How do restrictions on an agent’s authority affect third parties?

In the law of agency, restrictions placed on an agent’s authority by a principal do not always limit the agent's ability to bind the principal to a third party. While a principal may define the internal boundaries of an agent’s competence, a third party often cannot verify these specific limitations and must instead rely on the principal’s outward manifestations of authority or the agent’s position (such as an employee or partner).12

Under the doctrine of apparent authority, an agent may possess the external legal power to perform acts that they are internally restricted from undertaking. Even if a principal revokes an agent's real authority, the apparent authority toward a third party may persist. Because representation must function efficiently, the law often protects third parties who reasonably rely on the appearance of authority, effectively apportioning the risk of unauthorized acts between the principal and the third party. Consequently, an agent’s effective power to bind a principal to a contract can extend beyond the scope of the authority actually communicated to the agent.123