5.2 Duties and Liabilities of Agents and Principals
Key Takeaways
- An agent owes the principal fiduciary duties of loyalty (no secret profit or conflict), obedience, care and competence, accounting, and notification of material facts.
- A principal owes the agent compensation as agreed, reimbursement of authorized outlays, indemnity for authorized liabilities, and cooperation in the agency's performance.
- The principal is bound on contracts made with actual or apparent authority or later ratified; an agent who lacks authority is liable to the third party for breach of the implied warranty of authority.
- Respondeat superior makes an employer vicariously liable for an employee's torts in the scope of employment; independent contractors generally do not trigger that liability except for nondelegable duties and inherently dangerous work.
- A detour remains in the scope of employment; a frolic does not. Notice to an agent authorized to receive it is notice to the principal. Criminal acts of an agent are generally not imputed.
5.2 Duties and Liabilities of Agents and Principals
Once an agency exists, REG Blueprint II.A.2 asks who owes whom what, and who pays when something goes wrong. Duties run inside the agency (principal ↔ agent). Contract and tort liability run outside it (principal or agent ↔ third parties). Keep those two planes separate; mixing them is the usual miss. Worker classification for employment-tax purposes is a different topic, in employment taxes and worker classification; this section stays on common-law duties and vicarious liability.
Agent duties to the principal
The agent is a fiduciary. The Restatement catalog that REG tests:
| Duty | Content | Typical REG breach |
|---|---|---|
| Loyalty | Act solely for the principal's benefit in the agency matter; no secret profit, no conflicting representation, no usurping a business opportunity | Kickback from a vendor; buying the principal's target property in the agent's own name |
| Obedience | Follow lawful, reasonable instructions | Ignoring a purchase cap; signing a prohibited guarantee |
| Care / competence | Act with the care, competence, and diligence normally exercised by agents in similar circumstances; a specialist is held to the specialist's standard | Negligent failure to place required insurance; a CPA-agent bungling a filing the engagement covered |
| Accounting | Keep and render an account of money and property; no commingling | Depositing collections in the agent's personal account |
| Notification / information | Use reasonable effort to provide the principal with facts the agent knows, or should know, are material | Sitting on a customer's insolvency notice; failing to pass along a defect claim |
Secret profit is the loyalty item that writes itself. If the agent takes a side commission, the principal may recover that profit even if the principal also got a fair price. Consent after full disclosure is the only clean cure. Dual agency — representing both sides of a deal — is a loyalty conflict unless both principals consent with knowledge of the material facts.
A gratuitous agent still owes loyalty and, once the agent begins performance, a duty of care. REG will not reward an unpaid agent who is reckless merely because no fee was agreed.
Principal duties to the agent
The principal is not a fiduciary in the same way, but the principal owes:
- Compensation as agreed, or a reasonable value if the agency is not gratuitous and the parties left the amount open.
- Reimbursement for payments the agent made that were authorized or necessary in the agency.
- Indemnity against losses and liabilities the agent incurs in authorized activity, unless the loss comes from the agent's own fault.
- Cooperation — do not unreasonably interfere with the agent's performance, and do not destroy the subject matter of the agency (for example, undercutting a listing in a way that cheats the agent of an earned commission, depending on the listing contract).
Contract liability: authorized acts and the warranty of authority
If the agent acts with actual or apparent authority, or the principal ratifies, the principal is bound to the third party on the contract. Whether the agent is also bound depends on disclosure status, covered in 5.1: disclosed principal, agent generally out; unidentified or undisclosed, agent generally in.
If the agent acts without authority and the principal does not ratify, the principal is not bound. The agent is then liable to the third party for breach of the implied warranty of authority: the agent impliedly warrants that the principal exists and that the agent has the power the agent purports to have. That is a warranty theory, not a claim that the agent became a party to the underlying contract (though an unidentified or undisclosed agent may be that as well). A disclosed agent who truthfully says "I do not have authority to go above $10,000" does not make that warranty.
An agent who signs a deed or negotiable instrument in a personal capacity, or who fails to name the principal, can be personally liable on the instrument regardless of internal authority.
Tort: respondeat superior, independent contractors, frolic and detour
Respondeat superior makes an employer vicariously liable for an employee's torts committed within the scope of employment. Scope includes acts of the kind the employee is employed to perform, substantially within authorized time and space, and actuated at least in part by a purpose to serve the employer. Intentional torts are generally outside scope unless the employment contemplates force (a bouncer) or the tort is a misguided attempt to serve the employer (an overzealous collector).
Independent contractors generally do not trigger vicarious liability. Two REG-level exceptions, kept short:
- Nondelegable duties (a land occupier's duty to keep public-facing premises reasonably safe; certain statutory duties).
