(1) This Section governs the authority of a person (“the agent”) to affect the legal relations of another person (“the principal”) by or with respect to a contract with a third party, whether the agent acts in its own name or in that of the principal.
(2) It governs only the relations between the principal or the agent on the one hand, and the third party on the other.
(3) It does not govern an agent’s authority conferred by law or the authority of an agent appointed by a public or judicial authority.
1. Scope of the Section
This Section governs the authority of an agent to affect the legal relations between its principal and a third party. In other words, it focuses on the external relations between the principal or the agent on the one hand and the third party on the other and is not concerned with the internal relations between the principal and the agent. Even those provisions which deal with issues affecting both the internal and the external relations (see, e.g., Articles 2.2.2 and 2.2.10 on the establishment and termination of the agent’s authority, Article 2.2.7 on conflict of interests and Article 2.2.8 on sub-agency), consider those issues only with respect to their effects on the third party.
The rights and duties as between principal and agent are governed by their agreement and the applicable law which, with respect to specific types of agency relationships such as those concerning so-called “commercial agents”, may provide mandatory rules for the protection of the agent.
2. Authority to contract
The Section deals only with agents who have authority to conclude contracts on behalf of their principals. Intermediaries whose task it is merely to introduce two parties to one another with a view to their concluding a contract (e.g. real estate agents), or to negotiate contracts on behalf of a principal but who have no authority to bind the principal (as may be the case of commercial agents) are outside the scope of the Section.
On the other hand, the wording “the authority […] to affect the legal relations of […] the principal by or with respect to a contract with a third party” used in paragraph (1) is to be understood in a broad sense, so as to comprise any act by the agent aimed at concluding a contract or which relates to its performance, including giving a notice to, or receiving it from, the third party.
3. Irrelevant whether agent acts in its own name or in that of its principal
Contrary to a number of legal systems that distinguish between “direct representation” and “indirect representation” depending on whether the agent acts in the principal’s name or in its own name, no such distinction is made in this Section. As to the distinction between “disclosed” and “undisclosed” agency, see Articles 2.2.3 and 2.2.4.
4. Voluntary nature of the relationship between principal and agent
A further condition for the application of this Section is the voluntary nature of the relationship between principal and agent. Cases where the agent’s authority is conferred by law (e.g. in the field of family law, matrimonial property and succession), or is derived from judicial authorisation (e.g. acting for a person without capacity to act), are outside the scope of this Section.
5. Agents of companies
The authority of organs, officers or partners of a corporation, partnership or other entity, with or without legal personality, is traditionally governed by special rules, sometimes even of a mandatory character, which by virtue of their specific scope necessarily prevail over the general rules on the authority of agents laid down in this Section. Thus, for instance, if under the special rules governing the authority of its organs or officers a corporation is prevented from invoking any limitation to their authority against third parties, that corporation may not rely on Article 2.2.5(1) to claim that it is not bound by an act of its organs or officers that falls outside the scope of their authority.
On the other hand, as long as the general rules laid down in this Section do not conflict with the above-mentioned special rules on the authority of organs, officers or partners, they may well be applied in lieu of the latter. Thus, for instance, a third party seeking to demonstrate that the contract it has concluded with an officer of a corporation binds that corporation, may invoke either the special rules governing the authority of that corporation’s organs or officers or, as the case may be, the general rules on apparent authority laid down in Article 2.2.5(2).
1. A, a Chief Executive Officer of company B incorporated in country X, has under the company’s articles authority to carry out all transactions falling within the company’s ordinary course of business. A enters into a contract with C that clearly falls outside the scope of B’s ordinary business. According to Section 35A of the Companies Act of country X, “[i]n favour of a person dealing with a company in good faith, the power of the Board of Directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company’s constitution” and “[…] a person shall not be regarded as acting in bad faith by reason only of that person’s knowing that an act is beyond the powers of the directors under the company’s constitution […]”. B is bound by the contract between A and C even if C knew or ought to have known of the limitations to A’s authority, and B may not rely on Article 2.2.5(1) to claim the contrary.
