Next Article: Agent Liability to Third Parties
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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 – 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.
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.
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 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.
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.
Discussion: How do you feel about the doctrines of implied and apparent authority? Should an agent have the ability to bind an agent in contract when the agent does not have actual authority to do so? Why or why not? Should the standard be different for limited and general agents? Why or why not? Should the onus be on the employer to protect itself by informing third parties of the limited authority of the agent, or should the onus be on the third-parties to verify the authority of the agent? What is your justification for this opinion?
Practice Question: Kristy is an operations manager for ABC Corp. She has authority to enter into agreements for operational supplies. She does not, however, have authority to enter into sales agreements with retailers of ABC Corp products. In a couple of instances she is called upon to assist in putting together custom sales orders for large retailers. In these situations, Kristy was the primary point of contact with the retailers. 123 Corp learns about ABC Corps products through one of the retailers who previously worked with Kristy. 123 Corp contacts Kristy about putting together a custom sales package. What is Kristy’s authority to deal with 123 Corp.? If Kristy enters into an unauthorized agreement with 123 Corp, under what theory might ABC Corp be bound by the contract? Why?
- As stated, Kristy does not have the authority to enter into sales contracts on behalf of ABC Corp. That is, she does not have the express authority. If she does so anyway (goes outside of her express authority), ABC could be bound by her actions under three doctrines. First, Kristy could have implied authority. That is, the authority to enter into this agreement could be inferred from her past conduct with other retailers or from her title as operations manager. She may also have apparent authority. This is where she undertakes the activity (without authority), but it is reasonable for 123 Corp to believe her representation that she has authority. It is reasonable because of ABC’s conduct in allowing her to undertake similar or related transactions. Lastly, if she goes ahead and executes the purchase agreement, ABC could accept the purchase agreement – thereby ratifying her actions.