ACCA F4 - Corp and Business Law (ENG)

158 10: Agency law  Part D The formation and constitution of business organisations

Study guide

Intellectual level

D The formation and constitution of business organisations^

1 Agency law

(a) Define the role of the agent and give examples of such relationships paying

particular regard to partners and company directors

2

(b) Explain the formation of the agency relationship 2

(c) Define the authority of the agent 2

(d) Explain the potential liability of both principal and agent 2

Exam guide

Agency may form a multiple choice question requiring you to identify types of agent, how agency

relationships are established and an agent's authority and liability to others.

1 Role of agency and agency relationships

Agency is a relationship which exists between two legal persons (the principal and the agent) in which the

function of the agent is to form a contract between their principal and a third party. Partners, company

directors, factors, brokers and commercial agents are all acting as agents.

Agency is a very important feature of modern commercial life. It can be represented diagrammatically as

follows:

Contract

Negotiate

THIRD

PARTY

AGENT

PRINCIPAL

For instance Pendo may ask Alan to take Pendo's shoes to be repaired. Pendo and Alan expressly agree

that Alan is to do this on Pendo's behalf. In other words, Alan becomes her agent in making a contract

between Pendo and Thierry, the shoe repairer, for her shoes to be mended.

1.1 Types of agent

In practice, there are many examples of agency relationships, to which you are probably aware of in

everyday life, although you might not know that they illustrate the law of agency. The most important

agency relationships for the F4 syllabus are those of partners and company directors.

Types of agent

Partners This is a particularly important example of agents in your syllabus as accountants

who own and run an accountancy practice together are partners, and are therefore

agents of each other.

Company directors This is another important example of agency in your syllabus. Company directors

act as agents of their company.

FAST FORWARD