Apparent Authority Under § 8

Apparent Authority Under § 8

Restatement (Second) of Agency § 8 defines apparent authority as the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other’s manifestations to such third persons.¹ The definition repays a slow reading, because each phrase answers a different question about a lawyer who acted without the client’s approval. “Transactions with third persons” names the result: a settlement, a contract, or a stipulation that fixes the client’s position against someone outside the client-lawyer relationship. “Professedly as agent” requires that the lawyer present the act as one done for the client. “Arising from and in accordance with the other’s manifestations” supplies both the source and the measure of the power, which comes from what the client communicated to the outsider and reaches only as far as that communication carries.

Two working questions follow from the definition. Apparent authority exists only when the principal has in some way held out the agent as possessing certain authority and the third party has reasonably relied on the agent’s having it.² The first question looks at the client: what did the client say or do toward the outsider that made the lawyer look authorized? The second looks at the outsider: did the outsider hold the belief, and was it reasonable given everything the outsider knew? The two are linked because the belief must trace to the client’s own conduct. A belief drawn from rumor, or from the lawyer’s own boasting, may be sincere and even sensible, yet it gives the outsider nothing to enforce against the client.

The doctrine should not be confused with the vocabulary of vicarious tort liability. The Third Restatement uses “employee” for an agent whose principal controls or has the right to control the manner and means of the agent’s work, the kind of agent for whose torts the principal is vicariously liable.³ Apparent authority asks a different question: whether a transaction the lawyer made with an outsider binds the client.

The two requirements divide the risk according to who can control it. A client cannot control what a lawyer says to others, so a rule that let the lawyer’s claim bind the client would impose a risk that no precaution could reduce. Requiring a manifestation confines the client’s exposure to appearances the client created or allowed, and requiring reasonable belief denies recovery to the outsider who ignores a plain warning sign. The subsections that follow take up the client’s manifestation, the outsider’s belief, and the rule that a lawyer’s own claims cannot substitute for the client’s manifestation.

The Client’s Manifestation

Restatement § 8 locates the source of apparent authority in one place: the power arises “from and in accordance with the other’s manifestations to such third persons,” and the other person is the principal.⁴ When a lawyer’s authority is disputed, the principal is the client, so the first element asks what the client said or did toward the outsider. A manifestation is the principal’s outward words or conduct, the thing that led the third party to believe the agent had authority.⁵ The definition leaves no place for private wishes. What the lawyer privately assumed and what the client privately intended both lie on the far side of that line.

One court spelled out the consequence. When a person tells a third party that another is authorized to make a contract of a certain sort, and the other makes it on that person’s behalf, the person becomes “immediately a contracting party, with both rights and liabilities to the third person, irrespective of the fact that he did not intend to contract or that he had directed the ‘agent’ not to contract, and without reference to any change of position by the third party.”⁶

A simple negotiation shows the rule at work. At a meeting, P tells TP that A has authority to negotiate the purchase of an antique car and will meet TP the next day. P then tells A privately that A has no authority to do anything for P and must not enter a deal with TP. The next day A negotiates a deal that requires P to buy the car. P is bound, because A’s authority rested on what P told TP, and P can sue A for violating her instructions.⁷ A client who has told opposing counsel that a lawyer will negotiate stands where P stands. The rule works because an outsider cannot see instructions exchanged behind closed doors. If those instructions controlled, every deal with a represented party would turn on facts the counterparty has no means of learning. The client alone decides what the other side is told, and the client can correct a wrong impression with a short notice.

Manifestations take several forms, and a lawyer’s case may rest on any of them. The most direct is communication from the client to the outsider, words or conduct that led the other side to believe the lawyer had authority.⁸ A client also manifests by directing the lawyer to make statements to third parties, by designating the lawyer to perform acts or conduct negotiations, or by placing the lawyer in charge of a transaction.⁹ Each is conduct of the client toward the other side, even when the client never speaks to opposing counsel. A client who tells the lawyer to open settlement talks has designated the lawyer to conduct negotiations, and opposing counsel’s belief that the lawyer speaks for the client traces to that designation. How far a designation reaches is a separate question, and the later section on settlement authority returns to it.

