Legal Updates

A CEO who acted without authority may obligate the company but be personally liable to the company

January 13, 2019

A middleman orally agreed with the CEO of a company on a commission for a business connection and the CEO later confirmed by phone that he acted on behalf of the company.  However, later the company contended that the CEO did not have the authority to obligate it and repudiated the agreement.

The Court obligated the company to pay the middleman and the CEO to reimburse the company.  The general principle of agency law is that an agent acting for another without authority does not obligate or benefit the other unless the other later adopted the actions and the agent acting without authority is personally liable to the third party. However, in the case of a person acting for a company, an action taken out of authority, if the third party did not know, and need not have known of the lack of authority, obligates the company vis-à-vis the third party but the company can later on demand reimbursement from the person who acted out of authority.  Here the middleman had no reason to suspect that the CEO acted without authority and, thus, the CEO's actions obligate the company but the CEO is personally liable to the company for the funds to be paid.