Duties of a Principal to an Agent

Cite this article as: Jason Mance Gordon, "Duties of a Principal to an Agent," in The Business Professor, updated January 11, 2015, last accessed April 8, 2020, https://thebusinessprofessor.com/knowledge-base/duties-of-a-principal-to-an-agent/.
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Duties of a Principal to an Agent
This video explains what are the duties of a Principal to an Agent.

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Duties of a Principal to an Agent?

Generally, a principal owes the following duties to the agent:

Duty to Compensate – An agency relationship may be paid or gratuitous. The terms of an agency may be laid out in the agency agreement. If the agency agreement does not indicate the terms of compensation, the principal is obligated to provide the agent with reasonable compensation.

  • Example: Default rules in a relationship with a sales agent dictate that the agent will earn a reasonable commission on sales induced or completed.

Duty to Reimburse – The principal must reimburse the agent for a reasonable amount expended in carrying out her duties. Reasonable reimbursement includes the cost of travel, meals, lodging, incidental expenses, etc.

Duty to Indemnify – Generally, a principal must indemnify an agent for liability incurred in the performance of her duties. This generally arises when the instructions of the principal subject the agent to liability to a third party.

  • Note: If an agent exceeds or acts outside of the scope of her authority, the principal may be relieved from the duty to indemnify. If the principal later ratifies the actions of the agent, she will incur the obligation to indemnify the agent against liability.

Discussion: How do you feel about the default duties owed by a principal to an agent? Why do you think these are the default standards? Do you believe there should be any other or additional duties of the principal?

Practice Question: Ethan hires Naomi to serve as his buying agent. The employment agreement is very short and lists only Naomi’s primary responsibilities and compensation. Pursuant to her job description, Naomi will make purchases for the business but will not disclose that she is an agent of the business. One of her business deals goes bad and a client sues her for breach of contract. What are Ethan’s responsibilities in this situation?

Proposed Answer

  • The duties of a principal to an agent include compensation and indemnification. This means that the principal is first obligated to pay the agent when they carry out duties assigned to them by the principal. Secondly, the principal is obligated to indemnify the agent. This obligation is based on the fact that during the process of carrying out the assignments on behalf of the principal, the agent may incur some expenses that were not covered by the principal. Hence the principal must reimburse the agent for any claims, liabilities, and expenses incurred while performing duties under the agency.

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