Black-letter propositions
- 01
Agents must act with reasonable care, competence, diligence, and within lawful instructions.
- 02
Loyalty bars undisclosed self-dealing, adverse interests, secret profits, usurpation, and misuse of property or confidential information.
- 03
Agents must provide material information relevant to entrusted matters and keep accounts.
- 04
Consent can authorize conflicts when informed and not otherwise improper.
- 05
Principal remedies include damages, disgorgement, constructive trust, rescission, and forfeiture; agent rights can include indemnification and compensation.
Use this attack sequence under time
Frame the issue
Identify relationship and scope.
Resolve the next checkpoint
Name exact duty and challenged conduct.
Resolve the next checkpoint
Test disclosure and informed consent.
Resolve the next checkpoint
Trace loss or gain.
Finish the conclusion
Select compensatory and restitutionary remedies.
Common wrong turns
- No-loss self-dealing can still require disgorgement.
- An agent may prepare to compete but cannot misuse confidential information or divert opportunities while serving.
- Good faith does not automatically cure lack of informed consent.
Worked example
A purchasing agent secretly owns the supplier and charges a market price without disclosure.
The undisclosed conflict violates loyalty even if the price was fair; the principal can seek disgorgement and other relief.
Practice this topic
The fiduciary duties
Cornell describes a fiduciary duty as a legal obligation on a person given authority to act for another, requiring the fiduciary to act in the best interests of that person and not for personal gain. In agency, a fiduciary relationship exists once a principal manifests assent to an agent to act on the principal's behalf. The duties fall into three categories: obedience, loyalty and care.
NCBE's MEE outline lists the same three headings, the duty of care, the duty of loyalty and the duty of obedience, for fiduciary duties between principal and agent.
Loyalty in more detail
Cornell describes the duty of loyalty as requiring directors to place the interests of the company and shareholders before their own. It can be violated by diverting corporate assets, opportunities or information for personal gain, or by taking a corporate opportunity. Directors must report every conflict of interest, real or perceived, disclose relevant information, and present opportunities to the board before pursuing them.
Remedies are not stated in the sources cited here, so state the remedies your course teaches for breach of each duty.
Duty of care and limiting exposure
Cornell says the duty of care requires directors and officers to make decisions that pursue the corporation's interests with reasonable diligence and prudence, and that it is owed to the corporation, not to stakeholders or broader society. Corporations can limit exposure through indemnification, directors and officers insurance and waivers of liability in the charter.
A charter cannot limit director liability for a breach of the duty of loyalty, acts or omissions in bad faith, intentional misconduct or violation of law, or a transaction from which a director received an improper personal benefit. Loyalty also carries duties to keep confidential, and not misuse, information received as a director.
Frequently asked questions
What is the controlling rule for care, loyalty, obedience, information, and remedies?+
Agency fiduciary duties protect the principal from undisclosed conflicts and can support gain-based remedies without proof of loss.
How should I analyze care, loyalty, obedience, information, and remedies on the bar exam?+
Identify relationship and scope. Name exact duty and challenged conduct. Test disclosure and informed consent. Trace loss or gain. Select compensatory and restitutionary remedies.
What is a fiduciary duty?+
A legal obligation on a person authorized to act for another to act in that person's best interests and not for personal gain, according to Cornell.
What are the three fiduciary duties in agency?+
Obedience, loyalty and care, according to both Cornell's fiduciary duty entry and NCBE's MEE subject matter outline.
What does the duty of loyalty require of directors?+
Placing the interests of the company and the shareholders before their own personal and financial interests, according to Cornell.
How can loyalty be violated?+
By diverting corporate assets, opportunities or information for personal gain, or usurping a corporate opportunity, according to Cornell.
What must directors do about conflicts of interest?+
Report every conflict, real or perceived, disclose relevant information and let a disinterested vote be taken without them.