What is apparent authority?

Apparent authority is the power of an agent to act on behalf of a principal, even though not expressly or impliedly granted. Apparent authority arises when a reasonable third party understands that an agent has authority to act.

Apparent authority is often misinterpreted, but the phrase’s meaning is fairly simple. Apparent authority occurs when a third party thinks that an agent has the power to act for another company or individual (known as the principal) when that power has not been granted. The condition that arises if a third party believes that an agent has the authority to act for another person or company (called the principal) when that authority has not in reality been granted.

The “authority” in apparent authority arises if the third party believes, based on the principal’s behavior, that the agent has this power. If the agent uses this apparent authority, their acts can bind the company.

For example, Tom is an employee at T & G builders in Palo Alto who handles phone calls and office work. However, Tom is not authorized to sign contracts for the company because he is a lower-level employee and has just started working at T & G.

However, when a customer asks Tom to draw up a contract, he wrongly chooses not to wait for his supervisor. Instead, Tom presents the customer with a contract on official company stationary and signs the contract on T & G’s behalf. Although Tom did not have the authority to sign the contract, now the company he works for, T & G building, is legally responsible for the agreement Tom signed.

What Are the Dangers of Apparent Authority?

persons with apparent authority are not actually authorized to speak or act as they do, but they nevertheless create business obligations and liabilities. Therefore, if a third party agrees with an agent from the business and the third party believes that the agent has the authority to bind the business, the contract will be considered legitimate. Apparent authority hinges on perception, so the contract is valid if the third party can reasonably believe that the business representative has authority.

For example, if an employee like Tom is introduced as a business partner, then the people he is dealing with will grant him authority based on his position—even if he is not truly a partner.

Based on the use of apparent authority, one partner can legally make decisions on behalf of the business without consulting with the other partner. Sometimes, these decisions can be damaging or nefarious. Understanding how apparent authority works helps individuals and businesses keep their decision-making process in good working order.

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