Chapter 3-13 Agency Actions—Agent Personally Liable for Breach of Duty

• Jurisdiction: United States

3-13 Agency Actions—Agent Personally Liable for Breach of Duty

3-13:1 Overview

The agency relationship places several fiduciary duties upon the agent. The agent must act with care, loyalty, and obedience, in the execution of his agency and must fully disclose material information to his principal. If the agent breaches any of those duties to the principal, the principal may seek a wide variety of remedies.

3-13:1.1 Related Causes of Action

Agency Actions: Agent's Liability to Third Parties, Agency Action: Agent's Actions Binding upon Principal, Breach of Partnership Duty, Breach of Formal Fiduciary Duty, Officer and Director Liability: Breach of the Duty of Care, Officer and Director Liability: Breach of the Duty of Loyalty

MUST READ CASES

Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193 (Tex. 2002)

KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70 (Tex. 2015)

3-13:2 Elements

(1) An agency relationship exists

• An agency exists when the principal manifests assent to the agent that the agent shall act on the principal's behalf and subject to the principal's control, and the agent consents.⁴⁵⁴
• The law does not presume agency.⁴⁵⁵
• The party alleging agency has the burden of proving it.⁴⁵⁶
• Agency formation does not require consideration.⁴⁵⁷
• For an agency agreement to be enforceable as between the principal and agent, there must be consideration.⁴⁵⁸

(2) The agent breaches a duty of

• An agent's duties are characterized as fiduciary in nature.⁴⁵⁹

(2)(a) Care

• An agent is held to a reasonable standard of care regarding:

• The principal's property⁴⁶⁰

• An agent is held to a high standard of care regarding:

• The principal's funds which are to be paid to a third party.⁴⁶¹

• An agent may be held to a reasonable standard of care regarding:

• The quality of a contract the agent executes on the principal's behalf.⁴⁶²

(2)(b) Loyalty

• An agent may not compete with his principal while still an agent, without first making full disclosure to the principal.⁴⁶³
• Conduct that would violate the duty of loyalty includes:

• Appropriating trade secrets;⁴⁶⁴
• Soliciting the principal's customers while still an agent;⁴⁶⁵
• Carrying away customer lists;⁴⁶⁶ and
• Referring a customer to a competitor for a fee.⁴⁶⁷

(2)(c) Obedience

• An agent must obey all of the principal's lawful instructions.⁴⁶⁸

(2)(d) Full Disclosure

• An agent must disclose all known material facts which might affect the principal's rights.⁴⁶⁹

3-13:3 Damages and Remedies

3-13:3.1 Actual Damages

Actual damages are an appropriate remedy for an agent's breach of duty.⁴⁷⁰

3-13:3.2 Forfeiture of Fee

A principal may recover any fee paid to the agent.⁴⁷¹

The applicability and extent of forfeiture will depend upon the facts of each case.⁴⁷²

3-13:3.3 Disgorgement

Disgorgement is an appropriate remedy for breach of an agency duty.⁴⁷³

3-13:3.4 Avoidance of Contract

A contract entered into by a self-interested agent is voidable by the principal.⁴⁷⁴ A principal may not avoid a contract if he ratified the transaction.⁴⁷⁵

3-13:3.5 Breach of the Duty of Obedience

A breach of the duty of obedience imposes personal liability on the agent for any unauthorized contracts entered into.⁴⁷⁶

An agent who is authorized to purchase property is liable for any payments due on the purchase that are in excess of the agreed purchase price.⁴⁷⁷

If an agent is merely authorized to collect money, the agent is liable for any unauthorized expenditure of that money.⁴⁷⁸

If an agent remits funds to its principal in an unauthorized manner, it assumes any risk of loss of such funds.⁴⁷⁹

3-13:3.6 Exemplary Damages

Exemplary damages are available if the breach of duty is accomplished:

• Maliciously;
• Fraudulently; or
• With gross negligence.⁴⁸⁰

3-13:4 Defenses

3-13:4.1 Ratification

A principal may ratify a breach of the duty of loyalty.⁴⁸¹

A principal ratifies an unauthorized contract when:

(1) He gives approval by act, word, or conduct;
(2) With full knowledge of the facts of the earlier contract; and
(3) With the intention of giving validity to the earlier contract.⁴⁸²

A principal may not avoid a contract if he ratified the transaction.⁴⁸³

3-13:4.2 Estoppel

Equitable estoppel is an appropriate defense to an agent's breach of duty.⁴⁸⁴

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