CHAPTER III
PRINCIPAL AND AGENT

Duties and Liabilities of Agent

Sec. 30. Classification. The extent of the duties imposed upon
the agent are largely governed by his contract of employment.
In addition to the duties expressly assumed by the agent, certain
others are implied from the nature of the relationship. These du-
ties divide themselves roughly into five groups. The agent is: (1)
to be loyal to his principal; (2) to obey all reasonable instructions;
(3) not to be negligent; (4) to account for all money or property
received for the benefit of the principal; and (5) to inform the
principal of all facts which materially affect the subject matter of
the agency. A duty arising under any specific circumstances will
usually be found to fall within one of these groups.

Sec. 31. Duty to be loyal. As an organic part of every con-
tract of employment, an implied duty arises on the part of the agent
to be loyal to the interests of his principal. Because of this fact, it
is held that he should undertake no business venture which com-
petes or interferes in any manner with the business of his employer.
This same rule forbids a sales agent to sell his principal's property
to himself, unless the principal assents to the sale. 1 The rule also
prevents a purchasing agent from buying his own property or that
in which he has an interest. Transactions violating these rules
may always be rescinded by the principal, despite the fact that the
agent acted for the best interests of his principal and the contract
was as favorable as could be obtained elsewhere. The general rule
is applied without favor in order that every possible motive or in-
centive for unfaithfulness may be removed.

In any case in which the agent obtains the consent of the prin-
cipal to deal with himself, the agent must disclose fully all facts
which materially influence the situation. In such a case they do
not deal at "arm's length," and the circumstances demand the ut-
most good faith on the part of the agent.

Because of the loyalty demanded of an agent, a broker is denied
the right to represent both the seller and the buyer in the same
transaction unless both have been informed of his dual relationship.
His desire to earn the commission is apt to cause him to disregard
the best interests of one of his principals.

If a contract is entered into between the two principals, it may
be avoided when it is learned that one agent represented both par-
ties. Even though the agreement is fully performed, the agent
who, unknown to the parties, acted in a dual capacity is denied the
right to compensation for his services. He should have notified
the parties of his peculiar relationship.

Sec. 32. Use of confidential information. Loyalty demands
that all information of a confidential character acquired while in
the service of the principal shall not be used by the agent to ad-
vance his interests in opposition to those of the principal. An em-
ployee who learns of secret processes or formulas or comes into pos-
session of lists of customers may not use this information to the
detriment of his employer.

Thus, an employee who, having learned of a valuable lease held
by his employer, leases the property for himself, may be forced to
hold the lease in trust for his employer. If the agent "steals a
march" on his principal, the profit belongs to the principal and not
to the agent. The rule is applied with equal severity whether the
agent acts before or after he severs his connection with the princi-
pal. An employee who copies a list of his employer's customers
may not circularize such a group after he enters business for him-
self. A distinction must be drawn, however, between the use of
secret information and the use of skill acquired at a certain employ-
ment. The latter may be used, although it affects injuriously his
former employer. For this reason there is nothing to hinder a per-
son who has made the acquaintance of his employer's customers
from later circularizing those whom he can remember. His ac-
quaintanceship is part of his acquired skill. The employer may
protect himself in the latter case by a clause in the employment
agreement to the effect that the employee will not compete with
the employer or work for a competitor for a limited period of time
after his employment is terminated.

Sec. 33. Profits from violation of duty. All profits made by
an agent while violating his duty may be recovered by the princi-
pal. Such profits include rebates, bonuses, commissions, or divi-
sions of profits received by an agent for unfaithfulness in dealing
with a particular third party. Here again the contracts may have
been favorable to the employer, but the result is the same. 2

An agent is presumed to give all his time wholeheartedly to fur-
thering his principal's cause. Suppose, however, that he takes part
of his time, unknown to his employer, to perform work for some-
one else and obtains compensation for it. Clearly, such compen-
sation belongs to the principal. Thus, a traveling salesman who,

without the consent of his employer, carries a sideline which he sells
to customers of his employer, may be compelled to turn over his
sideline commissions to his principal.