2. A, Managing Director of company B incorporated in country X, has been given by the Board of Directors of the company the authority to carry out all transactions falling within the company’s ordinary course of business except the hiring and dismissal of employees. A hires C as the new accountant of B’s branch in country Y. B refuses to be bound by this appointment on account of A’s lack of authority to hire employees. C may overcome B’s objection by invoking Section 35A of the Companies Act of country X. Yet C, who as a national of country Y may not be familiar with that special provision of the Companies Act of country X, may equally rely on the general rule on apparent authority laid down in Article 2.2.5(2) and claim that, in view of A’s position as Managing Director of B, it was reasonable for C to believe that A had the authority to hire employees.
(1) The principal’s grant of authority to an agent may be express or implied.
(2) The agent has authority to perform all acts necessary in the circumstances to achieve the purposes for which the authority was granted.
1. Express or implied grant of authority
Paragraph (1) makes it clear that the granting of authority to the agent by the principal is not subject to any particular requirement of form and that it may be either express or implied.
The most common case of express authority is a power of attorney, but the principal may also confer authority on the agent in an oral statement or written communication or, in the case of a corporate entity, in a resolution by its board of directors. The granting of express authority in writing has the obvious advantage of providing clear evidence of the existence and precise scope of the agent’s authority to all parties concerned (principal, agent and third parties).
An implied authority exists whenever the principal’s intention to confer authority on an agent can be inferred from the principal’s conduct (e.g. the assigning of a particular task to the agent) or other circumstances of the case (e.g. the terms of the express authorisation, a particular course of dealing between the two parties or a general trade usage).
1. B appoints A as Manager of B’s apartment building. A has implied authority to conclude short term lease contracts relating to the individual apartments.
2. Scope of the authority
The broader the mandate conferred on the agent, the broader the scope of its authority. Accordingly, paragraph (2) makes it clear that the agent’s authority, unless otherwise provided by the principal in its authorisation, is not limited to its express terms, but extends to all acts necessary in the circumstances to achieve the purposes for which the authority was granted.
2. Owner B consigns to shipmaster A a cargo to be carried to country X within 10 days. With only three days of navigation left, the ship is damaged and must stop in the nearest port for repairs. A has implied authority to unload the cargo and consign it to another shipmaster to be carried to destination on another ship.
(1) Where an agent acts within the scope of its authority and the third party knew or ought to have known that the agent was acting as an agent, the acts of the agent shall directly affect the legal relations between the principal and the third party and no legal relation is created between the agent and the third party.
(2) However, the acts of the agent shall affect only the relations between the agent and the third party, where the agent with the consent of the principal undertakes to become the party to the contract.
1. “Disclosed” agency
With respect to the effects of the acts of the agent, this Section distinguishes between two basic situations: one in which the agent acts on behalf of a principal and within the scope of its authority and the third party knows or ought to know that the agent is acting as an agent, and the other in which the agent acts on behalf of a principal within the scope of its authority but the third party neither knows nor ought to know that the agent is acting as an agent. The first situation, which is the normal one, may be referred to as “disclosed” agency and is dealt with in this Article.
2. Agent’s acts directly affect legal relations between principal and third party
In the case of a “disclosed” agency, the rule is that the agent’s acts directly affect the principal’s legal position vis-à-vis the third party (paragraph (1)). Thus, a contract made by the agent directly binds the principal and the third party to each other. Likewise, any communication of intention that the agent makes to, or receives from, the third party affects the principal’s legal position as if the principal itself had made or received it.
1. A, a sales representative for computer manufacturer B, accepts the order placed by university C for the purchase of a certain number of computers. The sales contract directly binds B vis-à-vis C with the result that it is B, and not A, who is under an obligation to deliver the goods to C and who is entitled to payment by C.
