03-jeciene

VAIDA JĖČIENĖ∗ Vytautas Magnus University,

School of Law

IS A PRINCIPAL BOUND BY A CONTRACT

IF THE AGENT HAS EXCEEDED HIS AUTHORITY?

Constantly increasing competition at both national and international levels,

rapid changes of the business environment, dispensation of activities as a result of regional economic unions as well as globalization force people to implement devices that would enable them to spread and enlarge their operations beyond the limits of their own presence. Agents can be used as one of the means to broaden the scope of persons’ activities, thus, facilitating to accomplish the increasing demands of the modern society. The agent can be appointed to perform many and varied duties, all or part of which may consist of making contracts on behalf of another person. Common law countries as well as the civil law countries provide legal rules that govern the agency relationship. Although certain legal aspects of agency in common law countries differ from the ones in the civil law countries, the legal rules governing agency strive to achieve the same purpose – to provide the legal framework to persons who are involved in agency relationship to perform activities as well as to impose rights and obligations that are associated with such actions.

Due to the agency relationship the person (the principal) on whose behalf the agent acts acquires many positive results, nonetheless, legal difficulties may inevitably arise out of the relationship between the principal and the third person who deal through the agent. In cases where the agent who contracts on behalf of the principal but fails to comply with the requirements of the principal and makes a contract in excess of his authority, many controversial issues should be considered: who carries legal responsibility for the unauthorized acts of the agent; whether the principal’s legal commitments alter as a result of the unauthorized acts of his agent, who is responsible to the innocent third party; does the principal have a duty to assume the legal responsibilities of such contract, etc. As there exist so many conflicting interests involved, the legal solution to the stated issues is not always easy to achieve.

Thus, the purpose of this article is to analyze the contractual liability of the principal to the third party when the agent, who acts on behalf of (in the name of) the principal, exceeds his authority in making a contract with the third party. To demonstrate how different legal systems examine the issue, the United States, the United Kingdom, and Lithuania are chosen. The hypothesis is that the principal is not bound by the contract entered on his behalf (in name of the principal), if the agent exceeds the scope of authority, unless the principal ratifies the contract.

To confirm the stated hypothesis: ∗ VAIDA JĖČIENĖ. Address: Vytautas Magnus University, School of Law, Daukanto 28, Kaunas 44246, Lithuania. E-mail: [email protected]

Vaida Jėčienė Is a Principal Bound by a Contract, if the Agent has Exceeded His Authority ? 51

1) The agent’s power to affect the legal position of the principal will be analyzed.

2) Applicability of the general provisions that govern the contractual liability of the principal in relation to the excess of the agent’s authority will be determined.

3) Doctrine of ratification will be discussed. The analysis is restricted to the general legal provisions and principles that

govern contractual liability of the principal where the agent performs unauthorized act. Therefore, the specific rules that are applicable to partnerships, legal persons, and procure are beyond scope of this article.

1. Authority of the Agent as a Basis to Bind the Principal by the

Contract (The United States of America) Agency is a consensual relationship where the parties (the principal and the

agent) mutually agree that the agent will act on behalf of the principal and will be subject to the principal’s control.1The agent is the fiduciary of the principal and is obliged “[t]o act primarily for the benefit of another in matters connected with his undertaking”.2 As the fiduciary, the agent is also responsible to obey instructions of the principal.3 Where the agency relationship is formed, “any person possessing legal capacity to give legally operative consent can be a principal”.4 There are basically no limitations imposed on who can act as the agent, “[s]ince an agent does not contract on his own behalf he need not possess full contractual capacity”.5 It is legal capacity of the principal that is controlling in the agency relationship, thus, persons who have no legal capacity to act for themselves, can be appointed as agents. It depends on the principal whether he exercises care in choosing a person that the principal intends to act through. Under the law of agency, the agent who contracts on behalf of the principal with the third party does not become a party to that contract – the contract binds only the principal and the third party.6 So, if the agent makes the contract with the third party on behalf of the principal, does this mean that the principal automatically becomes liable for that contract?

The general rule is that the principal is bound by any contract formed on behalf of the principal by his agent only when principal granted authority so to act.7 In other words, the principal is liable to the third party for the contract, if the agent was authorized to enter into the contract for the principal. Before the principal can be exposed to contractual liability, it should always be considered whether the agent was granted authority to form the contract. Secondly, it should be looked whether

1 The Restatement (Second) of Agency (1958), § 1. 2 Ibid, § 13, comment a. 3 Ibid, § 14, comment a. 4 Harold Gill Reuschlein, William A. Gregory, The Law of Agency and Partnership, Second Edition (St.Paul, Minn.: West Publishing Co, 1990), p. 21. 5 K.R. Abbott, N. Pendlebury, Business Law, Fifth Edition (London: DP Publications LTD, 1991), p. 423. 6 Ibid, p. 423. 7 A. James Barnes, Terry Morehead Dworkin, Eric L. Richards, Law for Business, Fourth Edition (Homewood (IL), Boston (MA): Richard D. Irwin, Inc, 1991), p. 355.

International Journal of Baltic Law Volume 1 No. 3 (June, 2004) 52

the agent acted within the scope of his authority. Thirdly, it might be important to determine whether the principal is disclosed, partially disclosed or undisclosed.

The principal may grant actual (real) authority to the agent or the agent may act under apparent authority. Actual authority is defined in the Restatement (Second) of Agency as “[t]he power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him”.8 In case of actual authority, the principal communicates his consent to the agent that the agent is authorized to act on behalf of him.9 Actual authority may be express or implied.10 The principal grants express authority to the agent if “[t]he principal has made it clear, in express and explicit language, to the agent that he is quite willing or desires that the act under scrutiny be done”.11 So the principal expressly specifies extent of the agent’s power. This can be done orally or in writing, unless a specific form is required by law.12

Another type of actual authority is implied authority. When the principal grants express authority, it is usually implied that “[a]uthority to conduct transaction includes authority to do acts which are incidental to it, usually accompany it or reasonably necessary to accomplish it”.13 Thus, the scope of the agent’s implied authority is limited to such acts that are incidental to the transaction, customary done in the course of the transaction or necessary to achieve the required result. Moreover, the agreement itself may exclude certain acts of the agent that would otherwise be considered as authorized under the implied authority.14 It should be noted that authority of the agent can also be implied where the agent customary exercises some power that is not expressly granted to him by the principal and the principal does not object to such practice;15or when the agent is given the position, it might be implied that the agent has authority to perform the act.16

The agent may also act under apparent authority and make the principal liable for the contract formed on his behalf. Apparent authority is established by words or conduct of the principal that causes the third party reasonably to believe that the third party is dealing with the agent when, in fact, it is not.17 Apparent authority may be created where the agent is no longer the agent but the principal fails to notify third persons of termination of the agency relationship, it may arise from customs of trade;18 or it may be created by appointing the agent to a position.19 As apparent authority is created by words or conduct of the principal, it cannot arise from words or conduct of the agent alone.20 It should also be taken into consideration that apparent authority cannot be established if it is unreasonable for the third party to

8 See note 1: The Restatement, § 7. 9 Ibid, § 26. 10 See note 4:Harold Gill Reuschlein, p. 37. 11 Ibid. 12 Ibid, p. 35. 13 See note 1: The Restatement, § 35. 14 Ibid. 15 See note 4: Harold Gill Reuschlein, p. 42. 16 Lawrence S.Clark, Peter D.Kinder, Law and Business The Regulatory Environment, Third Edition (New York, St.Louis, San Francisco: Mc Graw-Hill, Inc, 1991), p. 274. 17 See note 1: The Restatement, § 27. 18 See note 7: A. James Barnes et al., p.357. 19 See note 4: Harold Gill Reuschlein, p. 61. 20 See note 7: A. James Barnes et al, p. 357.


believe that the agent has authority to act.21 Duty to determine the extent of the agent’s authority is imposed on the third party irrespective of whether the agent has actual or apparent authority.22

In sum, both actual and apparent authority of the agent is equally effective to make the principal liable for the contract.23 However, even when authority of the agent can be established, it is crucial to determine the scope of authority under which the agent acts, because he is empowered to affect the principal’s legal position where the agent acts within the limits of authority.24

