Inherent Agency Power

Restatement (Second) of Agency § 8A defines inherent agency power as the power of an agent “which is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.”¹ The definition works by elimination. It strikes the three sources on which a principal's liability might otherwise rest, so inherent power matters only where the outsider can show no authority, no manifestation by the principal, and no estoppel. It then names the one source left: the agency relation itself. An agent who agreed to act for another, and who holds the position that agreement created, can by that fact alone hold power over the principal's legal position.

The definition protects two groups. Persons “dealing with” the agent are the counterparties to contracts and settlements. Persons “harmed by” the agent need not have dealt with anyone. The word “servant” is the Second Restatement's term for what the Restatement (Third) calls an “employee,” an agent for whose torts the principal is vicariously liable.²

The doctrine's standing is uncertain. One treatise lists inherent agency power with estoppel and ratification in a “grab bag of lesser doctrines” that can bind a principal who gave neither actual nor apparent authority, and it calls the doctrine “curious.”³ The doctrine is also controversial: it extends a principal's liability beyond apparent authority and estoppel and rests on a vague kind of enterprise liability, by analogy to respondeat superior, and the Restatement (Third) expressly abandons the term.⁴ Most existing case law still applies the Second Restatement, however, and the basic principles of the two are largely the same, so § 8A remains worth knowing.⁵

The subsections below state the rule, apply it to hidden principals, follow it into the lawyer cases, and show how the Third Restatement reaches much the same ground without the label.

The § 8A Rule

Apparent authority and inherent power part ways on one question: what the outsider must show. Section 8 defines apparent authority as the power to affect another's legal relations by transactions with third persons, professedly as agent, “arising from and in accordance with the other's manifestations to such third persons.”⁶ One treatise's example shows the requirement at work. P tells TP that A may negotiate the purchase of an antique car, then privately tells A to make no deal. A negotiates one anyway, and P is bound, because A had apparent authority “based upon P’s manifestations to TP”; P's remedy is a suit against A for violating instructions.⁷ Inherent power starts where that example stops, with an outsider who can point to nothing P said. As Menard, Inc. v. Dage-MTI, Inc. puts it, the principal's representations to the third party are central to apparent authority, while inherent authority “originates from the customary authority of a person in the particular type of agency relationship so that no representations beyond the fact of the existence of the agency need be shown.”⁸

The customary scope of the role therefore measures the power. An owner who hires a manager seldom tells the manager's counterparties where the job stops, which leaves them one thing to go on: what managers in that business ordinarily do. Kidd v. Thomas A. Edison, Inc., as Menard describes it, applied that measure. The court reasoned that the scope of an agency is measured “not alone by the words in which it is created, but by the whole setting in which those words are used, including the customary powers of such agents,” and it enforced the contract because “the customary implication would seem to have been that [the agent’s] authority was without limitation of the kind here imposed.”⁹ The limit the principal set stayed between principal and agent. The outsider could rely on the role's customary scope.

Two reasons support giving the outsider that protection. The first is the purpose of delegation. Menard quotes the observation that “[t]he very purpose of delegated authority is to avoid constant recourse by third persons to the principal, which would be a corollary of denying the agent any latitude beyond his exact instructions.”¹⁰ A counterparty who had to confirm every step beyond the agent's literal instructions would be dealing with a messenger, and the principal would lose what it hired the agent to provide. The second reason is loss allocation. Menard invokes the policy behind vicarious liability: a business enterprise should bear the losses created by its agents' mistakes or overzealousness, because bearing them stimulates the principal's watchfulness in selecting and supervising agents.¹¹ The principal can choose and supervise the agent; the outsider can do neither. The treatise theory states the same point as fairness. One who appoints an agent to conduct a series of transactions over time should bear the losses when that agent, although without authority, does something usually done in connection with those transactions, because such agents are part of the principal's organization much as an employee is part of the employer's business.¹²

Two limits tie the rule to those reasons. The first concerns the agent. The theory speaks of an agent appointed to conduct a series of transactions over a period of time, and Restatement (Second) of Agency § 161 states the rule for the general agent, so an agent engaged for a single transaction falls outside the rationale.¹³ The second concerns the act. Section 161 lets a general agent bind the principal, where there is neither authority nor apparent authority, to acts that “usually accompany or are incidental to” the transactions the agent is authorized to conduct.¹⁴ The test measures the act against the work, and an act unconnected with the usual run of the business falls outside it.

