Duties of the Principal and Agent

Contractual duties

A principal has a duty to act in good faith in accordance with the terms of the contract between the agent and the principal.

Deal fairly and in good faith

A principal is obligated to treat the agent fairly and in good faith and to provide the agent with information concerning risks of physical or financial harm or loss that the principal knows or should know are present in the agent's work but that are unknown to the agent. In addition, although a principal does not owe an agent a duty of loyalty, a principal has a duty to refrain from conduct likely to injure an agent's business reputation or reasonable self-respect.

Duties of loyalty

Agency is a special relationship that gives rise to fiduciary duties on the part of the agent. As a fiduciary, the agent owes the principal a duty of loyalty, which generally requires the agent to act solely for the benefit of the principal (and not for the benefit of the agent or third parties) in matters connected with the agency. This duty applies to all agents, whether they are gratuitous or compensated and can vary depending on the parties' agreement. 1) Duty not to deal with the principal as an adverse party 2) Duty to refrain from acquiring a material benefit 3) Duty not to usurp a business opportunity 4) Duty not to compete 5) Duty to disclose—multiple principals 6) Duty not to use the principal's confidential information

What are the agent's duties?

An agent has two basic types of duties to a principal—a duty of loyalty, which includes a fiduciary duty, and a performance-based duty, which includes the duty of care.

Duties of performance

An agent owes performance-based duties to the principal, including a duty of obedience and a duty to perform with reasonable care. 1) Contractual duties 2) Duty of care 3) Duty of obedience 4) Duty to provide information 5) Duty to keep and render accounts

NOTE

EXAM NOTE: When answering questions that require you to address the duties of an agent to the principal, make sure you state the "must have" duties: i) Duty of care to perform with reasonable diligence and skill; ii) Duty to provide information to the principal regarding all matters relating to the agency relationship; iii) Duty of loyalty to the principal and to work only for his benefit; iv) Duty of obedience to the principal; and v) Duties not to usurp a business opportunity from the principal; not to take financial gain from the principal; to provide an accounting; and not to commingle the principal's property with that of a third party.

Duty to Indemnify

Subject to an agreement to the contrary, a principal has a duty to indemnify the agent against pecuniary loss suffered in connection with the agency relationship and within the scope of the agent's actual authority. The principal's duty to indemnify includes expenses and other losses incurred by an agent (such as attorney's fees) in defending an action brought by a third party. A principal is not obligated to indemnify losses that result from an agent's own negligence, illegal acts, or other wrongful conduct.

Duty to compensate

Whether a principal is obligated to compensate an agent depends on the terms of their agreement. To recover compensation, an agent must show that the principal expressly or impliedly agreed to pay compensation. If a principal has promised to pay compensation, then the agent can maintain an action for damages if the principal fails to pay.