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 Kentucky, as in other states, 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 agreements that legally bind 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 principal's actions or communications lead a third party to reasonably believe that the agent is authorized to act, even if the agent does not have actual authority. This can happen 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. In such cases, the principal may be bound by the agent's actions. It's important for principals to clearly define the scope of an agent's authority and for third parties to verify the extent of an agent's power before entering into contracts or other legal obligations.