When agency terminates by operation of law, which statement about contracts entered after termination is correct?

• A. They are generally binding regardless of reliance.
• B. They are generally not binding unless there was surviving authority or the third party relied on the agent.
• C. They are automatically void.
• D. They require retroactive ratification.

Answer: (B)

When an agency ends by operation of law, the agent loses actual authority to bind the principal for new deals. But two narrow possibilities can still make a post-termination contract binding: surviving authority and reasonable reliance on the agent’s apparent authority.

Surviving authority covers situations where the authority to act to complete matters remains in place for contracts that were initiated under authority or are to be performed after termination. In other words, even though termination has occurred, there can be an ongoing power to finish deals that were already in motion or contemplated to continue after termination, so a contract entered in that window can bind the principal.

Reasonable reliance on the agent’s apparent authority arises when the principal’s representations or prior conduct led a third party to believe the agent had authority to bind the principal, and the third party reasonably acted on that belief after termination. If the third party’s reliance is legitimate, the principal can be bound for contracts entered into on that basis even though the agency has terminated.

Absent these exceptions, contracts entered after termination are not binding. This keeps the line clear: authority ends with termination, but the principal may still be bound if the third party’s reliance on apparent authority is reasonable or if there is surviving authority to complete ongoing dealings.