DUTIES OF AGENT AND PRINCIPAL TO EACH OTHER
TOPIC 1. AGENT’S DUTIES TO PRINCIPAL
TITLE A. GENERAL FIDUCIARY PRINCIPLE
§ 8.01 General Fiduciary Principle
An agent has a fiduciary duty to act loyally for the principal’s
benefit in all matters connected with the agency relationship.
d(1). Remedies for breach of fiduciary duty—in general. An
agent’s breach of fiduciary duty may create several distinct bases on
which the principal may recover monetary relief or receive another
remedy. Under appropriate circumstances, an agent’s breach or
threatened breach of fiduciary duty is a basis on which the principal
may receive specific nonmonetary relief through an injunction. An
agent’s breach of fiduciary obligation may also furnish a basis on
which the principal may avoid or rescind a contract entered into
with the agent or a third party.
An agent’s breach also creates distinct bases on which the
principal may recover monetary relief. An agent’s breach subjects
the agent to liability for loss that the breach causes the principal.
See Restatement Second, Torts § 874. A breach of fiduciary duty
may also subject the agent to liability for punitive damages when the
circumstances satisfy generally applicable standards for their impo-
sition. For general standards applicable to awards of punitive dam-
ages, see Restatement Second, Torts § 908(2). In these respects, the
consequences of a breach of fiduciary duty do not differ from those
of other torts that an agent may commit against a principal.
The law of restitution and unjust enrichment also creates a
basis for an agent’s liability to a principal when the agent breaches a
fiduciary duty, even though the principal cannot establish that the
agent’s breach caused loss to the principal. If through the breach the
agent has realized a material benefit, the agent has a duty to
account to the principal for the benefit, its value, or its proceeds.
The agent is subject to liability to deliver the benefit, its proceeds, or
its value to the principalTTTT An agent must also account to the
principal for the value of the agent’s use of property of the principal
when the use violates the agent’s duty to the principal, although the
principal cannot establish that the use was harmfulTTTT If an
agent’s breach of duty is in connection with a transaction as or on
behalf of an adverse party, an alternate remedy that may be avail-
able to the principal is avoiding the transactionTTTT
(2). Remedies for breach of fiduciary duty—forfeiture of com-
missions and other compensation. An agent’s breach of fiduciary
duty is a basis on which the agent may be required to forfeit
commissions and other compensation paid or payable to the agent
during the period of the agent’s disloyalty. The availability of
forfeiture is not limited to its use as a defense to an agent’s claim for
Forfeiture may be the only available remedy when it is difficult
to prove that harm to a principal resulted from the agent’s breach or
when the agent realizes no profit through the breach. In many cases,
forfeiture enables a remedy to be determined at a much lower cost
to litigants. Forfeiture may also have a valuable deterrent effect
because its availability signals agents that some adverse conse-
quence will follow a breach of fiduciary duty.
Although forfeiture is generally available as a remedy for breach
of fiduciary duty, cases are divided on how absolute a measure to
apply. Some cases require forfeiture of all compensation paid or
payable over the period of disloyalty, while others permit apportion-
ment over a series of tasks or specified items of work when only
some are tainted by the agent’s disloyal conduct. The better rule
permits the court to consider the specifics of the agent’s work and
the nature of the agent’s breach of duty and to evaluate whether the
agent’s breach of fiduciary duty tainted all of the agent’s work or
was confined to discrete transactions for which the agent was
entitled to apportioned compensationTTTT
9. P Bank employs A, an advisor and facilitator, and
assigns A to work on a series of transactions. P Bank agrees to
compensate A by paying A an annual salary plus an amount to
be determined by P Bank on the basis of P Bank’s annual
profitability. Without P Bank’s knowledge or consent, during
A’s last year and a half working for P Bank, A accepts for A’s
personal account investment opportunities from three clients
with whom A worked on transactions on P Bank’s account. A
also does work on a fourth transaction in which A accepts no
such opportunity for A’s own account. All of A’s compensation
for the year and a half may be forfeited to P Bank. A’s
agreement with P Bank did not allocate A’s compensation on a
transaction-specific basis. A is also subject to liability to P Bank
for profits made by A, or property that A obtained, through A’s
receipt of material benefits from third parties. See § 8.02.