This duty of the agent refers only to the time which the contract
demands be spent on the principal's business. Any money made
after hours, or during a period when he is not expected to be work-
ing for his principal, unquestionably remains the property of the
agent.

Sec. 34. To obey instructions. It becomes the duty of an
agent to obey all instructions issued by his principal so long as they
refer to duties contemplated by the contract of employment. Bur-
dens not required by the agreement cannot be indiscriminately im-
posed by the employer. An instruction may not be disregarded
merely because it departs from the usual procedure and seems fan-
ciful and impractical to the employee. It is not his business to
question the procedure outlined by his superior. Any loss which
results while he is pursuing any other course makes him absolutely
liable for the result.

Furthermore, an instruction of the principal does not become im-
proper merely because the motive is bad. He may be well aware
of the agent's distaste for certain tasks, yet, if those tasks are such
as may be called for under the employment agreement, it becomes
the agent's duty to perform them. Failure to perform often results
in proper grounds for his discharge.

This obligation on the part of the agent to follow carefully his
principal's orders applies to an agent who acts gratuitously, as well
as to one who receives pay for his services. Although the former
is under no duty to perform, even though he has promised to do so,
yet, if he undertakes to carry out his commission, he must follow
explicitly the instructions received.

Closely allied to the duty to follow instructions is the duty to re-
main within the scope of the authority conferred. Because of the
doctrine of estoppel, it often becomes possible for an agent to ex-
ceed his authority and still bind his principal. In case of such a
violation of his contract, the employee clearly becomes responsible
for any resulting loss. He is in this instance failing to follow the
instructions set forth in his contract with his employer. These in-
structions must be fully complied with, as well as those issued later
by the principal.

Sec. 35. Unusual circumstances. Occasionally circumstances
arise which nullify instructions previously given. Because of the
new conditions, the old instructions would, if followed, practically
destroy the purpose of the agency. Whenever such an emergency
arises, it becomes the duty of the agent, provided the principal is



126 AGENCY

not available, to exercise his best judgment in meeting the situation.

An instruction to do an illegal or immoral act, or an act which
will impair the security or position of the agent, may be disre-
garded. To illustrate: A factor has a lien on goods in his posses-
sion for all money advanced to his principal. An order from the
principal to return the goods or to sell them on credit could be dis-
regarded until such time as all advances had been paid.

The usual effect of a failure to follow instructions is that it makes
the employee liable for resulting damage. In addition, if the per-
formance requested is of the essence of the agency, it may justify
a termination of the relationship. On the other hand, if the viola-
tion merely consists in the manner in which the task is performed,
the agent may not be discharged unless he persists in his failure to
follow orders.

Sec. 36. Duty not to be negligent. All agents are presumed to
exercise that degree of skill and diligence ordinarily expected of
those who perform like undertakings. An agent who agrees to per-
form a particular task implies that he possesses the requisite skill
and training. His duty is to exercise only a reasonable degree of
care, and he is not liable for a failure to use the highest degree of
care possible. Thus, an agent may be intrusted to loan the money
of another. If he exercises ordinary prudence in ascertaining the
state of the title to property securing the loan and reasonably esti-
mates its value, he cannot be held liable upon nonpayment of the
loan at its maturity. 3 In a previous chapter it was observed that
the negligence of an agent might, under certain conditions, make
the principal liable to third parties. Where the agent is clearly re-
sponsible for the damage, the principal may recover from the agent
the amount paid by him to the third party. The burden in such
cases may ultimately be shifted to the negligent party.

Sec. 37. Duty to account. Money or property intrusted to the
agent must be accounted for to the principal. Because of this fact,
the agent is required to keep proper records showing receipts and
expenditures, in order that a complete accounting may be rendered.
Any money collected by an agent for his principal should not be
mingled with funds of the former. If they are deposited in a bank,
they should be kept in a separate account and so designated that a
trust is apparent. Otherwise any loss resulting from an insolvent
bank must be borne by the agent.