1.1. Contractual Liability of Disclosed, Partially Disclosed, and Undisclosed Principals The principal is disclosed “[i]f at the time of a transaction conducted by an

agent, the other party thereto has notice that the agent is acting for the principal and of the principal’s identity”.25 The disclosed principal is a party to a contract entered on his behalf by the agent, unless otherwise indicated.26 Thus, the disclosed principal is bound by a contract where his agent’s authority is established. In the case of the disclosed principal the third party relies either on actual authority or apparent authority of the agent.27 When the principal is partially disclosed, “[t]he other party has notice that the agent is or may be acting for a principal but has no notice of principal’s identity”.28 The agent only indicates his status as an agent.29 Where the principal is partially disclosed and the agent forms the contract on behalf of the principal, the principal is liable for the authorized acts of his agent, unless otherwise agreed.30 The third party can rely on either actual or apparent authority of the agent. The principal is undisclosed, “[i]f the other party has no notice that the agent is acting for a principal”.31 This means that the third party is aware neither of the name of the principal nor of his identity. However, under the law of agency, the undisclosed principal is liable for the authorized acts of the agent.32 Still, as the third party deals solely with the agent without any knowledge about the agency relationship, there can be no apparent authority established.33 Whether the principal is disclosed, partially disclosed or undisclosed is determined at the time of the transaction.34

1.2. The Principal’s Contractual Liability Where the Agent Exceeds His Authority. Ratification

21 See note 4: Harold Gill Reuschlein, p.64. 22 See note 7: A. James Barnes et al., p. 358. 23 See note 4: Harold Gill Reuschlein, p.34. 24 Edward S Pearson, Law for European Business Studies (UK: Pitman Publishing, 1994), p. 154. 25 See note 1: The Restatement, § 4 (1). 26 See note 4: Harold Gill Reuschlein, p. 13. 27 See note 7: A. James Barnes et al., p. 358. 28 See note 1: The Restatement, § 4 (2). 29 See note 7: A. James Barnes et al., p. 367. 30 See note 4: Harold Gill Reuschlein, p.16. 31 See note 1: The Restatement, §4(3). 32 See note 4: Harold Gill Reuschlein, p. 14. 33 See note 1: The Restatement, § 159, comment e. 34 See note 1: The Restatement, § 4 comment c.


The agent’s power to affect the legal position of the principal is limited by the scope of his authority.35 If the agent is not granted authority to contract on behalf of the principal or if he exceeds his authority, such contract is not binding on the principal.36 When the agent exceeds his authority, it means that the agent’s acts can be covered on neither actual nor apparent authority. However, the agent does not exceed his authority, if he acts in emergency situations.37 Therefore, the principal is bound by the contract entered on his behalf by his agent in emergency situations provided that the agent’s acts are compatible with conditions to establish authority by necessity.38 When the agent exceeds his authority, it is usually associated with some negative consequences for the principal due to his disobedient agent. But this is not necessarily true. The excess of the agent’s power does not always produce harm to the principal. Where the agent’s acts exceed his authority, the result of such acts can still be beneficial or more advantageous to the principal. Still, from the point of view of law, beneficial consequences of the contract do not influence the legal duties of the principal - the principal is not bound by such contract. There are situations, however, when the principal would prefer to accept the contract, entered in excess of his agent’s authority, although he is not obliged to do it by law. The principal might ignore the fact that the agent has breached his fiduciary duty to act within the limits of authority and afterwards confirm the contract where he wants to protect the principal’s relationship with the other party,39 his business reputation,40 to escape from the lawsuit,41 or for some other reasons. This can be done by ratification.

Ratification enables the principal to affirm an act that was originally performed without authority.42 Under the doctrine of ratification, the principal may ratify the contract of the agent who has exceeded the authority granted or who has not been appointed as an agent at all.43 Once the principal ratifies the contract, he becomes bound by it as if the agent had authority and fully complied with the principal’s directions.44 Ratification acts retrospectively and relates to that point of time when the unauthorized act was originally performed.45 The principal is not obliged to ratify the contract formed in excess or without authority of the agent or purported agent.

However, if the principal chooses to ratify the unauthorized act, he is not entitled to partial ratification of the contract. The principal has to ratify the whole contract.46 Manifestation of ratification can be made either expressly or it can be implied.47 For instance, ratification by silence can be valid only in circumstances “[w]hich reasonably justify an inference of consent”.48 The principal who intends to

35 Edward S. Pearson, Law for European Business Studies (UK: Pitman Publishing, 1994), p. 155. 36 Ibid, p. 154. 37 See note 4: Harold Gill Reuschlein, p. 39. 38 See note 5: K. R. Abbott, p. 244. 39 US case: Goldstick v. ICM Realty, 788 F. 2d 456, 460 (7th Cir. 1986). 40 See note 1: The Restatement, § 82, comment d. 41 Ibid. 42 See note 4: Harold Gill Reuschlein, p. 72. 43 See note 7: A. James Barnes et al., p. 358. 44 See note 4: Harold Gill Reuschlein, p. 72. 45 Ibid. 46 Ibid, p. 76. 47 Ibid. 48 See note 1: The Restatement, § 94.


ratify must do it within the reasonable time.49 Whether the principal ratifies within the reasonable time, should be determined from the standpoint of both parties.50 As a result of ratification, an act that could not be legitimate becomes legitimate.51 Till the moment of ratification the agent or the purported agent is subject to liability to the third party.52 If ratification is valid, it releases the agent from liability to both the principal and the third party.53 However, ratification is subject to limitations. Conditions of ratification are the same where the agent acts in excess of his authority or where he has no authority to act at all.

The first requirement is that the principal can ratify only such contracts that would be valid if the agent had authority at the time the contract was formed.54 For example, if the agent makes a contract that is ultra vires of such company, the contract cannot be ratified.55 Second, the principal must exist when the contract is formed and be legally competent at the time of ratification.56 The Restatement (Second) Agency says that “[a]n act which, when done, the purported or intended principal could not have authorized, he can not ratify”.57 It should not be forgotten, though, that the legal capacity of the principal (not that of the agent) is controlling in agency relationship,58 therefore, for instance, if the principal is a corporation and the contract was formed on behalf of a corporation, when a corporation still did not exist, the principal cannot ratify such contract after corporation comes into existence.59 On the other hand, ratification cannot be effective, if the principal has full contractual capacity at the time the unauthorized act occurs but looses his capacity to contract before ratification occurs.60 Thirdly, the contract must have been formed on behalf of the person who later ratifies.61 The Restatement states that “[r]atification does not result from the affirmance of a transaction with the third person unless the one acting purported to be acting for the ratifier”.62 All what is required is that the agent disclosed his status of the agent.63 The agent does not have a duty to disclose identity of his principal to meet this requirement. If, however, the principal is undisclosed, he cannot ratify the contract.64 The forth requirement is that the principal must have knowledge of all material facts concerning the contract that was formed on his behalf in excess or without authority when he ratifies it.65 As ratification makes the principal liable for the unauthorized contract, it is reasonable that the principal cannot condemn himself to account for legal consequences of the 49 See note 4: Harold Gill Reuschlein, p. 78. 50 Ibid, p. 79. 51 Ibid, p. 80. 52 Ibid. 53 Ibid. 54 Ibid, p. 74. 55 See note 5: K. R. Abbott, p. 245. 56 See note 4: Harold Gill Reuschlein, p. 72. 57 See note 1: The Restatement, § 84(2). 58 See note 5: K. R. Abbott, p. 243. 59 J.Dennis Hynes, Agency, Partnership, and the LLC The Law of Unincorporated Business Enterprises Cases, Materials, Problems, Abridged fifth edition (Charlottesville, Virginia: LEXIS Law Publishing, 1998), p. 214. 60 See note 4: Harold Gill Reuschlein, p. 74. 61 Ibid. 62 See note 1: The Restatement, § 85 (1). 63 See note 4: Harold Gill Reuschlein, p. 73. 64 See note 16: Lawrence S.Clark, p. 278. 65 See note 4: Harold Gill Reuschlein, p. 74.


