Apparent authority arises when someone reasonably believes a person has the authority to act on behalf of another person or entity to engage in business transactions or enter into contracts. Typically, this belief stems from the person’s actions leading to the belief that they have been given authority to act. The issue of apparent authority is most often relevant in corporate and constitutional law. To explore this concept, consider the following apparent authority definition.
Definition of Authority
- The power to act derived from status, office, or position
- Power to act granted by someone in a position of authority or control
- Authority to act granted purposely or through negligence, allowing a third party to believe such authority has been granted; also called “authority by estoppels” or “ostensible authority.”
Examples of Apparent Authority
Apparent authority may be given by a company by providing an individual, who has no authority to make decisions or to contract, such items as business cards or stationery, business forms with the company’s logo, or a company truck with a logo. These items would lead any reasonable person to believe the individual had authority to act on behalf of the company. If these items have been provided by the company, any price quote given, or contract entered into between, the individual and a customer may be legally binding.
On the other hand, if an individual obtained or fabricated such items without the knowledge or permission of the company, it is likely the contract would not be legally binding, as the individual, though he had “apparent authority” to act, in reality was acting fraudulently. The difference is that, for the company to be bound to a contract or agreement made by an individual with “apparent authority,” there must be an act or express omission on the part of the company. An individual acting alone to give the customer a false impression cannot bind the company to any agreement.
Freeman and Lockyer v Buckhurst Park Properties
In 1964, the corporate director for Buckhurst Park Properties (“the company”) employed the architectural firm of Freeman and Lockyer (Plaintiff) on behalf of the company to develop plans to develop a property held by the company. The development fell through, and because the company had not paid the architects for their services, Freeman and Lockyer filed a lawsuit. The court found that, while the director had no actual authority to take the action of hiring the plaintiffs, the act was within his apparent authority, and so the act was binding on the company.
Grease Monkey International, Inc. v. Montoya
A former banker by the name of Mr. Sensenig was hired by Grease Monkey International, Inc. to act as president of the company. Unbeknownst to the company, Sensenig began contacting former banking clients, ostensibly soliciting money for the company, both through supposed loans and supposed investments. Sensenig was successful in pocketing rough half a million dollars before the victims of his scam realized what was happening.
Sensenig’s victims turned to Grease Monkey for relief, saying that, because Sensenig was an employee of the company, and they believed he acted on behalf of the company, Grease Monkey should be liable for repaying the money. The court initially denied this claim, arguing that the employer’s liability was limited to employees’ actions carried out to benefit the employer. Clearly, Sensenig’s only intent was to benefit himself.
Sensenig’s victims then discovered that Grease Monkey had given Sensenig considerable authority to borrow money without approval of the Board of Directors, and had failed to exercise control over their president. Seeing this lack of supervision was a key factor in the case, the court found that Grease Monkey had enshrouded Sensenig with “apparent authority,” upon which the fraud victims had relied. Grease Monkey was ordered to repay the money.
Factors of Apparent Authority
There are four factors of apparent authority required to bind a company to a contract or agreement resulting from the acts of an agent.
- Representation by the agent that he had authority to act on behalf of the company
- Such representation was made by an agent who had “actual authority” to act on behalf of the company in some capacity.
- The customer, client or other party to the contract was persuaded into the contract by such representation, and relied upon the agent’s apparent authority to bind the company to the contract.
- Under its articles of incorporation, the company had the capacity to enter into, or to delegate authority to enter such a contract.
The Course of Ordinary Business
The law recognizes that, in the course of ordinary business and daily business dealings, consumers rarely rely on “actual authority,” as they deal specifically with agents of the business rather than the owner or director. The consumer’s understanding of the agent’s authority comes from what the agent tells him, or is assumed by the fact that the company dispatched the agent to take care of the consumer’s issue. This is referred to as “warranty of authority.”
Related Legal Terms and Issues
- Agent – A person authorized to act on behalf of someone else, such as an employee, broker, or sales representative.
- Omission – The act of excluding or leaving something out; a failure to do something, especially something for which there is a moral or legal obligation to do.