When the client is a business, the manifestations come from people. A business association is not a flesh-and-blood person but a device through which real people conduct business,¹⁰ so the client’s words and designations reach the outsider through the individuals who act for it. Placing an agent in a position within an organization is itself a manifestation, and apparent authority may arise from a position that customarily carries specific authority even though the organization has withheld that authority from the agent.¹¹ In Bucher & Willis v. Smith, a Kansas appellate court noted that general managers, presidents, and partners illustrate apparent authority by position, and then held that the mere appointment of a lawyer as attorney for an estate gave him sufficient apparent authority to obligate the estate for services, such as a survey of the estate’s property, that were routinely and directly connected with the administration of the estate.¹² The appointment was the estate’s own act, and an outside surveyor could see it. The holding also carries its own limit: the authority reached services routinely connected with administering the estate.

A law firm manifests through the work it ordinarily does. The ordinary course of a firm’s business includes the practice of law and activities normally related to it, and firm liability follows that line, reaching malpractice by any firm lawyer, debts staff incur for services or supplies, and misapplied funds in the firm’s custody.¹³ In Myers v. Aragona, the court affirmed a judgment against a lawyer for losses that another lawyer caused by misappropriation, because the defendant used, and allowed the use of, a joint firm name on settlement statements and letterhead.¹⁴ The later section on law firms as principals develops this point.

A course of dealing is a manifestation because repeated acceptance of an agent’s acts tells outsiders how far the agent’s authority runs. In Essco Geometric v. Harvard Industries, Harvard had for over twenty years let its purchasing manager select vendors. When a new manager replaced him, no one told the vendor, Diversified, that Harvard had adopted new internal operating procedures or that the manager would have less authority.¹⁵ Harvard’s acceptance of its purchasing manager’s contracts over the years, a course of conduct that Diversified knew about, reasonably suggested that the manager could bind the company.¹⁶ The manifestation also need not be verbal. An owner who pays a supplier for every order an employee places has told the supplier, by conduct, that the employee can bind the owner, and a later private revocation changes nothing until the owner tells the supplier.¹⁷ A client who has repeatedly honored deals the lawyer made, without checking back, stands where that owner stands.

Silence can also be a manifestation. A principal is responsible for authority that the principal knowingly or negligently permits the agent to assume.¹⁸ A client who hears the lawyer announce authority to the other side, sees the other side begin to rely on the announcement, and says nothing has communicated assent as plainly as a client who spoke.

Silence of this kind overlaps with estoppel. The Restatement’s estoppel rule asks, among other things, whether the principal knew of the other person’s belief and that the other might change position because of it, yet took no reasonable steps to notify him.¹⁹ The difference is that estoppel looks to a change of position, while apparent authority binds the principal without one.

The fourth step does the sorting that most fact patterns are built to test. A lawyer’s confident assurance of authority feels like a manifestation, and the outsider’s belief in it may be entirely sincere, yet unless the client authorized or knowingly allowed the assurance, nothing in it traces back to the client.²⁰ Private instructions fall on the other side of the same line: however explicit, they cannot cancel a manifestation the client has already made.

Reasonable Belief and Inquiry

The Third Restatement turns the second half of the § 8 formula into an express requirement: apparent authority exists when a third party reasonably believes the actor has authority to act for the principal and that belief is traceable to the principal’s manifestations.²² The previous subsection supplied the manifestation. This one asks what the outsider actually believed, whether a person in that position could reasonably believe it, and what the outsider should have done when something looked wrong.

The belief must have three attributes, and the claim fails if any one is missing. It must be actual, because an outsider who never thought the lawyer was authorized was not misled by anything the client did. It must be reasonable, since the outsider has to act reasonably in addition to holding a subjective belief that the agent is authorized.²³ And it must be traceable to the client, meaning it flows from the client’s own words or conduct and not from the lawyer’s boasts.²⁴ The common reason is that the law binds a client to an unauthorized deal because appearances the client is responsible for misled the outsider. An outsider who held no belief, an unreasonable one, or one drawn from another source has no such appearance to point to.

