Is the agent’s statement binding upon the Principal?
Is the Principal known or unknown? That seems to make a difference when it comes to determining liability.
Disclosed Principal
It is rather trite law, that where a Principal is disclosed and an agent acting within his authority enters into a contract for the Principal, then the Principal is bound by the provisions of the contract.
The matter of authority falls into two categories:
1) actual, and
2) apparent.
In the case of actual authority, there may be a document which clearly outlines the extent and limitations imposed upon the agent’s authority. This type of document might be a power of attorney in the terms of an all encompassing delegation of authority or what is commonly found in real estate transactions, a listing agreement. This document is an agency agreement delegating limited authority to a real estate agent concerning the sale of a particular parcel of property.
Apparent authority is a conclusion drawn from the circumstances. If the Principal generally gives the impression to third parties that the agent possesses certain authorities, then the Principal will be bound by an agent acting within the scope of that apparent authority.
If the agent acts outside of the scope of his authority, then he is bound by the contract with the third party and not the Principal. So, the agent negotiates at his own risk.
Naturally, the Principal has the option to adopt and ratify the contract. In this regard, contractual ratification must meet three criteria:
1) the agent must have acted for the Principal,
2) at the time of the contract, the agent must have had a competent Principal, and
3) at the time of ratification, the Principal must have been legally capable of performing the contract.
Undisclosed Principal
If the agent does not disclose his Principal, then it is ordinarily presumed that the agent is not an agent for anyone, but is contracting on his own behalf.
If the third party becomes aware of the Principal, the third party can sue the Principal if the agent was acting within the scope of his authority. The issue of apparent authority is not relevant since the Principal was unknown, and the agency relationship was unknown.
Real Estate Transactions
The matter of agency occurs in almost every real estate transaction. Frequently vendors and purchasers delegate authority to someone to execute and negotiate contracts on their behalf, including attorneys (by power of attorney), executors (by Will), trustees (by appointment) and corporations (by by-law or resolution).
Additionally, most vendors and purchasers are brought together by real estate agents who possess limited authority. Here, the risk of acting outside of one’s authority is substantially greater.
A great many lawsuits are initiated and unresolved at an early stage since the Principals being the contracting parties (vendors and purchasers) fail to appreciate that the conduct, comments, statements, undertakings etc. made by their agents are binding upon them.
Brian Madigan LL.B., Broker