White Logo

Commercial Contract Legal Services

Commercial Contract Legal Services

Company Contracts, Capacity and Authority


The distinct legal personality of any company is such that acting’s and obligations arise through commitments made by either its principal or its agents acting on its behalf.

An agent is described as:

“…a person who has authority to act for and on behalf of another (the principal) in contracting legal relations with third parties; and the agent representing the principal creates, alters, or discharges legal obligations of a contractual nature between the latter and third parties”.

The crux of the agency role therefore is the ability to create and discharge legal relations on behalf of a principal, usually in return for the payment of a fee. The extent of the agent’s authority is a crucial issue as, in the event of the agent exceeding his authority, this may undermine the validity of any contract he enters in to on behalf of the principal. In some circumstances the contract may still be valid, for example if the agent can rely on his apparent authority, or where his acting’s are ratified by the principal.

Creation of the agency/principal relationship

The agency/principal relationship may be created expressly in writing e.g. in a letter, a contract, a Power of Attorney or a mandate, or orally between the parties.

It may be an implied appointment e.g. by being a partner or employee of a business, or common actings for a family member.

It may be created by “holding out” where a principal allows a non appointed person to represent himself as his agent to a third party and does not object.

Agency may be created by ratification, where an agent acts without authority and the principal ratifies his conduct. Some conditions apply to this, namely that: the principal must be in existence when the transactions take place and must have legal authority.

Agency may be also created by necessity, or by statute.

Authority of the Agent

If the agent has Express Authority to act on behalf of the principal, then a third party can always found on this, even if at the time of the transaction the third party was unaware of it. The principal will always be bound by the acting of the agent.

With Implied Authority, a court will always look at what is reasonable in the circumstances, that is, what could a third party reasonably assume to be the authority of the agent. The principal will be bound by any obligations arising out of acting’s of the agent which seem reasonable. For example, a manager of a public house may be held to have implied authority to enter into contracts of sale to buy products for the public house to sell, whereas a general manager of one branch of a large firm would not have implied authority to borrow money on behalf of the business, as this is out with what would be reasonable to fulfil his duties.

Where an agent is acting with Ostensible Authority, it is similar to agency by holding out, in that the principal has allowed a third party to believe that the agent has authority where the agent’s authority is actually limited. This is considered as a misrepresentation by the principal to a third party and the principal will be bound by the agent’s acting’s unless he intimates to the third party that the agent does not have authority, or that the third party has knowledge that the agent lacks authority.

Lastly, where an agent acts with Presumed Authority, acting reasonably and out of necessity, if for example he cannot contact the other party to make a decision, a court will generally uphold this authority.

Third Party Rights & Liabilities

Rights and liabilities of third parties are dependent on the way in which the agent contracts with the third party. If the agent, having proper authority transacts with the third party then both the principal and the third party are bound, not the agent, as he is acting properly on behalf of his principal.

If however the principal is not a legal person e.g. is a company which is not yet properly incorporated, then the agent will be personally liable. Similarly, if the agent acts out with the authority of his principal, he will be liable for breach of warrant of authority and the principal will not be liable.

Where an agent acts on behalf of an undisclosed principal with the proper authority, for example in circumstances where the principal prefers to keep his identity secret, the agent will not be liable, it is the principal who is bound. If however a problem arises and the agent refuses to name the principal then he may himself become liable.

In circumstances where an agent contracts with a third party as if he were the principal and the third party breaches in some way, the principal can disclose his interest in the contract and can sue the third party. If the third party finds that the contract is breached and had no awareness that the agent was not the principal, then the option exists for him to sue either the agent or the principal. Liability however is not joint and several, only one party can be selected.

The Role of the Promoter

The promoter has no legal definition, but is commonly the person who sets up the company and carries out preliminary activities in relation to that company. He cannot strictly act on behalf of the company as the company lacks legal personality and under s.51 of the Companies Act 2006, only the promoter is liable for commitments to third parties. Any exclusion of personal liability must be expressed in the contract to be effective.

For further information and what we can do for you please contact John Carruthers on 0141 404 1091 or email [email protected].

Get in touch with us

We're happy to discuss your requirements! Either fill out the form below, or give us a call on 0141 332 0915.

Contact Oracle Law

With expertise across the spectrum of Scottish Law, we'd be happy to discuss your needs!

We're always delighted to speak to you or meet you on an informal basis to discuss your requirements.

Let's have a chat