2. The facts are the same as in Illustration 1, except that one of the computers delivered is defective. The notice of such defects given by C to A directly affects B.
3. Acting in the principal’s name not necessary
For the establishment of a direct relationship between the principal and the third party it is sufficient that the agent acts within the scope of its authority and that the third party knows or ought to know that the latter acts on behalf of another person. By contrast, it is as a rule not necessary for the agent to act in the principal’s name (see also Article 2.2.1(1)).
In practice, however, there might be cases in which it is in the agent’s own interest to indicate expressly the identity of the person on whose behalf it is acting. Thus, whenever the contract requires the signature of the parties, the agent is well advised not simply to sign in its own name, but to add language such as “for and on behalf of” followed by the principal’s name, so as to avoid any risk of being held personally liable under the contract.
3. The facts are the same as in Illustration 1. For the sales contract to directly bind B vis-à-vis C it is irrelevant whether A, when accepting C’s order over the telephone, acts in its own name or expressly states that it is accepting in the name of B.
4. Computer specialist A is contacted by research centre C with a view to creating a computer programme for a special database on international case law. A, when signing the contract in its capacity as employee of software company B, should expressly state that it is acting on behalf of B. If A merely signs the contract without indicating B, C may hold A personally liable under the contract
4. Agent undertakes to become party to the contract
An agent, though openly acting on behalf of a principal, may exceptionally itself become party to the contract with the third party (paragraph (2)). This is the case, in particular, where a principal, who wants to remain anonymous, instructs the agent to act as a so-called “commission agent”, i.e. to deal with the third party in its own name without establishing any direct relation between the principal and the third party. This is also the case where the third party makes it clear that it does not intend to contract with anyone other than the agent and the agent, with the consent of the principal, agrees that it alone and not the principal will be bound by the contract. In both cases it will follow from the terms of the agreement between the principal and the agent that, once the agent has acquired its rights under the contract with the third party, it will transfer them to the principal.
Entirely different is the case where the agent steps in and, in violation of its agreement with the principal, decides to become party to the contract with the third party. In so doing the agent no longer acts as an agent, and this case therefore falls outside the scope of this Section.
5. Dealer B, expecting a substantial increase in the price of wheat, decides to purchase a large quantity of wheat. B, wishing to remain anonymous, entrusts commission agent A with this task. Even though supplier C knows that A is purchasing on behalf of a principal, the purchase contract is binding on A and C and does not directly affect B’s legal position.
6. Confirming house A, acting on behalf of overseas buyer B, places an order with supplier C for the purchase of certain goods. Since C, who does not know B, insists on A’s confirmation of B’s order, A accepts to be held liable itself vis-à-vis C. Even though C knows that A is purchasing on behalf of B, the purchase contract is binding on A and C and does not directly affect B’s legal position.
7. Dealer B instructs agent A to purchase a certain quantity of oil on its behalf. When A is about to conclude the contract with supplier C, the news arrives that the oil producing countries intend to reduce production substantially. A, expecting a rise in oil prices, decides to purchase the oil on its own behalf and enters into the contract with C as the only other party. In so doing A has ceased to act as agent for the principal and the consequences of its acts are no longer governed by this Section.
(1) Where an agent acts within the scope of its authority and the third party neither knew nor ought to have known that the agent was acting as an agent, the acts of the agent shall affect only the relations between the agent and the third party.
(2) However, where such an agent, when contracting with the third party on behalf of a business, represents itself to be the owner of that business, the third party, upon discovery of the real owner of the business, may exercise also against the latter the rights it has against the agent.
1. “Undisclosed” agency
This Article deals with what may be referred to as “undisclosed” agency, i.e. the situation where an agent acts within the scope of its authority on behalf of a principal but the third party neither knows nor ought to know that the agent is acting as an agent.
2. Agent’s acts directly affect only the relations between agent and third party
Paragraph (1) provides that in the case of an “undisclosed” agency the agent’s acts affect only the relations between the agent and the third party and do not directly bind the principal vis-à-vis the third party.
