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To what extent are agents liable in contract to third parties and to the principals they represent?
An agent acting within the scope of her authority is not liable to third parties on obligations entered into on behalf of the principal. Even if the agent exceeds her express authority, her implied authority may bind the principal to the agreement and relieve her from any contractual liability to the third party. The important point is that the agent must act on behalf of the principal and disclose that relationship to the third party. If the agent is acting on behalf of a principal, but fails to disclose her agency status, it may subject her to liability to the third party. In some cases, it may also serve to bind the principal once the agency relationship is determined.
- Note: If the agent goes beyond her express authority, she may be liable to the principal for any obligations binding the principal to third parties. That is, the principal may be able to recover damages suffered because of the agent exceeding her authority.
- Example: I work for ABC Corp. I enter into an agreement with 123 Corp on behalf of ABC Corp. I am not personally obligated to perform the contract. If I fail to tell 123 Corp that I work for ABC Corp (123 Corp believes that I have my own business), I am liable to 123 Corp if ABC Corp does not perform the contract. ABC Corp is obligated to perform the contract if my entering the contract was in my express, implied, or apparent authority. If I did not have express or implied authority, but 123 Corp realized I was acting on behalf of an agent, ABC Corp may be liable if I had apparent authority. In such a situation, ABC Corp may be able to sue me for any losses suffered.
Discussion: Should an agent who exceeds her express authority be liable to the principal? Why or why not? Should she be liable to the third-party? Why or why not?
Practice Question: Agnes is an agent of Emory Corp, a technology company that sells subscriptions to its cloud-based software. Agnes has the general title of manager, but has no express authority in her employment agreement. Agnes routinely negotiates sales agreements with large companies that are clients of Emory Corp. Agnes enters into an agreement with Tech, LLC that is far larger than any deal Agnes previously negotiated. The agreement is very poorly negotiated and it will cause a huge loss for Emory Corp. What is Emory Corp’s obligation? What are Agnes’s potential obligations and liabilities?
- In this situation, Agnes has the implied authority (based upon her past course of conduct) to enter into these types of agreement. As such, Emory will be liable on the contract. Agnes will no be liable to Tech, LLC if Emory breaches the agreement. Agnes, may however, be liable to Emory for losses if she knowingly acted outside of her authority.