The Concept of a Brokerage Agreement and the Duties of a Broker
The term broker, in its literal meaning, refers to an intermediary, agent, or commercial middleman.
In legal and commercial terminology, a broker or intermediary is a person or entity that facilitates transactions between buyers and sellers by providing the necessary conditions for their conclusion.
A broker is considered a non-banking financial entity whose primary function is to announce market asset prices to clients.
A brokerage agreement is one of the most widely used and significant contracts in business and commerce, and is also known as a service or agency agreement. Individuals entering the business market often share common concerns, such as achieving higher profitability, making timely and accurate investments, increasing capital, reducing risk, and ensuring efficient investment management. These objectives can largely be achieved through a brokerage agreement.
Legal Responsibilities and Obligations of the Broker
Definition of a Brokerage Agreement
In a brokerage agreement, one party, the principal or employer, requests the performance of certain services, while the other party, the broker, undertakes to perform them. In return, the principal is obligated to pay the broker a fee or commission, as specified in the agreement.
A brokerage agreement is a written instrument that defines the legal relationship between the principal and the broker. It typically includes provisions on the duration of the contract, its subject matter, the parties’ obligations, and the broker’s remuneration.
The Broker
As noted above, a broker is a non-banking financial intermediary that provides market price information to clients. The primary function of brokers or brokerage firms is to offer accurate market rates and execute clients’ trading instructions. Brokers may receive buy and sell orders from clients through various means, including telephone, fax, and online platforms, and execute such orders using the client’s deposited funds.
Brokerage activities cover a wide range of economic sectors, and numerous specialized brokerage firms operate in different markets. One of the most common forms of brokerage is securities brokerage in stock exchanges.
Duties of the Broker
The broker’s duties generally include the following:
- Providing guidance and professional advice to the other party throughout the term of the agreement, particularly in matters related to commerce and market development, in accordance with the contract.
- Organizing the sale of goods or services subject to the agreement and attracting investors.
- Maintaining confidentiality and safeguarding the principal’s sensitive and proprietary information.
- Performing all business-related tasks with due care, diligence, and a high level of professional responsibility.
Determination of the Broker’s Commission
The broker’s commission is typically paid by the client. The obligation to pay the broker’s remuneration rests with the party that engages the broker’s services, as agreed upon in the contract.
Supervision of Brokers
Like other financial intermediaries, brokers may generate both positive and negative effects. Therefore, regulatory oversight is imposed to prevent violations of clients’ rights. Supervision of brokers is carried out by regulatory bodies authorized by law, commonly referred to as regulators.
Regulators ensure the integrity and transparency of brokers’ financial and transactional activities by establishing and enforcing regulatory standards. Brokerage firms that operate under proper regulatory supervision are generally considered more reliable and trustworthy.
Title of the Brokerage Agreement
The first step in drafting any contract is selecting an appropriate title that reflects the agreement’s primary subject matter. Accordingly, the title of a brokerage agreement should clearly indicate the relevant business or commercial activity to which it relates.
Identification and Details of the Parties
Since the parties to a brokerage agreement are the principal and the broker, the contract must include their full identification details. For natural persons, this includes full name, national identification number, address, and contact information. The broker’s details are recorded in the same order as the principal’s.
If either party is a legal entity, the agreement must include the company name, registration number, economic code, registered address, contact details, and the name and position of the authorized representative.
Method and Amount of Payment of the Broker’s Fee
As a general rule, the amount of the broker’s fee is determined by mutual agreement of the parties and recorded in the contract. If the brokerage agreement consists of multiple stages or phases, the commission payable for each stage should be clearly specified.
The method of payment must also be determined and expressly stated in the agreement. Payment may be made in installments with a clearly defined schedule, or as a lump sum upon completion of the contract.
Frequently Asked Questions Regarding Brokerage Agreements
A brokerage agreement is a contract that defines the legal relationship between a principal and a broker, including the subject matter, duration, duties, obligations, and the broker’s remuneration.
A broker’s duties include providing advice and guidance, organizing sales or investments, maintaining confidentiality, and performing assigned tasks with due care and professional responsibility.
The broker’s commission is paid by the client or principal and is determined based on the agreement between the parties.
Brokers are supervised by regulatory authorities. Brokerage firms operating under recognized regulatory frameworks are generally considered reliable.
The agreement must include the parties' identification details, contact information, and, in the case of legal entities, company registration details and the names of authorized representatives.
The broker’s fee may be paid in installments or as a lump sum at the end of the contract, as specified in the agreement. What is a brokerage agreement?
What are the duties of a broker?
How is the broker’s commission determined?
How can one ensure the broker’s reliability?
What information must be included in a brokerage agreement?
How is the broker’s fee paid?