1. Art dealer A purchases a painting from artist C. When entering into the contract A does not disclose the fact that it is acting on behalf of client B, nor has C any reason to believe that A is not acting on its own behalf. The contract is binding on A and C only, and does not give rise to a direct relationship between B and C.
3. Third party’s right of action against principal
Notwithstanding the rule laid down in paragraph (1), the third party may exceptionally have a right of direct action also against the principal. More precisely, according to paragraph (2), if the third party believes that it is dealing with the owner of a business while in fact it is dealing with the owner’s agent, it may, upon discovery of the real owner, exercise also against the owner the rights it has against the agent.
2. Manufacturer A, after having transferred its assets to a newly formed company C, continues to contract in its own name without disclosing to supplier B that it is in fact acting only as the Managing Director of C. Upon discovery of the existence of C, B has a right of action also against that company.
(1) Where an agent acts without authority or exceeds its authority, its acts do not affect the legal relations between the principal and the third party.
(2) However, where the principal causes the third party reasonably to believe that the agent has authority to act on behalf of the principal and that the agent is acting within the scope of that authority, the principal may not invoke against the third party the lack of authority of the agent.
1. Lack of authority
Paragraph (1) expressly states that where an agent acts without authority, its acts do not bind the principal and the third party to each other. The same applies to the case where the agent has been granted authority of limited scope and acts exceeding its authority.
As to the liability of the false agent vis-à-vis the third party, see Article 2.2.6.
1. Principal B authorises agent A to buy on its behalf a specific quantity of grain but without exceeding a certain price. A enters into a contract with seller C for the purchase of a greater quantity of grain and at a higher price than that authorised by B. On account of A’s lack of authority, the contract between A and C does not bind B, nor does it become effective between A and C.
2. Apparent authority
There are two cases in which an agent, though acting without authority or exceeding its authority, may bind the principal and the third party to each other.
The first case occurs whenever the principal ratifies the agent’s act and is dealt with in Article 2.2.9.
The second case is that of so-called “apparent authority” and is dealt with in paragraph (2) of this Article. According to this provision a principal, whose conduct leads a third party reasonably to believe that the agent has authority to act on its behalf, is prevented from invoking against the third party the lack of authority of the agent and is therefore bound by the latter’s act.
Apparent authority, which is an application of the general principle of good faith (see Article 1.7) and of the prohibition of inconsistent behaviour (see Article 1.8), is especially important if the principal is not an individual but an organisation. In dealing with a corporation, partnership or other business association a third party may find it difficult to determine whether the persons acting for the organisation have actual authority to do so and may therefore prefer, whenever possible, to rely on their apparent authority. For this purpose the third party only has to demonstrate that it was reasonable for it to believe that the person purporting to represent the organisation was authorised to do so, and that this belief was caused by the conduct of those actually authorised to represent the organisation (Board of Directors, executive officers, partners, etc.). Whether or not the third party’s belief was reasonable will depend on the circumstances of the case (position occupied by the apparent agent in the organisation’s hierarchy, type of transaction involved, acquiescence of the organisation’s representatives in the past, etc.).
2. A, a manager of one of company B’s branch offices, though lacking actual authority to do so, engages construction company C to redecorate the branch’s premises. In view of the fact that a branch manager normally would have authority to enter into such a contract, B is bound by the contract with C since it was reasonable for C to believe that A had actual authority to enter into the contract.
3. A, Chief Financial Officer of company B, though lacking authority to do so, has, with the acquiescence of the Board of Directors, repeatedly entered into financial transactions with bank C on behalf of B. On the occasion of a new transaction which proves to be disadvantageous to B, B’s Board of Directors raises against C the objection of A’s lack of authority. C may defeat this objection by claiming that B is bound by A’s apparent authority to enter into the financial transaction on B’s behalf.
(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.