contract without proper prior evaluation of the circumstances. The principal is, therefore, not bound by the contract, “[i]f, at the time of affirmance, the purported principal is ignorant of material facts involved in the original transaction, and is unaware of his ignorance, he can thereafter avoid the effect of the affirmance”.66 However, if the principal is presented with such facts that would cause an ordinary prudent person to investigate the facts more precisely but the principal fails to do so, he loses his right to claim that his ratification is ineffective due to lack of knowledge of the material facts.67 It is also true that if the principal accepts the contract and is unwilling to investigate the facts, it is treated that the principal willingly assumes the risk associated with such contract.68 As it is stated in Oxford Lake Line v. First Nat’l Bank of Pensacola,69 the principal is liable on the ground of ratification if “[h]e ratified upon full knowledge of all material facts, or that he was willfully ignorant, or purposely refrained from seeking information, or that he intended to adopt the unauthorized act at all events, under whatever circumstances”.70 At last, if special form is required for an original grant of authority, ratification has to meet the same formalities. In case Estate of Huston v. Green71 the agent was granted the power of attorney to act on behalf of Ms. Huston. He did not have power to make gifts on behalf of her. When the agent made the gift to a person who took care of Ms. Huston, she orally approved the agent’s acts. However, the court said that the contract was void “[b]ecause a power of attorney must be in writing, any act performed by the agent acting under the power of attorney must therefore be ratified in writing to be valid”.72

There are specific circumstances, however, when the principal who complies with all requirements of ratification may be unable to ratify. Firstly, under the law of agency, the third party is allowed to withdraw from the contract prior to ratification.73 If the third party withdraws from the contract made in excess or without authority of the agent prior to ratification, ratification by the principal cannot be valid.74 The American doctrine of ratification regards the third party as an offeror who can withdraw prior to acceptance (i.e. prior to ratification of the principal or the purported principal).75 In contrast, the English courts view the withdrawal of the third party completely differently. The English courts do not allow withdrawal of the third party prior to ratification.76 Their view is based on the retrospective nature of ratification77as ratification places the parties in the same position in which they would have been if the agent had authority at the time the contract was made. So, if the third party was willing to be bound by the contract at that point of time, it cannot withdraw.78

66 See note 1: The Restatement, § 91 (1). 67 Ibid, § 91(1) comment e. 68 Ibid . 69 US case: Oxford Lake Line v. First Nat’l Bank of Pensacola, 40 Fla. 349, 359-60, 24 So. 480, 483 (1898). 70 Ibid. 71 US case: Estate of Huston v. Green, 60 Cal. Rptr. 2d 217 (Cal. App. 1997). 72 Ibid. 73 See note 1: The Restatement, § 88. 74 See note 4: Harold Gill Reuschlein, p. 77. 75 Ibid, p. 78. 76 Ibid. 77 Ibid. 78 Ibid.


Secondly, the principal may be unable to ratify if the third party loses capacity prior to ratification.79 Loss of capacity encompasses death of the third party, loss of mental capacity, loss of physical capacity in personal service contracts.80

Sometimes the principal may be precluded from refusing to be bound by the contract entered in excess or without authority of the agent or the purported agent. Under the law of agency, the principal is estopped by the unauthorized contract, if the third party can prove misrepresentation, reliance on the (purported) agency and change of position to the detriment of the third party.81 This is known as ratification by estoppel. For instance, if the principal retains the benefits of the unauthorized contract and fails to investigate material facts concerning the contract, he is estopped.82 Thus, he loses the right to reject the unauthorized contract and the principal (not the agent) becomes bound by it. The principal, however, can protect himself from ratification by estoppel, if he repudiates after discovery of the unauthorized acts of the agent or the purported agent.83 In agency estoppel can only be applicable to protect the interests of the third party.84 Moreover, unlike ratification, ratification by estoppel creates rights and obligations only between the third party and the principal, without changing legal relations between the principal and the agent.85 Ratification by estoppel should be distinguished from apparent authority of the agent. Apparent authority of the agent is created by representations of the principal to the third party.86 If the agent, having apparent authority enters into a contract on behalf of the principal, the principal immediately becomes a party to the contract with all rights and obligations to the third party.87 It is immaterial whether he intended to contract or not; or whether the position of the third party has changed.88 Estoppel only will be used to protect the third party that relied on the principal’s manifestations and thus sustained loss.89

Therefore, if the agent exceeds his authority, the principal is not bound by the contract entered on his behalf by the agent unless the principal is estopped or he ratifies the contract later and his ratification is consistent with the above stated requirements.

1.3. Contractual Liability of the Principal for the Unauthorized Acts – General and Special Agents

79 Ibid. 80 Ibid. 81 Ibid. 82 Ibid, p. 82. 83 Ibid, p. 81. 84 Ibid, p. 82. 85 Ibid. 86 See note 1: The Restatement, § 8. 87 Ibid, § 8 comment d. 88 Ibid. 89 Ibid.


The general agent is “an agent authorized to conduct a series of transactions involving continuity of service”.90 The general is usually appointed to act in a certain business for the principal and has implied authority to perform duties that are incidental to such business.91 The special agent is “an agent authorized to conduct a single transaction or a series of transactions not involving continuity of service”.92 Although it is sometimes problematic to distinguish whether the agent is the general agent or the special agent, it should always be done, before liability for the unauthorized acts of the agent can be imposed on the principal.

If the general agent has authority to act on behalf of the principal, the principal is liable for the authorized acts of the general agent. However, the principal can still be liable for the contract when the general agent performs unauthorized acts if such acts “usually accompany or are incidental to transactions which the agent is authorized to conduct”.93 Peculiarly enough, even if the general agent performs an act contrary to the directions of the principal (but customary or incidental to a transaction), the principal will be liable for the unauthorized act.94 It should be noted that if the third party knows or has a reason to know that the general agent has no authority to perform a specific act, the general agent cannot make his principal liable.95 The above stated rules are applicable to disclosed or partially disclosed principals.96 Do the rules differ, if the general agent works for the undisclosed principal? According to the Restatement (Second) of Agency, the general agent can also bind his undisclosed principal to a contract when the unauthorized acts occur, “if [such acts are] usual or necessary in such transactions, although forbidden by the principal to do them”.97 It should be noted again that apparent authority is not possible where the principal is undisclosed.98

The special agent, compared to the general agent, has narrower powers to bind the principal for the unauthorized acts. Where the principal appoints the special agent, the principal is not bound by the contract, if the special agent exceeds the scope of the authority granted.99 However, there are instances when the special agent’s sole deviation from authority cannot release his principal from liability.100 If the special agent acting on behalf of the principal discloses the identity or names the principal when the principal is willing to be unknown (i.e. the special agent acts contrary to the directions of the principal), the principal cannot escape liability and is bound by the contract.101 The same rule applies to situations when the principal is willing to be disclosed but the special agent contracts in his own name.102 It is also established that improper motive of the special agent cannot preclude the principal from liability, unless the third party knows or has a reason to know that the agent

90 See note 1: The Restatement, § 3. 91 See note 35: Edward S Pearson, p. 153. 92 See note 1: The Restatement, § 3. 93 See note 59: J.Dennis Hynes, p. 142. 94 See note 4: Harold Gill Reuschlein, p. 167. 95 Ibid. 96 See note 59: J.Dennis Hynes, p. 142. 97 See note 1: The Restatement, § 194. 98 Ibid, § 159 comment e. 99 See note 4: Harold Gill Reuschlein, p. 168. 100 See note 1: The Restatement, § 161A. 101 See note 4: Harold Gill Reuschlein, p. 168. 102 Ibid.


does not act for the benefit of his principal.103 This rule is applicable to general agents as well.104 Where the principal grounds authority to the special agent relying on the agent’s determination of facts, the principal cannot escape from liability, if the special agent is negligent in determining the facts upon which the authority was established.105 The rule applies to general agents, too.106

It should also be taken into consideration that so called ‘secret instructions’ to the agent do not release the principal from contractual liability. Where the third party has reasonable grounds to believe that the agent in similar position would generally be granted authority to perform certain acts, when, in fact, the agent’s authority is limited by secret instructions, the principal is bound by the contract formed contrary to such instructions.107 Therefore, whenever the principal seeks to protect himself from contractual liability, he must notify the third party about any restrictions of the agent’s authority.108

2. Authority of the Agent as a Basis to Bind the Principal on the

Contract (The English Law) The English law defines agency similarly to the definition used in the United

