Topic : Agency | Subject : Regulation | Uniform CPA Exam | Review in Audio

Topic : Agency | Subject : Regulation | Uniform CPA Exam | Review in Audio


Agency is a relationship in which one party,
who is an agent, is authorized to act on behalf of another party who will be the principal.
The law of agency is concerned with the rights, duties, and liabilities of the parties in
an agency relationship. Important to this relationship is the fact that the agent has
a fiduciary duty to act in the best interest of the principal. A good understanding of
this topic is important because business structures apply the concepts of agency frequently.
The CPA exam emphasizes on The creation and termination of the agency
relationship, The fiduciary duties that the agent owes to
the principal, The undisclosed as well as the disclosed principal
relationship, Unauthorized acts or torts committed by the
agent within the course of the agency relationship and,
Principal’s liability for agent’s unauthorized contracts.
Agency is a relationship between two parties, whereby one party, who is generally called
an agent, agrees to act on behalf of the other party, who is generally called the principal.
Both the terminologies the agent or the principal are with respect to third parties. Note that
a contract is not required but is frequently present.
Characteristics of agency include – Agent is subject to control of principal.
Agent is a fiduciary and must act for the benefit of principal.
Agent’s specific authority is determined by the principal but generally, the agent
has authority to bind the principal contractually with the third parties.
Employee is a type of agent in which employee’s physical conduct is subject to control by
employer. Business structures example corporations,
partnerships, and limited partnerships are principals; their various employees are agents.
Employees include corporate officers, but not directors, general partners, and other
employees such as professional support staff. Independent contractor is distinguished from
employee or an agent because, Independent contractor is not subject to control
of employer as to methods of work. Independent contractor is not subject to regular
supervision as an employee. Independent contractor controls the methods
and employer controls the results. Typically an independent contractor is paid
by the job, while an employee is paid a salary or an hourly wage on a continuous basis.
Often independent contractors provide their own tools and supplies for a job, while an
employee usually has tools and supplies provided by the principal.
Above distinction is important because, generally employer is not liable for torts committed
by independent contractor, but the employer can be held liable for the torts of an agent.
There are exceptions to the above general rule.
Employer may be liable for torts committed by independent contractor if –
Independent contractor is employed to do something inherently dangerous, or
Employer was negligent in hiring independent contractor.
Note that independent contractor may also be an agent in certain cases. For example,
an attorney representing a client in tax court is an instance wherein an independent contractor
is an agent. Power of attorney is a special agency situation.
This is a case where a person authorizes another person to act as his or her representative.
Characteristics of power of attorney include, Principal, in writing, grants authority to
agent. Only principal needs to sign because, the
principal is the only party relinquishing a legal right, and the law needs evidence
of the principal’s intent to do so. Agent need not be an attorney but anyone with
capacity to be agent. Power of attorney may grant general authority
or restricted authority. Broker is a special agent acting for either
buyer or seller in business transactions. Exclusive is the only agent, the principal
may deal with for a certain purpose during life of the contract.
Del-credere is a sales agent who, prior to the creation and as a condition of the agency,
guarantees the accounts of the customers to his or her principal.
E-agent is computer program or electronic method to take some action without specific
human review. A general agent is an agent with a broad range
of powers; a special agent is one that engages in only one specific
type of transaction for the principal. An agent who is hired by another agent is
called a subagent. Agency coupled with an interest is a situation
where in the agent has an interest in subject matter, through a security interest. Characteristics
of agency couple with an interest include- Principal does not have the power to terminate
agency coupled with an interest. Actually not an agency relationship because,
one who creates this relationship surrenders power.
Generally the agency contract need not be in writing. These are situations where the
agent enters into agreements which themselves fall under the Statute of Frauds. But if agency
contract cannot be completed within one year, it must be in writing. In some states, agency
contract needs to be written if agent is to buy or sell a specific piece of real estate
named in agency contract. Principal must be able to give legal consent.
Minors can, in most jurisdictions, appoint an agent, but minor may disaffirm agency agreement.
If other acts require some legal capacity, then principal must meet this requirement
or, agent cannot legally perform even if he or she has capacity. Note that capacity cannot
be increased by appointment of an agent. An agent must merely have sufficient mental and
physical ability to carry out instructions of his or her principal. An agent can bind
principal even if agent is a minor or, even if agent is legally unable to act for self.
Principal will be responsible for contract that the minor agent entered into on principal’s
behalf. Note that principal cannot use minor’s lack of capacity as a defense.
Consideration is not required to enter into a valid principal-agency relationship. When
consideration is missing, this is known as a gratuitous agency. Agency can also be implied
by the conduct or lack of conduct by either the principal or agent that allows third parties
to reasonably believe an agency exists; this is agency by estoppels.
An agent must merely have sufficient mental and physical ability to carry out instructions
of his or her principal. Corporations, unincorporated associations, and partnerships may act as
agents. Note that a mental incompetent or an infant of tender years may not be an agent.
The principal owes duties to the agent. Most of the principal’s duties to the agent are
determined by the employment agreement or the contract that the principal and agent
enter into. The principal’s duties to agent includes
– Compensate agent as per agreement, or, in
the absence of an agreement, pay a reasonable amount for the agent’s service.
Reimburse agent for reasonable expenses, unless their agreement states otherwise, and, indemnify
the agent against the loss or liability for duties performed at the principal’s direction
which are not illegal. Cooperate with agent and assist him or her
to perform duties as agreed to between principal and agent.
Inform the agent of risks involved. The principal may have remedies of discharging
agent, restitution, damages, and accounting, or an injunction. Note that the principal
does not owe agent any fiduciary duties; only the agent is a fiduciary in the principal-agent
