To what extent is a principal bound in contract by the actions of the agent?

A principal is generally bound to third parties pursuant to the contracts entered into by the agent on behalf of the principal. This means that the principal is responsible for any obligations incurred by the agent that are within her authority. An agent has varying sources of authority when dealing with third parties: Actual Authority, Implied Authority, and Apparent Authority.

What is Actual Authority? 

Actual authority is the express authority from the principal allowing the agent to enter into obligations (contracts) on her behalf. It can be specific instructions to do so or generally included in her job duties.

• Note: The principal is bound to third parties if disclosed, partially disclosed, or undisclosed.
• Example: Arnold is an employee of ABC Corp. He signs an employee agreement indicating that he will sell products manufactured by ABC Corp directly to retailers. He has express authority to enter into any contracts with retailers for the sale of ABC-manufactured goods.

What is Implied Authority?

Implied authority concerns the authority to enter into obligations that a reasonable person would imply from the agent's position, title, or past course of dealings. If an employee has the title of vice president, it implies a great deal of authority to act on behalf of the business. Further, if an employee entered into a previous contract on behalf of the principal, it may imply that she can enter into similar contracts in the future.

• Note: This principle can only apply to disclosed and partially disclosed principals. There can never be implied authority to act on behalf of an undisclosed principal.
• Example: Beth is hired by ABC Corp with the title of Senior Sales Manager. 123 Corp seeks to purchase a shipment of supplies manufactured by ABC Corp. Even if Beth is expressly prohibited in her employment agreement from entering into direct sales agreements, it is reasonable for a retailer to believe that a person with her title has that authority. If a retailer is unaware of Beth's limitations and Beth signs a sales contract on behalf of ABC Corp, ABC Corp will be bound by the contract. Beth may be liable to ABC Corp, but her title implies this authority to transact with third parties in this manner.

What is Apparent Authority?

Apparent authority arises from the reasonable representations of the agent to third parties. That is, when the agent represents that she has authority to enter into a contract on behalf of the principal, her actions will bind the principal if a reasonable person would believe those representations. The 3rd party's belief must generally result from some action or inaction by the principal.

• Note: This principle applies to disclosed and partially disclosed principals. There can be no apparent authority if the principal is not disclosed to the third party.
• Example: Gina works for ABC Corp. She has a generic title of manager. She is limited in her ability to sign purchase agreements on behalf of ABC Corp. She does, however, routinely negotiate the terms of purchase agreements with vendors. She then transmits the purchase agreements to her boss who signs them. The vendor never deals with anyone other than Gina. If Gina decides to start by personally signing the purchase agreement, ABC Corp will likely be bound by the contracts. By signing the agreements, she is representing to vendors that she has the authority to do so. It is likely reasonable for vendors to believe that she has this authority, as Gina is the primary point of contact for negotiating the agreements.

What is Ratification?

While an agent may bind the principal to the extent of her authority, the principal is also bound if she ratifies the conduct of the agent that is beyond her express, implied, or apparent authority. That is, if the principal accepts or takes advantage of the agent's actions, she impliedly ratifies those actions as taken on her behalf. In such a situation, this expands the implied and apparent authority of the agent when undertaking future actions.

• Note: Ratification can only take place if the principal is disclosed or partially disclosed.

In each of the above situations, a disclosed principal is liable to third parties dealing with the agent. If the agent exceeds her express authority, the third party may still have the ability to back out of the contract. The third-party is generally bound by the contract if the principal ratifies the agent's conduct before the third-party finds out about the lack of authority and withdraws.

Related Topics

• Agency Law (Intro)

• What is an Agency relationship?
• What are the types of agents?
• Employee vs. Independent Contractor
• What are the types of principals?
• What is required to form a principal-agent relationship?
• What are the duties of a principal?
• What are the duties of an agent?
• What is the authority of an Agent to Bind Business in Contract?
• When are Agents liable to principals and third parties?
• What is Respondeat Superior?
• What is a Frolic and Detour?
• When does the Agency Relationship Terminate?