Corporate and Business Law (Global) · Agency law

Liability to Third Parties and Termination of Agency in ACCA Corporate and Business Law

Updated 11 October 2026

A disclosed principal is bound by contracts the agent makes within authority, and the agent drops out. An undisclosed principal can sue and be sued once found. An agent who lacks authority is liable for breach of warranty of authority. Agency ends by agreement, revocation, renunciation, completion, or by operation of law such as death, insanity or bankruptcy.

Understand Liability to Third Parties and Termination of Agency

An agent is a person who makes contracts between a principal and a third party. Once the contract is made, the main question is: who is bound? The answer depends on whether the agent had authority and whether the third party knew a principal existed.

If the agent acts within authority (actual or apparent) for a disclosed principal, the contract is between the principal and the third party. The agent is normally not a party and is not liable. The agent can become personally liable if they agree to be, if they sign a deed in their own name, or if the custom of the trade makes them liable.

If the agent does not reveal that they act for someone, the principal is undisclosed. The agent is liable on the contract, as the third party thought the agent was the other party. The principal can still step in and sue, or be sued, on the contract once revealed. For the third party to claim against the principal, the agent must have acted within authority when the contract was made. The principal's right to enforce the contract is lost where the contract's terms exclude the principal, or where the third party's choice of contracting party was personal and material (for example, where personal skill or identity mattered). In that case the third party may refuse to deal with the principal. An express term excluding the principal may also bar a claim against the principal. The principal must also have existed, and the agent must have had authority, when the contract was made. An undisclosed principal cannot ratify later. Once the principal is discovered, the third party may elect to hold either the agent or the principal liable. Judgment against one of them bars action against the other. A clear and unequivocal election, made with knowledge of the principal's identity, can also bar it. The exact test depends on the jurisdiction, and merely starting proceedings may not be enough.

If the agent acts without authority, the principal is not bound unless they ratify. Ratification needs the principal to have existed and had capacity when the act was done, and the agent to have purported to act on behalf of an identified or identifiable principal. It must happen within a reasonable time and cover the whole act, not just part of it. The principal must ratify with knowledge of the material facts, or be willing to take the risk of them. An undisclosed principal cannot ratify. Where the principal does not ratify, the agent is liable to the third party for breach of warranty of authority. An agent impliedly promises that they have authority. The third party can claim damages for the loss caused, even if the agent was honest.

Agency ends in two ways. By act of the parties: mutual agreement, revocation by the principal, renunciation by the agent, or completion of the task or expiry of the period. By operation of law: death, mental incapacity or bankruptcy of either party, the principal's company being wound up, or the subject matter being destroyed or the agency becoming illegal. Details vary by jurisdiction, so answer using the general principles taught in the syllabus. Ending agency by act of the parties can leave apparent authority behind: third parties who dealt with the agent before and were not told may still bind the principal. Termination by operation of law ends the agent's actual authority automatically. Whether apparent authority survives for third parties who have no notice depends on the jurisdiction. In some jurisdictions the agent's acts remain binding where neither the agent nor the third party knew of the event. The effects of death, insanity, bankruptcy and winding up are not all the same, so state the general rule and flag that nuance.

Key formulas to remember

Disclosed principal: Agent acts within authority for an identified or identifiable principal → principal and third party are bound; agent drops out; Agent is liable only if they agree to be, sign a deed personally, or trade custom says so.
Undisclosed principal: Agent liable + principal can sue and be sued once revealed, if the agent had authority (subject to limits); The third party's claim against the principal requires the agent to have acted within authority, and an express term excluding the principal may bar it. The principal's right to enforce is lost where the contract excludes the principal or the third party's choice of the other party was personal and material. The principal must have existed when the contract was made.
Breach of warranty of authority: No authority + no ratification → agent liable in damages to the third party; Applies even if the agent acted honestly. Damages put the third party in the position as if the authority had existed.
Ratification conditions: Principal existed and had capacity at the time + agent purported to act for an identified or identifiable principal + done within reasonable time + whole act ratified + knowledge of the material facts, or willingness to take the risk of them; Valid ratification is retrospective and removes the agent's liability for breach of warranty of authority. An undisclosed principal cannot ratify.
Termination by act of parties: Agreement | revocation by principal | renunciation by agent | completion or expiry; Wrongful ending may give the other party a damages claim.
Termination by operation of law: Death | insanity | bankruptcy | winding up | destruction of subject matter | illegality; Actual authority ends automatically; no notice needed to end it. Whether apparent authority survives for third parties without notice depends on jurisdiction, so flag this.

How to solve Liability to Third Parties and Termination of Agency questions

Use the same order for any scenario question on agent liability or the end of an agency.

1Identify the principal, agent and third party, and write down what contract was made.
2Check authority: was it actual (express or implied), apparent, or was there none?
3Decide whether the principal was disclosed (identified or identifiable) or undisclosed at the time of contract.
4If authority existed, say who is bound: disclosed principal and third party; undisclosed means agent plus principal once revealed.
5If no authority, test for ratification using the conditions. If ratified, the principal is bound. If not, the agent is liable for breach of warranty of authority.
6For ending of agency, classify the event as an act of parties or operation of law, and check if a stated period or task applies.
7Consider whether apparent authority survives (it can after an act of parties; after operation of law it depends on the jurisdiction) and whether damages are due for wrongful termination.
8State a clear conclusion for each party in one sentence.

