In an agency by estoppel a defendant will be liable to a plaintiff because the defendant’s negligence or intentional acts caused the plaintiff to reasonably rely on there being an agency relationship between the defendant and someone who purported to act on behalf of the defendant.
As a general rule, a person can bind someone else to a contract if he has authority as an agent to act on that person’s behalf. The person on whose behalf the agent is acting is called the principal. For example, a salesperson (agent) can bind his company (principal) to a sales contract because he has authority as an agent to represent the company. If an agent sells a house on the owner’s (principal) behalf the owner can’t suddenly refuse to sell the house.
Naturally, the result is different if a person is not really an agent. If a person pretends to be a salesperson for a company he can’t force the company to honor a contract – – the “salesperson” is an imposter and no agency relationship exists with the company.
Courts will apply an exception where a person or company is careless and as a result a third party reasonably relies on the existence of an agency relationship. For example, let’s say an imposter goes around purporting to act as a salesperson for an electronics store that sells television sets. The electronics store, if it paid attention, would realize that the imposter is pretending to act as its salesperson and trying to get people to buy their televisions. Under these circumstances, especially if the electronics store is benefiting from the imposter, or customers are reasonably relying on the imposter being a real salesperson, a court might find there was an agency by estoppel. That is, although the imposter was not actually an agent, the store will be liable to the customer because the store carelessly allowed the customer to believe that the imposter was an actual salesperson.