REG, Regulation

Sources for Agency: Authority, Duties, and Third-Party Liability

Last reviewed 2026-09-14

The standards and authorities behind PocketCPA's REG lessons on Agency: Authority, Duties, and Third-Party Liability. The topic rests on Common law of agency (Restatement).

About this topic

Agency is the load-bearing doctrine under most of REG's business law. Partnership liability, a corporate officer's power to sign, employment classification, and the accountant's own exposure for a staff member's work all resolve into agency questions, so the rules below get reused far outside this group.

Read the timing column and the reliance column together. Ratification is the only route that works backward, and estoppel is the only one that demands the third party actually gave something up.

Key points

An agency relationship requires the principal's assent, the right to control, and the agent's consent.
An agent with actual authority (express or implied) binds the principal to third parties.
Apparent authority arises from the principal's conduct that leads a third party to reasonably believe the agent has authority.
A principal is liable for an agent's torts committed within the scope of employment under respondeat superior.

What the lessons cover

How agency forms
Actual versus apparent authority
Duties and liability to third parties
Ending the relationship
Ratification: relation back and its five conditions
Who is liable on the contract: disclosed, unidentified, and undisclosed principals
Tort liability: respondeat superior, the frolic line, and independent contractors

Authoritative references

Where these requirements sit in the literature.

