4.2 Law of Contract and Agency

Contracts and agency are the legal glue of financial advice. The advisory relationship is itself a contract, and most product sales involve an agent acting for a principal. A CeMAP adviser must be able to spot a binding contract, identify breach, and understand who is bound when an agent acts.

Elements of a Valid Contract

A legally binding contract in England & Wales requires five elements:

1. Offer — a clear statement of terms on which the offeror is prepared to be bound.
2. Acceptance — an unqualified agreement to the offer, mirroring its terms (the "mirror image rule"). Acceptance must be communicated; the postal rule and the general rule that acceptance is effective on receipt coexist.
3. Consideration — something of value moving from the promisee. It need not be adequate but must be sufficient; past consideration is generally not valid.
4. Intention to create legal relations — for commercial agreements this is presumed; for domestic/family agreements it is presumed not to exist unless rebutted.
5. Capacity — parties must have legal capacity (age 18+, sound mind, not intoxicated, etc.).

A contract may be express (terms written or spoken) or implied by conduct. Many advisory engagements are partly written (the suitability letter) and partly implied by conduct.

Unilateral vs Bilateral Contracts

In a bilateral contract both parties exchange promises — typical of advice engagements, where the client promises a fee and the firm promises advice. A unilateral contract is accepted by performance rather than promise — for example, an insurer's promise to pay on the happening of an insured event.

Terms, Breach and Remedies

Contractual terms are classified by importance:

• Condition — a term going to the root of the contract. Breach gives the right to terminate and claim damages.
• Warranty — a less important term. Breach gives a damages claim only.
• Innominate term — importance judged by consequences of breach; the court decides whether to allow termination.

Remedies for breach include:

Financial advice contracts most commonly give rise to damages claims — typically the difference between the client's actual position and the position they would have been in had suitable advice been given.

Agency

An agency is a relationship where one person (the agent) has the authority to affect the legal relations of another (the principal) with a third party. In financial services the firm typically acts as agent for the client (and sometimes for the product provider).

How agency is created

• By express agreement (written or oral).
• By implication from conduct or the position held.
• By ratification — where an agent acts without authority, the principal may later adopt the act, retroactively making it valid.
• By necessity (limited cases — e.g. a bailee forced to act).

Authority of the Agent

A principal is bound by acts of an agent acting within actual authority, and by acts within ostensible authority as against a third party who relied on the representation without notice of any limit.

Fiduciary Duty

An agent owes the principal fiduciary duties:

• To act in good faith and in the principal's best interests.
• To avoid conflicts of interest.
• Not to make a secret profit.
• To account for any money or property received on the principal's behalf.
• To exercise reasonable care and skill.

Breaching fiduciary duty may give the principal the right to rescind transactions, recover profits, or claim damages.

Termination of Agency

Agency ends by:

• Mutual agreement.
• Notice by either party.
• Death or mental incapacity of the principal (with limited exceptions for ongoing acts).
• Bankruptcy of the principal (where agency is revocable at will).
• Frustration (e.g. subject matter destroyed).

Application in Financial Advice

The advisory relationship is a contract for services regulated by the FCA's Conduct of Business rules. Where a firm acts as agent for a product provider, the client's contract of insurance or investment is with the provider, not with the adviser — but the adviser owes the client separate duties of suitability, disclosure and fair dealing under COBS and the Principles for Businesses.