The principal may follow any funds misappropriated by the
agent until they fall into the hands of a third party. Even then
the principal may follow the proceeds and impress a trust upon
them, so long as they have not reached an innocent third party.

8 Whitney v. Marline, 1882, 88 N.Y. 535; p. 566.



PRINCIPAL AND AGENT 127

Furthermore, if such proceeds can be shown to have increased the
estate of the agent, a trust may be imposed upon the agent's estate
to that extent.

Sec. 38. To give notice. It becomes the duty of an agent to
tell his principal of all facts which vitally affect the subject matter
of the agency and which are obtained within the scope of the em-
ployment. Matters learned while outside the scope of the em-
ployment and which the agent never expects to use need not be
communicated to the principal.

This rule extends beyond the duty to inform the principal of con-
flicting interests of third parties in a particular transaction, and
imposes upon the agent a duty to give all information which ma-
terially affects the interest of the principal. Thus, knowledge of
facts which have greatly advanced the value of property placed
with an agent for sale should be communicated before the property
is sold at a price previously established by the principal.

Duties and Liabilities of Principal

Sec. 39. To employ. First and foremost, it becomes the duty
of the principal to employ the agent in accordance with their agree-
ment and to pay him the agreed compensation. 4 If no definite
compensation has been agreed upon, there arises a duty to pay the
reasonable value of such services. Whenever the party perform-
ing the services is a stranger to the employer, the obligation to
compensate exists. However, where relatives are working for one
another and no express agreement has been formulated, the courts
are likely to infer that the services so rendered should be considered
as gratuitous.

Whether the agent is entitled to have actual work to perform in
addition to his compensation is questionable. Where, however, his
skill depends upon constant practice, it is doubtful whether the em-
ployer fulfills his agreement by merely paying the agreed compen-
sation without offering him any work to do.

Sec. 40. Real estate broker's commission. In the absence of
an express agreement, the real estate broker earns his commission
at either one of two times. As soon as he finds a buyer who is
ready, willing, and able to meet the terms outlined by the seller, he
has earned his commission. 5 The owner cannot rob him of his
compensation by refusing to deal with the prospective purchaser or
by withdrawing the property from sale. Likewise, he cannot re-
lieve himself of the duty to pay the commission by terminating the
agency and later contracting directly with the broker's prospect.

4 Walsh v. Isgro, 1938, 121 N.J.L. 165, 1 Atl.(2) 391; p. 567.
6 Knowles v. Henderson, 1945, 156 Fla. 31, 22 S.(2) 384; p. 568.



128 AGENCY

The fee is earned if it is shown that the broker was the inducing
cause of the sale.

The commission is also earned as soon as the owner contracts
with the purchaser, even though it later develops that the buyer is
unable to meet the contract's terms. The owner assumes the risk
of performance if he is willing to, and does, contract with the buyer
presented by the broker. The broker's commission is contingent
on payment by the purchaser only when his contract of employment
so states. An owner who lists property with several brokers is ob-
ligated to pay the first one to find a satisfactory purchaser, at which
time the agency of other brokers is automatically terminated.

Sec. 41. Compensation of sales representatives. Salesmen
who sell merchandise on a commission basis have problems con-
fronting them which are similar to those of the broker unless the
employment contract is specific in its details. To illustrate, let us
assume that X Co. appoints A as its exclusive sales representative
in a certain territory on a commission basis, and that the employer
is engaged in producing and selling electrical equipment. T, a
business man in the area involved, sends in a large order for mer-
chandise directly to the home office of X Co. Is A entitled to a
commission on the sale? It is generally held that such a salesman
is entitled to a commission only on sales solicited and induced by
him, unless his contract of employment gives him greater rights.

