Agent Liability to a Third Party

In this post, I discuss agent liability to third parties. I further discuss the danger it poses to agents as they perform their duties.

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An agent is someone another person has authorized to act on his or her behalf. The person on whose behalf the agent acts is called the principal. An agent may perform a variety of tasks on behalf of the principal. This can include entering into binding agreements with third parties.

The question then becomes, What personal liability to third parties can the agent incur? Must agents honor contracts they facilitate if the principal fails to perform?

The question of agent liability to a third party is vital.

The nature of the relationship between the agent and the third party—and consequently, the nature of agent liability to the third party—is fact-specific. It depends on the circumstances of the agency relationship and the type of agency relationship that exists.

Disclosed Principal

If an agent conducts authorized business on behalf of a disclosed principal, the agent generally does not incur liability. (A principal is a disclosed principal when the third party knows the principal’s identity.)

Consequently, any contract that the agent enters into is a contract between that third party and the principal. The agent is not a party to the contract. The third-party can therefore not hold the agent liable for breach of contract.

In the case of disclosed principals, there is usually no agent liability to third parties.

Unidentified Principal

If an agent conducts business on behalf of an unidentified principal, the agent is a party to the contract. (An unidentified principal exists when the third party knows a principal exists but does not know the principal’s identity.)

So, in these cases, the agent may be liable for a breach of contract.

There is an exception to this general rule. When the agent and third party agree that the agent is acting on behalf of an undisclosed principal, the agent is not a party to the contract. The third-party must consent to such an arrangement. Without such an agreement, there is agent liability to the third party.

Undisclosed Principal

Undisclosed principals exist when agents fail to disclose that they are working as an agent. To the third party, it appears that the agent is acting on his or her own behalf. In such circumstances, the agent is a party to the contract. There, therefore, exists agent liability to the third party.

Agent Liability

The differences between disclosed, unidentified, and undisclosed principals are vital. They protect innocent third parties. For agents to escape liability, they must disclose the existence of an agency relationship. They must also disclose the principal’s identity.

Just disclosing the existence of an agency relationship is not enough. Without identifying the principal, the third party remains ignorant of the identity of the other party to the contract. Therefore, the identity of the principal must also be disclosed. Otherwise, the third party may hold the person they do know—the agent—liable for performance of the contract.

Implied Warranty of Authority

Whenever an agent signs a contract with a third party, there is an implied warranty of authority. That is, there is an understanding that the agent is authorized to perform the act. Consequently, a third party may file a lawsuit against an agent that does not have the actual authority to enter into the agreement.

If, however, the agent states that he does not make a warranty of authority, or the third party knows that the agent does not have the necessary authority, there is no warranty of authority. Therefore, the agent should not be found liable in any lawsuit for violating that warranty.

Agent Liability to Third Party

The issue of agent liability to third parties is important. Most agents do not want to incur liability for commitments they make on another’s behalf. It is, therefore, important for agents—and principals and third parties—to understand when agent liability attaches.

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See Also:

Agency Relationships

Fiduciary Duties of an Agent