Some cases permit an agent to establish that the agent’s work
on balance was of benefit to the principal or require the principal to
establish that on balance it was damaged by the agent’s breach. The
better rule does not condition the availability of forfeiture as a
remedy on whether a principal can establish damage. The require-
ment that a principal establish damage is inconsistent with a basic
premise of remedies available for breach of fiduciary duty, which is
that a principal need not establish harm resulting from an agent’s
breach to require the agent to account. See Comments b and d(1).
The requirement may also tempt an agent to undertake conduct
that breaches the agent’s fiduciary duty in the hope that no harm
will befall the principal or that, if it does, the principal will be
unable to establish it or unable or unwilling to expend the necessary
resources required to litigate the question.
Likewise, the better rule does not allow an agent to offset
amounts otherwise forfeitable to the principal by showing benefits
gained by the principal through the agent’s work. The benefits
generated by a disloyal agent may be difficult to quantify, especially
when incentives created by the agent’s disloyalty reshape how the
agent performs assigned work.
TITLE B. DUTIES OF LOYALTY
§ 8.02 Material Benefit Arising Out of Position
An agent has a duty not to acquire a material benefit from a third
party in connection with transactions conducted or other actions taken
on behalf of the principal or otherwise through the agent’s use of the
b. Rationale. This rule stems from the ordinary expectation
that a person who acts as an agent does so to further the interests of
the principal and that it is the principal who should benefit from
turns of good fortune that may occur in connection with transac-
tions that the agent undertakes on the principal’s behalf. This
expectation may stem from the fact when an agent acts with actual
or apparent authority, the principal risks being bound by transac-
tions that may turn out to be disadvantageous to the principal in
An additional rationale for this rule stems from risks to a
principal’s interests that may arise when an agent pursues material
benefits from third parties in connection with actions taken on
behalf of the principal. For example, an agent’s interest in acquiring
a benefit from a third party may supersede the agent’s commitment
to obtain terms from the third party that are best from the stand-
point of the principal. Although the agent may believe that no harm
will befall the principal, the agent is not in a position disinterestedly
to assess whether harm may occur or whether the principal’s
interests would be better served if the agent did not pursue or
acquire the benefit from the third party. Only the principal can
assess the potential impact on the principal’s interests of an agent’s
anticipated receipt of a material benefit to be furnished by a third
party. By providing a material benefit to a person known to act as
an agent, a third party may become subject to liability to the
principal. A third party who provides substantial assistance or
encouragement to an agent in breaching the agent’s duty to the
principal is also subject to liability to the principalTTTT
1. P, who owns a racehorse, Grace, engages A, a jockey, to
ride Grace in an upcoming race. P agrees to pay A a fee of $500.
T, who has made a large bet that Grace will win the race,
promises to pay A $5000 if Grace wins the race. T asks A not to
tell P about T’s promise. Neither A nor T tells P about T’s
promise. Grace, ridden by A, wins the race. T pays A $5000. A
and T are subject to liability to P. A’s receipt of $5000 from T
breached A’s duty to P. T knowingly provided substantial assis-
tance and encouragement to A in A’s breach of duty to P. For
discussion of remedies available to P, see Comment eTTTT
The purpose of this rule is prophylactic. To establish that the
agent is subject to liability, it is not necessary that the principal
show that the agent’s acquisition of a material benefit harmed the
principal. The benefit realized by the agent can often be calculated
more readily than any harm suffered by the principal. However,
when the principal can establish that the agent’s conduct resulted in
harm to the principal, the principal may recover compensatory
Moreover, an agent’s acquisition of a material benefit may
breach this rule even though the agent’s ability to acquire the
benefit depends on achieving an outcome that may appear consistent
with the principal’s interests. In Illustration 1, P presumably wishes
that Grace will win the race, as do T and A. However, T’s promise to
pay A if Grace wins the race undermines P’s ability to exercise
control over A and may thwart P’s objectives as P understands
them. T’s promise may induce A to spur Grace on to assure that
Grace wins the race and A receives an additional $5000. However, P,
unbeknownst to A, may plan to enter Grace in another race that P
views as more important and thus may wish that Grace’s energies
not be overtaxed. Thus, the point of the rule is to focus the agent’s
