You may hear a client claim that the person who requested the goods or services or, in some cases, who signed the contract, had no authority to do so. As a result, the client refuses to pay. Who can sign a contract and can a debtor refuse to pay on the grounds that the person who signed wasn’t authorized to do so?
Although New York’s laws and rules have a laundry list of people who may accept service on behalf of a corporation, the law is silent as to who may actually bind a corporation. In an earlier article, we discussed the law of agency – how an agent can bind a principal. This could include a managing agent contracting for services or purchasing goods on behalf of a accompany. Or, a buying agent acting on someone’s behalf.
For purposes of this article, we will discuss actual and apparent authority.
Actual Authority and Apparent Authority
Actual authority is when you have the power to bind the principal (customer); the customer has given you the right to enter into agreements on their behalf. You would know that someone has actual authority based on public records, statements, contracts, or writing stating that the person or entity has the power to bind the customer.
Apparent authority is when it would appear that someone has the actual authority to bind the customer but, in fact, may not. In order to have apparent authority, there has to be some words or conduct by the principal to demonstrate to a third party that an agent has the ability to bind the principal to an agreement. An example of apparent authority is someone who has a business card and presents the card claiming to be able to sign the agreement.
Here’s a scenario our office handled. A lender was ready to make a loan to an entity but wanted a guarantor to guarantee the loan. The borrower produced an individual who claimed to have the authority to bind a third party to act as a guarantor for the loan transaction. To show their “authority’ to sign a guarantee on behalf of the corporation, they shared an eight-year-old consulting agreement. Based on the individual’s “apparent authority” to sign the guarantee, the lender agreed to make the loan.
However, it turns out that the guarantor had no actual authority to bind the company as a guarantor. The question before the court was whether the lender should have approved the loan based on the consulting agreement without conferring with the principal company, the guarantor, directly.
Apparent Authority in New York
In New York, in order for an agent to have apparent authority, a third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable.
Under New York law, one who deals with an agent does so at their own peril and must make the necessary effort to discover the actual scope of authority. To establish actual or apparent authority, the facts leading to that conclusion must emanate from the principal. Meaning the principal must have provided some form of conduct, either through words, writing, or a business card to give the reasonable impression that the agent had the authority to act on the principal’s behalf. The lender’s reliance on that conduct, and whether that reliance was reasonable, is what determines whether the agent’s apparent authority can bind the principal to the agreement.
In this fact pattern, the third-party lender had no communications or dealings with the principal guarantor to confirm whether the individual could act on the guarantor’s behalf prior to the approval of the lender. The lender solely relied on the agent’s agreement from 2015 without taking any further steps to verify the agent’s authority.
For a lender to rely on an eight-year-old agreement without any further verification of the guarantor is not considered “reasonable” as required by New York law. While the 2015 consulting agreement could possibly bind the guarantor to the loan signed by the individual, it would not be considered “reasonable” to do so without further verification or due diligence. This is due to the amount of time that lapsed since the guarantor’s consulting agreement with the individual was executed, and the lack of communication with the guarantor.
If you have a debt collection matter that you need assistance with, contact us to learn more about your options. We have the experience that pays.
