Legal Updates

Actions of an agent will not obligate its principal when the other party should have known that it was carried in deviation from authority

May 29, 2024

Borrowers who entered into a loan agreement were surprised to discover that the agent appointed by them to sign the agreement, which had already been drawn up with the lender, signed additional annexes without their approval, in which, in addition to the consideration stipulated in the agreement, a transfer of rights in many properties was added.

The Court accepted the borrowers’ contention due to the lenders' constructive knowledge of the agent's deviation from authorization. A person appointed by another (the “principal”) to take a legal action is deemed an “agent”and must act only within the given authority. Whereas when the other party did not know and need not have known that the agent deviated from the authorization granted to him and it was assumed that he acted in accordance with it - the actions of the agent will bind the principal despite the deviation, when the opposite party knew or should have known about the deviation from the authorization - the actions of the agent will not bind the principal. The determination of whether the other party 'should' have known may be based on early contractual relations between the principal and the other party. Here, it is not an agent sent to negotiate the terms of a transaciton, but rather an agreement which terms were drawn up before the execution date and the agent was sent to only to sign. Therefore, the agent's execution of new appendices to the agreement, the result of which is a significant increase in consideration for the other party, while substantially deviating from the contractual agreements between the parties, is a deviation from authorization and one that the other party should have known about. Therefore, the agent's signature on the additional annexes does not bind the borrowers.