efforts on furthering the principal’s interests as the agent reason-
ably understands them, taking into account manifestations made by
the principal. Permitting an agent’s focus to encompass additional
incentives offered by a third party is inconsistent with the singleness
of focus due the principalTTTT
3. P, who owns a used-car lot, employs A as its general
manager. A’s duties include contracting with suppliers of used
cars to replenish P’s inventory. One supplier, T, pays A $500 for
each car that A purchases for sale on P’s lot. A is subject to
liability to P. The payments A received from T are material
benefits that A acquired in connection with transactions A
4. Same facts as Illustration 3, except that T does not pay
A for cars that A purchases on behalf of P. Instead, T gives A a
three-year-old BMW, stating, ‘‘This is a gift from me to you in
gratitude for our good relationship.’’ Same result. A is subject to
e. Remedies. When an agent breaches the duty stated in this
section, the principal may recover monetary relief from the agent
and, in appropriate circumstances, from any third party who partici-
pated in the agent’s breach. A principal may avoid a contract
entered into by the agent with a third party who participated in the
agent’s breach of duty. The principal may recover any material
benefit received by the agent through the agent’s breach, the value
of the benefit, or proceeds of the benefit retained by the agent. The
principal may also recover damages for any harm caused by the
agent’s breach. If an agent’s breach of duty involves a wrongful
disposal of assets of the principal, the principal cannot recover both
the value of the asset and what the agent received in exchange. If a
principal recovers damages from a third party as a consequence of
an agent’s breach of fiduciary duty, the principal remains entitled to
recover from the agent any benefit that the agent improperly
received from the transactionTTTT
§ 8.03 Acting as or on Behalf of an Adverse Party
An agent has a duty not to deal with the principal as or on behalf of
an adverse party in a transaction connected with the agency relation-
b. Rationale. As a fiduciary, an agent has a duty to the
principal to act loyally in the principal’s interest in all matters in
connection with the agency relationship. See § 8.01. The rule stated
in this section is a specific application of this general principleTTTT
A principal may consent to conduct by an agent that would
otherwise constitute a breach of the agent’s dutyTTTT
1. P Corporation, which sells fabric-forming systems used
for purposes such as lining ditches, uses polypropylene fabric as
a principal component in constructing systems. P Corporation
hires A to make sales and perform marketing functions. A’s
duties do not involve negotiating the terms of P Corporation’s
purchase of polypropylene fabric. Unbeknownst to P Corpora-
tion, A owns one-half of the equity of T Corporation, the
principal supplier of polypropylene to P Corporation. A has
breached A’s duty to P Corporation. A’s ownership interest in T
Corporation makes A an adverse party in P Corporation’s
dealings with T Corporation.
2. Same facts as Illustration 1, except that A tells C, P
Corporation’s President, that A owns an interest in T Corpora-
tion. P Corporation, through C, has knowledge that in dealing
with T Corporation, it deals with A as an adverse party.
A principal’s knowledge that an agent deals as or on behalf of
an adverse party does not relieve the agent of duties to the principal
in connection with that transaction. Under the rule stated in § 8.06,
the agent has a duty to deal fairly with the principal and to disclose
to the principal all facts of which the agent has notice that are
reasonably relevant to the principal’s exercise of judgment, unless
the principal has manifested that the principal already knows them
or does not wish to know them. Thus, a principal’s knowledge that
its agent acts as or on behalf of an adverse party does not convert
the relationship between principal and agent into an arm’s-length
relationship. Moreover, as stated in § 8.11, an agent has a duty to
use reasonable effort to furnish information to the principal al-
though the agent does not deal as or on behalf of an adverse party.
3. Same facts as Illustration 2, except that A knows that T
Corporation is well along in the process of developing a new line
of polypropylene fabric that could be superior for P Corpora-
tion’s purposes. A has a duty to disclose this fact to P Corpora-
tion. That a superior product is in the offing is a fact that a user
of the current product would reasonably take into account in
determining how much of the current product to purchaseTTTT
Throughout the duration of an agency relationship, an agent has a
duty to refrain from competing with the principal and from taking action
on behalf of or otherwise assisting the principal’s competitors. During
that time, an agent may take action, not otherwise wrongful, to prepare
for competition following termination of the agency relationship.
