Tuesday, March 21, 2017

Actual, Apparent, and Inherent Authority

If you happen to get a Partnerships essay on the MEE, the chances are quite high that Agency issues will be mixed within.  And a very common Agency issue deals with the authority that an agent (for example a partner in a partnership) has to act for the principal (for example, the partnership).  This post will review three types of authority that should be known well going into the exam:

Actual Authority:  Actual authority is the authority that the agent reasonably believes s/he possesses based on the principal's dealings with the agent.  This type of authority may be express or implied.  Express is pretty straight-forward; look for an agency agreement and if the authority is stated within that agreement then express authority has been granted to the agent.  Implied authority is that which the agent reasonably believes s/he has as a result of the principal's actions even if there is no express agreement stating as such.

Apparent Authority: Apparent authority arises from the reasonable beliefs of third parties.  In other words, if a principal directly or indirectly holds out another as possessing certain authority and such holding out induces reasonable reliance by another that the agent has such authority, the agent will have apparent authority to act on behalf of the principal even if as between the agent and principal the definition of actual authority (either express or implied) has not been satisfied.  One way to think about this is that the principal will be estopped from denying that the agent has authority to act for the principal if the principal has acted in a way that would lead a reasonable person to believe that such authority was in fact granted.

Inherent Authority:  Even if the agent has no actual or apparent authority, the agent might still have the inherent authority to act on behalf of the principal.  Sometimes, courts wish to protect innocent third parties rather than the principal when an agent acts on behalf of the principal.  As such, the law will hold the principal liable for the acts the agent.  A very common example of inherent authority is respondeat superior in which an employer will be held liable for the acts of an employee that occur within the scope of the employee's employment.

There is more to say on this topic for sure (for example, how authority is terminated.)  Future posts will delve deeper into this commonly tested area.

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