REG Chapter 5 Part 2: Duties and Liabilities of Agents and Principals

Explain the various duties and liabilities of agents and principals

Welcome back to another exciting section of REG where I will discuss everything you need to know as it relates to duties and liabilities of agents and principles. Here are today’s learning outcomes.

  • Explain the various duties and liabilities of agents and principals.
  • Identify the duty or liability of an agent or principal given a specific scenario.

Principal’s Duties

There are 4 main duties a principal has towards an agent:

  1. Compensation – fair and reasonable payment (doesn’t have to be cash).
  2. Indemnification – reimbursement for losses incurred. The agent shouldn’t be responsible for the cost of doing something on the principal’s behalf.
  3. Good faith and fair dealing – must act in good faith and be fair towards the agent. Can’t have unreasonable request.
  4. Act according to the contract – the principal should hold up their end of the deal.

Principal’s Liability

Although the agent is acting on behalf of the principal, the principal can still be held liable for the agent’s actions. Here are some examples:

  1. Agent was following orders – If the agent was told to do something and as a direct result the agent commits a tort (hurts somebody) then the principal can be held liable. For example, principal “A” tells agent “B” to build faulty equipment to save money. Joe gets hurts using the equipment and holds the principal liable even though they didn’t make the equipment.
  2. Agent is incompetent (under-qualified) – If the principal hires someone who they know is under-qualified and has no idea what they are doing then a principal will be held liable when that person messes up.
  3. Principal doesn’t do it’s due diligence when hiring an agent – What if the principal doesn’t know the agent is unqualified? Well, if the principal doesn’t properly vet their candidates then they can still be held liable. Doing a simple background check can root out bad actors.
  4. Principal doesn’t supervise properly – If the principal doesn’t properly supervise the agent and the agent commits a tort then the principal may be held liable.

Agent’s Duties

There are two broad categories of duties an agent owes to a principal:

  1. Fiduciary duty – Unique to agent/principal relationships.
  2. General/contractual duties – Not unique to agent/principal relationship.

Generally, contracts between two or more people don’t bind those parties beyond the four corners of the contract. For example, if Company “X” buys from Company “Y” you wouldn’t assume they are in partnership to do business together. This is where an agent/principal relationship differs from a general contract between unrelated parties.

Because there is a special relationship that exists between an agent and a principal there are additional duties that exist. These are called fiduciary duties:

  • Duty to avoid self dealing – if Bob manages an investment account for Bill then he should act to help Bill as much as he can. Bob shouldn’t invest money into accounts that have low returns and high fees just so Bob can make a profit.
  • Duty to preserve confidential information – Spongebob has a duty to not give away the Krabby Patty secret formula because that would bankrupt Mr. Krab’s business.

Other duties exist that aren’t unique to agent principal relationships. These are general duties that non agent/principal relationships as well as agent/principal relationships have:

  • Duty of skill and care – agent should perform work to the best of their ability using their skill and expertise.
  • Duty of good conduct – as an agent you want to conduct yourself appropriately. although the principal can’t control the agent’s personal life you don’t want to hire a banker with a gambling problem.
  • Duty to act only as authorized – just because you’re an agent doesn’t mean you can do whatever you want. If the principal doesn’t authorized you to do something then you have a duty to not overstep your authority.
  • Duty to obey – agent’s have a duty to obey reasonable orders from the principal.

Agent’s Liabilities

This one is pretty easy:

  • Agent’s are responsible for their own actions.

Even if the principal tells the agent to do something illegal doesn’t make it ok to do something illegal. The agent is always responsible for the torts they commit, regardless who they are working for.

Key Highlights

  • Know the duties of a principal – compensation, indemnification, good faith dealing, and follow the contract.
  • Know the liabilities of a principal – principal can be held liable for an agent’s actions.
  • Know the duties of an agent – both fiduciary and general duties.
  • Know the liabilities of a principal – agents are responsible for their own torts.
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Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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