Law in Accounting: Chapter 23 Agency Relationships in Business

What is a fiduciary?

(n.) a person with a duty to act in the other persons behalf for the benefit in all matters related to the enterprise. (adj.) a relationship founded on trust and confidence

Under what circumstances is a principal liable for an agent's misrepresentation?

- A principal is exposed to tort liability whenever a third person sustains a loss due to the agent's misrepresentation. - The principal's liability depends on whether the agent was actually or apparently authorized to make representations and whether the representations were made within the scope of the agency. - The principal is always directly responsible for an agent's misrepresentation made within the scope of the agent's authority.

For what may a principal be liable when conducting activities through an agent?

- A principal may be liable for harm resulting from their own negligence or recklessness when conducting activities through an agent. - This liability includes giving improper instructions, authorizing the use of improper materials or tools, or establishing improper rules leading to the agent committing a tort.

What is the liability of a principal or employer for an agent's crime?

- Agents are liable for their own crimes. - A principal or employer is not liable for an agent's crime, unless the principal participated by conspiracy or other action. - In some jurisdictions, a principal may be liable for an agent's violation in the course and scope of employment, under specific statutes. - For example, a principal might be liable when an agent, during work, violates criminal regulations governing sanitation, prices, weights, or the sale of liquor.

What happens to an agent's apparent authority when an agency is terminated?

- Although an agent's actual authority ends when the agency is terminated, the agent's apparent authority continues until the third party receives notice (from any source) that such authority has been terminated.

What events lead to the termination of an agency?

- Death or mental incompetence of either the principal or the agent automatically and immediately terminates an ordinary agency relationship. - Impossibility occurs when the specific subject matter is destroyed or lost, or when it becomes impossible for the agent to perform the agency lawfully due to a change in the law. - Changed circumstances refer to an event that significantly affects the subject matter of the agency, causing the agent to reasonably infer that the principal no longer wants the agency to continue. - Bankruptcy of either the principal or the agent usually terminates the agency, except in certain circumstances. - War terminates the agency when the principal's country and the agent's country are at war with each other.

What is the liability of a disclosed or partially disclosed principal for contracts made by an agent?

- Disclosed or partially disclosed principals are liable to third parties for contracts made by agents within their authority. - If principal is disclosed, agent has no contractual liability for principal's or third party's nonperformance. - If principal is partially disclosed, agent may be treated as a party to contract, liable for nonperformance. - Doctrine can protect partially disclosed principals from negligent third-party behavior.

When is an employer liable for physical harm caused by the negligent act of an independent contractor?

- Generally, an employer is not liable for physical harm caused by the negligent act of an independent contractor because they lack control over the contractor's performance details. - An exception arises for contracts involving unusually hazardous activities, such as blasting operations or the transportation of highly volatile chemicals, where strict liability is imposed. - In such cases, an employer cannot be shielded from liability merely by using an independent contractor.

How is notice of agency termination effective?

- No particular form is required for notice of agency termination to be effective. - If the agent's authority is written, it normally must be revoked in writing. - The principal can personally notify the agent, or the agent can learn of the termination through other means.

What happens when an agency or contract is terminated?

- Once the relationship ends, the agent loses the right (actual authority) to bind the principal. - Termination of apparent authority may require notifying third parties that the agency has ended.

Under what circumstances does termination of an agency occur by operation of law?

- Termination of an agency by operation of law occurs due to death or insanity of either the principal or the agent, impossibility, changed circumstances, bankruptcy, or war. - When an agency terminates by operation of law, there is no duty to notify third persons.

When can an employer be held liable for an employee's intentional torts under the doctrine of respondeat superior?

- The employer can be liable for an employee's intentional torts that are committed within the course and scope of employment, just as the employer is liable for negligence. - For instance, a department store owner is liable when a security guard who is a store employee commits the tort of false imprisonment while acting within the scope of employment. - Similarly, a nightclub owner is liable when a "bouncer" commits the tort of assault and battery while on the job. - an employer who knows or should have known that an employee has the nature to commit tortious acts is liable for the employee's acts when if they would not be considered within the scope of employment (a bouncer who has committed assault and battery before that attacks a patron in the parking lot) - An employer may also be liable for permitting an employee to engage in reckless actions that can injure others.

What is the key factor in determining whether a principal may be liable for an agent's torts under respondeat superior?

- The key factor is whether the torts are committed within the scope of employment. - Factors considered by courts in determining whether an act occurred within the course and scope of employment include: 1. Authorization by the employer. 2. Time, place, and purpose of the act. 3. Commonality of the act among employees. 4. Advancement of employer's interest. 5. Involvement of employee's private interests. 6. Provision of means or instrumentality by the employer. 7. Foreknowledge by the employer. 8. Previous occurrence of the act by the employee. 9. Seriousness of the act, including involvement in a serious crime.

