee payments, once a covered service is performed. Some include what is called the "Finder Fee," which is generally paid at the conclusion of the agreement. The fee payment schedule describes other required minimum payments when transactions are completed.
Null-and-Void Clause
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Brokerage agreements also contain terms and conditions within the contract which once they are violated renders the entire brokerage agreement null and void. Each of the parties are expected to comply in good faith with the stipulated terms of the agreement. Say for instance company A violates a specific provision mandated by the brokerage agreement, company B then reserves the right to pull out of the agreement, citing such violation as the basis for its action. Brokerage agreements also specify the appropriate release forms that must be signed by one of the parties to the agreement prior to release of payments.
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Brokerage Agreement Terms
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All brokerage agreements clearly state conditions, a very important provision because nonfulfillment of those conditions could render the agreement null and void. A "condition" in the contract is different from a "promise," which may not have the full force to invalidate the agreement. To distinguish between what is a "condition" and a "promise" in the brokerage agreement, courts often look at the actual language used in the agreement. Such words as "only" are often important for the courts to make this determination. Additionally brokerage agreements specify the agreed-upon duration that the agreement remains in force. It generally specifies dates when expected transactions must be fully carried out.
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