§ 8.05 Use of Principal’s Property; Use of Confidential Infor-
(1) not to use property of the principal for the agent’s own purposes
or those of a third party; and
(2) not to use or communicate confidential information of the prin-
cipal for the agent’s own purposes or those of a third party.
b. Use of principal’s property. An agent who has possession of
property of the principal has a duty to use it only on the principal’s
behalf, unless the principal consents to such use. See § 8.06. This
rule is a specific application of an agent’s basic fiduciary duty stated
in § 8.01TTTT The rule is also a corollary of a principal’s right, as an
owner of property, to exclude usage by others. An agent is subject to
this duty whether or not the agent uses property of the principal to
compete with the principal or causes harm to the principal through
the use. An agent may breach this duty even when the agent’s use is
beneficial in some sense to the property or to the principal. An agent
is subject to liability to the principal for any profit made by the
agent while using the principal’s property when the use facilitates
making the profit, or otherwise for the value of the use.
1. P, who owns a stable of horses, employs A to take care
of them. While P is absent for a month, and without P’s
consent, A rents the horses to persons who ride them. Although
being ridden is beneficial to the horses, A is subject to liability
to P for the amount A receives for the rentals.
2. Same facts as Illustration 1, except that A permits A’s
friends to ride P’s horses for free during P’s absence. A is
subject to liability to P for the value of the use made of the
§ 8.06 Principal’s Consent
(1) Conduct by an agent that would otherwise constitute a breach of
duty as stated in §§ 8.01, 8.02, 8.03, 8.04, and 8.05 does not constitute a
breach of duty if the principal consents to the conduct, provided that
(a) in obtaining the principal’s consent, the agent
(ii) discloses all material facts that the agent knows, has
reason to know, or should know would reasonably affect the
principal’s judgment unless the principal has manifested that
such facts are already known by the principal or that the
principal does not wish to know them, and
(iii) otherwise deals fairly with the principal; and
(b) the principal’s consent concerns either a specific act or
transaction, or acts or transactions of a specified type that could
reasonably be expected to occur in the ordinary course of the agency
(2) An agent who acts for more than one principal in a transaction
between or among them has a duty
(a) to deal in good faith with each principal,
(b) to disclose to each principal
(i) the fact that the agent acts for the other principal or
(ii) all other facts that the agent knows, has reason to
know, or should know would reasonably affect the principal’s
judgment unless the principal has manifested that such facts
are already known by the principal or that the principal does
not wish to know them, and
(c) otherwise to deal fairly with each principal.
b. In general. This section defines the circumstances under
which conduct of a principal is effective as consent to conduct by an
agent that would otherwise constitute a breach of the agent’s duties
Common-law agency does not accord effect to all manifestations
of assent by a principal that purport to eliminate or otherwise affect
the fiduciary duties owed by an agent. This is so for two distinct
reasons: (1) the law, and not the parties, determines whether a
particular relationship is one of agency as defined in § 1.01; and (2)
the law imposes restrictions on the efficacy of a principal’s manifes-
tations of assent in the interest of safeguarding the principal’s
intention in creating a relationship of common-law agencyTTTT
Moreover, although a person may empower another to take
action without regard to the interests of the person who grants the
power, the law applicable to relationships of agency as defined in
§ 1.01 imposes mandatory limits on the circumstances under which
an agent may be empowered to take disloyal action. These limits
serve protective and cautionary purposes. Thus, an agreement that
contains general or broad language purporting to release an agent in
advance from the agent’s general fiduciary obligation to the princi-
pal is not likely to be enforceable. This is because a broadly sweep-
ing release of an agent’s fiduciary duty may not reflect an adequate-
ly informed judgment on the part of the principal; if effective, the
release would expose the principal to the risk that the agent will
exploit the agent’s position in ways not foreseeable by the principal
at the time the principal agreed to the release.
n contrast, when a principal consents to specific transactions or
to specified types of conduct by the agent, the principal has a
focused opportunity to assess risks that are more readily identifi-
able. Likewise, when a principal consents after-the-fact to action
taken by an agent that would otherwise breach the agent’s fiduciary
duty to the principal, the principal has the opportunity to assess
what the agent has done with a degree of specificity not available
before the agent takes actionTTTT
An agent bears the burden of establishing that the require-
ments stated in this section have been fulfilledTTTT
TITLE C. DUTIES OF PERFORMANCE
§ 8.07 Duty Created by Contract
An agent has a duty to act in accordance with the express and
implied terms of any contract between the agent and the principal.
