Question

When an agent who lacks a principal's authority executes a contract with a third party, the contract: ______.

a. ​binds the third party only.
b. ​binds the principal but not the agent.
c. ​does not bind the principal.
d. ​binds both the principal and the agent.

Answer 1

The contract executed by an agent who lacks authority does not bind the principal, as there is no given authority from the principal for the agent to make that contract. The correct answer is that it does not bind the principal.

Step-by-step explanation:

When an agent who lacks a principal's authority executes a contract with a third party, the contract does not bind the principal.

The principal has not given authority to the agent; therefore, the agent has no power to bind the principal to a contract. It is important to understand that the principal-agent relationship is based on the agent having authority from the principal, whether that is actual authority, implied authority, or apparent authority.

Without such authority, any contract made by the agent cannot bind the principal. In the options provided, the correct answer is that the contract does not bind the principal (Option c).