In a principal-agent relationship, the principal gives the agent authority to act on behalf of the principal, and to bind or obligate the principal to contracts and other legal obligations, as permitted by the scope of the agency (authority). An agent’s authority may be sufficient to bind or obligate the principal if the authority was expressly given to the agent (actual authority), or if it was implied to other persons that the agent had authority to act on behalf of the principal (apparent authority)—such as by the principal’s adoption of the agent’s prior actions on behalf of the principal.

In Alabama, the principal-agent relationship is governed by common law principles and state statutes that define the extent of authority an agent has to act on behalf of the principal. An agent with actual authority has been explicitly granted the power to make decisions and enter into contracts for the principal. This authority can be either express, where the principal has directly communicated the extent of the agent's power, or implied, where the authority is inferred from the duties and responsibilities assigned to the agent. Apparent authority, on the other hand, arises when a third party reasonably believes the agent has the authority to act, based on the principal's representations or conduct. If the principal knowingly allows the agent to act in a certain way or fails to correct the impression that the agent has certain powers, the principal may be bound by the agent's actions, even if the agent exceeds their actual authority. Alabama law requires that the principal-agent relationship and the extent of authority be clearly established to determine the binding obligations on the principal.