States.109 The agent must have express, implied or ostensible authority to bind the principal on the contract.110 The principal may orally, in writing or by deed grant express authority to the agent.111 If the agent has express authority to contract and acts within the scope of the express authority, the principal will be bound by a contract entered on his behalf.112 In case the principal’s instructions cause ambiguity to the agent and the agent acts in good faith in interpreting the intent of the principal, it is considered that the agent acts within extent of his authority if “a reasonable agent [would] interpret these instructions in the light of all circumstances [the same]”.113 However, if the agent’s authority is established by deed, the scope of the agent’s authority is determined strictly according to the deed.114 It should be considered that if the third party knows about the limitations to the express authority of the agent, the third party is bound by them.115 When the third party does not know about specific restrictions and the agent acts contrary to them, the principal can still be bound by the contract, if implied or ostensible authority is established.116

Similarly to the American law, if the agent is granted express authority to contract, it is implied that he has authority to do all the acts that are “necessarily

103 Ibid. 104 Ibid. 105 Ibid. 106 Ibid. 107 See note 16: Lawrence S. Clark, p. 276. 108 See note 7: A. James Barnes et al., p. 361. 109 “Agency is a legal relationship under which one person (the agent) acts on behalf of another (the principal).” Richard Stone, The Law of Agency (London: Cavendish Publishing Limited, 1996), p. 4. 110 Richard Stone Contract Law (London: Cavendish, 1996) p. 272. 111 Richard Stone, The Law of Agency (London: Cavendish Publishing Limited, 1996), p. 42. 112 See note 111: Richard Stone, p. 98. 113 Ibid, p. 43. 114 Ibid, p. 42. 115 See note 110: Richard Stone, Contract Law, p. 272. 116 Ibid, p. 272.


incidental to the express authority”.117 The scope of implied authority, however, does not cover reasonable acts of the agent, if they are not necessarily incidental to the express authority. As it is stated in Hamer v. Sharp,118 the express authority ‘to find a purchaser’ does not imply authority ‘to make sale of property’.119 Authority of the agent can also be implied if it arises from the agent’s type of work or the place of business.120 The agent will have implied authority if it is ‘usual’ in a particular position or ‘customary’ in particular business.121 However, it should be noted that any express limitations to the agent narrow the scope of the agent’s implied authority.122 Still, express limitations to the agent might not preclude the third party to rely on the implied authority of the agent, if the third party is unaware of certain restrictions of the agent’s authority.123

Ostensible authority of the agent (the American law usually refers to it as ‘apparent authority’) can be established, if the principal by his words or actions causes the third party to believe the agent has authority to act when, in fact, the agent has no authority to perform.124 The person who asserts to bind the principal on ostensible authority has to show a representation, a reliance on the representation and alteration of position due to such reliance.125

2.1. Contractual Liability of Disclosed, Partially Disclosed, and Undisclosed Principals Unlike the American law, the English law recognizes only two types of

principals, i.e. disclosed and undisclosed.126 If “[t]he third party knows from the start that [it is] dealing with an agent, and there is another party in the background who will end up having legal rights and liabilities towards, the third party”,127 the principal is disclosed. If the principal is undisclosed, “[t]he third party thinks that the agent is acting on their own behalf”.128 Where the contact is made on behalf of the disclosed principal within the limits of the expressly stated authority, the principal is bound by such contract.129 If the agent contracts on behalf of the undisclosed principal:

(1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority.

(2) In entering the contract, the agent must intend to act on the principal’s behalf

(3) […] (4) […] (5) The terms of the contract may expressly or by implication,

exclude the principal’s right to sue, and his liability to be sued. The

117 See note 111: Richard Stone, p. 43. 118 UK case: Hamer v. Sharp, LR 19 Eq 108 (1874). 119 See note 111: Richard Stone, p. 45. 120 Ibid, p.45. 121 See note 110: Richard Stone, Contract Law, p. 272. 122 See note 111: Richard Stone, p. 43. 123 Ibid, p. 44. 124 Ibid, p. 98. 125 UK case: Rama Corporation Ltd v. Proved Tin and General Investments Ltd, QB 147 (1952). 126 See note 111: Richard Stone, p. 93. 127 Ibid. 128 Ibid. 129 Ibid.


contract itself or the circumstances surrounding the contract, may show that the agent is the true and the only principal. 130

As well as under the United States law, where the principal is undisclosed, under the English law, ostensible authority of the agent cannot be established.131 Since the representations on which the third party relies must come from the principal and not from the agent, the third party at the time of entrance into the contract does not know that the principal exists and, thus, is unable to rely on the undisclosed principal. 132 Although implied authority of the agent is confusingly similar to the ostensible authority, they are different. Firstly, implied authority of the agent can be established only where the principal-agent relationship exists.133 Secondly, the implied authority is possible where the principal is undisclosed as implied authority of the agent is not solely based on representations of the principal.134

2.2. The Principal’s Contractual Liability Where the Agent Exceeds His Authority. Ratification

Rights and obligations of the principal that arise out of the principal-agent

relationship are based on the extent of the agent’s authority.135 If the contract is made within the agent’s authority (express, implied or ostensible), the disclosed principal is bound by such contract entered on his behalf by the agent.136 The undisclosed principal cannot escape from contractual liability as well, provided that the agent complies with the conditions discussed above. It should also be taken into consideration that the English law justifies the agent’s or the purported agent’s acts under emergency situations.137 The agent’s (or the purported agent’s) acts are authorized and, thus, the principal is bound by the contract entered on his behalf in emergency situations, if it is established that the agent acts in genuine emergency, has no possibility to communicate with the principal, and the agent acts in good faith concerning the interests of the principal.138

Similarly to the United States law, the English law recognizes the doctrine of ratification.139 Although it is generally stated that the principal has a right to ratify the unauthorized contract made on behalf of the principal where the contract is beneficial to the principal,140 it might be inferred that that the principal is not precluded from ratification of the unauthorized contract if the principal intends to ratify it for some other reasons. The principal can ratify the unauthorized actions of the agent whose acts exceed the scope of the authority or when the agent (or purported agent) acts without authority at all.141 Ratification acts retrospectively, thus, converting the unauthorized contract into the authorized one and making the

130 UK case: Siu (Yin Kwan) v. Eastern Insurance Co Ltd, 1 ALL ER213 (1994). 131 See note 111: Richard Stone, p. 99. 132 Ibid, p. 106. 133 Ibid, p. 104. 134 Ibid, p. 105. 135 Ibid, p. 41. 136 Ibid, p. 98. 137 Ibid, p. 35. 138 Ibid, p.p. 36-37. 139 Ibid, p. 25. 140 See note 110: Richard Stone, Contract Law, p. 275. 141 See note 111: Richard Stone, p. 25.


principal liable for the former unauthorized contract.142 Ratification can be express or implied as long as the principal’s intention to authorize the agent’s acts is evident.143 If, however, agency is established by deed, the unauthorized actions of the agent can be ratified only by deed.144 Conditions of ratification are basically the same as are recognized under the United States law.

First, the agent or the purported agent must indicate (expressly or by implication) that he works on behalf of the principal.145 Thus, it is evident that undisclosed principal cannot meet the first requirement of ratification. As it is stated in Keighley Maxted & Co v. Durant146 (the agent made a contract at a higher price than he was instructed), the contract is not subject to ratification if the person acting on behalf of the principal does not identify the principal at the time the contract is made.147 Second, the principal must exist at the time of the contract.148 In Kelner v. Baxter149 the court held that the company is barred from ratification when it intends to ratify the unauthorized contract of the agent who made the contract on behalf of the corporation before it came into existence.150 Thirdly, the principal must have capacity at the time of the agent’s unauthorized action.151 For instance, if the principal is a minor, under statutory provisions, the adult can ratify the contract made on the minor’s behalf by the agent.152 However, the minor can himself ratify the contract, if the contract is for the necessary goods and services.153 It should also be true that mentally incompetent principal cannot ratify, since it is the legal capacity of the principal that is controlling in the agency relationship.154 Under the English law, the contract that is made on behalf of the enemy aliens cannot be subject to ratification.155 Fourthly, the competent principal who loses his capacity at the time of ratification cannot ratify. The English law, however, interprets ‘lack of principal’s capacity’ broader than the United States law, in a sense that it does not limit itself to the legal capacity of the principal. For instance, in the case Grover&Grover v. Matthews,156 the principal could not ratify a contract of fire insurance after the fire destroyed the property.157 As well as under the United States law, the principal is restricted from ratification provided that the contract is void ab initio.158

The principal may be precluded from ratification if he does not ratify within the reasonable time,159 whereas, what constitutes a reasonable time should be considered on case by case basis.160 142 See note 110: Richard Stone, Contract Law, p. 276. 143 See note 111: Richard Stone, p. 30. 144 Ibid. 145 Ibid, p. 25. 146 UK case: Keighley Maxted & Co v. Durant, AC 240 (1901). 147 See note 111: Richard Stone, p. 26. 148 Ibid, p. 27. 149 UK case: Kelner v. Baxter, LR 2 CP 174 (1866). 150 See note 111: Richard Stone, p. 27. 151 Ibid. 152 Ibid, p. 28. 153 Ibid. 154 See note 5: K. R. Abbott, p. 243. 155 See note 111: Richard Stone, p. 29. 156 UK case: Grover&Grover v. Matthews, 2 KB 401 (1910). 157 See note 111: Richard Stone, p. 29. 158 Ibid, p. 30. 159 Ibid, p. 31. 160 Ibid.