§ 8.08 Duties of Care, Competence, and Diligence
Subject to any agreement with the principal, an agent has a duty to
the principal to act with the care, competence, and diligence normally
exercised by agents in similar circumstances. Special skills or knowledge
possessed by an agent are circumstances to be taken into account in
determining whether the agent acted with due care and diligence. If an
agent claims to possess special skills or knowledge, the agent has a duty
to the principal to act with the care, competence, and diligence normally
exercised by agents with such skills or knowledge.
c. Duty of competence. The specific skills that an agent must
possess to be competent depend on the nature of the service that the
agent undertakes to provide and the circumstances under which it
will be provided, such as the magnitude and complexity of transac-
tions that the agent will conduct on the principal’s account. For
example, an agent may be competent to lease apartments in a
residential building but lack the competence required to negotiate a
complex lease of commercial space.
If an agent undertakes to perform services as a practitioner of a
trade or profession, the agent ‘‘is required to exercise the skill and
knowledge normally possessed by members of that profession or
trade in good standing in similar communities’’ unless the agent
represents that the agent possesses greater or lesser skill. Restate-
ment Second, Torts § 299A. An agent may reasonably be expected to
know at least the basic rules and practices under which the agent’s
industry or profession operatesTTTT
An agent’s level of skill or knowledge may exceed the norm for
similarly situated agents. Alternatively, an agent may falsely repre-
sent that this is so. An agent’s performance should be evaluated
consistently with the agent’s claimed level of skill or knowledge
unless the agent establishes that the principal knew the agent’s
claim to be false. The agent’s professed level of skill or knowledge
becomes the standard against which the agent’s performance should
be assessed. For a comparable rule applicable to trustees, see Re-
statement Third, Trusts § 77(3) (Tentative Draft No. 4, 2005).
When an agent does not claim to possess special skills or knowledge
but in fact has a level of skill or knowledge that exceeds the norm,
the trier of fact may consider the agent’s actual knowledge and skills
in determining whether the agent acted with due care under the
circumstances. See Restatement Third, Torts: Liability for Physical
Harm § 12, Comment a (Proposed Final Draft No. 1, 2005). An
actor’s actual state of knowledge will always be relevant to deter-
mining whether the actor behaved with due care, regardless of the
source of that knowledge. Id., Comment a. An actor’s knowledge and
skills are combined to a degree that makes it difficult to disaggre-
d. Duty of diligence. An agent’s duty of diligence requires the
agent to bring the agent’s competence to bear on matters undertak-
en on behalf of the principal. Ordinarily, the scope of an agent’s
duty to be diligent is limited by the scope of the services the agent
undertakes to perform for the principal. The scope of an agent’s
duty may be expanded by contract or by the existence of a special
relationship of trust and confidence between agent and principal.
For example, a securities broker’s duty of diligence to a client who
directs trading in the client’s own account (a ‘‘nondiscretionary’’
account) is limited to executing the client’s orders to purchase and
sell securities in the account and does not extend to advising the
client or issuing risk warnings on an ongoing basis. In contrast, a
securities broker’s duty may include the provision of advice and
warnings when the broker’s relationship with the client is one in
which the client’s trust and confidence are invited by the broker and
Although an agent has a duty of diligence, that duty is to make
reasonable efforts to achieve a result and not a duty to achieve the
result regardless of the effort, risk, and cost involved. If an agent
makes a reasonable effort, the agent is not subject to liability to the
principal if the effort fails to accomplish the end desired by the
§ 8.09 Duty to Act Only Within Scope of Actual Authority and
to Comply with Principal’s Lawful Instructions
(1) An agent has a duty to take action only within the scope of the
agent’s actual authority.
(2) An agent has a duty to comply with all lawful instructions
received from the principal and persons designated by the principal
concerning the agent’s actions on behalf of the principal.
b. Duty to act only within scope of actual authority. TTT
If an agent takes action beyond the scope of the agent’s actual
authority, the agent is subject to liability to the principal for loss
caused the principal. The principal’s loss may stem from actions
taken by the agent with apparent authority, on the basis of which
the principal became subject to liability to third partiesTTTT
§ 8.10 Duty of Good Conduct
An agent has a duty, within the scope of the agency relationship, to
act reasonably and to refrain from conduct that is likely to damage the
TOPIC 2. PRINCIPAL’S DUTIES TO AGENT
§ 8.13 Duty Created by Contract
A principal has a duty to act in accordance with the express and
implied terms of any contract between the principal and the agent.