The Second Restatement's own illustration under § 161 isolates the doctrine by removing the usual appearance of authority. A general manager of a foundry violates instructions to buy an alloy from a certain firm and instead buys it from T, a different firm, writing on personal stationery and signing only “A, agent of P.” The Restatement concludes that P is bound.¹⁵ The personal stationery is the drafter's device for destroying a power-of-position argument, so the result rests on the manager's status and on the purchase being the kind of thing a foundry manager usually does.

The illustration also exposes the doctrine's weak point. At first glance § 161's limit is puzzling, because inherent power seems to overlap almost completely with the “power of position” type of apparent authority (§ 38) that ordinarily accompanies general agency.¹⁶ Almost all of the well-known inherent power cases can be classified as apparent authority cases.¹⁷ In practice, lead with apparent authority whenever the facts supply a title, letterhead, or course of dealing, and reserve § 8A for facts that withhold any appearance traceable to the principal.

Hypothetical Illustration

A landscaping company's general manager runs crews, purchasing, and equipment rentals day to day. The owner privately forbids her to rent from one particular yard, but she rents a trencher there, and the yard has heard nothing from the owner. Renting equipment is something a manager in her role usually does, so her power comes from the position, and the owner is bound; the owner's remedy lies against the manager. Suppose instead that the owner asks a neighbor to arrange a single weekend rental from a named yard, and the neighbor rents from a different yard that knows nothing of the instruction. The neighbor was engaged for one errand, with no series of transactions and no customary role to support a power, so inherent power does not reach the neighbor. The second yard would need apparent authority or estoppel, and each of those looks to what the owner said or knew.

Exam Analysis Steps

Because inherent power is what remains when the other routes fail, run it last. The steps are these:

Test actual authority, apparent authority, and estoppel first, and turn to inherent power only if each fails.
Ask whether the agent was appointed to conduct a series of transactions over time, as a general agent, or was engaged for a single transaction.
Ask whether the act in dispute usually accompanies or is incidental to the transactions the agent is authorized to conduct.
If both answers favor the outsider, conclude that the agency relation supplied the power, even though the principal forbade the act and said nothing to the outsider.
Check whether apparent authority by position reaches the same result, and say so when it does, because the two theories often converge.

Undisclosed Principal Cases

Apparent authority has nothing to work with when the outsider does not know a principal exists. Section 8 power arises “from and in accordance with the other's manifestations to such third persons,” and a principal the outsider has never heard of has made none.¹⁹ Estoppel fails for a parallel reason. As one treatise states it, estoppel applies when a party knew or should have known that a third party believed someone was acting on the party's behalf and the third party reasonably so believed, and an outsider who knows of no principal holds no such belief.²⁰ That leaves inherent agency power, which derives from the agency relation alone.²¹

A hidden principal is not exposed to every contract. When the agent acts with actual authority, the undisclosed principal is liable even though the outsider looked solely to the agent's credit, because the principal “is the one who initiated the activities of the agent and has a right to control them.”²² Seavey puts the point in fairness terms: “It is not unfair to the principal to make him liable on an authorized contract since it was his business which was being done.”²³ The same treatise finds this rationale more persuasive than the one the Restatement (Third) offers, which it calls “somewhat less persuasive.”²⁴ Authorized deals are the easy case. Inherent power addresses the hard one, in which the agent exceeds authority.

Watteau v. Fenwick is the English decision usually cited for the hard case: it held an undisclosed owner liable for goods that the manager of the owner's tavern bought contrary to instructions. The result depends on the customary scope of the role. Section 161 binds the principal only to acts that “usually accompany or are incidental to” the authorized transactions, and without that limit every hidden owner would answer for anything a visible manager signed.²⁵

Hypothetical Illustration

A silent investor buys a diner and keeps the former owner on as manager, operating under the old name. Against the investor's instructions, the manager orders a week's produce on credit from a grower who has never heard of the investor. The investor made no manifestation to the grower, so apparent authority is out, and the grower knew of no investor, so no belief that anyone acted for the investor can support estoppel. Buying produce is something a diner manager usually does, so inherent power binds the investor, who may then pursue the manager for disobeying. Suppose instead that the manager signs a contract to buy a fishing trawler for a seafood import venture of his own. Nothing about running a diner includes buying trawlers, so the purchase neither accompanies nor forms an incident of the manager's authorized work, and inherent power does not reach the investor.

