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Agency • Liability of Principal for Agent's Contracts
AG#015
Legal Definition
Generally, a principal is solely liable for any contracts entered into by an authorized agent. However, when a principal is partially disclosed or undisclosed by an agent to a third party, the third party may elect to hold the agent liable.
Plain English Explanation
Contract law generally holds that an enforceable contract exists when two parties mutually agree to be bound by certain terms. When a third party is aware that they are speaking to a representative of a principal, they are able to frame their agreement knowing they are not directly speaking to the person to be bound. If the agent does a poor job at communicating their position, however, it is possible for the third party to reasonably believe that they are dealing directly with the agent and, thus, can later enforce directly against them.
Hypothetical
Hypo 1: Sam owns a widget factory, WidgetCo. Bob is an employee of Sam's. His title is "Business Development," and his job involves finding new customers. One day, Bob is at a conference and meets Amy. Here is the entirety of their discussion:
Bob: Hi there! I manufacture widgets.
Amy: Awesome, I need to order 100 widgets.
Bob: Wonderful. I can totally make those for you at a cost of $350.
Amy: Great! Let me give you my phone number and we can arrange shipment and payment details, but I accept your offer.
Bob and Amy shake hands and walk off. When Bob gets back to the office the next day, he finds it boarded up. WidgetCo went out of business. Amy calls Bob and asks for a status update on her order and Bob says, "I'm sorry, but WidgetCo is no longer in business." Amy says, "What is WidgetCo?" Result: At no point did Bob represent himself as an employee of WidgetCo. Rather, he represented himself as someone who makes widgets, and agreed to an order from Amy who needed widgets. Though WidgetCo is no longer open, Amy may still be able to enforce her contract directly against Bob and sue him for damages due to the principal being undisclosed.
Bob: Hi there! I manufacture widgets.
Amy: Awesome, I need to order 100 widgets.
Bob: Wonderful. I can totally make those for you at a cost of $350.
Amy: Great! Let me give you my phone number and we can arrange shipment and payment details, but I accept your offer.
Bob and Amy shake hands and walk off. When Bob gets back to the office the next day, he finds it boarded up. WidgetCo went out of business. Amy calls Bob and asks for a status update on her order and Bob says, "I'm sorry, but WidgetCo is no longer in business." Amy says, "What is WidgetCo?" Result: At no point did Bob represent himself as an employee of WidgetCo. Rather, he represented himself as someone who makes widgets, and agreed to an order from Amy who needed widgets. Though WidgetCo is no longer open, Amy may still be able to enforce her contract directly against Bob and sue him for damages due to the principal being undisclosed.
Related Concepts
How can actual express authority be revoked?
How can a principal ratify an agreement that their agent made without authority to do so?
When does an agent have actual express authority to enter into an agreement?
When does an agent have actual implied authority to enter into an agreement?
When does an agent have apparent authority to enter into an agreement?
When is a principal liable for contracts created by their agent?
