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By August 20, 2012No Comments

A common issue arising in contract disputes relates to which representatives within a corporation (or acting on behalf of a corporation) have the authority to bind the corporation to a contractual obligation. 

It is well settled that a principal is liable for its agent’s conduct where the agent is acting within his authority or apparent authority.  Theo & Sons, Inc. v. Mack Trucks, Inc., 431 Mass. 736, 743 (2000).  This means that a corporation can be bound to a contract that is: 1) entered into by corporate representatives who have the actual authority to sign agreements on its behalf (perhaps as outlined in corporate resolutions or outlined in an employment agreement), OR 2) by those who can be reasonably viewed by third parties as having the apparent authority to bind the company. 

If the second classification of authority (apparent authority), which relies on the perception of others, sounds subjective and a bit scary, it should.  Whether it is a simple purchase order, a complicated services contract, or a real estate contract involving impactful legal concepts such as indemnification or force majeure, no business wants to be bound to a contract without granting actual approval to the terms of the contract.

Actual Authority

If an agent reasonably believes, based on some affirmative act of the corporation, that he/she is empowered to sign a contract on behalf of the corporation, he/she can do so and bind the corporation to the contract.  This type of authority is typically granted through either a written instruction or explicit, verbal instruction. For example, a clothing store will expressly authorize its “purchasing agent” to buy various lines of clothing from a clothing manufacturer, in order to sell the line of clothing at the retail store.  Thus, the purchasing agent has the actual authority to enter into contracts on behalf of the retail clothing store. 

Apparent Authority

On the other hand, apparent authority essentially arises out of the reasonable belief of a third party, who relies upon the statements and/or conduct of a corporation or its agent (perhaps a sales representative).  Sometimes, individuals working for a corporation sign a contract on the corporation’s behalf without the express, actual authority from the corporation to do so.  In certain circumstances, the reasonable belief of the other party entering a contract with a corporation can lead to a grant of authority, called “apparent authority.”

Many examples of apparent authority arise during a sales transaction between a customer and a sales representative. For example, one waitress in a restaurant might regularly order the paper products for the restaurant.  However, if a different waitress ordered the paper products on a particular occasion, the paper supplier could reasonably rely on the new waitress’s order, since all prior dealings were with an individual who had the same duties.  The same would be true if the bookkeeper of a manufacturer consistently ordered materials from a seller and, in a particular instance, a different bookkeeper or an assistant bookkeeper placed the order for the same materials over the telephone. Certainly, the seller can reasonably assume that a bookkeeper is the proper party to place the order based upon past conduct between the parties.

Disputes over authority of a corporate agent are highly fact intensive, and the outcome depends upon a variety of factors, including past conduct, the agent’s title and job duties, whether the contract at issue is a business to business contract or a consumer contract, and a host of other issues.  Without an established past course of conduct, it is unlikely that a Court will find that a low-level employee has the ability to bind a company (absent actual authority), see O’Malley v. Putnam Safe Deposit Vaults, Inc., 17 Mass.App.Ct. 332, 337 (1983) (no apparent authority where “there was no showing that [employee’s conduct] was within the usual responsibilities of a person in [his] position or that such practice could be viewed as reasonably necessary to his authorized duties.”).

Oftentimes, evaluating the authority of a corporate agent to bind the corporation involves a complicated assessment of a variety of factors.  Putting in place clear and effective corporate policies regarding authority to bind a business entity to contracts, or placing such terms of authority in corporate contracts, may be an effective way to manage some of these risks.