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Monday, June 14, 2010

Apparent Authority: Is It What It Seems?

Before your business ships materials to a construction site, you insist that the subcontractor execute an agreement that all payments from the general contractor to the subcontractor be in the form of a joint check with your company as joint payee. After the general contractor and the subcontractor execute this joint check agreement, you begin shipping materials. When the subcontractor disappears with an outstanding balance on the account, you notice for the first time that the few payments you received were from the subcontractor and not joint checks issued by the general contractor. A call to the general contractor reveals that they claim to have no knowledge of the joint check agreement; in addition, they insist that the person who signed the agreement had no authority to do so. Can you get past due money from the general contractor for its failure to comply with the joint check agreement?

Actual v. Apparent Authority

Our analysis of the validity of the joint check agreement begins with whether the employee of the general contractor had actual or apparent authority to sign the agreement.

Actual authority means that the general contractor has officially empowered the employee with the right to sign the agreement and bind the company.

Even if an employee does not have actual authority, an employer may be bound by the acts of its employee under the theory of apparent authority. According to the Virginia Supreme Court in the case Wright v. Shortridge, "An act is within the apparent scope of the employee's authority if, in the view of the character of his actual and known duties, an ordinarily prudent person, having a reasonable knowledge of the usage's of the business in which the agent is engaged, would be justified in believing that he is authorized to perform the act in question," In our case example, a common laborer does not have apparent authority while the job supervisor probably does.

Even when an employer has specifically limited the actual authority of an employee, the employer may still be bound under apparent authority if it has held out the employee as possessing authority or has permitted the employee to represent that the employee possesses such authority.

Estoppel Works Both Ways

The general contractor in our case may be estopped from denying that its employee lacked authority to sign the joint check agreement if it acted or allowed the employee to act as though the employee had ostensible authority. Thus, employers cannot claim that an employee lacks authority if it represented that the employee had such authority or if the employee is clothed with apparent authority to enter into the agreement.

On the other hand, if your company knew or should have known that the employee lacked authority, you will be estopped from arguing reliance upon the employee's apparent authority. Furthermore, if you accept checks without informing the employer of the breach of the joint check agreement, the employer may have a good argument that they were unfairly prejudiced by your failure to provide an opportunity for them to avoid breaching the agreement.

Avoid Problems

Employers who wish to limit and define the authority of their employees or other agents should place these limitations in writing and they should send potential contracting parties a copy of this document. To limit the appearance of authority, control and monitor activities of employees and avoid giving important titles to people with lesser duties. If you learn that an employee's act exceeds granted authority, immediately repudiate the act and disclose the lack of authority to third parties relying on the act. Otherwise, you may inadvertently ratify the act, or worse, unknowingly extend the authority to the employee to bind the company.

Parties who enter into agreements with companies should beware. You may think you are dealing with an employee with authority to bind the company; however, this may not be the case. Even the President of a corporation may not have actual authority to bind the company; the president's power as an agent comes only as delegation of authority from the bylaws or the board of directors. (See Annotation Note to Virginia Code §13.1-673)

Protect Yourselves!

Insist on documentation of the authority of the person who is signing the agreement, such as a corporate seal or a corporate resolution. When in doubt, send a copy of the agreement to the company's headquarters, this will assist your estoppel, reliance and ratification arguments if the company does not protest the agreement. Had the supplier, in our example, sent a copy of the agreement to the general contractor and immediately contacted them when the checks were not issued jointly, then they might have prevailed in court even without actual authority. As the facts stand in the example, they will lose and fail to recover any money from the general contractor.

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The above is not meant to replace legal counsel. To speak to one of Gross & Romanick's atttorneys, contact us at 703-273-1300 or fill out our online Information Request form.