(1) If a contract concluded by an agent involves the agent in a conflict of interests with the principal of which the third party knew or ought to have known, the principal may avoid the contract. The right to avoid is subject to Articles 3.2.9 and 3.2.11 to 3.2.15.
(2) However, the principal may not avoid the contract
(a) if the principal had consented to, or knew or ought to have known of, the agent’s involvement in the conflict of interests; or
(b) if the agent had disclosed the conflict of interests to the principal and the latter had not objected within a reasonable time.
1. Conflict of interests between agent and principal
It is inherent in any agency relationship that the agent, in fulfilling its mandate, will act in the interest of the principal and not in its own interest or in that of anyone else if there is a conflict between such an interest and that of the principal.
The most frequent cases of potential conflict of interests are those where the agent acts for two principals and those where the agent concludes the contract with itself or with a firm in which it has an interest. However, in practice even in such cases a real conflict of interests may not exist. Thus, for instance, the agent’s acting for two principals may be in conformity with the usages of the trade sector concerned, or the principal may have conferred on the agent a mandate which is so stringent as to leave it no margin for manoeuvre.
2. Conflict of interests as grounds for avoidance of the contract
Paragraph (1) of this Article lays down the rule that a contract concluded by an agent acting in a situation of real conflict of interests may be avoided by the principal, provided that the third party knew or ought to have known of the conflict of interests.
The requirement of the actual or constructive knowledge of the third party is intended to protect the innocent third party’s interest in preserving the contract. This requirement is obviously no longer relevant where the agent concludes the contract with itself and is therefore at one and the same time agent and third party.
1. Solicitor A is requested by foreign client B to purchase on its behalf an apartment in A’s city. A buys an apartment client C has requested A to sell on its behalf. B may avoid the contract if it can prove that C knew or ought to have known of A’s conflict of interests. Likewise, C may avoid the contract if it can prove that B knew or ought to have known of A’s conflict of interests.
2. Sales agent A, requested by retailer B to purchase certain goods on its behalf, purchases the goods from company C in which A is a majority shareholder. B may avoid the contract if it can prove that C knew or ought to have known of A’s conflict of interests.
3. Client B instructs bank A to buy on its behalf one thousand shares of company C at the closing price of day M on the stock exchange of city Y. Even if A sells B the requested shares from out of those it has in its own portfolio, there can be no conflict of interests because B’s mandate leaves A no margin for manoeuvre.
4. A, Chief Executive Officer of company B, has authority to appoint the company’s counsel in the event of a law suit being brought by or against B. A appoints itself as B’s counsel. B may avoid the contract.
3. Procedure for avoidance
As to the procedure for avoidance, the provisions laid down in Articles 3.2.9 (Confirmation), 3.2.11 (Notice of avoidance), 3.2.12 (Time limits), 3.2.13 (Partial avoidance), 3.2.14 (Retroactive effect of avoidance) and 3.2.15 (Restitution) apply.
4. Avoidance excluded
According to paragraph (2), the principal loses its right to avoid the contract if it has given its prior consent to the agent’s acting in a situation of conflict of interests, or at any rate knew or ought to have known that the agent would do so. The right of avoidance is likewise excluded if the principal, having been informed by the agent of the contract it has concluded in a situation of conflict of interests, raises no objection.
5. The facts are the same as in Illustration 1, except that before concluding the contract A duly informs B that it is acting as agent also for C. If B does not object B loses its right to avoid the contract. Likewise, if A duly informs C that it is acting as agent also for B and C does not object, C loses its right to avoid the contract.
5. Issues not covered by this Article
In conformity with the scope of this Section set out in Article 2.2.1, this Article addresses only the impact that the agent’s involvement in a conflict of interests situation may have on the external relationship. Issues such as the agent’s duty of full disclosure vis-à-vis the principal and the principal’s right to damages from the agent may be settled on the basis of other provisions of the Principles (see Articles 1.7, 3.2.16, 7.4.1 et seq.) or are otherwise governed by the law applicable to the internal relationship between principal and agent.