Hidden-owner cases show why the doctrine draws criticism. It extends the principal's liability beyond apparent authority and estoppel, and it justifies that extension with a vague enterprise liability modeled on respondeat superior.²⁶ The competing doctrines protect identifiable interests. Apparent authority protects third parties' reliance interests and lets them contract without confirming an agent's authority every time.²⁷ Inherent power asks only that the agent held the role. The Restatement (Third) abandons the term, and the last subsection of this section takes up what replaced it.²⁸

Inherent Power and Lawyers

When the principal is a client and the agent is a lawyer, retention is the agency relation, and the court and opposing parties are the outsiders § 8A protects. The question is whether retention alone, with no statement from the client to anyone, gives the lawyer power to bind the client to a step in the lawsuit. The answer varies by jurisdiction, and Indiana offers the clearest yes.

Menard observed that Indiana has on occasion taken an expansive view of apparent authority that folds in the concept of inherent agency power. It cited Koval v. Simon Telelect, Inc., which certified an answer to a federal court that retention of an attorney confers inherent power on the attorney to bind the client to an in-court proceeding.³⁰ Menard's description of inherent authority explains why retention suffices. The power rests on the customary role and not on representations to the outsider, so a client who hired counsel has already supplied the only fact the doctrine requires.³¹ The Menard passage supports the in-court proposition and no more, and an answer should attribute nothing further to Koval.

Menard's two reasons for status-based power fit litigation well. Delegated authority exists to spare third persons constant recourse to the principal, so a court and an opposing party can act on what the lawyer says at the table without halting the hearing to telephone the client.³² A business enterprise should also bear the losses created by its agents' mistakes or overzealousness, because bearing them stimulates watchfulness in selecting and supervising agents.³³ The client chose the lawyer and can monitor or replace the lawyer, and the court and the opposing party can do neither. The same reasoning marks where the argument weakens. A step taken in the court proceeding is the easiest to attribute to the lawyer's role, and the certification, as Menard reports it, speaks of in-court proceedings and says nothing about agreements reached elsewhere.

In settlement disputes, courts commonly reach a similar result by a different route. They presume that an attorney of record who enters a settlement agreement, purportedly for a client, had authority to do so, and the burden of proof falls on the party disputing the lawyer's authority.³⁴ Some cases distinguish settlements made in open court from those made away from the courthouse, and they find the lawyer's authority more readily for the in-court kind.³⁵ A client who loses on authority may still be bound: even if the lawyer lacked actual or apparent authority to settle, the client is bound if the client later ratifies the settlement.³⁶

The two approaches agree in treating courtroom acts generously, because a lawyer speaking before a judge is visibly the client's voice. They differ on what the client can do about it. Under the Indiana approach, the lawyer's status covers the in-court step, and the client's private instructions do not defeat the power. Under the presumption, the court begins by favoring the lawyer's authority, and the client may try to rebut it with evidence.

Hypothetical Illustration

In a jurisdiction that follows Indiana's approach, a client privately tells her lawyer to stipulate to nothing at a hearing without calling first. At the hearing the lawyer stipulates to the authenticity of the other side's key exhibit. The client never spoke with the court or opposing counsel and objects as soon as she learns of it. Retention alone gave the lawyer power to bind the client to an in-court step, so the stipulation holds, and her remedy runs against the lawyer. A second client in the same jurisdiction tells his lawyer to explore settlement but to agree to nothing without his signature. The lawyer meets opposing counsel at the other side's office and signs a settlement that afternoon. The certification, as reported, speaks of in-court proceedings, so the dispute returns to the presumption that an attorney of record had authority, and the client carries the burden of showing that the lawyer lacked it.

