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Rights, Duties, and Liabilities Between Principal and Agent

An agency is the creation of a contract entered into by mutual consent between a principal and an agent.  By agency, a principal grants authority to an agent to act on behalf of and under the control of the principal.  The relation between a principal and an agent is fiduciary and an agent’s actions bind the principal[i]. The law of agency thus governs the legal relationship in which an agent deals with a third party for his/her principal.

An agent owes certain duties towards his/her principal and a principal owes certain duties towards his/her agent.  The scope of an agent’s duty to the principal is determined by:

  • the terms of the agreement between the parties[ii]; and
  • extent of the authority conferred and the obligations of loyalty to the interests of the principal.

An agent’s primary duties are:

  • act on behalf of and be subject to the control of the principal;
  • act within the scope of authority or power delegated by the principal;
  • discharge his/her duties with appropriate care and diligence; and
  • avoid conflict between his/her personal interests

Other duties of an agent include:

  • not to acquire any material benefit from a third party in connection with transactions conducted or through the use of his/her positions as an agent[iii];
  • to act with the care, competence, and diligence normally exercised by agents in similar circumstances[iv];
  • to take action only within the scope of the his/her actual authority[v];
  • to comply with all lawful instructions received from the principal and persons designated by the principal concerning agent’s actions on behalf of the principal[vi];
  • to act reasonably and to refrain from conduct that is likely to damage the principal’s enterprise[vii];

An agent is liable to a principal when he/she acts without actual authority, but with apparent authority.  An agent is liable to indemnify a principal for loss or damage resulting from his/her act.

A principal owes certain contractual duties to his/her agent.  Correlative with the duties of an agent to serve a principal loyally and obediently, a principal’s primary duties to his/her agent include:

  • To compensate the agent as agreed; and
  • To indemnify and protect the agent against claims, liabilities, and expenses incurred in discharging the duties assigned by the principal[viii].

Because of the fiduciary relationship, a principal owes his/her agent a duty of good faith and fair dealing[ix]. However, a principal can be relieved of contractual obligations by an agent’s prior breach of contract.

A principal has a duty to act in accordance with the express and implied terms of any contract between a principal and an agent[x].

When an agent acts within the scope of actual authority, the principal is liable to indemnify the agent for payments made during the course of the relationship irrespective of whether the expenditure was expressly authorized or merely necessary in promoting the principal’s business.

[i] Andrews v. Schram, 562 N.W.2d 50 (Neb. 1997)

[ii] E. S. Harper Co. v. General Ins. Co., 91 Idaho 767, 771 (Idaho 1967); Garl v. Mihuta, 50 Ohio App. 2d 142 (Ohio Ct. App., Lorain County 1975)

[iii] Restat 3d of Agency, § 8.02

[iv] Restat 3d of Agency, § 8.08

[v] Restat 3d of Agency, § 8..09

[vi] Restat 3d of Agency, § 8.09

[vii] Restat 3d of Agency, § 8.10

[viii] Western Smelting & Refining Co. v. First Nat’l Bank, 35 N.W.2d 116 (Neb. 1948)

[ix] Lawrence Warehouse Co. v. Twohig, 224 F.2d 493 (8th Cir. Iowa 1955)

[x] Restat 3d of Agency, § 8.13

Inside Rights, Duties, and Liabilities Between Principal and Agent