Quickest way: Three-question filter

When to use it: For one or two mark objective test questions where you have under a minute.

Ask: did the agent have authority? If no, think ratification, then warranty of authority.
Ask: did the third party know there was a principal? If no, agent liable and principal may sue.
Ask: how did the agency end? Death, insanity or bankruptcy means ended by law with no notice needed.

Common mistakes in Liability to Third Parties and Termination of Agency

Saying the agent is always liable on a contract with an undisclosed principal and the principal is never liable.
Students remember that the agent is liable and forget the principal can be sued once revealed.
Fix: Remember both can be liable. The third party can generally choose between them once the principal is found.
Treating breach of warranty of authority as a claim by the principal.
The word 'authority' makes students link it to the principal.
Fix: The claim is by the third party against the agent. The agent promised they had authority.
Allowing ratification where the principal did not exist when the agent acted.
Students focus on the principal's later approval and skip the time conditions.
Fix: Check existence, capacity, whether the agent purported to act for an identified or identifiable principal, reasonable time, ratification of the whole act, and knowledge of the material facts (or willingness to take the risk) before accepting ratification.
Saying revocation always ends the agent's power to bind the principal immediately.
Students ignore apparent authority.
Fix: Revocation ends actual authority, but a third party who was not told may still rely on apparent authority.
Treating all terminations as needing notice.
Notice is common in practice for revocation or renunciation.
Fix: Termination by operation of law, such as death or bankruptcy, ends the agent's authority automatically without notice. Flag that the effect on third parties can vary by jurisdiction.

Worked examples

Example 1

Asha buys goods from Beta Ltd in her own name, without saying she is buying for Chen, who authorised her to do so. Beta later learns of Chen. Beta's terms did not exclude agents and the identity of the buyer was not important to Beta. Who can be liable for the price?

Show the solution

Asha had Chen's authority, so authority was present.
Chen was undisclosed at the time of contract.
As the party Beta dealt with, Asha is liable on the contract.
Once Chen is revealed, Beta can claim against Chen as principal because Asha had authority. Chen could also sue, as nothing excluded him and Beta's choice of buyer was not material.
Beta can therefore pursue either Asha or Chen, but it cannot recover the price twice. Judgment against one bars action against the other. A clear and unequivocal election made with knowledge of Chen's identity can also do so. The exact test depends on the jurisdiction, and merely starting proceedings may not be enough.

Answer: Beta can claim the price from Asha or from Chen once Chen is revealed. Judgment against one of them bars action against the other, as can a clear and unequivocal election made with knowledge of Chen's identity. The exact test depends on the jurisdiction.

Example 2

Dev, an agent, signs a supply contract with Ola Co for his principal Mira, stating he has authority. In fact Mira had limited his authority and the contract exceeds it. Mira refuses to ratify. Ola loses profit. What is Dev's position, and what happens if Mira dies before Ola contacts her?

Show the solution

Dev acted without authority, so Mira is not bound unless she ratifies.
Mira refuses, so no ratification takes place.
Dev impliedly warranted that he had authority, and that was untrue.
Ola can sue Dev for breach of warranty of authority and recover damages for its loss, even if Dev acted honestly.
If Mira dies, the agency ends by operation of law. Mira can no longer ratify herself, and whether her estate could ratify depends on the jurisdiction, so do not rely on it. Dev's liability stays, because he had no authority when the contract was made and Mira's death does not change that.

Answer: Dev is liable to Ola in damages for breach of warranty of authority. Mira's death ends any agency automatically and means she can no longer ratify herself. It does not reduce Dev's liability, because he lacked authority when the contract was made.

Exam tips

Look at the question wording. 'The agent is liable' often points to warranty of authority or an undisclosed principal.
In Section B scenarios, spot the termination event first, then decide if it is by act of parties or by operation of law.
Termination by operation of law (death, insanity or bankruptcy) ends the agent's actual authority automatically. Whether apparent authority survives for third parties without notice depends on the jurisdiction, so flag that and do not state it as a fixed rule.
For written answers, name each party and state the outcome separately for the principal, agent and third party.
Check each ratification condition one by one; a single failed condition defeats ratification.

Practice questions from Agency law

Liability to Third Parties and Termination of Agency: frequently asked questions

Can a third party sue an undisclosed principal?

Yes, generally once the principal is discovered and if the agent acted within authority. The third party can usually choose to sue either the agent or the principal. An express term excluding the principal may bar a claim against them. The principal's own right to enforce is lost if the contract excluded the principal or the third party's choice of contracting party was personal and material.

What is breach of warranty of authority?

It is the agent's liability when they claim to act for a principal without authority and the principal does not ratify. The third party can sue the agent for damages. It applies even where the agent honestly believed they had authority.

How does agency end by operation of law?

It ends automatically on events such as the death, insanity or bankruptcy of the principal or agent, winding up of a company party, destruction of the subject matter or illegality. No notice is required to end the agent's actual authority. Exact details, including protection for third parties without notice, can differ by jurisdiction.

Does the agent leave the contract once the principal is disclosed?

Usually yes. If a disclosed principal is bound by an authorised contract, the agent drops out and has no liability. Exceptions arise if the agent agrees to be liable, signs a deed personally or trade custom requires it.