The problem of apparent authority
This tale of sloppy paperwork should serve as a wake-up call:
A contractor needed a crane and operator. At the end of each day, the crane operator presented a “work authorization” form to one of the contractor’s foremen to sign, primarily concerning hours worked. None of the foremen was authorized to sign contracts or change orders for the contractor.
The crane company’s form agreement had terms and conditions on the reverse side, including a broad indemnity clause for work site injuries. When a worker was injured by the crane, the crane rental company was sued. In turn, that company sued the contractor for indemnification.
In Marin Storage & Trucking Inc. v. Benco Contracting and Engineering Inc., a California court ruled that the indemnity clause was not hidden, and over a period of time the contractor had allowed its foremen to sign the work authorizations. So, the foreman had no “actual” authority to bind his employer, but he had “apparent” authority as the contractor continued to pay the crane invoices.
What is apparent authority?
We now enter the arcane world of the law of agency. One of my favorite cases concerned a contractor’s president who became mentally unstable. His past contributions to the company were recognized and so he was allowed to keep his title and office, but everyone in the company was told he had no authority. Despite the arrangement, he signed a number of foolish contracts and the company was bound by them. He had apparent authority.
“Actual authority is that authority which a principal expressly or implicitly grants to an agent [in which case the principal] controls, or has the right to control, the [agent’s] business.”
—Hoover v. Sun Oil Co.
Covered by this concept would be your sales agents, purchasing director, vice president of finance, etc., each with specific and limited authority. For example, a night watchman does not have actual authority to accept services of a lawsuit against his employer.
On the other hand:
“The concept of apparent agency or authority focuses not upon the actual relation of a principal and agent, but the apparent relationship. Manifestations by the alleged principal which create a reasonable belief in a third party that the alleged agent is authorized to bind the principal create an apparent agency from which spring the same legal consequences as those which result from an actual agency.”
—Billops v. Magness Construction Co.
What does this mean? If a company allows one of its employees to accept responsibility for certain contract obligations without objection, or sends one of its employees regularly to weekly meetings knowing that important decisions are being made, the other party may develop a “reasonable belief” that it is dealing with an approved decision-maker.
I was involved in litigation over the construction of a complex industrial facility. The owner acted as its own construction manager and directly entered into more than 100 contract and supply agreements. Inevitably, there were delays and out-of-sequence work. As a result, the owner developed a new CPM schedule midway through the project. All of the trade contractors signed off on the revised plan, including the electrical contractor’s general foreman. That person was talented and experienced, but knew nothing about CPM. Worse, he did not send the revised schedule back to his home office. Was the electrical contractor bound by the foreman’s acceptance of the CPM? The answer was yes. The same issue, with the same result, occurred on a prison job in Ohio.
In both of these cases, the contractor’s foreman was deemed to have “apparent” authority to bind his company, at least on scheduling matters, because the owner was led to believe that the employee had the power to act for his company.
How can you protect yourself?
It is typical for contracts to contain a clause stating who has authority to modify the contract, both for the contractor as well as the owner. That language did not help with the crane company discussed earlier, or with the schedule updates.
The only really good way to control the “apparent” authority dilemma is for you to know what is happening in the field. You need regular reports, schedule and cost updates, manpower reports and estimates, detailed daily logs, correspondence files, drawing and shop drawing logs, to list a few paperwork areas. You also need to instruct your field personnel about not signing anything without reading the paper, and perhaps calling home for further advice.
Your field people are making important decisions every day, which they should. They need to be told, however, that reporting those decisions to home office is not criticism or an insult to their professionalism or abilities.
The issues discussed here apply to contracts in the private sector. Other and different rules apply to public contracts, federal and state. EC