Actual and apparent authority are the two ways an agent can bind a principal. Actual authority comes from what the principal communicates to the agent. Apparent authority comes from what the principal communicates, by words or conduct, to a third party. The internal message creates actual authority; the external impression creates apparent authority. Either can leave the principal legally responsible for the agent’s actions, which is why the distinction matters more to principals than to the outsiders they deal with.
Actual Authority: What the Principal Tells the Agent
Under the Restatement (Third) of Agency, an agent acts with actual authority when the agent reasonably believes, based on what the principal has communicated, that the principal wants the agent to act.1H2O. Restatement of Agency (Third) Excerpts The belief has to trace back to something the principal actually said or did. An agent cannot manufacture authority through wishful thinking.
Actual authority comes in two forms.
Express Authority
Express authority is stated directly, orally or in writing.2Legal Information Institute. Express Authority A board resolution letting a CEO sign a purchase agreement, a power of attorney granting someone the right to manage finances, or a verbal instruction to “go negotiate the lease” all create express authority. Written grants are far easier to prove than oral ones, which is why serious agency relationships are usually documented.
Implied Authority
Implied authority is never spelled out. It is understood from the agent’s role, industry custom, or what is reasonably necessary to carry out express duties.3Legal Information Institute. Actual Authority A store manager hired to run the business has implied authority to order inventory, schedule staff, and handle vendors, even if none of those tasks appear in the employment contract. You cannot run a store otherwise. Courts also look at past dealings between the principal and agent and the norms of the trade to decide what was implicitly granted.
Apparent Authority: What the Principal Signals to Third Parties
Apparent authority exists when a third party reasonably believes an agent can act for a principal and that belief is traceable to the principal’s own conduct. The Restatement (Third) defines it as the power to affect a principal’s legal relations when a third party “reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.”1H2O. Restatement of Agency (Third) Excerpts The agent might have no actual permission at all. That does not matter if the principal’s words or behavior created a reasonable appearance of authority.
Here is the practical contrast. Both types of authority require a reasonable belief traceable to the principal. With actual authority, the relevant belief belongs to the agent. With apparent authority, the relevant belief belongs to the third party.4H2O. Apparent Authority A principal who tells an agent “you can sign deals up to $50,000” creates actual authority. A principal who tells a supplier “talk to my agent about placing orders” creates apparent authority, regardless of any private spending limit the principal set with the agent.
When Each Type Binds the Principal
A principal is bound by contracts an agent enters when the agent acts with either actual or apparent authority.5Legal Information Institute. Apparent Authority From the third party’s side, the two look the same in effect: the principal owes the obligation. From the principal’s side, they represent very different failures. Actual authority is a supervision problem, meaning the agent did what they were told. Apparent authority is a communication problem, meaning the principal signaled something outward that did not match what they told the agent internally.
When an agent acts with no authority at all, the principal generally is not bound. The third party’s recourse shifts to the agent personally. Agents carry an implied warranty of authority: a promise, built into representing someone, that the agent actually has the power they claim.6American Bar Association. The Liability of Managers and Other Agents for Their Own Actions on Behalf of an LLC If that promise proves false, the third party can sue the agent for the resulting loss, even where the agent believed in good faith that they had authority.
When Reliance on Apparent Authority Is Reasonable
Not every belief about an agent qualifies. Courts examine the circumstances to see whether the third party was justified in assuming the agent could act for the principal.
- The agent’s position matters. A person employed as a salesperson is reasonably assumed to have authority to make sales. A court in 370 Leasing Corp. v. Ampex Corp. found it “reasonable for third parties to assume a salesman has authority to make sales” based on the role alone.
- Whether the principal communicated limits matters. In the same case, the court emphasized that no evidence limiting the agent’s authority was “ever relayed to the plaintiff.” Restrictions kept between the principal and the agent do not protect the principal.
- Whether the act was incidental to the agent’s known role matters. Third parties can reasonably assume an agent is authorized to do things that ordinarily accompany the transactions the agent is known to handle, unless the third party has notice otherwise.
The overarching standard is the reasonably prudent person test. Would someone in the third party’s shoes, knowing what they knew, have believed the agent had authority? Blind trust does not qualify. If an entry-level employee claims the power to sell the entire company, a sophisticated buyer cannot claim reasonable reliance.
When the Principal Is Undisclosed
Apparent authority depends on the third party’s belief about the principal. Where the third party does not know a principal exists, apparent authority cannot arise, because there are no manifestations from the principal to create it. In undisclosed-principal situations, only actual authority matters. The agent must have genuine express or implied authority and must have intended to act on the principal’s behalf when entering the transaction. Once the principal’s existence surfaces, the third party can typically enforce the contract against either the principal or the agent.
Ratification When Neither Authority Existed
When an agent acts without authority, the principal has a choice: walk away or embrace the deal. Ratification is retroactive approval that gives the unauthorized act the same legal effect as if actual authority had existed from the start.7H2O. Ratification
Ratification is not as simple as saying “I approve.” Several conditions apply:
- The principal must have the legal capacity to authorize the act both when it occurred and at the time of ratification.7H2O. Ratification
- The principal must know the material facts of the transaction before affirming it. Ratification based on incomplete information may not hold.
- The principal must ratify before delay creates adverse or inequitable effects on the third party. If the third party has withdrawn, or circumstances have materially changed, the window may have closed.
- Ratification is all or nothing. A principal cannot keep the favorable parts of a deal and reject the rest.
Ratification can happen through explicit statement or through conduct. A principal who learns an agent signed an unauthorized supply contract and then accepts deliveries under it will likely be found to have ratified through conduct.
Tort Liability Through Apparent Authority
Apparent authority reaches beyond contracts. A principal can be liable for an agent’s tort when the principal provided apparent authority and the agent used that authority to commit or conceal the wrong.8H2O. Tort Liability: Principal and Agent A company that tells customers an agent will handle their purchase is liable if the agent lies about the product to close the sale. The company gave the agent the apparent authority to sell, and the agent used that authority to deceive. Fraud committed under the cover of that authority can generate exposure well beyond any contractual liability.
Apparent Authority That Lingers After Termination
Ending an agent’s actual authority does not automatically end their apparent authority. If the principal’s past actions created the appearance that the agent was authorized, that appearance persists until the principal takes steps to dismantle it.9H2O. Apparent Termination
Apparent authority only ends when it is no longer reasonable for the third party to believe the agent still has actual authority.9H2O. Apparent Termination Fire a purchasing manager, fail to tell the suppliers that manager regularly called, and the company may still be bound when the former manager places another order. From the supplier’s perspective, nothing changed.
Practical steps to shut apparent authority down include notifying third parties who dealt with the former agent, retrieving company property like vehicles and ID badges, revoking access to company email and ordering systems, and publicly announcing the change when appropriate. The fired-salesperson-with-a-company-truck scenario appears in the case law repeatedly because it is such an easy mistake to make and such an expensive one to fix later.