Ostensible authority of an agent is imposed by the law as a way of preventing a principal from repudiating a deal instituted by someone who appeared to have authority for that principal where it would be unconscionable to a third party to do so.
If a principal (P) such as a corporation, partnership or an individual uses a person (A) to do certain things on behalf of P, the legal term for A is “an agent”.
In many cases, the extent of the agent’s authority will be clear enough. A land agent engaged under a sales agency agreement, for example, will carry out the duties of the agent in marketing and facilitating offers on the property, and do all things incidental to finalising a legally valid sale contract.
To take another example of a formal, defined agency: a person may be appointed a universal agent to do all things for the principal pursuant to a Power of Attorney.
However, agency can arise in a number of informal ways. A businesswoman might ask an agent to advertise her business. A businessman might arrange for an agent to source a particular kind of machinery for production. In certain cases, the extent of the agent’s authority is not written down.
A problem can arise when an A, dealing with a third party (T), either poses as an agent of P, thus having no authority, or, being an agent of P, goes beyond his authority.
For example, P is a private moneylender. He pays A commission to introduce borrowers. A is not authorised to form loan contracts; he is simply to introduce borrowers and is paid a commission based on that. But suppose A gets excited and draws up a loan contract on behalf of P. P does not want to do that deal, but he may be bound by it if he has done something that leads T to believe A is acting with P’s authority.
If P had appointed A “Managing Director” of the loans business, this could amount to holding A out as having authority to do the deal. On the facts, he has no actual authority to form the loan contract but a Court might hold he has Ostensible Authority. Ostensible authority of an agent is imposed by the law as a way of preventing P repudiating the deal where it would be unconscionable to T to do so.
The principles and practical effects of this doctrine can be complex. If your business structure is such that you are regularly engaging agents, we recommend a review of your arrangements sooner rather than later, to avoid finding yourself trapped in a bargain you neither wanted nor knew about!
For further information please contact Peter on 8362 6400 or email Peter Jakobsen. Join our mailing list to receive updates and advice on current issues.