Ratification primarily focuses on unauthorized acts of the agent and, therefore, it neither extends the agent’s authority in future nor establishes agency relationship where the principal ratifies the unauthorized acts of the purported agent.161 Ratification, however, does not preclude from ostensible authority of the agent or purported agent in future.162

In sum, the English law acknowledges the general rule of the common law that where the agent exceeds his authority or where the person acts without authority, the principal is not bound.163 It depends solely upon the principal’s intent whether he is or is not willing to ratify the unauthorized contract. In case he decides not to ratify, when the agent exceeds his authority or where the person acts without authority, the principal is not bound. However, if the principal ratifies the unauthorized contract and his ratification is effective, the principal is personally liable for the former unauthorized contract.

3. Authority of the Agent as a Basis to Bind the Principal by the

Contract (Lithuania) Under the Lithuanian Civil Code,164 persons can make contracts personally as

well as through agents.165 However, the Code does not define the agency relationship directly. Still, it is stated that the agent is empowered to make a contract on behalf of (in the name of) the principal, which creates, alters and abolishes the civil rights and obligations of the principal, provided that the agent acts within the scope of his authority and discloses the fact of agency.166 A relationship created between the principal and the agent enables the agent to act in the name and interests of the principal although the rights and obligations resulting from the agent’s acts bind the principal rather than the agent.167 This accords the common law rule that the agent who contracts on behalf of the principal with the third party does not become a party to that contract – the contract binds only the principal and the third party.168 It is important to note that agency relationship can only be established where the person acts in the name of the other, as the Civil Code imperatively states that persons who act in their own name although in the interests of another persons cannot be considered as agents.169 Thus, distributors who buy goods or services in their own name and for their own money from foreign manufacturers for resale or final consumers,170 trade intermediaries,171 commissioners,172 trustees173 cannot be ascribed to agents. Depending on what grounds the agent has been granted the

161 Ibid, p. 33. 162 Ibid. 163 See note 5: K. R. Abbott, p. 245. 164 The Civil Code of Lithuania (2000 07 18, No.VIII-1864). 165 Ibid, article 2.132, part 1, translated by dr.Tadas Klimas in: “The New Agency Rules in Lithuania: Translation and Commentary”, Teises Apzvalga (2001, No. 5), p. 106. 166 Ibid, article 2.133, part 1, translated by dr.Tadas Klimas: see note 165. 167 Ibid, article 2.133. 168 See note 5: K. R. Abbott, p. 243. 169 The Civil Code of Lithuania, article 2.132, part 4, translated by dr.Tadas Klimas: see note 165. 170 Ibid, article 6.796. 171 Ibid, article 2.132, translated by dr.Tadas Klimas: see note 165. 172 Ibid, article 6.780. 173 Ibid, article 6.955.


right to act in the name and interests of the principal, several types of agency are found in the Civil Code: 1) by contract (convention), 2) under the provisions of the statute, 3) by the decision of the court, 4) by the administrative act.174

Both natural and legal persons can act as agents.175 However, unlike the common law, the Lithuanian law of agency requires that the agent had full legal capacity to be able to act in name and interests of the principal.176

Under the general rule, the principal is bound by the contract that is made by his agent (i.e. the contract creates, alters and abolishes the civil rights and obligations of the principal).177 The question arises whether this rule can always be applied. The answer is ‘no’, because there are two main requirements imposed by law to make this rule effective. First, the agent is empowered to make a contract on behalf of (in the name of) the principal, provided that the agent acts within the scope of his authority.178 Secondly, the agent has to disclose the fact of agency.179 The term ‘authority’ should be understood as the power of the agent granted by the principal, which allows the agent to make a contract and perform other legal acts in the name of the principal that bind the principal.180 In other words, “[i]t is the subjective right of the agent that determines his appropriate behavior, the possibilities of his actions with the third party”.181 Thus, the term ‘authority’ in Lithuania is used similarly to the one provided by the Restatement (Second) of Agency “[t]he power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him”.182 Authority can be granted expressly or “[t]he rights of an agent also may be understood from the circumstances under which the agent acts (a seller in retail trade, cashier etc.)”.183 Usually the agent is granted express authority by a written document (the power of attorney) that confirms that one person (the principal) empowers the other person (the agent) to represent the principal in relations with third parties.184 The extent and content of the authority granted to the agent in the power of attorney is generally clearly defined. However, if the agent’s authority is not clearly defined in the power of attorney, it does not mean that the power of attorney is not in force.185 The Civil Code provides that:

The agent whose rights are not explicitly defined in the power of attorney has authority to carry out only those actions which are necessary for the preservation of the principal’s wealth and property interests and for the safeguarding of his property.186

174 Ibid, article 2.132, part 2, translated by dr.Tadas Klimas: see note 165. 175 Ibid, article 2.132, part 3, translated by dr.Tadas Klimas: see note 165. 176 Ibid. 177 Ibid, article 2.133, part 1, translated by dr.Tadas Klimas: see note 165. 178 Ibid. 179 Ibid. 180 Valentinas Mikelėnas et al., Lietuvos Respublikos Civilinio kodekso komentaras, antroji knyga Asmenys (Vilnius: Justitia, 2002), p. 262, translated by the author. 181 Ibid, p. 262 182 See note 1: The Restatement, §7. 183 The Civil Code of Lithuania, article 2.133, part 2, translated by dr.Tadas Klimas: see note 165. 184 Ibid, article 2.137, part 1, translated by dr.Tadas Klimas: see note 165, p. 110. 185 See note 180: Valentinas Mikelėnas et al., p. 274. 186 The Civil Code of Lithuania, article 2.137, part 2, translated by dr.Tadas Klimas: see note 165, p. 110.


Thus, the agent can act under implied authority in relatively limited circumstances. So, in this respect it is different from the American view that “[a]uthority to conduct transaction includes authority to do acts which are incidental to it, usually accompany it or reasonably necessary to accomplish it”;187 As well as from the English rule that, if the agent is granted express authority to contract, it is implied that he has authority to do all the acts that are “necessarily incidental to the express authority”.188

In addition to the requirement that the agent is obliged to act within the scope of his authority to be able to bind the principal, the agent has also to comply with the second requirement i.e. to disclose the fact of agency. The fact of agency can be disclosed in a number of ways, for example, by showing a power of attorney to the third party or it can be understood from the circumstances under which the agent acts.189 It should be taken into consideration that the principal and third party’s rights and obligations under the contract are determined differently if the agent fails to meet the second requirement.190

In sum, the principal is bound by the contract provided that the agent acts within the limits of his authority and discloses the fact of agency. The agent has to meet both requirements; he cannot view them as alternatives. Thus under the Lithuanian civil law as well as under the United States and the English law, the scope of authority is crucial to make the principal liable for the contract. However, the common law rules do not always impose an obligation to disclose the fact of agency in order to bind the principal by the contract.

