Breach of warranty of authority

3 key takeaways

• A breach of warranty of authority happens when an agent acts without proper authorization from the principal.
• The agent can be held personally liable for any losses or damages resulting from their unauthorized actions.
• Understanding the scope of authority and ensuring proper authorization are crucial to avoiding breaches of warranty of authority.

What is a breach of warranty of authority?

A warranty of authority is an assurance given by an agent that they have the authority to act on behalf of a principal. When an agent makes representations or enters into agreements without having the necessary authority, it constitutes a breach of this warranty. As a result, the agent may be held personally liable for any consequences that arise from their unauthorized actions.

Key elements of a breach of warranty of authority

1. Representation of authority: The agent asserts that they have the authority to act on behalf of the principal.
2. Lack of actual authority: The agent does not have the actual authority to perform the actions they undertake.
3. Third-party reliance: A third party relies on the agent’s representation of authority.
4. Resulting damage: The third party suffers a loss or damage due to the agent’s lack of authority.

How does a breach of warranty of authority work?

1. Agent’s representation: An agent claims to have the authority to act on behalf of a principal in a particular transaction.
2. Third-party reliance: A third party relies on the agent’s representation and enters into a transaction or agreement.
3. Discovery of lack of authority: It is later discovered that the agent did not have the actual authority to act on behalf of the principal.
4. Resulting liability: The third party may hold the agent personally liable for any losses or damages incurred due to the unauthorized actions.

Examples of breach of warranty of authority

1. Business transaction

• Scenario: An agent for a company negotiates and signs a contract with a supplier, claiming to have the authority to do so. However, the agent does not have the necessary authorization from the company’s board of directors.
• Outcome: The supplier, relying on the agent’s representation, begins fulfilling the contract. When the company refuses to honor the contract, the supplier may hold the agent personally liable for any resulting losses.

2. Real estate deal

• Scenario: A real estate agent claims to have the authority to sell a property on behalf of the owner. The agent signs a sales agreement with a buyer, who relies on the agent’s representation.
• Outcome: If it is later discovered that the agent did not have the owner’s permission to sell the property, the buyer may hold the agent personally liable for any damages resulting from the failed transaction.

Importance of understanding breach of warranty of authority

• Legal liability: Agents must understand the scope of their authority to avoid personal liability for unauthorized actions.
• Trust and confidence: Ensuring proper authorization helps maintain trust and confidence in business and legal transactions.
• Risk management: Both principals and agents should have clear agreements and documentation to define the scope of authority and reduce the risk of breaches.

Real-world application

Example: A sales manager at a technology company negotiates a large contract with a client, claiming to have the authority to finalize the deal. The client relies on the manager’s representation and signs the contract. However, the company’s executive team later reveals that the sales manager did not have the authority to approve such a large contract without executive approval.

Liability: The client may hold the sales manager personally liable for any losses or damages incurred due to the breach of warranty of authority.

Risk management: To avoid such situations, the company should have clear internal policies and communication channels to ensure that all employees understand the limits of their authority and seek proper approvals when necessary.

Related Topics

• Agency law: Learn about the legal principles governing the relationship between agents and principals.
• Authority in contracts: Understand the different types of authority (actual, apparent, and implied) and their implications in contractual agreements.
• Liability of agents: Explore the circumstances under which agents can be held personally liable for their actions.
• Contract law: Discover the basics of contract law, including the formation, performance, and enforcement of contracts.

Understanding the concept of a breach of warranty of authority is essential for anyone involved in transactions or agreements where one party acts on behalf of another. It helps in recognizing the importance of proper authorization and the potential consequences of acting without it.