Fiduciary Duties of an Agent

As I discussed in a previous post, an agency relationship exists where one party—the principal—authorizes a third party—the agent—to act on his behalf as if he were actually the one acting. This provides the agent with a significant amount of power, and so the law provides for the fiduciary duties of an agent—meaning that the agent must act in the best interest of the principal.

Duties of an Agent

The agent particularly owes a duty of loyalty to his principal. This means that one of the duties of an agent is to avoid doing anything that harms the principal, that exceeds the authority granted by the principal, and that helps the principal’s competitors.

Partnership Relationship

Agency relationships often exist simultaneously with partnership relationships. Partners are agents of the partnership, and so must act in the best interest of the partnership. A partner may not use his position to enrich himself at the expense of the partnership.

There are therefore some special rules that apply to the duties of an agent in the context of a partnership. For example, RUPA § 404(b)(1) provides that, in the conduct and winding up of the partnership, a partner must “account to the partnership and hold as trustee” any property, profit, or benefit derived in the process.

A Duty That Cannot Be Eliminated

It is important to recognize that fiduciary duties of an agent exist among partners, and the core duties of loyalty and care cannot be eliminated by agreement.

Under RUPA § 105(c)–(d) (in the 2013 Revised Uniform Partnership Act, the analogous § 103(b)(3) of earlier RUPA), a partnership agreement may identify specific categories of activity that do not violate the duty of loyalty—provided the carve-out is “not manifestly unreasonable”—and the partners may, after full disclosure, authorize particular conduct that would otherwise breach the duty. What partners cannot do is wholesale waive the underlying duties themselves. A partnership arrangement exposes the partners to a great amount of liability risk—which is why I generally recommend against operating a business as a general partnership—and the law takes these duties seriously.

Disclaimer: This post is for informational purposes only and is not legal advice. The fiduciary duties of agents and partners vary by state and depend on the specific facts of each relationship. Consult a qualified Arkansas attorney about your specific situation.