The salesman usually earns his commission as soon as an order
from a responsible buyer is obtained, unless his contract of employ-
ment makes payment contingent upon delivery of the goods or col-
lection of the sale's price. If payment is made dependent upon
performance by the purchaser, the employer cannot deny the sales-
man his commission by terminating the agency prior to collection
of the account. When the buyer ultimately pays for the goods, the
seller is obligated to pay the commission.

An agent who receives a weekly or monthly advance against fu-
ture commissions is not obligated to return the advance if commis-
sions equal thereto are not earned. The advance, in the absence of
a specific agreement, is considered by the courts as a minimum sal-
ary.

Sec. 42. Reimbursement and indemnity. Money expended by
the agent in behalf of the principal may be recovered. It must ap-
pear that the money was reasonably spent and that its expenditure
was not necessitated by the misconduct or negligence of the agent.

The agent is justified in presuming that instructions given by the
principal are such as he lawfully has a right to give and that per-
formance resulting from such instructions will not injuriously affect
third parties. Where this is not the case, and the agent incurs a
liability to some third party because of trespass or conversion, the



PRINCIPAL AND AGENT 129

principal must indemnify the agent against loss. 6 In like manner,
it becomes the duty of the principal to make possible performance
by the agent whenever the latter has entered into a contract in
his own name for the former's benefit. The undisclosed principal
must fully protect his agent.

Termination of Agency

Sec. 43. By act of the parties. An agency may be terminated
by an act of the parties or by operation of lawyers. An agency which
is created to continue for a definite period of time ceases, by the
original agreement, at expiration of that period. If the parties con-
sent to the continuation of the relationship beyond such period,
the courts imply the formation of a new contract of employment.
The new agreement contains the same terms as the old one, and
continues for a like period of time. 7

An agency created to accomplish a certain purpose automatically
ends with the completion of the task assigned. In such a case third
parties are not entitled to notice of the termination. Furthermore,
where it is possible for one of several agents to perform the task, as
selling certain real estate, it is held that performance by the first
party terminates the authority of the other agents.

Any contract may be terminated by mutual agreement; there-
fore, the agency relationship may be severed in this manner. Fur-
thermore, either party to the agreement has full power to terminate
it whenever he desires, although he possesses no right to do so.
Wrongful termination of the agency by either party subjects him
to a suit for damages by the other party. An exception to these
rules exists in the case of so-called agencies coupled with an inter-
est. Such agencies cannot be terminated without the consent of
the agent, and a full discussion of them will be found in a subse-
quent section.

Sec. 44. Wrongful termination and its effect. An employ-
ment at the will of the parties may be terminated at any time. On
the other hand, if the employer wrongfully terminates a contract
which was to continue for an agreed period, he becomes liable for
damages. However, if the agent is discharged for cause, such as
failure to follow instructions or to exercise proper care, or for non-
performance of various other duties, he may not recover damages
from his employer.

The employee who has his employment wrongfully cut short is
entitled to recover his compensation for work done before his dis-
missal and an additional sum for damages. Most of the states per-
mit him to bring an action either immediately following the breach,

6 Hoggan v. Gaboon, 1903, 26 Utah 444, 73 Pac. 512, 99 A.S.R, 837; p. 570.
7 Sines v. Superintendents of the Poor, 1885 58 Mich. 503; p. 571.



130 AGENCY

in which he recovers prospective damages, or after the period has
expired and thus recover the damages actually sustained. In the
latter case he is compelled to deduct from the compensation called
for in the agreement the amount which he has been able to earn
during the interim. Under such circumstances the employee is
held to a duty to exercise reasonable diligence in finding other work
of like character. Apparently this rule does not require him to seek
employment in a new locality or to accept work of a different or
more menial character. His duty is to find work of like kind, pro-
vided it is available in the particular locality.

Sec. 45. Termination by law. Certain acts are held by law to
terminate the agency. Among these are death, insanity, or bank-
ruptcy of either of the parties. Bankruptcy has such an effect
only in case it affects the subject matter of the agency.

