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REG: Business Law: Agency: Liabilities in Disclosed vs. Undisclosed Principal Situations - YouTube
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Okay guys so the first thing we have to
look at here in the agency relationship
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what is exactly an agency? So remember
it鈥檚 a legal relationship, you鈥檙e going
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to have one person or possibly an entity,
the principal who is going to appoint
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somebody else to act on their behalf,
that other party is the agent. So just
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keep track of the facts when you read it,
who鈥檚 the principal, who鈥檚 the agent and
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who鈥檚 the 3rd party. Now traditionally,
the CPA exam they love agency and this is
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also the foundation for partnership and
corporate law so very, very important.
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But the CPA exam is generally going to
focus in on the following issues. Number
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1, what are the requirements for creating
a valid principal/agency relationship?
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So one of the big things you got to
remember is the principal has to have
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capacity and consent but ironically the
agent need not have capacity. So you
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could appoint a minor to be your agent.
Why you鈥檇 want to do that I don鈥檛 know
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but you could do it if you want to. The
rights and duties between the principal
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and agent, remember LORA, L-O-R-A, we鈥檒l
get into that. Compensate, possibly
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reimburse, indemnify the agent if these
are reasonable expenses incurred in the
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ordinary course of that agency
relationship. Then remember the
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authority that the agent has to bind the
principal this, 3 types of authority
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we鈥檙e going to go through. The actual,
the apparent and then if there鈥檚 no
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actual or apparent authority but the
agent purports to be working on behalf of
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the principal maybe the principal will
want to ratify, we鈥檒l see about that. And
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then all the matters related to liability
of the party. So when is the principal
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liable to the 3rd party? Is the agent
potentially liable to the 3rd party? So
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that鈥檚 how it鈥檚 going to work. So let鈥檚
take a look now at how our little
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PowerPoint is going to play for you. My
man, who鈥檚 that Mike Brown up there? So
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remember a guy named Walt? Walt Disney.
Wanted to buy some land in Florida,
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expand his business. He had that Walt
Disney land, he wanted Walt Disney World
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and there was a lot of stuff for sale in
Florida but he certainly didn鈥檛 want the
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world to know he was buying it for
himself because that would have jacked up
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the price. So he appointed this guy in
the swamp, right there I guess that鈥檚,
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he鈥檚 in the swamp. It鈥檇 be pretty cool
if we had a graphic where an alligator
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game and like ate this guy. But
nonetheless this is the guy who鈥檚 going
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to be negotiating on behalf of Walt. All
righty so now close your eyes guys and
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imagine, imagine it鈥檚 early 1960 so
Gearty was what about 75 years old back
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then? So it鈥檚 early 1960, you鈥檙e a
successful business owner and you want to
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expand your California operations to
Florida. You set your sights on
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developing that worthless land, that
swamp you were just looking at. It鈥檚
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cheap, it鈥檚 plentiful, about $80 per
acre, now there are 10鈥檚 of 1,000鈥檚 of
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acres for sale, it鈥檚 perfect. But if word
gets out that it鈥檚 you Mr. Walt Disney
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World successful businessperson, you鈥檙e
the one buying up the swampland, that鈥檚
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obviously going to drive the price up.
So what did Walt Disney do? So he hired
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a bunch of people to buy the land on his
behalf and then he told them not to tell
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anyone that they were buying it for him.
So we know the principal was undisclosed.