What are the consequences if an agent contracts with a third party without authority?

- The principal cannot be held liable on the contract, regardless of disclosure status. - Generally, the agent is liable on the contract. - If principal is disclosed or partially disclosed, agent's liability to third party depends on whether third party relied on agency status, constituting breach of implied warranty of authority. - If third party knows agent lacks authority or agent expresses uncertainty about authority, agent is not personally liable.

Who may be liable if a principal authorizes an agent to commit a tort?

- The principal may be liable to persons or property injured, as the act is considered to be that of the principal. - Additionally, an agent acting at the principal's direction can also be liable as a tortfeasor (someone who commits a tort), along with the principal, for committing the tortious act, even if the agent was unaware of its wrongfulness.

What is the principal's duty when an agency is terminated by the parties?

- When an agency is terminated by act of the parties, it is the principal's duty to inform any third parties who know of the existence of the agency. - If the principal knows that a third party has dealt with the agent, the principal is expected to notify that person DIRECTLY.

According to Federal Law, how much must an an employer pay for overtime?

1 1/2 times the regular hourly rate

what questions should one consider between determining if a person is an employee or independent contractor?

1. How much control can the employee exercise over the details of the work? (if the employer can control the details, it indicated employee status) 2. Is the worker engaged in an occupation or business distinct from that of the employer? (if so, independent contractor status) 3. Is the work usually done under the employees direction or by a specialist without supervision?(if. done by employers direction, employee status) 4. Does the employer supply the tools at the place of work? (if so, employee status) 5. For how long the person employed? (long continues period, employee status) 6. What is the method of payment? (regular payment by time period, employee status) 7. What degree of skill is required of the worker? (independent contractors are highly skilled)

What are the requirements for ratification?

1. The agent must have acted on behalf of an identified principal who subsequently ratifies the action. 2. The principal must be aware of all material facts involved in the transaction. (if not then the principal can rescind the contract) 3. The principal must affirm the agent's act entirely. 4. The principal must have the legal capacity to authorize the transaction at the time of the agent's act and ratification. Must also have the legal capacity to to engage in the transaction 5. Ratification must occur before the third party withdraws from the transaction. 6. The principal must observe the same formalities for ratification as would have been required for initial authorization.

How can an agency relationship be terminated by act of the parties?

1. lapse of time 2. purpose achieved 3. occurrence of a special event 4. mutual agreement 5. at the option of one party (revocation if by principle, renunciation if by agent)

What circumstances might lead a court to apply the doctrine of agency by estoppel?

A court can apply the doctrine of agency by estoppel when a principal has led a third party to believe that an agent has authority to act. If the third party relies on the principal's representations to their detriment, the principal may be estopped (prevented) from denying the agent's apparent authority.

What is a respondent superior?

A doctrine under which a principal or an employer is held liable for the wrongful acts committed by agents or employees while acting within the course and scope of agency or employment.

What is ratification in an agency relationship?

A party's act of accepting or giving legal force to a previously unenforceable contract or other obligation entered into on that party's behalf by another party.

What is cooperation in a principals duty to an agent?

A principal has a duty to cooperate with the agent and assist in performing agency duties, refraining from actions that hinder performance. Granting an agent an exclusive territory establishes an exclusive agency, prohibiting the principal from competing with the agent or assigning another agent to compete. Violating this exclusivity can lead to liability for the agent's lost profits.

What is the duty of safe working conditions in the principals duty to the agent, and how does this apply when the agent is an employee?

A principal is required to provide safe working premises, equipment, and conditions for all agents and employees. The principal has a duty to inspect the working conditions and to warn agents and employees about any hazards. When the agent is an employee, the employer's liability is frequently covered by state workers' compensation insurance, and federal and state statutes often require the employer to meet certain safety standards.

What is a partially disclosed principal?

A principal whose identity is unknown by a third party, but the third party knows that the agent is or may be acting for a principal at the time the agent and the third party form a contract.

what is an agency?

A relationship between two parties in which one party (the agent) agrees to represent or act for the other (the principal).

What is the equal dignity rule?

A rule requiring that an agent's authority be in writing if the contract to be made on behalf of the principal must be in writing. Failure to comply makes the contract voidable at the option of the principal. The contract is then considered an offer and must then be ratified or affirmed in writing

What is notification in an agents duties to a principal, and how is that conducted by law?

An agent is required to notify the principal of all matters that come to the agent's attention concerning the subject matter of the agency. Generally, the law assumes that the principal knows of any information acquired by the agent that is relevant to the agency. It is a basic tenant of agency law that notice to the agent is also notice to the principal

What types of authority can and agent have to act on behalf of the principal?

