Principal–Third Party Relations in Disclosed Agency
When an agent acts on behalf of a principal, the legal effects of that action are often felt in the relationship between the principal (P) and the third party (T). Where the agency is disclosed—that is, the third party knows that the agent is acting for a principal and the identity of that principal is known or ascertainable—the rules are relatively clear. Yet even in such situations, important issues arise around liability, payment, and misrepresentation.
1. Principal–Third Party
In a disclosed agency, if an agent (A) enters into a contract with a third party (T) and reveals that they are acting for a principal (P), then:
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The contract is between P and T, not between A and T.
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The principal can sue and be sued on that contract.
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The agent is generally not a party to the agreement, unless they specifically agree otherwise.
Key point: authority matters
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If A acts within actual authority, P is fully bound.
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If A acts outside actual authority but within apparent authority, P is still bound (though A may be liable to P for exceeding instructions).
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If A acts without any authority and there is no ratification, P is not bound. In such cases, A may be liable to T for breach of the implied warranty of authority—the promise that they had the right to act when in fact they did not.
example :
A startup founder (P) asks their marketing agent (A) to sign a sponsorship deal with a local podcast (T). The agent signs within the given budget—P is bound. If the agent signs for double the agreed budget but presents themselves as having authority, the podcast may still enforce the deal against P (apparent authority). P may later seek compensation from the agent for exceeding instructions.
2. Principal–Third Party: Payment
Generally, payment to the agent is not payment to the principal, unless one of the following exceptions applies:
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Express or implied agreement – the contract specifies that the agent can receive payment.
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Actual authority – the principal authorises the agent to collect payment.
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Estoppel – the principal’s conduct or representation leads the third party reasonably to believe that payment to the agent is valid.
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Ratification – even if the agent lacked authority, if the principal later accepts the payment, it counts as discharge.
Key point: money given to an agent is risky
The third party remains liable until the money reaches the principal—unless one of the above exceptions applies.
example :
A design agency (T) hires a freelance project manager (A) working for a tech company (P). T pays A directly for a large project. If A disappears with the money and P never authorised A to collect payments, T still owes P. However, if P had sent an email confirming that A could handle payments, P cannot later deny it—T is discharged.
3. Principal–Third Party: Misrepresentation by the Agent
A misrepresentation is a false statement of fact that induces a party to enter into a contract. When an agent makes such a statement, the principal may be held liable if the agent was acting:
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within their actual authority,
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within their apparent authority, or
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where the principal later ratifies the misrepresentation.
The principal’s liability arises even if they were unaware of the misrepresentation or even if the agent acted for personal gain.
Remedies for the third party:
The agent may also face personal liability if the misrepresentation amounts to fraud (deceit) or negligence.
example :
An estate agent (A), acting for a property developer (P), tells a buyer (T) that a new apartment comes with free underground parking. In truth, the parking spaces are sold separately. T buys relying on this statement. Later, when T discovers the truth, they can claim rescission of the contract or damages from P, because A acted within apparent authority. If A knew the statement was false, they may also be personally liable for deceit.
The law of agency ensures that principals are accountable for the conduct of their agents when dealing with third parties—provided the agency is disclosed. Payment rules protect principals from unauthorised receipt of funds, while misrepresentation rules protect third parties from being misled.
In practice:
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Principals must clearly define and communicate their agents’ authority.
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Third parties should check authorisations before paying agents.
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Agents must avoid exaggerations or false claims, as both they and their principals may be held liable.
Agency Law: Agent–Third Party Relations
1. Agent–Third Party: Liability to the Third Party on the Contract
In most cases, when an agency is disclosed, the principal is the party legally bound by the contract, not the agent. However, this does not mean that an agent can never be personally liable. Courts recognize that an agent may assume liability alongside the principal depending on the circumstances.
The key question is: did the parties intend for the agent to be personally liable?
This intention is determined objectively by looking at:
Example :
An events manager (agent) books a concert venue on behalf of a startup music label (principal). If the contract is signed simply in the agent’s name without clarifying the role, the venue may hold both the agent and the label responsible for payment. Adding the label’s name clearly and signing “for and on behalf of” usually protects the agent from personal liability.
Customs of trade may also imply liability. For instance, in some online marketplaces, intermediaries who do not disclose the actual seller may be personally responsible for refunds.
Pre-Incorporation Contracts
A company cannot authorize an agent before it legally exists. Therefore, if promoters make contracts on behalf of a company that is not yet incorporated, they are personally liable.
