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Principal and Agent Relationship

7. What are the duties of an agent?

Agents generally have the following duties to the principal:

•    Loyalty – An agent has the duty of loyalty to act for the principal’s advantage and not to act to benefit herself at the principal’s expense. An agent is expected to refrain from undertaking actions personally that would conflict with the purpose of the agency. An employee has a lower duty of loyalty with regard to opportunities that are outside of the employee’s duties or responsibilities to the employer. Generally, this means that an agent may not simultaneously represent the principal and another party to a transaction.

⁃    Note: Employees are agents of the employer. If an employee does not have permission, she violates a duty of loyalty by undertaking activities for a third party that are similar to the duties of the employee in the agency relationship. This is seen as competing with the employer. If, however, she performs services unrelated to or not the type of services the employer would seek to provide to the client, she does not a breach a duty by providing those services. This is true even if the employee provides those services to a client of the employer.

⁃    Example: I work for ABC Corp as a professional service provider. A potential client comes in to seek the services of ABC Corp. I cannot compete with ABC Corp by trying to convince the client to pay me to serve them personally rather than hire ABC Corp. I also have a side job selling supplies to construction contractors. This is a completely different line of business from ABC Corp. If it does not conflict with ABC Corp’s services, I can offer my supplies for sale to the client without violating my duty of loyalty.

•    Duty of Care – An agent has a duty to exercise due care and diligence when carrying out the responsibilities of the agency. This is often referred to as a duty to not act negligently in carrying out the principal’s affairs.

⁃    Example: I work for ABC Corp as an accountant. I represent ABC Corp in every action I undertake as part of my employment, such as preparing client taxes. I have a duty to ABC Corp and the client to exercise reasonable care in carrying out my job duties.

•    Information & Disclosure – The agent has a duty to protect all confidential information of the principal, such as trade secrets. Further, the agent has a duty to keep the principal fully informed of all material information acquired as a result of the agency relationship.

⁃    Example: I am a sale agent for ABC Corp. I receive an offer from a customer to undertake a joint venture with ABC Corp. I have a duty to transmit this information to ABC Corp. I acquired this information as a result of the agency relationship, and it is obviously outside of my unilateral decision-making authority.

•    Obedience – The agent has a duty to obey the reasonable instructions from the principal.

⁃    Example: I work for ABC Corp selling insurance. ABC provides me detailed training and instructions on what types of policies to write and the client area that I can serve. I have a duty to obey these instructions as agent of my employer.

•    Accounting – The agent has a duty to account to the principal for monies handled. Further, the agent may have a duty to account to third parties for whom money is handled. This includes situations where an agent collects too much money from a third party and is still in possession of those funds or when an agent intentionally collects funds that belong to the third party and the principal is undisclosed.

⁃    Example: I am a financial advisor for ABC Corp. I am responsible for reporting and keeping accurate records regarding all money or value transferred or received in carrying out my job duties.

•    Note: The principal-agent relationship is a fiduciary or trust-based relationship. The agent may have any other duties as established in the agency agreement.

•    Discussion: Should the duty of loyalty and care be the same for an agent in every situation? Why or why not? Should these duties vary depending upon whether the agent is a limited or general agent? Why or why not?

•    Practice Question: Carol is an employee of Rob’s accounting firm. She is a CPA, but she has been thinking of breaking away from the firm and starting her own practice. One day, a representative from a large corporation walks into the CPA firm and inquires about accounting services. Carol is strongly considering offering her personal services to the representative’s firm? Are there any issues in this situation?

 

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