Key Takeaways

  • An apparent contract arises when a party reasonably believes an agreement exists, often based on the conduct or representations of the other party.
  • Apparent authority allows an agent to bind a principal to a contract, even if no actual authority exists.
  • Courts consider factors like the principal’s conduct, the agent’s role, and third-party perceptions when determining the existence of apparent authority.
  • States vary in their recognition and interpretation of apparent authority in contract disputes.
  • Apparent authority differs from actual authority, and proving it typically requires clear evidence of the principal’s conduct.

An apparent contract is created when two parties reach an agreement that is directly related to the contract. 

Creating an Apparent Simple Contract

People make promises every day, whether it's agreeing to meet up for a cup of coffee or arranging a doctor's appointment. In some cases, what began as a simple agreement can be upgraded to a legally binding contract if certain conditions are met. For an agreement to reach the level of a contract, there must be consideration and intention.

Contracts must contain several factors to be considered legally binding:

  • Consent of both parties.
  • A legitimate purpose.
  • Parties that have legal capacity.

When these factors don't exist, there can be no contract, meaning the simple arrangement would not be legally binding. An agreement, or arrangement, is the basis of any contract. In most cases, an agreement occurs when an offer is made by one party and the other party accepts. However, in some cases, an agreement can also be created by the actions of the parties involved.

Take, for example, Harrison v. Nickerson. In this case, the plaintiff saw an auction advertisement and decided to visit the auction for the purpose of buying a specific item. When he arrived, he found that the item in question had been withdrawn, and decided to file a lawsuit against the auctioneer. The court found that there was no agreement in place because the newspaper advertisement was simply an invitation to the auction and not an offer of the item the plaintiff wanted to purchase.

While contracts are founded on agreements, a legally binding contract must meet several strict requirements, with the most important being the presence of intention. Intention can be a complicated issue because it can either be expressed directly or implied through the actions of the parties involved. When parties are negotiating a contract, the language that is used and the conduct of each party will be vital in proving intention.

In commercial agreements, it is common to include exemption clauses. It is extremely common for the intention of contracted parties to be vague. This makes court cases very difficult, as the court's main goal in contract disputes is deciding whether or not the party's intent was for their agreement to be legally binding. To help with this issue, courts will first decide if the agreement was non-commercial or commercial. Once the court has decided if there was a commercial purpose for the agreement, it will be easier to determine if there was intent. 

Elements That May Create an Apparent Contract

An apparent contract can arise when the behavior or statements of one party lead a reasonable person to believe a binding agreement exists. This is particularly relevant in agency relationships, where a principal's actions may give the impression that an agent has authority to act.

Key factors courts evaluate when determining whether an apparent contract exists include:

  • Conduct of the principal: Has the principal taken steps that would lead a third party to believe the agent is authorized to act?
  • Reasonableness of reliance: Did the third party reasonably rely on the belief that an agreement was in place?
  • Nature of the transaction: Is it common for such arrangements to be made informally or through agents?

Unlike written contracts, apparent contracts often rely heavily on circumstantial evidence. For example, if a company consistently allows an employee to negotiate deals without objection, a court may determine that the employee had apparent authority—thus creating a binding contract.

What Is Apparent Authority?

When an agent has the right to act without the express permission of the principal, this is known as apparent authority. However, apparent authority only exists if a third-party understands that the principal's actions have given this authority to their agent.

The purpose of apparent authority is to protect the rights of third parties. For instance, if the agent's signature did not make the principal legally responsible for the contract, then the third-party could be damaged in some way. The principal can be legally culpable for their agent's actions if apparent authority exists. Apparent authority can be interpreted differently depending on the state where you reside.

New Jersey, for instance, often will not recognize apparent authority, because the state's interpretation is that these powers only exist when the principal has engaged in intentionally misleading actions. 

Legal Implications of Apparent Authority

Apparent authority serves to protect third parties who enter into agreements based on a reasonable belief that an agent has authority to act on behalf of the principal. If a principal’s behavior or representations lead a third party to assume the agent is authorized, the principal can be held liable—even if the agent lacked actual authority.

Legal consequences include:

  • Binding the principal: Even in the absence of actual authority, the principal may be obligated to honor agreements entered into by the agent.
  • Limitations on denial: A principal cannot later deny the agent’s authority if they contributed to the impression that authority existed.
  • Litigation exposure: Disputes often hinge on whether the third party’s belief was reasonable and whether the principal’s conduct justified that belief.

For example, a company executive introducing someone as “our new sales director” could lead to the establishment of apparent authority if that person then signs agreements with vendors. Courts would consider the introduction as evidence of authority.

Apparent Authority vs. Actual Authority

When a breach of contract occurs, apparent authority is frequently an issue.

Imagine that two parties agree to a contract whose purpose is selling a piece of valuable real estate. Later on, the buyer decides not to purchase the property, causing the seller to sue for breach of contract. Now, imagine that the buyer is a consulate working on the behalf of a foreign government. In general, foreign governments have sovereign immunity, which means they usually cannot be sued.

The seller, in this case, claims that when the consulate signed the contract, immunity was waived because the consulate was acting on the foreign government's behalf. The foreign government's defense is that the consulate did not have actual authority to enter into a contract on their behalf, meaning immunity is still in place.

In such a case, the court's priority would be discovering if the consulate actually did have authority to sign the contract. If not, then the seller would have no basis for a lawsuit.

How Courts Evaluate Apparent Authority Claims

Courts assessing apparent authority look at several core factors to determine whether a third party’s reliance was reasonable and whether the principal’s conduct supported that reliance:

  1. Manifestation by the principal: Has the principal made any statements or taken any actions that would lead a third party to believe the agent had authority?
  2. Reliance by the third party: Did the third party rely on that appearance of authority in entering the agreement?
  3. Reasonableness of the belief: Was it reasonable under the circumstances to assume the agent had authority?

If all three elements are present, the court may enforce the contract against the principal, even if the agent lacked actual authority.

States differ in their recognition of apparent authority. Some, like New Jersey, are more restrictive and require intentional acts or omissions by the principal to mislead the third party. Other jurisdictions may apply broader interpretations to protect third-party reliance.

Frequently Asked Questions

  1. What is an apparent contract in simple terms?
    An apparent contract is one where a party reasonably believes a valid agreement exists based on another party’s conduct, even if no formal contract was signed.
  2. How is an apparent contract different from an express contract?
    An express contract is clearly stated, either orally or in writing. An apparent contract arises from conduct or circumstances suggesting a contract exists, even without explicit terms.
  3. Can apparent authority create a binding contract?
    Yes. If a third party reasonably believes an agent had authority to act based on the principal’s conduct, the principal may be legally bound by the agent’s actions.
  4. What’s the risk of relying on apparent authority?
    The risk lies in misinterpreting the principal's conduct. If a court finds the belief unreasonable, the third party may not be able to enforce the contract.
  5. How do courts determine if apparent authority existed?
    Courts examine whether the principal’s actions would lead a reasonable person to believe the agent had authority, and whether the third party reasonably relied on that belief.

If you need help with an apparent contract, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.