To avoid the annoyance of troublesome processes and procedures, people and businesses sometimes choose to make decisions based on convenience. For some, convenience comes in the form of quick grants of authority to another for one-off business-related tasks. When authorization to act on another’s behalf is given, the one who receives the authority is called an “agent” and the one who gives the authority is deemed a “principle.” It is crucial that a principle is clear when granting agency authority. If an agent’s scope of authority is not specifically communicated to the agent, or to those with which the agent will interact on behalf of the principle, an agent could act in a manner that injures another, whether physically or financially, and the principle could be called to answer to the injured party.
The authority given in an agency relationship can take many forms, including express and apparent. Express authority is the power of an agent to act on behalf of a principle as is expressly granted by the principle through clear communications. This form of authority focuses on the particularities of a principle’s explicit permissions and prohibitions. If not careful, a principle could mistakenly believe it has given express authority for a task without considering how vagueness in the described scope of authority could grant more than intended. This lapse can result in an increase in the intended authority of the agent and can be the grounds for a lawsuit based on apparent authority. Apparent authority is the power of an agent to act on behalf of a principle, even if such authority is not expressly granted. This form of authority only exists if a third party reasonably infers, from the principle’s conduct, that the principle granted such authority.
Below are two scenarios that show how business decisions based on convenience can turn out to be inconvenient:
Scenario 1: Real Property
Jessica and Jon are friends. Jon is in the business of buying and selling rental properties. Jessica is in the market for a vacation home and finds a beautiful lakefront property, but she does not want to hire a professional to assist with the closing. Instead, knowing Jon’s background and experience with buying properties, Jessica decides it is more convenient to ask Jon to help her close on the property. So, Jessica texts Jon “I need to purchase this property ASAP! Can you help me secure the necessary financing? I do not care what the financing terms are so long as they’re reasonable.” Jon agrees to assist Jessica and calls a friend, Beatrice, to ask for the necessary financing. Jon explains that he is calling on behalf of Jessica and negotiates financing terms with Beatrice. Beatrice and Jon finalize a written agreement, and one of the terms is that Beatrice is to have access to and personal use of the vacation home every other summer. Beatrice gives Jon the money and a copy of the agreement. Jon gives Jessica the money and the agreement, but Jessica decides not to review the agreement and uses the money to close on the property. On closing day, Jessica calls Beatrice to thank her, stating “Thank you, Beatrice. You drive a hard bargain, but I am glad we could come to a reasonable agreement.” A year later, Beatrice calls Jessica to schedule her use of the lakefront property, but Jessica refuses to give Beatrice access.
Tip to Avoid Litigation: Beatrice is likely to sue Jessica for breach of contract, requesting a court to order Jessica to provide Beatrice access to the property. To support her claim, Beatrice could allege that Jon had the express authority to secure the necessary financing and, given Jessica’s phone call to Beatrice on closing day, had apparent authority to accept the terms of her financing offer. To avoid this kind of litigation, Jessica should have specified that Jon only had authority to assist her in securing financing from a bank or prohibited him from signing any agreement on her behalf. If Jessica had explicitly limited Jon’s authority, Beatrice’s claim would be moot.
Scenario 2: Service Contracts
Joseph is the new owner of his first business, his father’s café, which his father owned and ran for 15 years. Until Joseph understands how to properly operate and manage the business, he authorizes his father to continue to manage the ordering and stocking of materials and supplies for the café. With this authority, Joseph’s father engages RENTS, a rental company he used when he first opened the café. On behalf of the café, Joseph’s father executes a two-year service agreement, engaging RENTS to deliver supplies and materials to the café. Joseph, busy learning how to manage the business, does not know that a contract was signed, but he has talked with RENTS employees and managers whenever he was at the café during a delivery. Eight months later, following a disagreement related to services, Joseph’s father stops paying the rental company.
Tip to Avoid Litigation: RENTS is likely to sue the café for breach of contract, requesting the court to order the café to pay the rental company for the remaining term of the contract. To support its claim, the rental company could argue that Joseph’s father had express authority to manage the ordering of supplies and materials and, given Joseph’s awareness that RENTS was providing services to the café, also had apparent authority to execute the agreement. To avoid this kind of litigation, Joseph could have explicitly limited his father’s authority by prohibiting his father from signing contracts on behalf of the company.
When granting agency authority, be mindful of exactly what it is you would like accomplished and how clearly to describe your request to reduce the risk of litigation and the unintended cost of convenience.
Katherine T. McCarley, Associate in our Litigation practice group, focuses her practice in the areas of civil and commercial litigation, defending institutional and small businesses. If you have any questions regarding this article, please contact Katherine here or call 585.258.2800.
Reprinted with permission from The Daily Record and available as a PDF file here.