3.1. Principal’s contractual Liability Where the Agent Exceeds His Authority (General Provisions). Ratification

Where the agent acts within the scope of his authority and discloses the fact of

agency, he is empowered to change, alter and abolish the civil rights and obligations of the principal.191 As it was discussed above, authority of the agent to act in the name of the principal, disclosing the fact of agency can only be valid if the principal expressly grants his agent the right to perform a certain task or when it can be implied according to the circumstances under which the agent acts. Thus, the principal is not bound by the contract if the agent fails to comply with the obligation to act within the scope of his authority. The excess of the agent’s authority can be viewed as any act that is not performed within the authority granted. Moreover, the principal cannot be responsible for the contract, which has been entered in the name of the principal without any authority at all. Under certain circumstances, though, the principal might be willing to be bound by the contract entered in the name of the principal although in excess of the authority granted or with no authority at all. Under the Lithuanian law as well as the United States law and the English law, the principal, nevertheless, can assume the legal rights and obligations of such unauthorized contract, if he ratifies it. As it is stated in the Civil Code:

187 See note 1: The Restatement, § 35. 188 See note 111, Richard Stone, p. 43. 189 See note 180: Valentinas Mikelėnas et al., p. 262. 190 The Civil Code of Lithuania, article 2.133, part 3, translated by dr.Tadas Klimas: see note 165, p. 107. 191 Ibid, article 2.133, part 1, translated by dr.Tadas Klimas: see note 165.


A convention made in the name of another person by one who has no right to make such a convention or who acts in excess of his authority, creates, changes or abolishes rights and obligations for the principal only if the principal subsequently ratifies the whole of this convention or that part which was made in excess of authority.192

The law does not impose duty on the principal to ratify any contract that is made either in excess of the agent’s authority or with no authority at all. However, once the principal decides to ratify the unauthorized contract, he is under obligation to comply with all procedural requirements of ratification. The Civil Code establishes that when the unauthorized acts occur, the third party (i.e. the person with whom the agent or purported agent has entered into the contract) can address the request to the principal (or the purported principal) to ratify or not to ratify the unauthorized contract.193 It should be noted that there are two imperative requirements provided by the Code to make the request valid. Firstly, the request to ratify or not to ratify must be in writing. Secondly, the time period for ratification cannot be shorter than fourteen days.194 This does not mean, however, that the third party is precluded from providing any longer period for the ratification. It is important that the principal, once he gets the request, must ratify the unauthorized contract within the time limit that is indicated in the request. Under the general provisions of agency, the principal does not have an obligation to respond, if the principal decides not to ratify the unauthorized contract.195 However, he can notify about his disagreement to the third party. Therefore, if the principal does not respond to the third party within the provided time limit, it is considered that the principal has refused to ratify the unauthorized contract.196 The principal’s silence, thus, under the general provisions of agency, can be viewed as a refusal to be bound by the unauthorized contract.

It should be taken into consideration that contrary to the general rules of agency, in cases of commercial agency, the principal after disclosure of the unauthorized contract has a duty to notify the third party if he refuses to ratify the unauthorized contract.197 As in cases of commercial agency it is considered that the principal has ratified the contract if, after the discovery of the unauthorized acts he does not immediately inform the third party that he disapproves of it.198 Although the Code does not specify the time limit within which the principal has to notify about his refusal to be bound by the unauthorized acts of the commercial agent (or the purported commercial agent), the Code, however, imposes an obligation to respond immediately after the discovery of the unauthorized acts of the commercial agent.199 Therefore, in commercial agency principal’s silence is viewed as consent to ratify the contract but not as refusal to ratify it; thus, failure on the part of the principal to notify makes him liable for the unauthorized contract.200

The general provisions governing agency do not indicate the form in which ratification has to be done. As well as there are no requirements provided in what 192 Ibid, article 2.136, part 1, translated by dr.Tadas Klimas: see note 165, p. 110. 193 Ibid, article 2.133, part 6, translated by dr.Tadas Klimas: see note 165, p. 107. 194 Ibid. 195 Ibid. 196 Ibid. 197 Ibid, article 2.163, part 1. 198 See note 180: Valentinas Mikelėnas et al., p. 265. 199 The Civil Code of Lithuania, article 2.163, part 1. 200 See note 180: Valentinas Mikelėnas et al., p. 265.


form the refusal to ratify should be done in order to be valid. Therefore, one can rely on the commentary of the Civil Code, which states that ratification can be done orally, in writing or by some other action of the principal.201 Probably the same rule could be applicable to cases where the principal responds to the third party that he refuses to ratify the unauthorized contract. To decide whether the principal by his conduct gives sufficient grounds that he intends to ratify, the general provisions of the Civil Code can be helpful. As it is stated in the article 1.79 of the Civil Code, it is presumed that the party ratifies the contract if after acquiring the possibility to ratify or to refuse it, the party fully or partially performs the contract or if it requests the other party to perform the contract, or if it assures the other party that it will perform, etc.202

The Civil Code of Lithuania as well as the Restatement (Second) of Agency and the English law establishes that ratification acts retrospectively,203 i.e. it relates to that point of time when the unauthorized act was performed. Therefore, if the principal ratifies the unauthorized contract, the principal assumes all rights and obligations under the contract from the moment the unauthorized contract is made rather than from the moment it is approved.204

According to the Civil Code as well as under the Restatement, the third party can withdraw from the contract that is made in excess of the authority or with no authority. However, the withdrawal must take place prior to ratification of the principal.205 It should also be taken into consideration that the third party loses its right to withdraw from the contract made by the unauthorized agent, if at the time the contract was made, the third party knew or should have known that the third party was entering into the contract with the agent who had no authority or who exceeded his authority.206 Thus, under the general provisions of agency, the party can withdraw only if it withdraws prior to ratification and if the third party was honest at the time it entered into the contract.207

If the principal complies with all requirements of ratification and ratifies the contract, the principal (not the agent or purported agent) is bound by such contract.208 However, if the principal does not ratify the contract that is formed in the name of the principal and disclosing the fact of agency but in excess or with no authority of the agent, the principal is not bound.209 Thus, the agent (or the purported agent) is exposed to legal obligations to the third party, unless the third party knew or should have known that it was dealing with the unauthorized person.210 It is evident that the law protects only the interests of the honest persons, i.e. the third party, which did not know and should not have known that the contract was made with an unauthorized agent acting in the name of another person. In deciding whether the third party knew or should have known that the person lacked authority to make the contract in the name of another person, it should be analyzed, taking concrete circumstances into account, whether the third party was prudent

201 Ibid. 202 The Civil Code of Lithuania, article 1.79, part 2. 203 Ibid, article 2.133, part 6, translated by dr.Tadas Klimas: see note 165, p. 107. 204 Ibid. 205 Ibid, article 2.133, part 7, translated by dr.Tadas Klimas: see note 165, p. 108. 206 Ibid. 207 Ibid. 208 Ibid, article 2.133, part 6, translated by dr.Tadas Klimas: see note 165, p. 107. 209 Ibid. 210 Ibid, article 2.133, part 8, translated by dr.Tadas Klimas: see note 165, p. 108.


enough to investigate that the person is authorized to act in the name of another person.211

There are special circumstances, though, when principal is precluded from ratification. Firstly, it is provided by the Code, that the person cannot appoint the agent to make such contracts “[t]hat can be made only personally because of their character”212 as well as in cases where special laws prohibit delegation of authority to the other person.213 Thus, if the principal fails to comply with such requirement that governs agency, any contract made in the principal’s name and disclosing the fact of agency cannot be valid, therefore, no later ratification is possible. Secondly, according to the Code, if the principal himself cannot make a contract, his agent cannot enter into such contract in the name of the principal either.214 Therefore, the principal who has no right to enter into the contract, cannot ratify the contract made in his name, unless special provisions of the law provides the opposite. This rule applies to legal persons, too.215 Thirdly, contrary to the common law rules, the Lithuanian Civil Code does not state directly, whether ratification is possible if the principal dies prior to ratification or if the principal loses its legal capacity prior to ratification. The answer probably should be negative as ratification is a unilateral act216 that can be valid only if a person who expresses his will is legally competent.217 Fourthly, special attention should be drawn to the part 9 of the Article 2.133, which says:

If an agent’s act exceeded his authority, but in such a way that the third party had a reasonable basis for believing he was making a convention with an agent acting within his authority, then the convention binds the principal [.]218

