What are the duties of an agent to his principal?

What Is the Principal-Agent Relationship?

The principal-agent relationship is an arrangement in which one entity legally appoints another to act on its behalf. In a principal-agent relationship, the agent acts on behalf of the principal and should not have a conflict of interest in carrying out the act. The relationship between the principal and the agent is called the "agency," and the law of agency establishes guidelines for such a relationship.

Principal-Agent Relationship

Key Takeaways

• A principal appoints an agent to act on their behalf and in their best interest. Examples include an investor picking a fund manager or someone hiring an attorney for legal work. 
• There should be no conflict of interest between the two, if there is, this creates a principal-agent problem. 
• The principal-agent relationship is expressed clearly through a written contract or is implied through actions.

Understanding a Principal-Agent Relationship

A principal-agent relationship is often defined in formal terms described in a contract. For example, when an investor buys shares of an index fund, he is the principal, and the fund manager becomes his agent. As an agent, the index fund manager must manage the fund, which consists of many principals' assets, in a way that will maximize returns for a given level of risk in accordance with the fund's prospectus.

Agents have an obligation to perform tasks with a certain level of skill and care and may not intentionally or negligently complete the task in an improper manner.

The principal-agent relationship can be entered into by any willing and able parties for the purpose of any legal transaction. In simple cases, the principal within the relationship is a sole individual who assigns an agent to carry out a task; however, other relationships under this guise have a principal that is a corporation, a nonprofit organization, a government agency or a partnership.

The agent is most often an individual capable of understanding and ultimately carrying out the task assigned by the principal. Common examples of the principal-agent relationship include hiring a contractor to complete a repair on a home, retaining an attorney to perform legal work, or asking an investment advisor to diversify a portfolio of stocks. In each scenario, the principal is the individual seeking out the service or advice of a professional, while the agent is the professional performing the work.

Special Considerations

Whether the principal-agent relationship is expressed clearly through a written contract or is implied through actions, the principal-agent relationship creates a fiduciary relationship between the parties involved. This means the agent acting on behalf of the principal must carry out the assigned tasks with the principal's best interest as a priority.

The agent is responsible for completing tasks given by the principal so long as the principal provides reasonable instruction. Additionally, the agent has an obligation to perform tasks that will not intentionally harm the principal. A duty of loyalty is also implied within the principal-agent relationship, which requires the agent to refrain from putting himself in a position that creates or encourages conflict between his interest and the interest of the principal, also known as the principal-agent problem.

Section 182 of the contract act defines, “An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is represented, is called the principal”.

The function of an agent is essentially to bring about contractual relations between the principal and third parties. An agent has certain rights, duties and liabilities towards the principal and third parties depending upon the nature of business. These rights, duties and liabilities can be generated as:-

Rights of an Agent

i) Right to Receive Remuneration — The agent is entitled to receive an agreed remuneration or reasonable remuneration unless otherwise agreed upon. An agent has a right to claim his remuneration on completion of his work, even if the contract never materializes on account of breach. But, if an agent is found guilty of misconduct or fraud, etc. he has no right over remuneration. In addition, he is entitled or liable to compensate the principal for any such loss.

ii) Right of Retainer: An agent has the right to retain any sum, received by him on behalf of his principal from the third parties, which may fall due as part of his remuneration, or advances or expenses incurred in the general conduct of business.

iii) Right of Lien: An agent has the right to retain any movable or immovable property, papers or goods of the principal received by him, until the amount of commission due to him is received. This kind of   a lien is a ‘Particular lien’ which will end as soon as the possession is cost. However, by a special contract such a lien can be extended to a ‘General Lien’.

iv) Right to be Indemnified Against Consequences of Lawful Acts: An agent has also the right to be indemnified against the consequences of all lawful acts done by him in exercise of authority conferred upon him. This right of the agent is obvious for the simple reason that an agent is a representative of his principal.

v) Right to be Indemnified Against Consequences of Acts Done in Good Faith: An agent has the right to be indemnified against all acts done by him in utmost good faith ,where one person employs another to do an act and the agent does the act in good faith, the employer or principal is liable to indemnify the agent.

