Principal liability to third parties for contract

When is a principal liable under contract?

A principal is subject to liability on a contract that the agent enters into on the principal's behalf if the agent has the power to bind the principal to the contract. An agent has the power to bind the principal to a contract when: i) The agent has *actual authority* (express or implied); ii) The agent has *apparent authority*; or iii) The principal is *estopped* from denying the agent's authority. In addition, even if an agent acts with no power to bind the principal, the principal can become subject to liability on the contract if the principal *ratifies* the contract.

Can implied authority be created by position?

A principal may manifest assent to the actions of his agent by placing the agent in a position that customarily has certain authority, such as vice president or treasurer.

What is apparent authority?

Apparent authority, also known as the doctrine of "ostensible agency," derives from the *reasonable reliance of a third party* on that party's perception of the level of authority granted to the agent by the principal. The perception is based on the principal's behavior over a period of time.

When does estoppel applies to an agreement by an agent?

Estoppel applies when a third party is justifiably induced to make a detrimental change in position because that third party believed the transaction was entered into for the principal and either the principal: i) Intentionally or carelessly caused the belief; or ii) Having notice of such belief and the possibility that the belief might induce others to change their positions in reliance on it, failed to take reasonable steps to notify them of the facts. In short, a principal, or purported principal, is liable for the appearance of authority arising solely from the principal's failure to take reasonable steps and use ordinary care.

When is actual express actual authority created?

Express actual authority can be created via: i) Oral or written words; ii) Clear, direct, and definite language; or iii) Specific detailed terms and instructions.

Can silence create a manifestation of assent?

For actual authority to exist, a principal must make a manifestation that causes the agent reasonably to believe that the agent is authorized. Silence or the failure to dissent by a principal to the actions or words of an agent when a reasonable person would do so can constitute a manifestation of assent for an agent to act on the principal's behalf. A principal must give the agent *clear notice* if the principal disagrees with the agent's actions.

Is express authority an objective or subjective standard?

For express (actual) authority to exist, the principal's manifestation must cause the agent to believe that the agent is doing what the *principal wants* (subjective standard), and the agent's belief must be *reasonable* (objective standard). Awareness of the agent's authority by a third party does not determine the nature or extent of the authority.

When does ratification occur?

For ratification to occur, the following elements must exist: i) The principal must ratify the entire act, contract, or transaction (either by express manifestation of assent or conduct that justifies a reasonable assumption of consent); ii) The principal must have the legal capacity to ratify the transaction at the time it occurs; the third party must also have the legal capacity to engage in the transaction; iii) The principal's ratification must be timely (before the third party withdraws from the transaction); and iv) The principal must have knowledge of the material facts involved in the original act.

When is implied actual authority created?

Implied actual authority allows an agent to take whatever actions (designated or implied in the principal's manifestations) are properly necessary to achieve the principal's objectives, based on the agent's reasonable understanding of the manifestations and objectives of the principal.

Can implied authority be created by acquiescence?

Implied authority based upon acquiescence commonly results from: i) A principal's acceptance of the agent's acts as they occur; or ii) The principal's failure to object to the unauthorized actions of the agent that: a) Affirm the agent's belief that those actions further the principal's objectives; and b) Support the agent's perceived authority to act in the future. Thus, it is imperative that a principal stop, correct, and clarify any unacceptable act performed by an agent when the act takes place, so as not to grant implied authority as to the future actions of the agent.

What is the difference between apparent and implied authority?

Implied authority results when the principal's words or actions cause an agent to reasonably believe in the agent's authority to act. Apparent authority results when the principal causes a third party to reasonably believe that the agent has authority to act.

What can an agent with implied authority do?

In the absence of instructions to the contrary, an agent has implied authority to act within accepted business customs or general trade usage within an industry. The agent must be aware of the normal business customs or usage before she acts.

When does changed circumstances terminate the agency relationship?

The agency relationship terminates when the changed circumstance should cause the agent to reasonably believe that the principal no longer consents to the agent acting on the principal's behalf.

Does loss of capacity terminate the agency relationship?

The common-law rule is that an individual principal's loss of capacity terminates the agent's actual authority. There is a modern trend holding that actual authority does not terminate until the agent has notice that the principal has been adjudicated to lack capacity or that the principal's loss of capacity is permanent.

Does the death of the agent terminate the agency relationship?

The death of the agent automatically terminates the agent's actual authority. Authority does not pass to the agent's estate or heirs.

Does a principal's death terminate the agency relationship?

The traditional common-law rule is that the principal's death terminates all power of the agent to act, including actual authority, regardless of whether the agent or third party has notice of the principal's death. There is a modern judicial trend to hold that the principal's death does not terminate an agent's authority until the agent has notice of the principal's death.

When does specified circumstances terminate the agency relationship?

When an existing agreement between the agent and the principal specifies the circumstances under which the agent's actual authority terminates, the occurrence of that circumstance terminates the agency, and the agent should reasonably conclude that the principal no longer would assent to the agent acting on the principal's behalf.