Reasonableness is measured objectively, by asking what a person in the outsider’s position, knowing what this outsider knew, would believe about someone holding this role. Custom enters the measure because the line between ordinary and extraordinary acts depends to a degree on the custom for people holding that title.²⁵ Essco shows the measure at work. The vendor knew that Harvard had never entered a non-cancellable requirements contract, yet testimony established that industry custom presumed without question that a purchasing manager could bind the company to one, and no one had told the vendor of the company’s new internal limits. On those facts it was not unreasonable for the vendor to believe the manager had that authority, even though such contracts had not been the parties’ prior practice.²⁶

The analogy is the restaurant owner whose history of paying for an agent’s orders was a manifestation to the supplier, so that a private revocation did not end the authority. If the owner wants to cut it off, she should inform the supplier.²⁷

A belief cannot be reasonable once the outsider knows the authority is missing. The partnership rules put the point in its plainest form: a partner has apparent authority to bind the firm to transactions within the ordinary course of its business, unless the third party is aware that the partner lacks actual authority.²⁸ An outsider who knows the limit was not misled by any appearance. For a client, the practical lesson is that a clear notice to the other side, like the letter to opposing counsel in the earlier example, separates a lawyer’s unauthorized act that binds from one that does not.

Even without actual knowledge, an outsider may have a duty to inquire. Cases such as Link v. Kroenke treat the duty of inquiry as part of the doctrine, and in Bayless v. Christie, Manson & Woods International, Inc. the Tenth Circuit quoted the principle that a person with means of knowledge reasonably open to him about the limits of an agent’s authority cannot hold the principal unless he uses ordinary diligence to ascertain them, and that he has such means if he knows or has reason to know that the authority is evidenced by a document open to and intended for his inspection.²⁹ The reasoning is practical. The person who can learn the limit cheaply, by reading a document or placing a call, is the person who must do so.

Some transactions invite questions because of what they are. A position tells outsiders what its holder customarily does, and that message reaches ordinary acts without reaching unusual ones. Today a corporate president can generally bind the corporation to deals in the ordinary course of business, while unusual contracts, such as long-term employment contracts or the settlement of litigation, should be authorized by the board.³⁰ A president might lack authority to enter lengthy employment contracts or to settle litigation involving the corporation.³¹ In Jennings v. Pittsburgh Mercantile Co., the court framed the issue as the apparent authority an officer holds by virtue of his office to consummate an extraordinary transaction and denied it, reasoning that any other conclusion would improperly extend the usual scope of authority attached to corporate office and undercut the board’s proper role.³² The Seventh Circuit reached the same result about the title of president in Chase v. Consolidated Foods Corp., holding that the title does not carry apparent authority to make an unusual and extraordinary contract, such as one to sell a major corporate division.³³ An outsider can see that such a deal is unusual, so the deal itself is a warning sign, and the title the outsider relied on said nothing about authority of that size. Settling litigation sits on the list of unusual acts. A lawyer hired to handle a case holds a position whose customary authority may therefore stop short of ending it, a tension the lawyer-specific sections take up.

The outsider’s own want of care can defeat reliance. In Transmutual Insurance Co. v. Green Oil Co., the court stated that Transmutual was bound by Smith’s acts under apparent authority only toward third persons who incurred a liability in good faith and without ordinary negligence. It agreed that the card issuer, Green Oil, acted negligently by issuing Smith a credit card without independently verifying her authority, and so Green Oil could not rely on Smith’s ostensible authority to establish agency between Smith and Transmutual.³⁴ The decision shows the doctrine’s second face: the principal’s manifestations matter, but so does what the outsider did to check.

The fourth and fifth steps decide most problems, because they ask what the outsider could have learned cheaply and whether the deal itself should have prompted the question. A fact pattern that offers a hesitating agent, a document to read, or an unusually large commitment is built to test them.

