(1) An agent that acts without authority or exceeding its authority is, failing ratification by the principal, liable for damages that will place the third party in the same position as if the agent had acted with authority and not exceeded its authority.
(2) However, the agent is not liable if the third party knew or ought to have known that the agent had no authority or was exceeding its authority.
1. Liability of false agent
It is generally recognised that an agent acting without authority or exceeding its authority shall, failing ratification by the principal, be liable for damages to the third party. Paragraph (1), in stating that the false agent shall be liable to pay the third party such compensation as will place the third party in the same position as it would have been in if the agent had acted with authority, makes it clear that the liability of the false agent is not limited to the so-called reliance or negative interest, but extends to the so-called expectation or positive interest. In other words, the third party may recover the profit that would have resulted if the contract concluded with the false agent had been a valid one.
1. Agent A, without being authorised by principal B, enters into a contract with third party C for the sale of a cargo of oil belonging to B. Failing B’s ratification of the contract, C may recover from A the difference between the contract price and the current market price.
2. Third party’s knowledge of agent’s lack of authority
The false agent is liable to the third party only to the extent that the third party, when entering into the contract with the false agent, neither knew nor ought to have known that the latter was acting without authority or exceeding its authority.
2. A, a junior employee of company B, without having authority to do so engages construction company C to redecorate B’s premises. B refuses to ratify the contract. Nevertheless C may not request damages from A since it should have known that an employee of A’s rank normally has no authority to enter into such a contract.