Eg.: A employs B to sell the goods in A’s possession B sells the goods unaware of the fact that C is the actual owner of the goods. C sues B for the recovery of the value of goods. In this case B has a right to be indemnified by A and to rum burse the   expenses incurred by B is the liability of A.

vi) Right to Compensation: The agent has a right to be compensated for injuries sustained by him due to the principals neglect or want of skill. However, the principal is not liable for any compensation for the injuries caused by the own neglect of the agent.

vii) Right of Stopping of Goods in Transit: An agent has a right to stop the goods in transit if:-

a) He has bought goods either with his own money or by incurring a personal liability for the price on behalf of the principal,

b) The principal has become insolvent of/and

c) When an agent, e.g. del Credere agent is personally liable to his principal to his principal for the price of the goods sold, he can exercise the unpaid seller’s right and stop the goods in transit on the unsolvency of the buyer.

viii) Agent’s Right To do All Lawful Things: A person who is appointed as an agent has the right to do all lawful things which fall under the usual course of business.

ix) Right in Emergency: An agent has a right to do all such acts which could protect his principal from loss in case of emergency as would have been done in his own case, in a similar situation.

x) Right to Appoint Sub-Agent & Substitute Agent: An original agent has a right appointed would be responsible to the original agent, except in case of fraud, etc. Where an agent has an express or implied authority he may name another person as   substitute agent to act for his principal.

xi) Right   to Renounce His Agency: An agent is in full right to renounce his agency by giving a reasonable notice to   his principal.

xii) Right to Receive Compensation for Remature Revocation: If there is an express or implied conduct on the part of the agency that the agency would continue for a specified period and if there is previous revocation without any reasonable cause, the agent would have a right to compensation in such a case.

Duties and Responsibilities of an Agent

i) Duty of Follow Principal’s Directions of Customs: The first and the foremost duty of an agent is to act within the scope of authority conferred upon him and act according to the directions given by his principal. In the absence of any such instructions the agent should work according to the customs prevailing in the agency. If he acts otherwise he is liable to make good the loss caused by him.

ii) Duty to Carry Out Work With Reasonable Skill & Diligence: The agent must conduct the business with reasonable skill and diligence unless otherwise specified i.e. if the principal has notice of want of skill. In general the agent is expected to work in the manner as he would do in his own name.

iii) Duty to Render Accounts: It is the duty of the agent to maintain proper accounts of his principal’s property and render it to him on demanded, or periodically if so agreed upon.

iv) Duty to Communicate: It is the duty of the agent to communicate to the principal with full diligence any difficulty that may arise from time to time. He should obtain proper instructions from the principals, before taking any steps in facing the difficulty. But, if due to certain reasons he is unable to communicate the difficulty, he has full authority to take all reasonable steps to prevent loss.

v) Duty Not to deal on his On Account: It is the duty of the agent not to buy from or sell goods to the principal in his own account, which he is actually asked to sell or buy on his principal’s behalf, without obtaining prior consent of his principal, all material facts being disclosed.

vi) Duty not to make any profit out of his Agency Except his Remuneration: An agent stands in a fiducidary relation to his principal and therefore he must not make any secret profits from the agency. He is authorized only to a fixed remuneration or commission as the case may be. If the principal gets the notice of any such secret profit he can either recover the amount of profit from the agent, refuse to pay his remuneration, terminate the agency without prior notice, file a suit against his agent or can even repudiate the contract entered by his agent with the third party.

vii) Duty on Termination of Agency by Principal’s death or Insanity:   When an agency is terminated due to the death or insanity of his principal, it is the duty of the agent to take all steps to protect and preserve all the   interests entrusted to him.

viii) Duty not to delegate His Authority: It is the duty of an agent not to do his work i.e. to perform the work which he has expressly or impliedly undertaken to perform personally except   of specifically agreed upon.

ix) Duty   not to use the Information Obtained in the course of the Agency Against his Principal: It is   the duty of the agent not to use the information obtained in the course of business against his principal. If he does so, he must compensate the loss incurred by his principal.

x) Duty to Pay Sums Received for the Principal: It is the duty of the agent to pay all such sums to his principal which he may have received for him. He has the right to deduct any amount which may be outstanding in this account like remuneration, etc.

xi) Duty not to set up an Advance Adverse Title: When an agent receives goods from his principal or other sources, on behalf of the principal, it is the duty of the agent not to set up on adverse title i.e. his own title or title of third parties to it. If he does so, he can be held liable.

xii) Duty in Naming an Agent for his Principal: Selecting an agent for his principal, an agent is bound to put in same amount of discretion, as he would do in his own case, under similar circumstances.

Liabilities of an Agent

i) Liabilities in Respect of Damages and Misconduct:   In case of breach of contract by an agent, he is liable to pay damages. If he is found guilty of misconduct, the principal can hold back his   remuneration for that part of business which he has mis-conducted.

ii) Personal Liability of an Agent where Fixed by Trade Custom or Usage: Ifthe trade custom or   usage in business specifies the personal liability of an agent, then hill be held personally liable for his misconducts, until unless specified.

iii) When an Agent Expressly Agrees to be Liable: When the contract expressly specifies that the agent shall be held personally liable in   case of breach of contract, then he can be held liable personally.

iv) Liability for his wrongful Acts: An agent is held liable personally when he acts beyond his authority or commits fraud or misrepresentation.

v) Liability for the Acts of Sub-agents: When an agent appoints a sub-agent, without having the authority to do so, hill be liable for all acts of the sub agent, both to the principal and the third party.

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