Example:
Two entrepreneurs sign a lease for office space while their tech startup is still in the incorporation process. Even if the company later ratifies the lease, the entrepreneurs remain personally liable unless the lease is formally transferred (novation) to the company after incorporation.
This rule protects third parties, ensuring they are not left without recourse against a non-existent entity.
Agent–Third Party: Merger and Election
If both the principal and the agent could be liable, the third party (T) must make a choice: sue either the agent or the principal. Once T makes this choice (by obtaining judgment, for instance), they cannot change their mind.
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Election = a deliberate choice, made with full knowledge of the facts.
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Merger = once a judgment is obtained against one party, the other is automatically discharged, even if the judgment is not satisfied.
Example:
A logistics broker (agent) signs a shipping contract for a retailer (principal). If the broker is held liable alongside the retailer, the shipping company (third party) must choose whom to sue. If it obtains a judgment against the broker and the broker goes bankrupt, the company cannot then pursue the retailer.
This rule can feel harsh, but it encourages clarity in contracts and avoids double recovery.
Agent–Third Party: Liability for Breach of Warranty of Authority
When someone claims to act as an agent but lacks actual or apparent authority—and the principal does not ratify—the “agent” is not binding anyone but may still be liable.
The law implies a warranty of authority: by presenting themselves as an agent, they promise that they have the authority they claim. If this turns out to be false, the third party may sue for breach of this warranty.
Example:
A freelance consultant signs a supply agreement claiming to represent a well-known fashion brand without authorization. When the brand denies the contract, the supplier can sue the consultant for misrepresenting their authority.
The liability is strict: even if the “agent” honestly believed they had authority, they may still be responsible.
Agent’s Liability in Tort
Agents can also be personally liable in tort:
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Negligence: If an agent assumes responsibility and fails to meet a duty of care, causing foreseeable loss.
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Fraud (deceit): If an agent deliberately makes a false statement, they are directly liable, even without proof of assumed responsibility.
Example:
An estate agent falsely assures a buyer that a property has no legal disputes when, in fact, the agent knows otherwise. This is fraudulent misrepresentation, and the agent may be liable in tort.
Agent–Third Party: Agent’s Right to Sue Third Party
As a general rule, the agent cannot enforce the contract between the principal and the third party. However, there are exceptions:
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If the contract specifically intends to grant the agent rights.
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If the agent is personally liable under law (for example, under company legislation), they may also enforce the contract.
Example:
An influencer marketing agency (agent) negotiates a sponsorship deal for a brand (principal) with a social media platform (third party). If the contract states that the agency can also sue for unpaid fees, the agency can enforce the contract directly against the platform.
Key Takeaways
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Normally, the principal is liable, not the agent.
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Agents may still incur personal liability depending on contract terms, trade customs, or pre-incorporation agreements.
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Third parties must choose carefully (merger/election) whom to sue.
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Agents who overstate their authority risk liability for breach of warranty of authority.
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Agents may also be liable in tort for negligence or fraud.
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In rare cases, an agent may sue the third party, but only if expressly allowed or legally responsible.
In a disclosed agency, who is normally bound by the contract?
The principal and the third party – not the agent, unless agreed otherwise.
If an agent collects payment from a third party without authority, is the principal discharged?
Yes, the money is always deemed received by the principal.
No, unless there is authority, estoppel, agreement, or ratification.
When can a principal be liable for an agent’s misrepresentation?
If the agent acted within actual or apparent authority, or the principal ratified it.
Only if the principal personally made the misrepresentation.
Can an agent ever be personally liable on a disclosed agency contract?
Yes, if the contract suggests personal liability or trade custom implies it.
No, agents are never personally liable once a principal is disclosed.
What is the rule on pre-incorporation contracts?
They automatically bind the company once incorporated.
Promoters are personally liable unless the contract is novated to the company.
What does “merger and election” mean in agent–third party relations?
The third party must choose whom to sue (agent or principal); once judgment is obtained, the other is discharged.
Both principal and agent can always be sued together until payment is made.
What is a breach of warranty of authority?
When an “agent” falsely represents having authority, making them personally liable to the third party.
When a principal fails to disclose full payment terms in the contract.
Can an agent ever sue the third party directly?
Yes, if the contract gives them rights or they are personally liable under law.
No, an agent can never sue a third party.