An agent has implied authority to appoint a sub-agent to perform acts which it is not reasonable to expect the agent to perform itself. The rules of this Section apply to the sub-agency.
1. Role of sub-agents
In carrying out the mandate conferred on it by the principal, an agent may find it convenient or even necessary to avail itself of the services of other persons. This is the case, for instance, where certain tasks are to be performed in a place distant from the agent’s place of business, or if a more efficient performance of the agent’s mandate requires distribution of work.
2. Implied authority to appoint sub-agents
Whether or not the agent is authorised to appoint one or more sub-agents depends on the terms of the authority granted by the principal.
Thus, the principal may expressly exclude the appointment of sub-agents or make it conditional upon its prior approval. If nothing is said in the authorisation as to the possibility of appointing sub-agents and the terms of the authority granted are not otherwise inconsistent with such a possibility, the agent has the right under this Article to appoint sub-agents. The only limitation is that the agent may not entrust the sub-agent(s) with tasks that it is reasonable to expect the agent itself to perform. This is the case in particular of acts requiring the agent’s personal expertise.
1. Chinese museum B instructs a London-based art dealer A to buy a particular piece of Greek pottery on sale at a private auction in Germany. A has implied authority to appoint German sub-agent S to purchase that piece of pottery at the auction in Germany and to send it to B.
2. The facts are the same as in Illustration 1, except that B does not specify the particular piece of Greek pottery to be acquired at the auction in Germany as it relies on A’s expertise to choose the most suitable item offered for sale. A is expected to make the purchase at the auction itself, but once it has purchased the piece of pottery, it may appoint sub-agent S to send it to B.
3. Effects of a sub-agent’s acts
This Article expressly states that the rules of this Section apply to the sub-agency. In other words, the acts of a sub-agent legitimately appointed by the agent bind the principal and the third party to each other, provided that those acts are within both the agent’s authority and the authority conferred on the sub-agent by the agent, which may be more limited.
3. The facts are the same as in Illustration 1. The purchase of the piece of Greek pottery by S directly binds B provided that it is within both the authority that B has granted to A and the authority that A has granted to S.
(1) An act by an agent that acts without authority or exceeds its authority may be ratified by the principal. On ratification the act produces the same effects as if it had initially been carried out with authority.
(2) The third party may by notice to the principal specify a reasonable period of time for ratification. If the principal does not ratify within that period of time it can no longer do so.
(3) If, at the time of the agent’s act, the third party neither knew nor ought to have known of the lack of authority, it may, at any time before ratification, by notice to the principal indicate its refusal to become bound by a ratification.
1. Notion of ratification
This Article lays down the generally accepted principle whereby acts which have no effect on the principal because they have been carried out by an agent holding itself out to have authority but actually without authority or exceeding its authority, may be authorised by the principal at a later stage. Such subsequent authorisation is known as “ratification”.
Like the original authorisation, ratification is not subject to any requirement as to form. As it is a unilateral manifestation of intent, it may be either express or implied from words or conduct and, though normally communicated to the agent, to the third party, or to both, it need not be communicated to anyone, provided that it is manifested in some way and can therefore be ascertained by probative material.
Agent A purchases on behalf of principal B goods from third party C at a price higher than that which A is authorised to pay. Upon receipt of C’s bill, B makes no objection and pays it by bank transfer. The payment amounts to ratification of A’s act even if B does not expressly declare its intention to ratify, fails to inform both A and C of the payment and C is only subsequently informed of the payment by its bank.
2. Effects of ratification
On ratification the agent’s acts produce the same effects as if they had been carried out with authority from the outset (paragraph (1)). It follows that the third party may refuse partial ratification of the agent’s acts by the principal as it would amount to a proposal by the principal to modify the contract that the third party has concluded with the agent. In turn, the principal may not revoke ratification after it has been brought to the attention of the third party. Otherwise the principal would be in a position to withdraw unilaterally from the contract with the third party.