An agent's authority to act can be categorized as either actual (express or implied) or apparent.

What is apparent authority?

Authority that is only apparent, not real. An agent's apparent authority arises when the principal causes a third party to believe that the agent has authority (by words or pattern of conduct), even though the agent does not.

What is power of attorney?

Authorization for another to act as one's agent or attorney either in specified circumstances (special) or in all situations (general). It is usually notarized.

How is an agency by agreement formed?

Can be an express or implied agreement. Can be an express written contract or an oral agreement (such as an agreement to mow a neighbors lawn on a regular basis) Can also be implied by conduct

What are emergency powers?

Emergency powers refer to the authority granted to an agent to take immediate action to protect or preserve the principal's property or rights in situations where communication with the principal is impossible due to an unforeseen emergency.

How do agency relationships arise?

Generally, an agency relationship can arise in four ways: by agreement of the parties, by ratification, by estoppel, or by operation of law.

What is reimbursement and indemnification in a principals duties to the agent?

In an agency relationship, reimbursement and indemnification are key duties of the principal towards the agent. Reimbursement involves the principal repaying the agent for funds disbursed and necessary expenses incurred in performing agency duties, barring any expenses due to the agent's misconduct. Indemnification is the duty to compensate the agent for harm or loss in situations where the principal acted with misconduct and is in a legal suit with the third party the agent contracted. This duty extends to gratuitous agents as well, ensuring they're reimbursed for expenses incurred while benefiting the principal, such as veterinary bills paid on behalf of the principal's sick dog.

What is compensation in a principals duty to the agent?

In general, when a principal asks an agent for services, the agent expects payment, and the principal has a duty to pay for those services. This duty applies unless the agency is gratuitous and the agent isn't expecting payment. If there's no agreed-upon amount, the principal owes the agent the usual compensation for those services.

What is vicarious liability?

Indirect liability imposed on a supervisory party (such as an employer) for the actions of a subordinate (such as an employee) because of the relationship between the two parties.

What is loyalty in an agents duty to a principle?

It is one of most fundamental duties in a fiduciary relationship. The agent has the duty to act SOLEY for the principal and not in the interest of the agent or a third party. An agent cannot represent two principals in the same transaction, and any information exchanged is considered confidential. The agent's actions must be strictly for the benefit of the principal and must not result in any secret profit for the agent.

What factors determine liability for contracts formed by an agent?

Liability for contracts formed by an agent depends on how the principal is classified and whether the agent's actions were authorized or unauthorized.

What are the exceptions to the equal dignity rule due to modern business practices?

One exception is that an executive officer of a corporation typically doesn't need written authority to conduct ordinary business transactions. Additionally, the rule doesn't apply when an agent acts in the presence of a principal or when the agent's signing is merely a formality. For instance, if a principal negotiates a contract but is absent on the day of signing, orally authorizing an assistant to sign the contract is generally considered sufficient.

what is an independent contractor?

One who works for, and receives payment from, an employer but whose working conditions and methods are not controlled by the employer. An independent contractor is not an employee but may be an agent.

How are principals classified in terms of liability for contracts formed by an agent?

Principals are classified as disclosed, partially disclosed, or undisclosed.

What is ratification in the context of agency relationships?

Ratification occurs when the principle affirms an agents unauthorized act, binging the principal to the agents action as if it were authorized from the start. Ratification can be expressed or implied

What are the types of power of attorney and what do that mean?

Special and General Special power of attorney means the agent is only allowed to do specified acts General power of attorney means the agent can transact all business for the principle (should be used with great caution)

What liability does the agent have when a principal's identity is undisclosed and the agent is forced to pay the third party?

The agent is entitled to be indemnified (compensated) by the principal, who ultimately bears the responsibility for failure to perform.

In what circumstances might the courts recognize an agency relationship even without a formal agreement?

The courts may find an agency relationship in situations like family purchases where one spouse buys necessities charged to the other spouse's account (the courts would rule that the spouse is liable for the necessities purchased by the other spouse because of social policy or legal duty), or in emergencies where an agent takes necessary actions beyond their authority, such as a railroad engineer arranging medical care for an injured motorist.

What is a key factor in establishing an agency by estoppel?

The crucial factor in establishing an agency by estoppel is that it is the actions or statements of the principal, not the agent, that create an agency by estoppel

What knowledge is attributed to the employer regarding dangerous conditions discovered by an employee?

The employer is charged with knowledge of any dangerous conditions discovered by an employee and pertinent to the employment situation.

If an agent contracts beyond the scope of their authority, how might the principal still incur liability?

The principal may still become liable by ratifying the contract. beyond the scope of the agents authority means to make contracts or deals that the principal did not approve

What options does the third party have once the undisclosed principal's identity is revealed?