Restatement (Third) of Agency Sec. 7.07 is the respondeat superior rule: an employer is subject to vicarious liability for a tort committed by an employee acting within the scope of employment. The same section defines scope of employment as performing assigned work or conduct subject to the employer's control, and expressly puts an employee's independent course of conduct, not intended to serve any purpose of the employer, outside that scope.
Sec. 1.01 is the definition of agency: the principal manifests assent that another act on the principal's behalf and subject to the principal's control, and the other consents to act. Consideration and a writing are not elements, and Sec. 1.04 and its comment cover the gratuitous agency.
Sec. 1.04(2) carries the three disclosure categories.
- A principal is disclosed when the third party has notice both that the agent acts for a principal and of the principal's identity ((a)).
- A principal is undisclosed when the third party has no notice that the agent acts for a principal at all ((b)).
- A principal is unidentified when the third party has notice of the agency but not of the identity ((c)).
Secs. 2.01 and 3.01 create actual authority: at the time of acting, the agent reasonably believes in accordance with the principal's manifestations to the agent that the principal wishes her to act.
Sec. 2.02 fixes the scope of actual authority, reaching acts implied in the principal's manifestations, meaning acts necessary or incidental to achieving the principal's objectives as the agent reasonably understands them. Sec. 2.02(3) and its comment govern the ambiguous instruction: a reasonable reading confers actual authority even if the principal meant the other one.
Secs. 2.03 and 3.03 create apparent authority: the power to affect a principal's legal relations where a third party reasonably believes the actor has authority and that belief is traceable to the principal's own manifestations. Sec. 3.03 supplies the position-based manifestation, since a third party who knows of an appointment may reasonably believe the person holds the authority customarily accompanying it. The comment to Sec. 2.03 is where apparent authority is held unavailable for an undisclosed principal.
Sec. 2.05 is estoppel to deny the existence of agency, reaching a person who made no manifestation, where the third party justifiably changes position and the person either intentionally or carelessly caused the belief, or had notice of it and of the risk that others would act on it and failed to take reasonable steps to notify them.
Sec. 2.06 covers the undisclosed principal. Sec. 2.06(2) is the operative rule: an undisclosed principal may not rely on instructions given to an agent that reduce the agent's authority below what a third party would reasonably believe the agent to have under the same circumstances had the principal been disclosed.
Secs. 3.04 and 3.05 split capacity. Sec. 3.04 is the principal's. Sec. 3.05 is the agent's, and it provides that any person may ordinarily be empowered to act on another's behalf and that an individual who lacks capacity to do an act for his own account may still have capacity to do it for a principal.
Secs. 3.06 and 3.10 cover termination of actual authority. Sec. 3.10(1) provides that notwithstanding any agreement between principal and agent, actual authority terminates on the principal's revocation by a manifestation to the agent, effective when the agent has notice. Sec. 3.10(2) cross-refers to the power given as security.
Sec. 3.07(2) terminates actual authority on the death of an individual principal, effective when the agent has notice. Sec. 3.08(1) terminates it on the principal's loss of capacity, and Sec. 3.08(2) is the durable-power exception, under which a written instrument may provide that a subsequent loss of capacity does not terminate the authority.
Sec. 3.11 governs termination of apparent authority. (1) Termination of actual authority does not by itself end apparent authority. (2) Apparent authority ends when it is no longer reasonable for the third party to believe the agent continues to act with actual authority.
Sec. 3.12 is the power given as security, the modern name for an agency coupled with an interest. (1) defines it as a power held for the benefit of the holder or a third person, given to protect a legal or equitable title or to secure a duty apart from any duties incident to an agency relationship. (3) provides that it is not terminated by revocation, the creator's loss of capacity, or, unless otherwise agreed, the creator's death.
Secs. 4.01 and 4.02 are ratification and its effect: affirmance of a prior act done by another gives the act the effect it would have had if the actor had held actual authority, reaching back to the moment of the original act. Sec. 4.01(2)(b) is ratification by conduct.
The conditions on ratification sit in Secs. 4.03 through 4.07. Sec. 4.04(1)(a) requires that the ratifier existed at the time of the act. Sec. 4.05 fixes the timing, so an affirmance is ineffective once circumstances have arisen that would make relation back adverse and inequitable to the third party, the paradigm being the third party's manifestation of intent to withdraw. Sec. 4.06 requires knowledge of material facts. Sec. 4.07 requires the affirmance to encompass the entirety of the act, contract, or single transaction.
Secs. 6.01 through 6.03 allocate contract liability. Sec. 6.01: with a disclosed principal and an agent acting with actual authority, the principal and third party are parties and the agent is not, unless the agent and third party agree otherwise. Sec. 6.02: with an unidentified principal and an agent acting with actual or apparent authority, the principal and third party are parties and so is the agent, unless they agree otherwise. Sec. 6.03: with an undisclosed principal and an agent acting with actual authority, unless excluded by the contract the principal is a party and so are the agent and the third party.
Sec. 6.04 is the provision behind the promoter's personal liability: a promoter who contracts for a corporation not yet formed is personally liable. Only a novation, in which the third party agrees to release the promoter and take the corporation in her place, ends that liability. Sec. 6.09 prevents a double recovery by discharging the claim against one obligor to the extent a judgment against the other is satisfied.
Sec. 6.10 is the agent's implied warranty of authority, the third party's remedy against an actor who had none, measured to put the third party where it would have been had the authority existed.
Sec. 7.01 keeps the agent liable for the agent's own tort, and provides that unless a statute says otherwise an actor remains liable although acting as an agent or employee, with actual or apparent authority, or within the scope of employment.
Sec. 2.04 states the black-letter respondeat superior rule alongside Sec. 7.07, which is why either citation is accepted.
- Sec. 7.07(1) is vicarious liability for an employee's tort within the scope of employment.
- 7.07(2) defines scope of employment and excludes an independent course of conduct not intended to serve any purpose of the employer.
- 7.07(3)(a) defines an employee by the principal's control or right to control the manner and means of the work.
Sec. 7.05(1) is the principal's direct liability for negligence in selecting, training, retaining, supervising, or otherwise controlling an agent, which requires neither an employment relationship nor conduct within the scope of employment. Sec. 7.06 covers non-delegable duties.
Sec. 8.01 states the general fiduciary principle: a duty to act loyally for the principal's benefit in all matters connected with the agency relationship. Its applications run to eight sections.
- Sec. 8.02, no material benefit from a third party through the agency or the agent's position.
- Sec. 8.03, no dealing with the principal as an adverse party.
- Sec. 8.04, no competing or assisting competitors during the relationship, though preparation for later competition is permitted.
- Sec. 8.05, no use of the principal's confidential information.
- Sec. 8.06, disclosure plus the principal's informed consent as the cure.
- Sec. 8.08, care, competence, and diligence.
- Sec. 8.09, act within the scope of actual authority and comply with lawful instructions.
- Sec. 8.11, reasonable effort to provide the principal with facts the agent knows the principal would wish to have.
Sec. 8.13 obliges the principal to act in accordance with the terms of any contract with the agent. Sec. 8.14 is indemnification: in accordance with any contract, and unless otherwise agreed when the agent makes a payment within the scope of actual authority or beneficial to the principal, unless the agent acts officiously, or suffers a loss that fairly should be borne by the principal.

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.