Agent Liability to a Third Party

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, including 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 answer depends largely on the type of principal involved. The Restatement (Third) of Agency establishes default rules for three categories of principal—disclosed, unidentified, and undisclosed—each carrying different liability consequences for the agent.¹

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 has notice that the agent is acting for a principal and has notice of the principal’s identity.²

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, and the third party cannot hold the agent liable for breach.

In the case of disclosed principals, there is usually no agent liability to third parties. For example, if a corporate purchasing manager signs a supply contract on behalf of Acme Corporation, and the supplier knows the contract is with Acme, the purchasing manager generally bears no personal liability if Acme fails to pay. (Note, however, that even a disclosed-principal agent may face liability under the implied warranty of authority if the agent lacked actual authorization.)

Unidentified Principal

If an agent conducts business on behalf of an unidentified principal, the agent is a party to the contract. An “unidentified principal” (sometimes called a “partially disclosed principal”) exists when the third party knows a principal exists but does not know the principal’s identity.³

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

There is an exception to this default rule. When the agent and third party agree otherwise—for example, that the third party will look solely to the principal for performance—the agent is not a party to the contract. Without such an agreement, however, the agent remains liable 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, both the agent and the principal are parties to the contract and both may be held liable by the third party.⁴

Consider a real estate investor who sends a buyer’s agent to purchase property without revealing the investor’s involvement. If the seller believes the agent is buying the property personally, the agent is fully liable under the contract—even though the agent intended to act on the investor’s behalf.

Agent Liability and Principal Disclosure

The differences between disclosed, unidentified, and undisclosed principals are vital. They protect innocent third parties who need to know the identity of the person with whom they are contracting.

For agents to escape liability, they must disclose the existence of an agency relationship and 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. The third party may therefore 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 holds the actual authority to perform the act on the principal’s behalf.⁵ Consequently, a third party may file a lawsuit against an agent who does not have the actual authority to enter into the agreement.

This warranty exists even when the principal is fully disclosed. If an employee signs a contract purporting to bind the employer, but the employee was never authorized to do so, the third party may sue the employee for breach of the implied warranty of authority—even though the third party knew the employer’s identity.

There are three exceptions to this warranty. First, if the principal ratifies the agent’s unauthorized act, the warranty is not breached—the ratification retroactively supplies the authority the agent lacked. Second, if the agent expressly disclaims the warranty of authority, no warranty arises. Third, if the third party knows that the agent does not have the necessary authority, the warranty does not apply. In any of these cases, the agent should not be found liable for violating a warranty that was never effectively made.

Protecting Against Agent Liability

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

The safest course for any agent is to clearly identify both the principal and the agency relationship before entering into any agreement. Where there is any doubt about the scope of authority, agents should obtain written authorization from the principal and consider expressly disclaiming any personal warranty of authority in the contract itself.

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1. 1. Restatement (Third) of Agency §§ 6.01–6.03 (Am. Law Inst. 2006). The Restatement framework is the leading secondary authority on principal-agent liability in American law.

2. 2. Restatement (Third) of Agency § 1.04(2)(a). A disclosed principal exists when the third party has notice that the agent is acting for a principal and has notice of the principal’s identity. The liability rule for disclosed-principal agents appears at § 6.01.

3. 3. Restatement (Third) of Agency § 6.02. The Restatement uses “unidentified principal” rather than “partially disclosed principal,” though many courts still use the older terminology.

4. 4. Restatement (Third) of Agency § 6.03. When the principal is undisclosed, both the agent and the principal are liable to the third party on the contract.

5. 5. Restatement (Third) of Agency § 6.10. The implied warranty of authority is a separate basis of liability from the underlying contract and does not require that the third party prove reliance.