It’s a phrase often heard in business, “know who speaks for your company.” On its face, it sounds like a simple question, whose answer is easily ascertained. However, all too often, a business finds itself committed to an unwanted agreement; or liable for upholding promises made by one of its agents whom the firm did not realize had the power to bind the company. The law of agency describes the relationship between two parties, where one is a principal and the other is an agent who represents the principal in transactions with a third party. Understanding when an agent acts within the scope of authority granted by the principal when dealing with third parties, and therefore can bind the company, requires further discussion. The following is a short summation of the different ways an agent may obtain authority:
- Actual Authority– Often broke into two subsets – “express actual authority” and “implied actual authority.” Express actual authority occurs when the principal has expressly conferred authority on the agent. Implied actual authority arises when an agent has authority by virtue of that authority being necessary to carry out the express authority given by the principal.
- Apparent Authority– This authority arises when the words or conduct of the agent would lead a reasonable person to believe that the agent was authorized to act, even if the principal had never discussed it with the agent. Note that what is important here is the reasonable belief of the third party. For example, a business card or firm letterhead that confers an officer title on the agent may be sufficient grounds for a person to form a reasonable belief of the agent’s authority. As such, it’s important for principals to know how their agents are being held out to the public, who their agents are speaking with, and the topics of those discussions.
- Inherent Authority- Authority to take an action that a reasonable person in the principal's position shouldhave foreseen the agent would be likely to take. This is closely related to apparent authority in that no actual authority had ever been given by the principal to the agent.
- Ratification- The affirmance by a principal of a prior act by the agent which did not bind the firm initially, but which was done or professedly done on the firm’s account. Ratification requires acceptance of the results of the act by the principal with intent to ratify, and with full knowledge of all the material circumstances surrounding any transaction or agreement.
As seen, it is not always cut-and-dry as to who “speaks for the company.” As a principal, or an owner of a company, communication is key, and understanding the roles and activities of the firm’s agents can help define roles and authority of those in the firm. For further information about this, or other related topics, please contact us at (619) 298-2880, or at [email protected].