Exam Analysis Steps

Because inherent power for lawyers is one jurisdiction's view and the settlement cases follow a different route, sort a problem by deciding which route the facts and the governing law open. The steps are these:

Decide whether the governing law treats retention of an attorney as conferring inherent power, as Indiana does, or leaves the question open, in which case the analysis proceeds under apparent authority.
Identify the act and where it took place: an in-court proceeding or an agreement made away from the courthouse.
For an in-court act in a jurisdiction that recognizes the doctrine, conclude that retention supplied the power without any statement by the client, and note that the client's remedy lies against the lawyer.
For a settlement made away from the courthouse, apply the presumption that an attorney of record had authority, and put the burden on the party disputing it.
If neither route binds the client, ask whether the client later learned of the deal and ratified it.

The first step does more work than it appears to. An answer that treats Indiana's view as a national rule overstates the law, and an answer that ignores inherent power in a jurisdiction that recognizes it misses the simplest basis for binding the client.

The Third Restatement's Retreat

The Restatement (Third) of Agency expressly abandons the term inherent agency power, which Restatement (Second) of Agency § 8A coined.³⁸ It does not abandon the justifications behind the term. Other doctrines in the Third Restatement encompass them: the importance of the agent's interpretation in the agent's relationship with the principal, apparent authority, estoppel, and restitution.³⁹ The question is where the Third Restatement reaches the results that inherent power once reached, and where it stops.

The corporate president shows the overlap. One treatise puts the question this way: whether we see the power as inherent authority, as the Second Restatement does, or as a branch of apparent authority, as the Third does, the question is whether an officer can bind the corporation by acts taken in office. The president generally can bind the corporation to deals entered into in the ordinary course of business.⁴⁰ Another treatise says the president's authority is integral to the position; it “goes with the territory” of being the president.⁴¹ The two Restatements reach the same place by different routes. The Second locates the power in the office, and the Third treats it as a branch of apparent authority, which rests on the principal's manifestations to outsiders.

The president also shows where the power stops under either approach. Unusual contracts, such as long-term employment contracts or the settlement of litigation, should be authorized by the board.⁴² A title tells outsiders what the office customarily carries, so it supports belief in ordinary acts and gives no support to an act an outsider can see is unusual. If the board learns that an officer exceeded authority, the corporation can still ratify the contract by accepting it, usually by board act, and it is then liable on the deal.⁴³

Hypothetical Illustration

Nordlund Tool Co. prints the title President beneath Okafor's name on its letterhead and website. The board has privately told Okafor to keep any single purchase under $50,000, but he signs a $90,000 steel order with a supplier that knows only the title. Buying steel is ordinary-course business for a toolmaker, so the title supports a reasonable belief that the president can place the order, and Nordlund is bound whether a court calls the source apparent authority or inherent power; Okafor answers to the board for exceeding the cap. Okafor also signs a ten-year employment contract guaranteeing a relative a managerial post, and on another day signs an agreement settling a lawsuit against Nordlund. These are unusual acts that call for board authorization, so the title alone does not bind Nordlund to either, unless the board later ratifies.

Settlement of litigation appears on the list of unusual acts, which ties the corporate example to the lawyer cases. A lawyer's role, like a president's title, covers the ordinary conduct of a matter and does not by itself carry the power to conclude it. That is why the settlement cases look for more than the retainer.

Set side by side, § 8 and § 8A differ on two points and converge on a third. The first difference is the manifestation: § 8 requires the principal's manifestations to the third person, while § 8A requires nothing beyond the agency relation.⁴⁴ The second is the kind of agent: § 8A rests on the general agent who conducts a series of transactions, and its test asks whether the act usually accompanies or is incidental to that work.⁴⁵ The two converge in result, because the acts that usually accompany an agent's position are the acts a title or role communicates to outsiders, which is why most inherent power cases can also be decided as apparent authority cases.⁴⁶

When an exam does not say which Restatement governs, name both theories and keep them separate. If the facts supply a title, letterhead, or course of dealing, apparent authority carries the case under either Restatement. If the facts withhold any manifestation by the principal, a Second Restatement answer names inherent power for a general agent acting within the usual incidents of the work. A Third Restatement answer notes that the term has been abandoned and applies whichever successor doctrine fits: apparent authority, estoppel, or restitution.⁴⁷ Close with the limit, because extraordinary acts need specific authorization under either Restatement.⁴⁸