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Duties of the Agent & Principal During the Agency Relationship

During the agency relationship, the agent and principal owe certain duties to each other. These duties provide limitations on how the agent can act while in that role.

The Agent’s Duties

law of employmentWhile the agent is acting on behalf of the principal, he has certain duties to the prin­cipal. Those include …

Loyalty. An agent must act for the best interests of the principal. The agent also may not act for his or her secret benefit. While an agent for the principal, the agent must put the principal’s interests first. For example, the agent cannot sell property he or she owns to the principal without disclosing that he or she owns the property.

An agent cannot act for both parties to a transaction unless both know of the relationships and agree. Think of a real-estate transaction. The realtor cannot represent both the buyer and seller unless both parties know and agree to the dual representation. Otherwise, a conflict of interest will be assumed.

An agent cannot accept secret commissions or gifts from third persons because of his role as agent. An agent also cannot knowingly deceive the principal or aid the principal’s competitors.

Obedience and performance. An agent has a duty to obey all lawful instruc­tions. Lawful is the key here. If the principal asks the agent to act in a way that is against the law, the agent can refuse. Otherwise, the principal can expect the agent to obey and perform as instructed. If the agent doesn’t, the agent is liable to the principal for failing to obey and perform its responsibilities.

Reasonable care. An agent must use the care a reasonable person would use. If the agent fails to, the agent is liable to the principal for any damages. The agent must utilize any special skills he has on behalf of his principal. “Reasonable care” in this instance is similar to the standard for torts.

Accounting. An agent must account to the principal for all property or money the principal entrusts to her. Toward this end, the agent must keep the principal’s money separate from her own. This is why attorneys are required to have trust accounts for client funds and not intermingle client funds with firm assets.

Information. An agent must keep the principal informed of all facts related to the agency.

The duties and liabilities of the agent continue after the termination of the agency. At that point the agent continues to owe a duty until he has completed the tasks he was assigned during the agency.

The Principal’s Duties

The principal also owes duties to the agent. Those include …

  • Honoring any employment contract. If there is a contract, the agent is allowed to work for the principal for the duration of the contract terms. The only excep­tion occurs if the contract provides an early termination procedure.
  • Compensation. The agent is entitled to payment for the services rendered. This amount can either be set in a written contract or determined by the reasonable value of the services. There are two variations on compensation:
    • Repeating transactions: Often if a third party will make repeated purchases from the principal after the agent contracts the original business, the agent will receive a stream of income from those secondary purchases.
    • Post-agency transactions: While an agent is not entitled to payment for post-agency transactions, if the parties’ employment agreement calls for such compensation, the agent will receive ongoing compensation.

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