A contract is an agreement entered into by two or more parties. Contracts can only be binding on the parties that have signed and agreed to the terms and conditions of the agreement, with certain exceptions allowing for the binding of third parties through representation. In certain instances, a third party can conclude a contract on behalf of someone else without binding themselves to that contract; alternatively, a contract can be concluded so that a third party can benefit from that contract. In this article, I will be exploring the implications of the third-party agreement of agency and who is liable for performance.
Third-party contracts are a common occurrence in the law of agency. Often times a principal will instruct an agent to conclude a contract on their behalf with a third party. In such a situation, there are two separate contracts that have been created. The first contract will have been concluded by the agent and their principal and this contract is referred to as a mandate. The mandate is the contract that gives the agent authority to act on behalf of the agent and thus indemnifies the agent from being liable to the contract they will be concluding with the prospective third party1. The second contract is the contract concluded by the agent and the third party. This contract, although having been concluded by the agent and the third party, will only be binding on the third party and the principal. The third party need not be aware of the existence of the principal during the conclusion of the contract in order for the contract to be valid and binding on the parties, namely the third party and the principal.
Who is Liable under the Contract
As mentioned above, a third-party contract comprises three parties: the principal, the agent, and the third party. Since the agent derives their authority to contract with the third party through the mandate provided to him by the principal, they cannot be held liable for the contract concluded by themselves and the third party. At the conclusion of this contract the agent is indemnified and the rights, duties and responsibilities are binding on the principal and the third party2. The agent can only be held liable for the mandate which he concluded with the principal. Should there be a breach of contract in the primary contract the third party may enforce the contract on the principal and not the agent.
Third party contracts are unique contracts that provide an exception the ordinary principals of privity to contract. When a third-party contract is concluded, an agent will conclude the contract on behalf of their principal and thus they will not be bound to the terms of that contract even though they are technically a party to the contract. The third party will therefore only have the right to enforce the contract on the principal since the agent is indemnified by their mandate received from the principal. The principal is therefore also entitled to enforce the contract on the third party.
1. Hutchison (ED),Pretorius C(ED), Naude T et al (2017), "The Law of Contract", Third Edition. South Africa: Oxford University Press Southern Africa (Pty) Limited.
2. Hutchison (ED),Pretorius C(ED), Naude T et al (2017), "The Law of Contract", Third Edition. South Africa: Oxford University Press Southern Africa (Pty) Limited.
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