A principal has a duty to indemnify an agent
(1) in accordance with the terms of any contract between them; and
(2) unless otherwise agreed,
(a) when the agent makes a payment
(i) within the scope of the agent’s actual authority, or
(ii) that is beneficial to the principal, unless the agent acts
officiously in making the payment; or
(b) when the agent suffers a loss that fairly should be borne by
the principal in light of their relationship.
b. Agent’s right to indemnification—in general. In general, a
principal’s obligation to indemnify an agent arises when the agent
makes a payment or incurs an expense or other loss while acting on
behalf of the principal. An agent’s actions on behalf of a principal
may result in pecuniary loss for the agent. For example, an agent
may be required to make payments to third parties to carry out the
agent’s work for the principal. Actions taken by an agent may also
result in litigation against the agent brought by third parties with
whom the agent has interacted on the principal’s behalf. A contract
between a principal and an agent may anticipate the possibility that
the agent will incur pecuniary losses, specify when and to what
extent the principal has a duty to indemnify the agent, and prescribe
procedures to be followed by the agent in claiming rights to indem-
In the absence of such a contract, a principal has duties to
indemnify the agent as stated in subsection (2). If an agent acts with
actual authority in making a payment to a third party, the principal
has a duty to indemnify the agent unless otherwise agreed.
1. P retains A, an import broker, to handle importation of
a large quantity of herbicide. A learns that the amount of duty
payable on the herbicide will exceed a prior estimate given by
the customs service because the herbicide contains various
chemicals not listed on its label. Fearing forfeiture of the
security bond A has posted for the duty, A pays the additional
amount under protest and seeks indemnity from P. P has a duty
to indemnify A. A acted with actual authority in making the
d. Rights to indemnification in connection with litigation. In
the absence of an express contractual provision that requires the
principal to indemnify an agent in connection with litigation against
the agent, a principal has a duty to indemnify the agent against
expenses and other losses incurred by the agent in defending against
actions brought by third parties if the agent acted with actual
authority in taking the action challenged by the third party’s
§ 8.15 Principal’s Duty to Deal Fairly and in Good Faith
A principal has a duty to deal with the agent fairly and in good faith,
including a duty to provide the agent with information about risks of
physical harm or pecuniary loss that the principal knows, has reason to
know, or should know are present in the agent’s work but unknown to
b. Duty to deal with agent fairly and in good faith. A principal
has a duty to deal fairly and in good faith with an agent. This duty
does not supersede the principal’s power to terminate the agent’s
authority as stated in § 3.10(1). This general duty encompasses
more specific duties. The general duty obliges the principal to
refrain from engaging in conduct that will foreseeably result in loss
for the agent when the agent’s own conduct is without fault.
1. P Corporation, wishing to do business in Taiwan, en-
gages A as its general manager in Taiwan. P Corporation
designates A as its ‘‘responsible person’’ or legal representative
in Taiwan, which requires such a designation to conduct busi-
ness in the country. As P Corporation’s designated ‘‘responsible
person,’’ A affixes A’s ‘‘chop’’ or signature-equivalent, to tax
returns that P Corporation prepares and files in Taiwan. Hav-
ing decided to cease doing business in Taiwan, P Corporation
terminates A’s engagement but does not remove its designation
of A as its ‘‘responsible person,’’ although A requests several
times that P Corporation do so and tells P Corporation that A is
concerned that A may be subject to liability in the event of tax-
related disputes between P Corporation and Taiwan. Taiwan
assesses a tax liability against P Corporation that P Corporation
contests and then, following an adverse final determination,
does not pay. Taiwanese authorities notify A that A is forbidden
to leave the country until its tax dispute with P Corporation is
resolved. P Corporation has breached its duty of good faith. P
Corporation is subject to liability for loss suffered by A, includ-
ing attorney’s fees incurred by A to resolve A’s predicamentTTTT