The third party generally can elect to hold either the principal or the agent liable on the contract. At the same time, the undisclosed principal can require the third party to fulfill the contract, except under certain circumstances: 1. The undisclosed principal was expressly excluded as a party in the contract. 2. The contract is a negotiable instrument signed by the agent with no indication of signing in a representative capacity. 3. The performance of the agent is personal to the contract, allowing the third party to refuse the principal's performance.

What happens when neither the fact of agency nor the identity of the principal is disclosed, but the agent acts within the scope of authority?

The undisclosed principal is bound to perform just as if the principal had been fully disclosed at the time the contract was made.

What happens if a principle does not ratify a contract?

They are not bound and the third party's agreement with the agent is considered an un accepted offer. The third party can revoke the offer at any time without liability.

What are stipulations for entering into an agency contract?

Those who cannot legally enter into contracts directly generally are not allowed to do so indirectly through an agent. (In some states, however, a minor can be a principal.) Any person can be an agent regardless of whether that person has the capacity to enter a contract (including minors). Agency relationships made for illegal purposes are unenforceable It also illegal for physicians and other licensed professionals to employ unlicensed agents to perform professional actions.

What is the difference between "work for hire" and independent contractors?

Under the Copyright Act, any copyrighted work created by an employee within the scope of employment at the request of the employer is a "work for hire." The employer owns the copyright to the work. In contrast, when an employer hires an independent contractor—a freelance artist, writer, or computer programmer, for instance—the independent contractor normally owns the copyright. (unless the contract states "work from hire")

What is accounting in the duties of an agent to the principal?

Unless an agent and a principal agree otherwise, the agent has the duty to keep and make available to the principal an account of all property and funds received and paid out on behalf of the principal. This includes gifts from third parties in connection with the agency. The agent must maintain separate accounts for the principle's funds and the agent's funds and they may not intermingle

What is an agency by estoppel?

When a principal causes a third person to believe that another person is the principal's agent, and the third person deals with the supposed agent, the principal is "estopped (stopped) to deny" the agency relationship. In such a situation, the principal's actions create the appearance of an agency that does not in fact exist. Actions made it seem like their was an agency relationship, so one cannot deny that their was one The third person must prove that she or he reasonably believed that an agency relationship existed. (justified in concluding)

What is a disclosed principal?

a principal whose identity is known by the third party at the time the contract is made by the agent

What is an undisclosed principal?

a principal whose identity is totally unknown by the third party and the third party has no idea the agent is acting in an agency capactity

What is a gratuitous agent?

agents who act on behalf of a principal without receiving any compensation. They cannot be liable for a breach of contract because there is no contract. They must act in an acceptable standards of care and they have the same duty to perform as other agents.

Who is liable when an agent commits a negligent act?

both the agent and the principal

what are examples of independent contractors?

building contractors or subcontractors (independent contractors), truck drivers who use their own equipment and hire themselves on a per job basis (not truck drivers that drive for a company), brokers, insurance agents (independent contractors and agents), insurance BROKERS are an agent of the person obtaining insurance

How is an agency relationship terminated?

by an act of the parties or by operation of law

what law governs agency relationships/law?

common law

What is the principals duties to the agent?

compensation, reimbursement and indemnification, cooperation, safe working conditions

What is implied authority?

do what is reasonably necessary to carry out their express authority and accomplish the objectives of the agency. (example: a manager of a supermarket has the implied authority to do what is reasonably required like making contracts with third persons- hire employees, advertise, purchase merchandise and equipment)

what is the most common agency relationship?

employer and employee

How does power of attorney terminate?

incapacity or death of the person giving the power.

What is express authority?

is actual authority declared in clear, direct, and definite terms (can be oral or in writing)

What are the agents duties to the principal?

performance, notification, loyalty, obedience, accounting

What is a protection that employees have that independent contractors do not?

protection under anti-discrimination statutes

Under the IRS criteria from determining if someone is an employee or an independent contractor, what is the most important factor?

the degree of control the business exercises over the worker

What duty do agents and principals owe each other?

the duty to act with the utmost good faith

What is obedience in an agents duties to the principal?

the duty to follow all lawful and clearly stated instructions of the principal. They may deviate from instructions without violating the duty if it is an emergency situation. Whenever instructions are not clearly stated, the agent can fulfill the duty of obedience by acting in good faith and in a manner reasonable under the circumstances.

What is performance in an agents duty to a principal?

use reasonable skill and diligence in performing the work. The degree of skill is what is expected of a reasonable person under similar circumstances (ordinary care). If an agent has a a special skill and fails to exercise that degree of skill, it constitutes a breach of duty