Agency Law: Formation of Agency Relationship -Principal-Agent Relationship. CPA Exam REG

In this video, I discuss the formation of agency relationships.
Start your free trial: ✅farhatlectures...
Agency is a legal concept where one person or entity (known as the principal) allows another person or entity (the agent) to act on their behalf. For an agency relationship to be established, certain criteria must be met:
Principal With Capacity and Consent: The principal must be legally capable of entering into contracts, meaning they are not a minor or legally incompetent. Additionally, both the principal and the agent must agree to this relationship.
Writing: Generally, an agency relationship doesn't need to be in writing. However, there are exceptions:
If the agent is to buy or sell land on behalf of the principal, many states require a written agreement.
Contracts to find a buyer or seller (like a real estate broker's agreement) or to build a house are considered service contracts and can be orally agreed upon.
If the agency agreement cannot be completed within a year, it must be evidenced in writing.
Capacity of Agent: Interestingly, while the principal must be competent, the agent doesn’t have to be. This means a minor or someone who is mentally incompetent can act as an agent.
Consideration: Unlike many contracts, an agency relationship does not require consideration (something of value exchanged between the parties).
Comprehensive Example:
Imagine Sarah, a competent adult, owns a large plot of land. She wants to sell this land but doesn't have the time to handle the sale process herself. She decides to appoint Alex, a real estate agent, to act on her behalf.
Sarah (the principal) and Alex (the agent) agree that Alex will find a buyer and handle the sale. Even though Alex is just 17 years old (a minor), he can legally act as Sarah's agent because only the principal's competency is required. Since this transaction involves selling land, Sarah and Alex sign a written agency agreement, as required by law in their state. They agree that Alex will receive a commission from the sale as his payment, but it's important to note that even if there was no such payment, the agency relationship would still be valid as consideration is not required for its formation.
This example illustrates how an agency relationship can be legally formed and function within the bounds of the law.
#cpaexaminindia #cpaexam #accountingmajor