The effect of these classifications is that they define a principal’s, and potentially an agent’s liability to third parties under contracts entered into by the agent. For example, if an agent discloses the identity of the principal and the agent is acting in the capacity of an agent with authority, the principal is bound to honour the terms of the agreement with the third party. If, on the other hand, the agent contracts with a third party without disclosing the identity of their principal or that an agency relationship exists, the agent, not the principal, may be personally liable under the contract.

In the situation where the existence of the agency is disclosed to the third party but the identity of the principal is not then, if the agent is acting with authority, the agent should not have any liability. Agency is an exception to the common law doctrine of privity of contract.

See Disclosed, partially disclosed and undisclosed principal.

See also Privity of contract

See also Relationship between principals and third parties.

Agents must ensure they act within the scope of their actual or apparent authority if they want to avoid liability. Known as a breach of warranty of authority, where an agent contracts outside of their actual or apparent authority and a third party acts to their detriment on the representation, the agent is liable to the third party for their loss.

See Breach of warranty of authority.

See also Liability of agent or principal for wrongs.

Where an agent has breached its duties to the principal, remedies available to the principal include damages, an account of profits and in some cases rescission of the agency agreement.

See Remedies.