3. Time of ratification
The principal may in principle ratify at any time. The reason for this is that normally the third party does not even know that it has contracted with an agent who did not have authority or who exceeded its authority. However, even if the third party knows from the outset, or subsequently becomes aware, that the agent was a false agent, it will have a legitimate interest not to be left in doubt indefinitely as to the ultimate fate of the contract concluded with the false agent. Accordingly, paragraph (2) grants the third party the right to set a reasonable time limit within which the principal must ratify if it intends to do so. It goes without saying that in such a case ratification must be notified to the third party.
4. Ratification excluded by third party
A third party, who when dealing with the agent neither knew nor ought to have known of that agent’s lack of authority, may exclude ratification by giving the principal notice to this effect any time before ratification by the latter. The reason for granting the innocent third party such a right is to avoid that the principal is the only one in a position to speculate and to decide whether or not to ratify depending on market developments.
5. Third persons’ rights not affected
This Article deals only with the effects of ratification on the three parties directly involved in the agency relationship, i.e. the principal, the agent and the third party. In accordance with the scope of this Section as defined in Article 2.2.1, the rights of other third persons are not affected. For instance, if the same goods have been sold first by the false agent to C, and subsequently by the principal to another person D, the conflict between C and D as a result of the principal’s subsequent ratification of the first sale will have to be solved by the applicable law.
(1) Termination of authority is not effective in relation to the third party unless the third party knew or ought to have known of it.
(2) Notwithstanding the termination of its authority, an agent remains authorised to perform the acts that are necessary to prevent harm to the principal’s interests.
1. Grounds for termination not covered by this Article
There are several grounds on which the agent’s authority may be terminated: revocation by the principal, renunciation by the agent, completion of the act(s) for which authority had been granted, loss of capacity, bankruptcy, death or cessation of the existence of the principal or the agent, etc. What exactly constitutes a ground for termination and the way it operates as between the principal and the agent falls outside the scope of this Article and is to be determined in accordance with the applicable laws (e.g. the law governing the internal relations between principal and agent, the law governing their legal status or personality, the law governing bankruptcy, etc.) which may vary considerably from one country to another.
2. Termination effective vis-à-vis third party
Whatever the grounds for termination of the agent’s authority, in relation to the third party termination is not effective unless the third party knew or ought to have known of it (paragraph (1)). In other words, even if the agent’s authority has been terminated for one reason or another, the agent’s acts continue to affect the legal relationship between the principal and the third party as long as the third party is neither aware of nor ought to know that the agent no longer has authority.
Obviously the situation is clear whenever either the principal or the agent gives the third party notice of the termination. In the absence of such notice it will depend on the circumstances of the case whether the third party ought to have known of the termination.
1. Principal B opens a branch office in city X. An advertisement published in the local newspaper indicates Managing Director A as having full authority to act on behalf of B. When B subsequently revokes A’s authority, a similar notice thereof in the same newspaper is sufficient to make the termination effective vis-à-vis B’s customers in city X.
2. Retailer C has repeatedly placed orders with sales representative A for the purchase of goods sold by principal B. A continues to accept orders from C even after its authority has been terminated on account of B’s bankruptcy. The mere fact that the bankruptcy proceedings were given the publicity required by the applicable law is not sufficient to make the termination effective vis-à-vis C.
3. Authority of necessity
Even after termination of the agent’s authority the circumstances of the case may make it necessary for the agent to perform additional acts in order to prevent the principal’s interests from being harmed.
3. Agent A has authority to purchase a certain quantity of perishable goods on behalf of principal B. After the purchase of the goods A is informed of B’s death. Notwithstanding the termination of its authority, A continues to be authorised either to resell the goods or to store them in a suitable warehouse.
4. Restriction of authority also covered
The rules of this Article apply not only to termination but, with appropriate modifications, also to subsequent restrictions of an agent’s authority.