Last week I talked about the exception to the necessary consideration you need to form a contract, reliance. Today, I will focus on dealing with agents in the context of contracts.
Agents – Can Only Enter Contracts with a Principal’s Permission
A principal (p) typically enters an agreement with an agent (a) so that the agent can do things on the principal's behalf. Typically, (p) gives money to (a), and (a) agrees to do things, such as enter into contracts with third parties for the benefit of (p).
Agents in contract law are people who enter agreements on behalf of another, called the principal. Most everyone has met or been an agent at some point of their life. Employees are agent and their principal is the employer. I bring this up because when you hire your first employee give some thought into how they will be interacting with customers, clients, suppliers, vendors, and other business people.
When Can an Agent Bind the Principal to a Contract?
It depends on the authority given to them by the principal. An agent can only act as far as the authority given to them by the principal. An action beyond their authority is unauthorized. Thus an agent who is only authorized to purchase 3 computers exceeds their granted authority when he buys 5 computers.
(P) only authorized (a) to buy 3 computers, NOT 5. It is in this instance that (a) exceeded his purchasing authority. Thus the issue is whether or not (p) owes the computer seller for the extra 2 computers.
Is the Principal Bound to a Contract made by their Agent when the Agent Exceeded their Authority?
First of all, it is important to understand that when an agent enters a contract, you sue the principal not the agent if something goes wrong. In the situation of a contract that was unauthorized we need to see there was apparent authority. In the above example, it is clear the agent had the authority to buy 3 of the 5 computers. However, does the principal have to pay for the other 2?
Under the rule of apparent authority, if the seller reasonably does not understand the agent exceeded their authority the principal is bound on the contract. If the seller had reason to know, then the principal is released from the contract.
How would you know? For example, if the computer seller sells computers to Computer Purchasing Agent Alex of Principal Piko Powers Partnership on a weekly basis it is safe to assume they would not question the purchase. However, if Uncle Adam came into the computer store and said he for Piko, the computer seller should question his authority.
Apparent authority can be thought of how does the third party view the relationship of (p) to (a)? The best determination is if the third party has any reason to doubt the authority of the agent. This is always a case-by-case basis in disputes and is determined by the facts of the situation.
The rationale behind apparent authority is that the principal is in the better position to control their agent. Secondly, an agent who exceeds their authority gives the principal a cause of action against the agent.
Last Word on Agents, Contracts, and Duty
An agent has the duty to put their principal’s interest ahead of their own. Therefore, an agent cannot make personal gain or profit beyond what the principal and agent agreed to in an agency agreement. Where does this concept frequently get violated? When the agent sees a better business opportunity with a third-party, thus they never enter into a contract on behalf of the principal. Instead they supplant the principal and “steal” the contract and make it their own. This will also give rise to a cause of action by the principal against the agent.
An agent cannot "steal" an opportunity from a third party to the detriment of their principal if the terms of their agency agreement covers the opportunity. The principal generally sues to get the benefit of the opportunity that was misappropriated by the agent.
As a small business and startup owner you always need help, but just be aware of what others are doing on your behalf. You don’t want to find yourself stuck with extra inventory and equipment and the bill to pay for it.
*Disclaimer: This post discusses general legal issues, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction. Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.