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Lecture 3

AYB205 - Week 3 - Agency Theory

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Department
Accountancy
Course
AYB205
Professor
All Professors
Semester
Summer

Description
AYB205 – LAW OF BUSINESS ENTITIES LECTURE 3: INTRODUCTION TO AGENCY THEORY QUESTIONS FOR MID-SEMESTER EXAM ARE DRAWN FROM THE SLIDES Agency  An Agency involves three parties: o The Principal  Employers another person (the agent) to act on their behalf  Right to represent must give rise to an obligation o The Agent  Authority to act can be made known:  Expressly  Impliedly or ‘By Conduct’ which gives rise to an ‘apparent’ or ‘ostensible’ Authority to act on behalf of the Principal. o The Third Party  An agency relationship usually arises from a contract o Legal basis of an Agency relationship usually subject to common law of contract.  Some statute exists that modifies Agency terms and conditions in certain industries, such as the Property Agents and Motor Dealers Act 2000 (Qld)  Agency Agreements, oral or written, would normally specify things such as: o Agency duration o Agency remuneration o Scope (and specific limits) on the agent’s authority Objective Test  A reasonable person examining the conduct and actions of the parties would conclude that the Agent was properly empowered to act. Agency Authority  Apparent or Ostensible Authority Matter of Fact o Where the words or conduct of the Principal lead a Third Party to reasonably believe that an Agent has authority. o It appears to the third party that the Agent has actual authority (even though they may not); and o The Principal is responsible, to some degree at least, in creating this appearance. Tooth & Co v Laws (1888) 9 lR (NSW) 154  Where apparent authority can be established, the Third Party is still able to enforce the contract with the Principal.  Obviously, if the Third Party is aware (or reasonably should have been aware) of the Agent’s lack of actual authority, they can’t then rely on any apparent authority. Panarama Developments v Fidelis Furnishings [1974] 3 WLR 440 Agent Duties  An Agent’s duties include, but are not restricted to: o Following the Principal’s instructions faithfully; o Acting personally and not to delegate; o Exercising due care, skill and attention; Mitor Investments v General Accident [1984] WAR 365 o Acting in good faith Hewson v Sydney Stock Exchange (1967) 87 WN (NSW) 422 o Maintaining confidentiality of all information gained through the agency relationship; o Keeping full and proper accounts;
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