113/4213 VOCABULARY DUTIES & LIAB OF AGENTS AND PRINCIPALS

Question 1

Agency Coupled with an Interest

Answer 1

“Agency coupled with an interest” is an agency relationship in which an agent has a property or security interest in the thing to be disposed of or managed. (The interest must be in the property itself, not merely an interest in or rights to a percentage of the proceeds to be received from disposition of the property.) In most cases, this is the only agency relationship that courts will enforce specifically. It is an irrevocable agency, i.e., the principal cannot terminate the agency.

Question 2

Agreement

Answer 2

An agreement is an element of a contract. It is an offer by the offeror followed by an acceptance by the offeree. An agreement must be reasonably definite as to what each party is to do and must manifest genuine intent by both parties to agree and be legally bound. An agreement is a mutual understanding, an objective “meeting of the minds.”

Question 3

Apparent Authority

Answer 3

Apparent authority is the appearance of authority, derived from the words or actions of the principal, that leads a third party reasonably to believe and to act upon the belief that actual authority exists in the purported agent when in fact it does not. Apparent authority is judged from the viewpoint of the third party, and would probably evoke the estoppel doctrine.

Question 4

Commissions

Answer 4

Commissions are payments to employees, agents, or brokers for selling, purchasing, and collecting services and other business transactions that are usually determined as a percentage of the transaction price.

Question 5

Work on this

Constructive Trust

Answer 5

The breach of a duty by an agent often results in some form of damage to the principal (usually with gain to the agent), and as such any gain (financial or property) the agent has received is held as a constructive trust for the benefit of the beneficiary, the principal, whether the agent knows it or not. A constructive trust is an equitable device that calls for the agent to be the trustee of the “ill-gotten” goods or income for the benefit of the principal.

Question 6

Disclosed Principal

Answer 6

A disclosed principal is a principal whose identity is known to third parties dealing with an agent. A disclosed principal is liable for the actions of the agent; the agent is not liable on contracts that the agent made within the scope of their authority.

Question 7

What is a constructive trust in relation to a principal and agent and agency law?

Answer 7

ChatGPT
In agency law, a constructive trust is a legal concept that may be applied when a principal-agent relationship involves certain circumstances or transactions that give rise to equitable remedies. A constructive trust is not a traditional trust as you might think of in estate planning; instead, it’s a remedy imposed by a court to address unjust enrichment or unfair conduct in the context of agency relationships.

Here’s a general explanation of how a constructive trust might apply in relation to a principal and agent in agency law:

Unjust Enrichment: A constructive trust can be established when an agent, who owes a fiduciary duty to their principal, acquires property, assets, or benefits through unjust enrichment. Unjust enrichment occurs when the agent obtains something that rightfully belongs to the principal, often through a breach of their fiduciary duty.

Breach of Fiduciary Duty: In an agency relationship, the agent is considered a fiduciary, meaning they have a legal obligation to act in the best interests of the principal. If the agent breaches this duty by, for example, misappropriating funds, diverting opportunities, or engaging in self-dealing, a court may impose a constructive trust.

Restoration of Property or Benefits: When a court imposes a constructive trust, it effectively orders the agent to hold or return the property, assets, or benefits they acquired to the principal. The agent is considered a trustee of these assets for the benefit of the principal.

Equitable Remedy: A constructive trust is an equitable remedy, meaning it’s intended to ensure fairness and prevent the agent from profiting from their wrongful actions at the expense of the principal. It’s not punitive but rather aims to restore the principal to their rightful position.

Constructive trusts can arise in various situations within agency law, such as cases of embezzlement, fraud, self-dealing, or when an agent wrongfully acquires property or opportunities that belong to the principal. The specific application of a constructive trust will depend on the facts and circumstances of the case, and it typically involves litigation to determine whether it’s an appropriate remedy.

It’s important to note that the application of constructive trusts can be complex and subject to legal interpretation, so individuals involved in such matters should seek legal advice and representation to understand their rights and responsibilities in agency relationships.