So, if under special circumstances the third party has grounds to believe that the contract is made with the authorized agent when, in fact, the agent exceeds his authority, the principal is bound by such contract. It has to be proved, though, that a reasonable person (in the third party’s place), under the same circumstances, in analogous situation would have acted the same.219 This is the special case where the agent who acts in excess of his authority can bind the principal without the principal’s ratification. Still, it is not clear, whether this provision is only applicable to situations where the agent exceeds his authority or it might be interpreted broader and be used in cases where the person acts with no authority as well. It should be noted that if the third party knows or should know that the agent exceeds his authority, the principal cannot be bound.220

211 See note 180: Valentinas Mikelėnas et al., p. 266. 212 The Civil Code of Lithuania, article 2.132, part 1, translated by dr.Tadas Klimas: see note 165, p. 106. 213 Ibid. 214 Ibid, article 2.134, part 3, translated by dr.Tadas Klimas: see note 165, p. 109. 215 Ibid, article 2.141, translated by dr.Tadas Klimas: see note 165, p. 113. 216 See note 180: Valentinas Mikelėnas et al., p. 265. 217 The Civil Code of Lithuania, article 1.63, part 3; article 2.10 part 2. 218 Ibid, article 2.133, part 9, translated by dr.Tadas Klimas: see note 165, p. 108. 219 See note 180: Valentinas Mikelėnas et al., p. 266. 220 The Civil Code of Lithuania, article 2.133, part 9, translated by dr.Tadas Klimas: see note 165, p. 108.


3.2. Special Provisions Governing Agency in the International Sale of Goods. Excess of the Agent’s Authority. Ratification

The Lithuanian Civil Code provides special provisions that govern agency

relationship in the international sale of goods. These provisions acknowledge the general rule of agency that the principal is bound by the contract provided that: 1) the agent acts in the name and in the interests of the principal, 2) discloses the fact of agency (i.e. the third party knows or should know that it is making a contract with the agent), 3) the agent acts within the scope of his authority.221 Thus, if the agent fails to comply with the provided requirements, the principal is under no duty to assume the legal consequences of such contract.222 It is also stated that the principal is not bound by the contract entered in the name of the principal although in excess of the authority granted or with no authority at all.223 However, the provisions of the Civil Code, which echo the provisions of the Convention on Agency in the International Sale of Goods,224 allow the principal to assume the legal rights and obligations of the unauthorized contract if the principal ratifies the unauthorized contract.225

The procedural requirements differ from the requirements of ratification under the general provisions of the Civil Code. Firstly, it is explicitly stated that ratification of the unauthorized acts can be made in any form, as well as it can be implied from the conduct of the principal (or the purported principal).226 It is also provided that ratification is effective (in force) when it reaches the third party227 and from that point of time it becomes irrevocable.228 Contrary to the general provisions of agency, the special provisions do not indicate the shortest time period during which the principal can make a decision to ratify the unauthorized contract or not. Secondly, the special provisions establish that if entering into the contract the third party neither knew nor should have known that it was dealing with the unauthorized person, it has a right to notify the principal that it refuses to be bound by such a contract even if the principal ratifies it. Such notification, however, should take place prior to ratification,229 i.e. it can be done at any time before ratification reaches the third party, unless ratification is implied from the conduct of the principal. On the other hand, if the principal fails to ratify within the reasonable time, the third party can withdraw from the contract.230 It should also be taken into consideration that if the principal does not ratify within the reasonable time and, thus, the third party decides to withdraw from the contract, the third party is obliged to immediately notify the principal about its withdrawal.231 This rule is not applicable, however, if the third party knew or should have known that the agent had no authority or that he exceeded his authority.232 Thirdly, the principal is not restricted to partially ratify the

221 Ibid, article 2.171, part 1. 222 Ibid. 223 Ibid. 224 Convention on Agency in the International Sale of Goods (Geneva, 17 February 1983). 225 The Civil Code of Lithuania, article 2.173, part 1. 226 Ibid. 227 Ibid. 228 Ibid. 229 Ibid, article 2.173, part 2. 230 Ibid. 231 Ibid. 232 Ibid, article 2.173, part 3.


unauthorized contract. However, in case of partial ratification, the third party has a right to refuse the partial ratification.233 If the agent acts on behalf and in the interests of the legal person before its creation, such acts are subject to ratification only if the special provisions of the law allow such ratification.234

So the general rule remains the same, if the principal refuses to ratify the contract that is formed in the name of the principal and disclosing the fact of agency but in excess or with no authority of the agent, the principal is not bound.235 Thus, the agent (or the purported agent) is exposed to legal obligations to the third party, unless the third party knew or should have known that it was dealing with the unauthorized person.236 It is explicitly stated that if the principal does not assume the legal rights and obligations of the unauthorized contract, the agent (or the purported agent) is under duty to compensate the third party for damages.237 The third party is not entitled to request compensation from the principal if the third party knew or should have known that it was dealing with the unauthorized person.238 Peculiarly enough, the special provisions of the Code that govern the international sale of goods fail to specify whether ratification acts retrospectively. So, one can rely on the general provisions of agency that acknowledge the retrospective nature of ratification239 (2.133.6) or on the Convention on Agency in the International Sale of goods, which states that “[o]n ratification the act produces the same effects as if it had initially been carried out with authority”.240

It should also be noted that apparent authority of the agent or the purported agent is acknowledged under the special provisions that govern the international sale of goods. Therefore, if the principal by his own manifestations causes the third party to reasonably believe that the agent has been granted authority to contract on behalf and in the interests of the principal and that the agent acts within the scope of his authority, the principal is bound by contracts entered on the principal’s even though, in fact, the agent exceeds his authority or acts with no authority.241 It has to be proved, nevertheless, that the principal’s manifestations would cause a reasonable person (in the third party’s place), under the same circumstances, in analogous situation to believe that the agent has authority to act and that the agent acts are within the scope of the authority granted.242 This is the special case where the agent who acts in excess of his authority or with no authority can bind the principal without the principal’s ratification. Contrary to the general provisions, the special provisions that govern agency in the international sale of good explicitly state that apparent authority is applicable both: when the agent exceeds his authority or when the person (or agent) acts with no authority.243 Still, if third party who knows or has a reason to know that the agent, in fact, has no authority or acts in excess of his

233 Ibid, article 2.173, part 4. 234 Ibid, article 2.173, part 5. 235 Ibid, article 2.174, part 1. 236 Ibid, article 2.172, part 1. 237 Ibid, article 2.174, part 1. 238 Ibid, article 2.174, part 2. 239 Ibid, article 2.133, part 6, translated by dr.Tadas Klimas: see note 165, p. 107. 240 See note 225: Convention, article 15 (1). 241 The Civil Code of Lithuania, article 2.172, part 2. 242 See note 180: Valentinas Mikelėnas et al., p. 338. 243 The Civil Code of Lithuania, article 2.174, part 1.


authority, the third party looses it right to rely on the apparent authority244 and the principal is not bound by such contract, unless it ratifies it.

Conclusions

The purpose of this article was to analyze the contractual liability of the

principal to the third party when the agent, who acts on behalf of (in the name of) the principal, exceeds his authority in making a contract with the third party. The hypothesis stated that: the principal is not bound by the contract entered on his behalf, if the agent exceeds the scope of authority, unless the principal ratifies the contract. The hypothesis is proved. Analytical, systematic and comparative analysis of the laws and legal principles governing agency in the United States, the United Kingdom and Lithuania enable to provide the following conclusions:

1) Common law countries acknowledge the general rule that the principal is bound by the contract formed on behalf of the principal by his agent only if the agent is authorized to enter into the contract for the principal. Under the Lithuanian law, the general rule is that the agent is empowered to bind the principal by the contract (i.e. to establish, alter or abolish the civil rights and obligations of the principal) only if the agent acts within the scope of his authority and discloses the fact of agency. Thus, under the Lithuanian law the agent has to meet both requirements to bind the principal by the contract. In this respect common law rules differ, as the common law rules do not impose the requirement always to disclose the principal.

2) Common law rules as well as the Lithuanian Civil Code rely on the principle that the contract entered on behalf of the principal by the agent in excess of the granted authority (actual or apparent) does not create legal consequences to the principal. Although special attention should be drawn to the contractual liability of the principal for the unauthorized acts of the special and general agents as the United States law provide broader powers to the general agents to bind the principal by the contract.

