Respecting the authority: when can an employee bind their company?

Contracts are enforceable if those making them have authority. Without understanding what this means, however, companies risk being bound to contracts they never intended to enter. Here, we explore the definition of authority – and its power to bind a company – from a contractual perspective.

To make an enforceable contract, you need several ingredients. Start with the intention to make something legally binding; add evidence of agreement and consideration between the contracting parties; and mix with terms that are both certain and complete. An additional, necessary ingredient to our contractual cake, is authority. In other words, if the parties do not have authority to enter a contract in the first place, then you might as well forget the Hollywood handshake, because that contractual cake is going to fall flat.

Unfortunately, the term ‘authority’ can be troublesome. Although often expressed explicitly in an individual’s contractual obligations, it can also be implied – or even apparent – whether to the person acting on behalf of a principal, or the third party with which they are dealing. This can lead to situations in which a contract becomes binding, regardless of whether the agent (for example, an employee) had the authority to enter it in the eyes of the principal (a company, for example).

What’s more, several recent cases demonstrate that authority can be apparent from something as simple as an email or a job title. Clarity, then, is key to successfully navigating interactions with third parties. Agents need to know the scope of their authority, and when and how they can give the green light.

What is ‘actual authority’?

Actual authority is the most straightforward form of authority. According to a classic definition from Diplock LJ, it is a “legal relationship between principal and agent created by a consensual agreement to which they alone are parties.”

An agent acts on behalf of a principal; a common form of this relationship would be the company as principal, and the employee as agent. The remit of their actual authority is, as Diplock LJ explains, defined by “applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade, or the course of business between the parties.”

Actual authority comes in two forms: express and implied. Applying Diplock LJ’s principles, express authority would come from words explicitly giving an agent authority to conduct a particular transaction (for example a board resolution).

Implied authority, however, is more nuanced, and is more likely to involve the concepts of “usages of the trade” or “the course of business.” Holding the job title of chief executive, for example, will naturally imply an authority to carry out certain transactions, unless explicitly stated otherwise.

Crucially, both express and implied actual authority are binding.

What is ‘apparent authority’?

Things get more complicated when we enter the realm of apparent authority. This is frequently argued by a third party that wishes to bind a principal to a contract entered into by that principal’s agent. The burden of proving apparent authority falls on the third party.

The 2019 case between cosmetics retailer Superdrug and cosmetics manufacturer Athena Brands Ltd provides a useful demonstration of the ways in which apparent authority can be proven. In February 2018, Superdrug informed Athena that “orders going forward” for its Nature’s Alchemist product line “would be unlikely”, after initial sales of the product proved slower than expected.

Athena, who had confirmed a minimum quantity of cosmetic products from a ‘buyer’ at Superdrug, took the retailer to the English Commercial Court, claiming for the shortfall in the minimum quantity of products sold, plus storage costs for unsold stock and interest. The figure came in at just under £1m.

Superdrug argued that its buyer, and main point of contact for Athena’s ‘senior brand manager’, had neither the actual nor the apparent authority to enter a contract. Furthermore, the buyer’s request for Athena to “please go ahead” did not constitute an agreement or commitment, because it failed to follow any of Superdrug’s internal policies. In return, Athena argued that the instructions to “go ahead” were presented with the apparent authority, upon which they directly relied.

The High Court granted summary judgment in favour of Athena. It found, as a matter of fact, that the employee had been held out as a buyer authorised to negotiate terms of trade, with no relevant restriction identified to Athena. Furthermore, the existence of internal procedures was meaningless if the third party was not aware of them, and the agent made no effort to communicate them.

Apparent authority can be a pitfall for companies. If it is reasonable for a third party to assume, then it is likely a company will be bound to any resulting contract.

Setting out scope

As a first step, agents dealing with third parties need to be fully briefed as to the scope and limits of their authority, and the internal procedures for negotiating and, where relevant, approving contracts. They should also understand the importance of communicating this clearly to the third party, so that they are not ultimately bound by an agreement they never intended to make.

Proving or denying authority can be a complex, time-consuming and expensive process. It is therefore best practice to avoid this entirely by making the scope of an individual’s authority clear to all parties from the get-go.

This article was co-written by Lucy Collins.