Apparent authority

Apparent authority is an important concept related to the doctrines of the law of agency in the United States and several other countries. The law of agency provides a legal framework for contractual relationships that involve an agent who acts on behalf of another person, known as a principal. Apparent authority arises under circumstances when a third party would reasonably believe that an agent has the authority to act, even if the agent does not actually have the express authority to do so from the principal. In short, the agent’s actions are assigned to the principal as long as the third party infers that the agent has been granted the authority from the principal. In such situations, the principal is bound by the agent’s actions, even if no actual authority is granted. On the other hand, third parties are protected from liabilities if they acted reasonably.

Background

Apparent authority is part of agency law. Agency law governs the legal relationships that arise when one party grants another the authority to act on their behalf. Such relationships involve a pair of distinct entities: a principal and an agent. The principal grants the agent to act on their behalf. The agent acts on behalf of the principal in dealing with third parties. Agency law also governs the relationship shared between principals, agents, and third parties. Specifically, according to agency law, the principal is considered liable for and is legally bound by the actions taken on their behalf by the agent within the scope of the authority that the principal grants to the agent.

Agencies are a part of many legal relationships. For example, in marriages, one spouse may act as an agent for the other spouse in certain situations. Under some circumstances, the legal affairs of a person who has passed away may be handled by a family member or some other representative acting as an agent. Agencies are particularly common in the business world. Agents frequently work on behalf of principals during business. Sales agents regularly buy or sell goods on behalf of businesses. Real estate agents work on behalf of those wishing to buy or sell a home. A talent agent may negotiate contracts on behalf of an artist or athlete.

There are two types of legal agency: express and implied. An express agency arises when a principal and agent agree to engage in an agency relationship verbally or via a written business contract. Such a contract usually outlines the full scope of authority that the principal grants to the agent. Implied agencies come about through the conduct of the principal and agent. Simply put, the principal’s conduct gives the agent the authority to take reasonably necessary actions aimed at achieving the principal’s goals. This means that the agent can take actions on behalf of the principal without the latter’s express consent. Instead, the agent’s power is derived from their relationship with the principal. In either case, the third party in a negotiation typically believes that the agent has the authority to act on behalf of the principal.

Overview

When an agent interacts with a third party on behalf of a principal, their ability to act is reliant upon the authority they receive from the principal to do so. This authority can be either actual or apparent. Actual authority arises when a principal expressly confers on an agent the power to act on their behalf. In other words, the principal clearly establishes what the agent does or does not have the authority to do when negotiating with third parties. Actual authority may be given verbally or in writing, with the latter being preferable in most cases. Depending on the circumstances, actual authority may be general, limited, or broad in scope.

Although similar to actual authority in some respects, apparent authority differs in one important way. In short, apparent authority is not expressly granted by the principle. Instead, apparent authority relies on the third party’s reasonable belief that an agent is empowered to act on behalf of the principal. When an agent presents themselves to a third party as having the authority to act on behalf of a principal through their words or conduct, the third party is likely to believe that the agent has that authority, whether or not they actually do. In some cases, a third party may be led to reasonably presume that the scope of an agent’s power to act on behalf of the principal is broader than it actually is. When this happens, the agent can be said to be acting on apparent authority rather than actual authority.

On the surface, the use of apparent authority would seem to put third parties at a disadvantage in their negotiations with agents and potentially at risk of being defrauded. Fortunately, the doctrine of apparent authority as outlined in the law of agency prevents that from being the case. While no rules or regulations exist outlawing the use of apparent authority, special protections are in place for third parties. Specifically, a contract created between a third party and an agent operating under apparent authority is considered legally binding on the principal. This means that the principal is required to live up to the terms of the contract and cannot simply back out because the agent overstepped their actual authority. In essence, the principal, rather than the third party, assumes any potential risk associated with the agent’s use of apparent authority. As long as they act responsibly, third parties are protected from liability. Therefore, it is up to principals to ensure that their actions or inactions do not give rise to apparent authority. The best way to do this is for principals to be mindful of whom they give the authority to bind them and clearly establish the boundaries of the authority they grant to their agents.

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