Question 8

Emergency Powers

Answer 8

Question 9

Estoppel

Answer 9

Estoppel is a legal doctrine that protects a party from harm if that party acted upon an induced expectation of another. For example, if a renter was told by the landlord that the monthly rental would be reduced due to damage caused by a leaky roof and the renter relied on this expectation, the landlord would be estopped from collecting the original rental amount.

Question 10

Fiduciary

Answer 10

A fiduciary is one who holds a position of trust with respect to another party or its property. It is the fiduciary’s duty to act selflessly for the benefit of another, with undivided loyalty, obedience, and diligence—with due care and in good faith. This is the primary duty of an agent to the principal (although someone who is the agent of another is not necessarily considered a fiduciary for federal income tax purposes), of a trustee to the trust, and of an executor/executrix to the estate.

Question 11

Good Faith

Answer 11

Good faith has several meanings, depending on the situation.

For financial instruments: Did the particular person asserting the status of “holder in due course” take the instrument honestly and without notice? (The objective test would be to ask, would a reasonable person have known?)

For bankruptcy law: The debtor proposing reorganization under Chapter 13 is required to demonstrate good faith by two elements:

1. Honesty of purpose
2. Full disclosure of financial facts

For commercial law: Factual honesty in conduct and transactions. For merchants, it is observance of reasonable commercial standards of fair dealing in addition to factual honesty.

Question 12

Implied Authority

Answer 12

Question 13

Indemnify

Answer 13

To indemnify is to provide compensation for loss or damage sustained or protection or security from future loss or damage. It is the duty of the principal to the agent, to protect the agent from loss and liability for acts that are not illegal or known to be wrong, performed at the direction of the principal. Corporations often indemnify members of the board of directors. Insurance is a form of indemnity.

Indemnity involves a two-party contract; the indemnitor (principal, insurance company, corporation) assumes the risk of loss. There is no default on the part of the party indemnified (agent, insured party, board member). (Contrast to suretyship.)

Question 14

Independent Contractor

Answer 14

An independent contractor is a party who is not subject to control and supervision by the party who employs the contractor. The employer seeks results only—the contractor controls the methods. No agency relationship exists and the employer is not liable for the torts of the contractor. Control is the key element. Attorneys and CPAs are usually independent contractors. The IRS also uses a 20-factor test to help determine whether an individual is an employee or an independent contractor. An independent contractor’s earnings are subject to self-employment tax.

Question 15

Liability

Answer 15

Liability is the state of being legally responsible for making good, making right, or making whole the wronged or owed party. Liability may include payment for debts, reimbursement for losses or damage, or payment of penalties.

Question 16

Noncompliance with Laws and Regulations by Client

Answer 16

Noncompliance with laws and regulations by a client describes violations of laws or governmental regulations perpetrated by the entity or by the management or employees acting on behalf of the entity. Noncompliance by clients does not include personal misconduct by entity personnel unrelated to business activities.

Determination as to whether a particular act is noncompliant is usually beyond the auditor’s professional competence and is generally based on the advice of counsel.

Auditors consider noncompliance with laws and regulations from the perspective of the relation to or effect of the noncompliance on the audit objectives rather than from a per se legal perspective. The auditor is most likely to be familiar with and to detect noncompliance with laws and regulations that has a direct and material effect on the determination of financial statement amounts (e.g., manipulation of tax laws or regulations regarding revenue accrued under government contracts).

The responsibility of the auditor to detect and report noncompliance is the same as for errors and fraud—the independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting noncompliance by the client that is material to the financial statements.

When the auditor concludes, based on information obtained and, if necessary, on consultation with legal counsel, that noncompliance with laws and regulations has or is likely to have occurred, the auditor should consider the effect on the financial statements as well as the implications for other aspects of the audit.

Examples of noncompliance with laws and regulations include lapping and kiting of checks between bank accounts.