relationship. The agent also owes duties to principal. Agent
is a fiduciary and must act in the best interest of the principal and with loyalty.
The agent’s duties to the principal include –
Carry out instructions of principal exercising reasonable care and skill.
Account to the principal for profits and property that rightfully belong to the principal and
not commingle funds. Not to compete or act adversely to principal
including, not acting for one-self unless the principal knows and agrees.
Give any information to principal that he or she would want or need to know.
After termination, the agent must cease acting as agent.
Agency contract liability is based on two issues –
What authority did the agent have to enter into the contract with the third party?
Was the principal disclosed to the third party? The authority that the agent has depends on
from whom the agent received the authority. Actual authority comes from the principal.
Express actual authority is explicit power that the principal gives to the agent to enter
into a contract. Implied actual authority arises from express authority.
Apparent authority comes from a third party’s reasonable, but mistaken, belief that the
agent has actual authority to enter into the contract. Apparent authority occurs where
the principal’s words, actions, lack of words, or lack of action allows a reasonable
third party to believe that the agent has actual authority to enter into a contract
for the principal. Note that no authority occurs where the agent
has neither actual nor apparent authority. Disclosed principal occurs when the third
party knows of the existence of the principal and knows the identity of the principal. Partially
disclosed principal occurs when the third party knows of the existence of the principal,
but does not know the identity of the principal. Undisclosed principal is when the third party
does not know of the existence of the principal. General rules of liabilities are as follows
– If agent acts with authority, either actual
or apparent, the principal is liable, regardless of disclosure status.
If agent acts with no authority, then the principal is not liable, unless the principal
ratifies the contract. If the principal is partially disclosed or
undisclosed, the principal is personally liable, regardless of authority.
If the principal is partially disclosed or undisclosed, the principal is personally liable,
regardless of authority. If the agent acts without authority, then
the agent is personally liable. If the principal ratifies the contract, the
agent is relieved of personal liability. Ratification occurs when a principal chooses
to be bound by the terms of an unauthorized contract. Ratification is valid when all of
the following are true: Third party knew of the principal’s existence
at the time the contract was entered into The principal has knowledge of all the material
facts of the contract. Third party does not withdraw from contract
prior to ratification. Note that ratification must be for the entire
contract. Therefore ratification cannot occur when the principal is undisclosed since the
third party was unaware of the existence of the principal. Also note that ratification
can be explicit or implied from the principal’s actions.
Tort liability also arises when the conduct of the agent creates a loss for third party.
Torts can arise from careless conduct or negligence, or purposeful conduct called the intentional
tort. General rules of liabilities in situation
of torts are as follows – The agent is always personally liable for
the tort. The principal’s liability for the agent’s
tort depends upon whether the agent’s tort was committed in the scope of employment.
If the agent’s tort occurred in the scope of employment, then the principal is liable
for the tort under the doctrine of respondent superior.
Intentional torts are normally outside the scope of employment. However, intentional
torts committed to primarily benefit the principal are usually in the scope of employment. Intentional
torts which are foreseeable and relate to the job are normally in the scope of employment.
If an agent commits a tort in the scope of employment, then the principal and agent are
jointly and severally liable. The scope of employment means that the agent
is engaged in the performance of the agency relationship. Generally, if the tort occurs
during working hours, at the workplace, while doing the tasks that the agent is employed
to perform, then the tort is in the scope of employment. Torts that occur slightly outside
the work environment are still considered in the scope of employment; these are known
as detours. Torts that occur substantially outside the work environment are still considered
outside the scope of employment; these are known as frolics.
Note that the issue is not whether the principal authorized the particular activity that the
employee engaged in; rather, does the agent’s activity fall within the scope of employment.
Joint liability means that the injured third party can sue both the principal and the agent
in the same lawsuit. Several liabilities mean to separate liability; thus the injured third
party could choose just to sue the principal or just to sue the agent.
Termination of agency relationship occurs either by the actions of the parties or by
operation of law. An agreement between the agent and the principal
to terminate the agency relationship is an example of action of the parties to terminate
agency relationship. Original agreement may be time specified and thus after completion
of the time the agency relationship is terminated. Agent and principal may also mutually consent
to terminate the agency relationship. Agency relationship may also be terminated by accomplishment
of objective stated in the original agreement. Principal or agent both may terminate the
agency. Party that terminates is liable for breach of contract if termination is before
specified period of time. Note that one still has power to terminate relationship even though
he or she has no right to terminate. If either party breaches duties owed, other party may
terminate agency without liability. If no time is specified in agency, then either party
may terminate without liability. Note that agency coupled with an interest is irrevocable.
The law automatically ends the principal-agent relationship –
If agreement becomes illegal or impossible. On death, insanity, or court determined incompetence
of either party except an agency coupled with an interest.
On bankruptcy of principal. Note that bankruptcy of agent does not affect unless agent’s
solvency is needed for performance. If subject matter necessary for the performance
of the relationship is destroyed, the law automatically ends the principal-agent relationship.
Termination eliminates any actual authority that the agent had. Apparent authority could
still exist, if third parties are unaware that the principal-agent relationship was
terminated. To eliminate apparent authority, notice of the termination must be provided
to third parties. Constructive notice is sufficient to third parties who have not previously dealt
with agent. Actual notice must be given to third parties who have previously dealt with
agent unless, the third party learns of termination from another source. Finally note that notice
is not required when termination occurs due to operation of law.

Leave a Reply

Your email address will not be published. Required fields are marked *