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Related Articles: Business Law/Litigation/Construction
Law
This article
is intended to provide general information on Virginia law, and is not intended
to be relied upon as a substitute for legal advice for specific situations. The
contents of the article may be out-of-date, since it was produced at a specific
time and may not have been updated.
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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