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 a 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, through direct communication, or implied, based on the duties and responsibilities assigned to the agent. 'Apparent authority' occurs when a third party reasonably believes an agent has the authority to act on behalf of the principal, often due to the principal's conduct or representations. 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 courts will look at the interactions between the principal, agent, and third parties to determine whether apparent authority exists. It is important for principals to clearly define the scope of an agent's authority and to communicate any limitations to third parties to avoid unintended obligations.