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So really, this is a true story, this is
how Walt Disney World came to be, I mean
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Walt Disney got these people to purchase
the land on his behalf, those people were
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the agents, they had the actual authority
to enter into those contracts on his
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behalf, he was the principal. And because
Walt Disney specifically told the agents
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don鈥檛 tell anyone that you鈥檙e working on
my behalf well we know that鈥檚 that
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special type of relationship with an
undisclosed principal. Remember when the
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principal is undisclosed there is no way
to have apparent authority and there鈥檚 no
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way for the principal to ratify when
they鈥檙e undisclosed. Okay we鈥檒l talk
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more about that in a second. And by the
way when the 3rd party doesn鈥檛 know about
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the existence or identification of the
principal well then the agent in going to
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be liable, you know to perform that
contract. So the agent is liable and
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then the principal is going to be liable
if the agent had actual authority. And
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then when the 3rd party finds out the
existence and identifee, of the principal
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they鈥檙e going to have to choose who do
they want to hold liable. But when the
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principal is undisclosed that鈥檚 one of
the situations where yes the agent is
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liable to the 3rd party. All right. My
man, look at this guy. So Walt the
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principal, actually that was my hairline
like until I was like 25 years old, I
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mean I, really pretty scary. But
nonetheless Walt the principal, to be a
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principal you got to have capacity, you
got to consent to the relationship, don鈥檛
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forget that. And remember a writing is
generally not required, it can be an oral
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agreement unless it involves the
purchasing or selling of land like we had
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in this case or you want that agreement
to last more than a year so the MY LEGS
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mnemonic. So if it鈥檚 more than a year
you want to hire them to be an agent for
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multiple years, should be in writing or
buy or sell land. So the MY LEGS, the Y
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and the L. Now the agent we know need not
have capacity so it鈥檚 kind of weird
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unless you studied that, that鈥檚 one of
the things you wouldn鈥檛 have known. And
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consideration is not a legal requirement
to form a valid agency relationship. Now
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unless you鈥檙e told otherwise it鈥檚
presumed that the agent is going to get
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paid but it could be gratuitous, the
agent could agree to work for free. Okay
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now in our example the fact that Walt was
undisclosed had no effect on the agent鈥檚
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actual authority. Actual authority comes
from the instructions specifically given
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to the agent by the principal. So the
fact that the agent is undisclosed has no
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effect on their actual authority. Okay
remember actual authority arises from the
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communication between the principal and
the agent. So there鈥檚 that express
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actual authority, your specific oral or
written instructions. And then there鈥檚
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the implied actual authority to do
whatever is necessary to accomplish that
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goal or objective. Now the principal is
bound if the agent had authority. So
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whether it鈥檚 actual or apparent authority
the principal is bound okay. So if the
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agent had any type of authority the
principal is bound. It鈥檚 irrelevant that
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the principal is not disclosed or
partially disclosed or undisclosed. Just
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remember if the principal鈥檚 identity is
not known then there鈥檚 no way the agent
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can have apparent authority. Apparent
authority only exists when the 3rd party
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reasonably believes this agent is acting
on behalf of the principal okay. So if
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the agent doesn鈥檛 have authority let鈥檚
say, no actual, no apparent authority, so
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if the agent has no authority whatsoever,
no actual and no apparent authority which
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we鈥檒l review in a second then the
principal can be bound if they choose to
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ratify. Now remember for the principal
to the, ratify the 3rd party has to know
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of the existence and identity of the
principal. So it鈥檚 almost as if the
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agent had apparent authority, they don鈥檛
they鈥檙e trying to create it themselves
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but with ratification the agent is
purporting to work on behalf of this
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principal okay. So it鈥檚 not really
apparent authority but it鈥檚 kind of like
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it. Okay for a principal to ratify don鈥檛
forget all the material facts have to be
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disclosed and they got to ratify the
entire transaction not just part of it
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okay. Now actual versus apparent
authority. So with actual versus
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apparent authority, the actual authority
we know expressed or implied that鈥檚 your
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oral or written instructions. The big
thing on the exam is the apparent
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authority or what they call estoppel
okay. So now for the agent to have
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apparent authority that鈥檚 got to be
because the principal did something or
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failed to do something that made 3rd
parties reasonably believe the agent
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could do this. So apparent authority can
come from giving somebody a fancy title,
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partner, president, they have a position,
manager. Okay or if the agent quits or
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gets fired and you fail to give notice to
the 3rd parties, that agent quit or got
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fired well then even though they no
longer have the actual authority they can
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still have the apparent authority to act
on your behalf. And don鈥檛 forget the
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secret limiting instructions, we鈥檙e not
talking about whispering in somebody鈥檚
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ears but if the, if the principal puts a
limit on the agent and says listen I
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realize I鈥檓 making you the manager of my
store and I realize it鈥檚 customary for
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managers to hire and fire employees but
in this case I鈥檓 actively involved, I
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want to pick all the employees. That鈥檚
quote/unquote like a secret limiting
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instruction okay. That will definitely
destroy actual authority but that will
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not destroy apparent authority unless 3rd
parties are given notice of that
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limitation okay. So that鈥檚 the big thing
there. Okay with apparent and
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ratification both of those situations are
only possible again if the principal鈥檚
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existence and exact identity is known by
the 3rd party. For the principal to
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ratify they have to be fully disclosed
and the agent has to have been purporting
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to work on their behalf. But remember
the agent can鈥檛 create their own apparent
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authority. So it鈥檚 almost like apparent
authority except it鈥檚 not because the
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principal didn鈥檛 create that perception,
the agent is trying to create it for
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themselves okay. But nonetheless the
agent has to be purporting to work on
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behalf of that principal. All righty now
the duties of the principal and the agent
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unless we agree otherwise, compensation.