Authority Cannot Be Self-Created

Apparent authority ordinarily cannot be created by the agent’s own words or actions, such as a false representation to a third party that the agent is authorized.³⁶ The rule follows from the definition, since § 8 grounds the power in the other’s manifestations to the third person, and the other is the principal.³⁷ The previous subsections built apparent authority out of what the client said, designated, or allowed. This rule marks the edge of that structure by naming what it leaves out: a lawyer’s own assurance, however confident, is not among the client’s manifestations.

The reason lies in who controls what. The doctrine holds a client to a deal the client never approved because the client is responsible for the appearance that misled the outsider, and responsibility of that kind requires that the client had some hand in creating the appearance. A lawyer’s announcement is an appearance created entirely by the lawyer, and the client, who cannot hear every conversation the lawyer has, cannot prevent it. If the announcement sufficed, the client’s exposure would be fixed by how far the lawyer was willing to overstate, and there would be no limit to the liability the doctrine imposes.³⁸ Delegation would then become a hazard, because anyone who engaged an agent would risk being committed by whatever the agent chose to say.

The cleanest case is the impostor. Apparent authority arises from a principal’s manifestation to a third party that another person is authorized to act for the principal, and only an act within the scope of that manifestation binds the principal.³⁹ Where a stranger claims to be a landowner’s agent and the landowner has never communicated with the buyer, there is no manifestation to hold the landowner to. The same analysis applies to the impostor posing as a store’s salesman in Hoddeson v. Koos Bros., where the customer could not charge the store because nothing the store did made the impostor look authorized.

Courts apply the same rule to people who really do hold an office. The Jennings court denied apparent authority to an officer in a setting close to one where the officer falsely announces that the board has met, approved the deal, and authorized him to say so, and it stated the principle in a sentence: “An agent cannot, simply by his own words, invest himself with apparent authority.”⁴⁰ A title is itself the organization’s manifestation, and it carries what the title customarily carries, so an officer’s own assurance that the title reaches further adds nothing to it.

The rule has a limit that matters in practice, and the limit turns on the word authority. An agent may have actual authority to make statements about his own authority, and implied authority usually supplies it, since an agent sent to negotiate would reasonably assume he may say so.⁴¹ Because the principal authorized the statements, they are deemed the principal’s manifestation relayed through the agent, which is why the doctrine admits them while excluding the agent’s unauthorized assertions.⁴² The permission covers an accurate account of what the principal conveyed. It does not cover a false report that the board voted or that the client approved a figure, which is the agent’s own word and falls on the Jennings side of the line.

Documents work the same way. In the familiar rug illustration, an owner writes an agent giving him full power to negotiate and close the sale of a valuable oriental rug. She sends no copy to the prospective buyer and tells the agent not to display the letter, yet the agent shows it and closes. Nearly all courts find the owner liable, on the reasoning that she should realize her conduct is likely to result in a manifestation to the buyer, given the considerable risk that an agent will display indicia of authority to improve his bargaining position.⁴³ The paper is the principal’s own act, so the buyer’s belief traces to her. The cases between the two extremes, where the agent alters a genuine document, are unsettled: one view warns that liability would have no limit if an agent could rewrite his own authority, and the other holds that a principal who placed indicia of authority in the agent’s hands invited reliance on them.⁴⁴

Fact patterns exploit this boundary by pairing a confident lawyer with a credulous counterpart. When opposing counsel reports that the lawyer announced the client’s approval of a figure and that counsel believed it, the instinct is to find apparent authority because the belief was sincere. The analysis asks instead what the client contributed. If the client authorized the announcement, supplied the document, placed the lawyer in a position that carries the authority, or stood by in silence while knowing the other side relied on the claim, the client’s own conduct supplies the manifestation.⁴⁵ If the client did none of these, the belief rests on the lawyer’s words alone. The party who seeks to charge the client carries the burden of establishing the lawyer’s authority, and courts will look beyond written and spoken words to all the surrounding circumstances in deciding whether that burden is met.⁴⁶