As part of the agency relationship, the agent may enter into contracts with third parties. As long as the agent stays within the established limits of the agency agreement, then the agent's authority to make these contracts is either explicit or implied, depending on the agency agreement. Third parties can reasonably assume that the agent has the authority to do all the tasks and functions within the scope of the appointment.
An agent with apparent authority has the ability to bind the principal in contract, and therefore the principal will be responsible to a third party for that contract. In the event the principal chooses to refuse the contract entered into by the agent, the agent may be found liable to the principal for contracts entered into with apparent but not actual authority, if the agent violated the specific terms of the agency agreement that was made with the principal. For example, an agent enters into a contract for design services with a third party, and the principal becomes responsible for the compensation as agreed upon in the contract. However, if the principal does not agree to the terms of the contract and views the actions of the agent as outside the agent's apparent authority, then the principal can notify the third party, thus defeating the apparent authority of the agent.The principal is bound by the actions of the agent as long as the agent was acting within the scope of the agency agreement and objectives of the principal.
Scenario with Liable Third Party
The agent must also understand that their communications with the third parties reflect on the principal. It is therefore vital for the agent to avoid conversations, interactions, and presentations that cast a negative light on the principal or the business.