Can a principal be held liable for breach of contract if a third party agrees to contract without consulting the principal?

Ontario, Canada


The following excerpt is from Ellas Restaurant (Scarborough) Ltd. v. Zejnelovski-Veseli, 2005 CanLII 25888 (ON SC):

The portions of the text that were highlighted by counsel are reproduced below: Where an agent in fact is expressly or impliedly authorized to contract with a third person on behalf of his principal, and the third person knows it and deals with the agent on that basis, there is no difficulty in concluding that a contract is formed between the principal and the third party. It is as though the principal were dealing directly with the third party, an agent forming a mere means of communication between two principal parties. The principal’s secret instructions to the agent do not alter the reasonableness of the third party’s expectation. It has been held in such circumstances that the principal is liable if the agent acts within the apparent or ostensible authority. The third party’s expectation is thereby preferred to the principal’s express wish not to contract. The agent has no “right” to disregard the principal’s instructions – the principal can sue the agent for breach of contract – but the agent has a “power” to bind the principal vis-a-vis the third party. One of two innocent parties must suffer for the agent’s default, and the risk is placed on the principal, perhaps because the principal has the better opportunity to investigate the agent’s trustworthiness, or perhaps because it is thought that the principal should absorb as one of the costs of the enterprise the loss caused by the agent’s defaults…The principal having led the third party to believe that the agent had authority is estopped from denying it after the third party’s reliance. If the agent did not have actual or apparent authority when dealing with the third party, the principal may still be liable if the latter subsequently ratifies the transaction. Again ratification may be by words, or, as in the case of Spiro v. Lintern, discussed in Chapter 5 above, by conduct. In such a case the principal’s conduct amounts to a manifestation of assent to the transaction, and it seems consistent with the general theories of contract formation that the principal should be held liable.

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