It is said of such cases that the agency is immediately terminated
and that no notice need be given to either the agent or the third
parties. However, with reference to insanity, unless the principal
has been publicly adjudged insane, it is believed that his agent's
contracts are binding on the principal unless the third party is
aware of the facts.

Sec. 46. Agency coupled with an interest. It is said that an
agency coupled with an interest cannot be terminated without the
consent of the agent. Such agencies are of two classes: those in
which the agent has a legal or equitable interest in the subject mat-
ter; and those in which the agency is created as a source of reim-
bursement to the agent because of money owed him by the princi-
pal. This latter type is most often called an agency coupled with
an obligation. Although it cannot be terminated by the principal
during his lifetime, it is terminated by death, whereas a true agency
coupled with an interest is not terminated in either case. To illus-
trate : A mortgagee who receives a mortgage in which is included a
provision giving him the right to sell in case of default could not
have this right taken away during the lifetime or by the death of
the principal. On the other hand, an agent who is given the right
to sell a certain automobile and to apply the proceeds on a claim
against the principal has his right cut off by the death of his prin-
cipal.

Under either type of agency it should be clear that the interest in
the subject matter must be greater than the mere expectation of
profits to be realized. 8 In other words, a principal who has ap-
pointed an agent to sell certain goods on commission could certainly
terminate the agency at any time he desired, although his conduct
might constitute a breach of the agreement.

8 Flanagan v. Brown, 1886, 70 Cal. 254; p. 571.



PRINCIPAL AND AGENT 131

Review Questions and Problems

1. Name the five duties which the agent owes to the principal.

2. A, while employed by P, learns that a lease held by P is very valu-
able. Just before the lease expires A obtains a new lease in his own
name at a slightly increased rental. May P compel A to assign the lease
to him?

3. Should an agent act as the representative of the two contracting
parties? If he does act for both, unknown to the parties, may he later
recover compensation for his services?

4. A, while acting as a traveling salesman for P, for which work he
is paid a regular salary, carries a sideline which nets him $75 a month.
If P learns of this fact, may he recover the profit from At

5. Assuming that P gives A an instruction which appears unreasonable
and impractical, may A disregard the instruction? Suppose the instruc-
tion is one which falls within the list of A's duties, but it is one known
to be distasteful to him; may he disregard it?

6. A collects money for P, but deposits it in X bank in his own name.
The bank becomes insolvent and is expected to pay about 40 cents on the
dollar. Who must bear the loss?

7. A invests for P $1,000 in a note secured by a first mortgage on real
estate. Are there any circumstances under which A might be liable in
case the mortgagor failed to pay the note and the real estate did not
prove to be ample security?

8. P takes A into his home and treats him as a child of his own, fur-
nishes him with the necessities of life, and makes possible his education.
After A becomes of age, may he recover the reasonable value of various
services rendered to P while he was a minor?

9. What is the difference between reimbursement and indemnity?
May an agent of an undisclosed principal always recover from the prin-
cipal for liabilities incurred while representing him?

10. A, appointed to sell merchandise in a certain area for P, was to
receive a commission of 2% on all sales. He received a weekly advance
of $40 for ten weeks but his commissions only averaged $20 a week. Does
he owe P the $200 difference?

11. How long does an agency relationship continue? What is the
result of a wrongful termination?

12. What is the difference between an agency coupled with an interest
and one coupled with an obligation running from the principal to the
agent? P gives A a mortgage to secure a note and in the mortgage gives
A the right to sell the property in case of default. Does the right to sell
cease upon the death of P?

13. A acted as P's agent in a sale of real estate to T 7 , for whom he was
also acting as purchasing agent. After the transaction had been com-
pleted P first learned of the dual agency and he refused to pay A his
commission of $1,320. Assuming P obtained the full price at which the
property was listed, is A entitled to his commission?