Okay so, you could agree to work for free
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but that would be the exception rather
than the rule. Reimbursement and
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indemnification for reasonable expenses
incurred in the course of that
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relationship, so it鈥檚 got to be
necessary, reasonable, things of that
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nature. And then remedies of the agent.
If the principal fails to perform as
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agreed to then the agent obviously can
sue for breach of contract and then look
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to sue for compensatory and possibly
consequential damages. Anything that鈥檚
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reasonably foreseeable they should be
able to collect. All right on the flip
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side here鈥檚 that LORA mnemonic. Duties
of the agent to the principal. You
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ready, duty in loyalty, there鈥檚 the L, no
self-dealing okay, no kickbacks, you鈥檙e
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there to operate on the behalf of your
principal not for yourself so no
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self-dealing. A duty of obedience,
sounds like a dog, the duty of obedience
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you got to follow reasonable
instructions. Now your duty of obedience
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is not absolute, if they ask you to do
something illegal or unethical you should
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say no. So you should follow all
reasonable instructions okay. Reasonable
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care, don鈥檛 be negligent, exercise
reasonable care so you do diligence, all
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that kind of stuff. And then the A in
LORA are duty to account, no commingling.
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Keep the principal鈥檚 funds separate and
apart from your own, don鈥檛 put anything
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on the business credit card for personal
expenses you know so that no commingling,
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duty to account. So therein lies LORA.
All righty let鈥檚 do it. If it鈥檚 January
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or, February where are we traveling?
Florida, you got to love it. The
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Sunshine State, the sunshine, the palm
trees of Florida, they got it better yes
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they do, no state income tax. You got to
love the state of Florida so here we go.
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All of the land is accumulated by the
agents and then the land development
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begins and all those people who sold to
those agents got pretty upset when they
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found out it was Walt Disney World
because they probably could have sold it
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for 50 times the price they got. But
even though the principal鈥檚 identity was
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unknown doesn鈥檛 matter, it鈥檚 still a
legal agreement. Okay so now when will
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the principal/agent relationship be
terminated? Now remember there鈥檚 a
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difference between having the power to do
something versus the right to do it. So
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pretty much the agency/principal
relationship is at will. So as a general
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rule the principal can fire the agent
whenever they want, they have the power
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to do that, the agent can quit whenever
they want, general rule. Remember the
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one situation where the principal doesn鈥檛
have the power or the right to terminate
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the agent is that agency coupled with an
interest. But outside of that there鈥檚 a
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general rule of thumb even though there鈥檚
an agreement to work for 5 years the
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principal can fire the agent, the agent
can quit. But that鈥檚 the difference
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between having the power to do it and the
right to do it. If there鈥檚 a contractual
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agreement for you to work for me for 3
years as my agent and you quit well I
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might be able to sue you for breach of
contract. You have the power to quit but
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not the right okay. So if there鈥檚 no
right to do it then breach of contract.
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Sometimes the agency relationship
terminates by operation of law. So
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remember all the operation of law
situations? So for 1, if the subject
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matter is illegal right, you can鈥檛 do
something, you can鈥檛 agree to be an agent
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to hire somebody, the agent is going to
buy drugs on your behalf so that agency
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relationship immediately terminated. Okay
death of either party whether it be the
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principal or the agent automatically
terminated. Discharge in bankruptcy of
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the principal. If I can鈥檛 pay you and you
want to get compensated, that would
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automatically terminate the relationship.
Remember a realtor or a CPA or a lawyer,
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failure to have the necessary license
automatically terminated, there鈥檚 no
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actual or apparent authority so no notice
is required, automatically terminated by
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operation of law. And then destruction
of the subject matter. If I hire you to
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sell my house and the house burns to the
ground you鈥檙e automatically terminated.
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Okay so now let鈥檚 take a look at another
example and let鈥檚 apply these in some
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detail. Let鈥檚 do it baby.
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