Question 17

Ratification

Answer 17

Ratification is the act of approving a formal document such as a labor agreement. In private contract law, ratification is a principal’s approval of an act by its agent’s lack of authority to legally bind the principal.

Question 18

Ratify

Answer 18

To ratify is to affirm or sanction a contract (1) by accepting the benefit of the act retroactively, with full knowledge of the facts and the right to avoid the contract (express ratification) or (2) by failure to repudiate or disaffirm the contract (by silence or by retention of goods received; implied ratification). Ratify is the opposite of repudiate.

Question 19

Respondeat Superior

Answer 19

Respondeat superior is the legal doctrine under which a principal can be held liable for the acts of the agent (or servant-employee) when the tort is committed by the agent within the scope of employment or authority and during the course of duties, even though the principal did not authorize, have knowledge of, or have any fault regarding the tort. This rule is a form of strict liability for the principal: the principal is liable even though not at fault or negligent.

Question 20

Continued

Answer 20

Question 21

Responsibility of Confidentiality

Answer 21

One of the ethical responsibilities to clients is the obligation not to reveal client information obtained during the client-accountant relationship. Section 1.700 of the AICPA Code of Professional Conduct addresses this issue:

Confidential Client Information Rule:

“A member in public practice shall not disclose any confidential client information without the specific consent of the client.

“This rule shall not be construed (1) to relieve a member of his or her professional obligations of the ‘Compliance With Standards Rule’ [1.310.001] or the ‘Accounting Principles Rule’ [1.320.001], (2) to affect in any way the member’s obligation to comply with a validly issued and enforceable subpoena or summons, or to prohibit a member’s compliance with applicable laws and government regulations, (3) to prohibit review of a member’s professional practice under AICPA or state CPA society or Board of Accountancy authorization, or (4) to preclude a member from initiating a complaint with, or responding to any inquiry made by, the professional ethics division or trial board of the Institute or a duly constituted investigative or disciplinary body of a state CPA society or Board of Accountancy. Members of any of the bodies identified in (4) above and members involved with professional practice reviews identified in (3) above shall not use to their own advantage or disclose any member’s confidential client information that comes to their attention in carrying out those activities. This prohibition shall not restrict members’ exchange of information in connection with the investigative or disciplinary proceedings described in (4) above or the professional practice reviews described in (3) above.”

ET 1.700.001

There are certain times when confidential client information must be disclosed, which are:

compliance with a validly issued and enforceable subpoena or summons,
review of CPA’s professional practice under the AICPA or state CPA society authorization review,
responding from inquiry by a recognized investigative or disciplinary body, and
compliance with the Compliance with Standards Rule and Accounting Principles Rule.
The important time to remember this rule is during the planning stage of rendering professional services. Here, for example, the auditor usually discusses with the prior auditors all information relevant to the audit. However, the client must give full consent before such a discussion can occur.

ET 1.700.050 (“Disclosing Client Information in Connection with a Review of the Member’s Practice”) declares that “a review of a member’s professional practice includes a review performed in conjunction with a prospective purchase, sale, or merger of all or part of a member’s practice.” However, the interpretation also imposes on prospective purchasers the obligation not to disclose or use to their advantage any such confidential client information that comes to their attention during such a review.

Question 22

Tort

Answer 22

A tort is a civil wrong, not including breach of contract, for which the injured party is entitled to compensation (e.g., negligence).

Question 23

Ultra Vires Act

Answer 23

The Ultra Vires Act is a doctrine that forbids an act by a corporation that is beyond the scope of its powers as specified in its articles of incorporation and under state law. It is largely irrelevant today as a result of the broad powers accorded a corporation by the Model Business Corporation Act, which allows a corporation to do “all that is lawful.”

Question 24

Undisclosed Principal

Answer 24

An undisclosed principal is a principal whose existence and identity are not known to third parties dealing with the agent. An undisclosed principal is liable for the actions of the agent; the agent is also liable on contracts entered into for an undisclosed principal.