How does an agent’s authority differ from the internal contract between a principal and an agent?

In the law of agency, the agent’s authority and the internal contract between a principal and an agent are distinct relationships that do not always align.1

The internal contract governs the bilateral relationship between the principal and the agent, establishing the agent’s duties—such as care, obedience, and loyalty—and the principal’s obligations, such as compensation and indemnification. This contract defines the agent's "real authority," which includes both the legal power to act and the internal privilege or justification to do so.234

In contrast, an agent’s authority vis-à-vis third parties may extend beyond the scope of the internal agreement. Under the doctrine of apparent authority, an agent may possess the external legal power to bind a principal to a transaction even if they are acting in violation of their internal instructions. This occurs because third parties often rely on the principal’s manifestations of authority or the agent's position rather than the specific, private limitations set within the internal contract. Consequently, while an agent may be liable to their principal for breaching the internal contract, their actions may still create valid, binding obligations for the principal toward an unsuspecting third party.145