- Inherently dangerous activities (blasting, and similar work that remains dangerous even when carefully done).
Whether a worker is an employee or an independent contractor for vicarious-liability purposes is a common-law control test: who controls the manner and means of the work, who supplies tools, how the person is paid, and whether the work is part of the regular business. Do not import Form W-2 versus Form 1099-NEC rules into this chapter; those are the employment-tax overlay in chapter 8.
Frolic versus detour is the scope-of-employment fork:
- A detour is a minor deviation. The employee is still within scope; the employer remains vicariously liable.
- A frolic is a substantial departure for the employee's own purposes. Vicarious liability pauses until the employee reasonably returns to the employer's business.
Criminal acts of an agent are generally not imputed to the principal. A principal can of course be liable for a crime the principal directed, or for a regulatory offense that does not require personal mens rea, but REG's default is: the crime stays with the actor. Do not convert respondeat superior into automatic criminal imputation.
Notice to the agent is notice to the principal
A notification given to an agent is effective as to the principal when the agent receives it, if the agent has actual or apparent authority to receive that kind of notice, and if the information comes to the agent in the course of the agency. Knowledge the agent acquires while acting for the principal is generally imputed. Exceptions REG may flag: the agent is acting adversely to the principal (the adverse-agent limitation), or the third party knows the agent will not pass the information along. A customer who tells a sales clerk that goods are defective has notified the store; a customer who tells the clerk a personal secret unrelated to the agency has not.
Duty table
| Duty | Owed by | Typical breach |
|---|---|---|
| Loyalty (no secret profit, no conflict) | Agent → principal | Side commission; self-dealing in the subject matter |
| Obedience | Agent → principal | Ignoring lawful instructions |
| Care / competence | Agent → principal | Negligent performance of the assigned work |
| Accounting | Agent → principal | Commingling or failure to render an account |
| Notification / information | Agent → principal | Withholding material facts learned in the agency |
| Compensation | Principal → agent | Nonpayment of an earned fee |
| Reimbursement | Principal → agent | Leaving the agent to eat authorized outlays |
| Indemnity | Principal → agent | Refusing to cover liabilities from authorized acts |
| Cooperation | Principal → agent | Blocking performance or destroying the agency's subject matter |
Worked scenario: lunch detour versus delivery
Facts. River & Co. employs Sam as a driver. Sam's job is to deliver parts in a company van. On Tuesday, while on a scheduled delivery route, Sam takes a two-block side trip to a drive-through, then continues to the customer. Backing out of the drive-through, Sam negligently hits a parked car. On Thursday, Sam finishes the last delivery at 2:00 p.m., drives 18 miles in the opposite direction to a personal appointment, and, still in the company van, runs a red light and injures a pedestrian.
Analysis.
- Tuesday. A two-block lunch stop on an active delivery route is a detour — a minor deviation. Sam is still within the scope of employment. River & Co. is vicariously liable to the parked-car owner under respondeat superior. Sam remains personally liable as the tortfeasor; vicarious liability is additional, not a substitution.
- Thursday. An 18-mile trip in the opposite direction for a personal appointment after the day's deliveries is a frolic. River & Co. is not vicariously liable for the red-light injury unless Sam had reasonably returned to the employer's business. The van's logo does not, by itself, recreate scope.
- Independent-contractor contrast. If Sam were a true independent courier controlling the manner and means of deliveries, River & Co. generally would not be vicariously liable for either accident, absent a nondelegable or inherently dangerous exception — neither of which a routine parts run is.
- Criminal overlay. If Thursday's red light were charged as a crime, that prosecution runs against Sam. River & Co. is not a criminal defendant merely because it owns the van.
- Notice overlay. If a customer handed Sam a written rejection of nonconforming parts during the Tuesday delivery, River & Co. has notice when Sam receives the writing. The firm cannot claim it never heard because Sam stuffed the paper in the visor.
An agent for a disclosed principal takes a side commission from a vendor on an authorized purchase. The principal received a fair market price on the goods and learned of the commission only later. Which statement correctly describes the agent's duty of loyalty?
River & Co. employs Sam to deliver parts in a company van. On Tuesday, during an active delivery route, Sam takes a two-block drive-through stop and negligently hits a parked car. On Thursday, after finishing the last delivery, Sam drives 18 miles in the opposite direction to a personal appointment, runs a red light, and injures a pedestrian. Which statement is correct?
An agent, claiming to represent a disclosed principal, signs a supply contract that is entirely outside both actual and apparent authority. The principal refuses to ratify. What is the agent's exposure to the third party?