3) The United States law, the English law and the Lithuanian law allow the principal to ratify the unauthorized contract provided that the principal complies with the imposed requirements of ratification. Valid ratification acts retrospectively: it relates to that point of time when the agent originally formed the unauthorized contract on behalf of the principal. Ratification releases the agent from liability to both the principal and the third party as the principal becomes bound by the unauthorized contract and assumes all rights and obligations associated with it.

4) The major difference between the provisions and the legal principles concerning ratification in common law countries and the Lithuanian law is that the Lithuanian Civil Code tends to strictly determine the procedural requirements of ratification whereas it fails to directly provide the general principles that would make ratification valid or would imperatively preclude the principal from ratification. Certain ambiguities still cannot be resolved as there is no case law concerning different issues of ratification under the new provisions of the Civil Code.

244 Ibid, article 2.172, part 2.


5) It should also be taken into consideration that the Lithuanian Civil Code establishes some different procedural rules that govern ratification in commercial agency as well as in agency of the international sale of goods. Therefore, the principle lex specialis derogat lex generalis should be applicable.


Abstract in Lithuanian VAIDA JĖČIENĖ AR SANDORIS, KURIS SUDARYTAS ATSTOVUI VIRŠIJANT JAM SUTEIKTAS TEISES, YRA PRIVALOMAS ATSOVAUJAMAJAM?

Santrauka Didėjanti konkurencija nacionaliniame ir tarptautiniame lygmenyse, pokyčiai

verslo aplinkoje, veiklos pasiskirstymas, sąlygojamas regioninės integracijos bei globalizacijos, skatina žmones ieškoti būdų, kuriais būtų galima praplėsti savo veiklos ribas neapsiribojant vien tik asmeniniu dalyvavimu tam tikroje veikloje. Fizinių bei juridinių asmenų atstovavimas yra viena iš priemonių, kuri įgalina asmenis praplėsti savo veiklos spektrą taip palengvinant adekvatų poreikių įgyvendinimą modernioje visuomenėje.

Tiek bendrosios, tiek ir civilinės teisės sistemos šalys pripažįsta atstovavimo institutą. Nors tam tikri atstovavimo teisinių santykių aspektai civilinės ir bendrosios teisės sistemos šalyse skiriasi, jie siekia to paties tikslo – sudaryti sąlygas atstovavimo teisiniams santykiams egzistuoti bei nustatyti atstovavimo teisnių santykių subjektų teises ir pareigas. Kadangi atstovavimo atveju už civilinių teisinių santykių subjektus sutartis sudaro bei kitus teisinius veiksmus atlieka kiti asmenys (veikiantys ‘už juos’ (on behalf of) arba ‘jų vardu’ (in the name of)), neišvengiamai susiduriama su teisinės atsakomybės klausimais tarp atstovaujamojo ir atstovo, tarp atstovo ir trečiųjų asmenų bei tarp atstovaujamojo ir trečiųjų asmenų.

Šio straipsnio tikslas yra išanalizuoti atstovaujamojo sutartinę atsakomybę trečiajai šaliai, kai atstovas, veikdamas atstovaujamojo vardu (‘už atstovaujamąjį’), sudaro sutartį viršydamas jam suteiktas teises. Čia keliama hipotezė, kad atstovaujamajam nėra privaloma sutartis, kuri sudaryta atstovui viršijant jam suteiktas teises, nebent atstovaujamasis patvirtina tokią sutartį. Siekiant pagrįsti iškeltą hipotezę, straipsyje yra lyginamos Jungtinių Amerikos Valstijų, Didžiosios Britanijos bei Lietuvos teisės normos bei teisminė praktika. Straipsyje analizuojama:

1. Atstovui atstovaujamojo duodami įgaliojimai, jų rūšys (authority), kurie suteikia teisę atstovui atstovaujamojo vardu sudaryti sutartis bei atlikti kitus teisinius veiksmus.

2. Atstovaujamojo sutartinė atsakomybė trečiajai šaliai, kai atstovas, veikdamas atstovaujamojo vardu (‘už atstovaujamąjį’) sudaro sutartį viršydamas jam suteiktus įgaliojimus.

3. Sutarties, kuri buvo sudaryta atstovui viršijant jam suteiktas teises, patvirtinimo (ratifikavimo) sąlygos bei teisinės pasekmės.

Straipsnis neanalizuoja specialių teisės normų, reglamentuojančių atstovavimo teisinių santykių ypatumus partnerystėje, juridinių asmenų atstovavimo specialiųjų teisės normų bei prokūros.

Bendrosios teisės sistemos šalyse yra įtvirtinta bendra taisyklė, kad atstovo už atstovaujamąjį (on behalf of) sudaryta sutartis yra atstovaujamajam privaloma, jeigu atstovas, sudarydamas sutartį, veikė jam suteiktų įgaliojimų ribose. Atstovo įgaliojimai gali būti aiškiai apibrėžti (express), numanomi (implied) bei tariami (apparent). Lietuvos Respublikos civilinis kodeksas (toliau – LR CK) taip pat įtvirtina bendrą taisyklę, kad atstovo sudaryta sutartis atstovaujamojo vardu, atskleidžiant atstovavimo faktą ir neviršijant suteiktų teisių, yra privaloma atstovaujamajam. Taigi, pagal LR CK, atstovas privalo patenkinti abu reikalavimus (atskleisti atstovavimo faktą bei neviršyti jam suteiktų teisių), kad sutartis atstovaujamajam taptų privaloma.


Šiuo aspektu bendrosios teisės sistemos šalių teisės normos skiriasi nuo teisės normų, įtvirtintų LR CK, kadangi JAV ir Didžiojoje Britanijoje nėra būtina atskleisti atstovavimo fakto, kad sutartis taptų privaloma atstovaujamajam.

Tiek bendrosios teisės sistemos šalių teisės normos bei teisminė praktika, tiek ir LR CK pripažįsta, kad atstovaujamajam nėra privaloma sutartis, kuri sudaryta atstovui viršijus jam suteiktas teises. Tačiau reikia atkreipti dėmesį į tai, kad JAV teisės normos suteikia daugiau teisių atstovui bendrojo atstovavimo atveju (general agents), nei esant specialiajam atstovavimui (special agents). Todėl atstovaujamojo sutartinė atsakomybė už atstovo atliktus teisinius veiksmus bendrojo atstovavimo atveju turi tam tikrų skirtumų lyginant su specialiuoju atstovavimu. Kita vertus bendrosios teisės tradicijos šalyse taip pat ir Lietuvoje yra numatyta išimtis, kada atstovaujamojo vardu (ar ‘už atstovaujamąjį’) sudaryta sutartis, nors ir atstovui viršijant suteiktas teises, tampa privaloma atstovaujamajam, – kai atstovaujamasis tokią sutartį patvirtina (ratifikuoja). Atstovaujamojo patvirtinta sutartis turi atgalinio veikimo galią, todėl laikoma, kad sutartis tampa galiojančia nuo sutarties sudarymo momento, o ne nuo jos patvirtinimo. Sutarties, kuri buvo sudaryta atstovui viršijant jam suteiktas teises, patvirtinimas sukuria teisines pasekmes atstovaujamajam, o ne atstovui.

Daugelis atsovaujamojo patvirtinimą reglamentuojančių principų bendrosios teisės sistemos šalyse bei Lietuvoje sutampa. Esminis skirtumas yra tas, kad LR CK akcentuojami procedūriniai patvirtinimo reikalavimai, tačiau atstovavimo teisinius santykius reglamentuojančiose teisės normose nėra pateikiami bendrieji principai, kuriems esant atstovaujamasis galėtų patvirtinti sutartį ar jam tai padaryti būtų draudžiama imperatyviomis teisės normomis. Taip pat svarbu pažymėti, kad LR CK yra numatyti tam tikri sutarties, sudarytos atstovui viršijant jam suteiktas teises, patvirtinimo procedūrinių skirtumai esant komerciniam atstovavimui bei esant komercianiam atstovavimui sudarant ir vykdant tarptautinio prekių pirkimo–pardavimo sutartis.

Straipsnyje iškelta hipotezė, kad atstovaujamajam nėra privaloma sutartis, kuri sudaryta atstovui viršijant jam suteiktas teises, nebent atstovaujamasis patvirtina tokią sutartį, yra įrodyta.

03-jeciene

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