Key Takeaways

  • Actual authority is the legally conferred power from a principal to an agent, allowing the agent to act on the principal’s behalf.
  • It comes in two forms: express actual authority (clearly stated) and implied actual authority (inferred from conduct or duty).
  • Written documentation of actual authority is not required but is strongly recommended to reduce legal disputes.
  • General vs. specific actual authority defines how broad or narrow the agent's powers are.
  • The distinction between actual authority and apparent authority is vital in determining when a principal is legally bound.
  • Businesses should clearly outline the scope of authority to mitigate unauthorized contractual obligations.

Actual authority refers to specific powers that are conferred by a principal onto an agent. The agent then acts on the principal's behalf. There are two sub-types that fall under actual authority: express and implied.

About Actual Authority

When a principal's words or behavior gives an agent a reasonable belief that he or she is empowered to act on the principal's behalf, it is known as actual authority. Actual authority may be either broad, general power or limited, special power.

This authority is given in writing or orally, although written authority is generally the preferred form because verbal authority can be difficult to verify. In express actual authority, a principal tells the agent — verbally or in writing — exactly what the principal wants the agent to do on its behalf.

In a corporation, express authority comes in the form of bylaws and resolutions that are the product of directors' meetings. This gives the authorized individual permission to carry out specific acts on the corporation's behalf.

If the agent operates under actual authority and enters into a contract with a third party, the contract creates obligations and rights between the third party and the principal.

General vs. Specific Actual Authority

Actual authority can be further categorized as either general or specific. General actual authority refers to a broad range of actions an agent is permitted to take as part of their role. For example, a store manager may have general authority to manage day-to-day operations, hire staff, and order supplies.

Specific actual authority, on the other hand, is limited to clearly defined tasks or decisions. This could include a directive to sign a particular contract, negotiate a single deal, or sell a designated asset. If an agent acts outside of the specific authority granted, the principal may not be bound by those actions, potentially exposing the agent to liability.

Express Actual Authority

There are limits on an agent operating under express actual authority, such as the following:

If the principal tells the agent that it wants the agent to sell its trademark rights under certain time or price constraints and the agent sells the rights within those specific constraints, the agent acted under express actual authority to sell the trademark.

However, if the agent sells the copyright and not the trademark, the agent is acting outside the scope of his or her express actual authority. The principal may or may not be bound to the obligation, depending on the specific circumstances in that case. In addition, the agent may be required to cover any damages that the principal suffered as a result.

Implied Actual Authority

Implied authority is also known as usual authority. This is authority granted to an agent to perform acts that are necessary and reasonably incidental to the effective performance of his or her duties. Under implied authority, an agent has authority to perform actions that are designed to carry out goals that the principal has expressed.

Usually, the situation determines what the exact powers in implied authority are as well as the customs of a profession, business, or trade.

For instance, the principal requests that its agent sell its real estate portfolio. Using implied authority, the agent has the power to put the property on the market, negotiate with interested parties, and present offers for the portfolio.

The agent's power is generally limited to what's considered reasonable in the situation along with the instructions that the principal provided.

Factors Influencing Implied Authority

Several factors influence whether an agent's actions fall within implied actual authority:

  • Custom and practice within the industry or organization.
  • The nature of the agent’s position, such as whether they typically engage in negotiations or contract execution.
  • The history of prior dealings between the agent and principal.
  • Whether the actions are necessary to carry out express instructions.

Courts often consider what a reasonable third party would assume about the agent’s authority based on context. For example, if a purchasing manager routinely negotiates with vendors, it is reasonable for suppliers to believe that manager has implied authority to bind the company in those negotiations.

Written Actual Authority

Someone acting under actual authority isn't required to have written authority, but putting it in writing can help avoid potential legal issues in the future. Written actual authority provides legal documentation that the agent had the legal power to act within its limitations.

For instance, when a store owner gives permission to a store clerk to lower prices on certain items, the clerk has actual authority to perform that action. In case something happens — such as the business taking an immediate financial hit or the clerk being fired — having that written actual authority will help prevent the store owner from blaming the clerk. The owner won't be able to claim that the clerk's actions were outside the scope of his or her authorized duties.

This provides valuable protection for an employee in the event the owner tries to file civil or criminal charges.

Many large businesses use actual authority in one way or another. It's often more efficient to have an agent carry out certain duties because the business owners may be busy handling other tasks. Whenever possible, it's better to put things in writing in order to avoid any confusion and potential legal headaches down the road.

Actual Authority vs. Apparent Authority

It’s essential to distinguish actual authority from apparent authority. While actual authority is granted directly by the principal to the agent, apparent authority arises when a third party reasonably believes the agent is authorized—based on the principal’s representations or conduct—even if no actual authority exists.

For instance, if a company executive regularly allows a junior employee to negotiate and sign contracts without objection, a vendor might reasonably assume that employee has authority. If a dispute arises, the company may still be bound under the doctrine of apparent authority, despite a lack of actual authority.

Understanding this distinction is crucial for both principals and third parties to avoid unintended liabilities or unenforceable agreements.

Importance of Defining Agency Scope in Business

In commercial settings, defining the scope of an agent's authority is vital. Ambiguity in roles can lead to unauthorized actions, contractual disputes, and even litigation. To minimize risk:

  • Use clear, written documentation to define the scope of actual authority.
  • Provide employee handbooks or resolutions outlining agent powers.
  • Regularly review and update authority based on role changes or organizational restructuring.
  • Communicate any limitations on authority to relevant third parties (e.g., vendors or clients).

By proactively managing the delegation of authority, businesses can ensure that agents act within appropriate boundaries, reducing potential liability and protecting contractual integrity.

Frequently Asked Questions

  1. What is the difference between actual authority and apparent authority?
    Actual authority is explicitly granted by the principal to the agent, while apparent authority is based on third-party perceptions of the agent’s power.
  2. Can actual authority be given verbally?
    Yes, actual authority can be conveyed verbally or in writing, though written documentation is preferred to avoid disputes.
  3. What happens if an agent exceeds their actual authority?
    If an agent acts beyond their actual authority, the principal may not be legally bound to the agreement, and the agent could be liable for any resulting damages.
  4. Is implied actual authority legally enforceable?
    Yes, courts recognize implied actual authority when it is reasonably necessary to carry out duties assigned by the principal.
  5. Why is written actual authority recommended?
    Written authority provides clear evidence of the agent's powers, helping to prevent misunderstandings and protect both parties in case of legal challenges.

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