“Credit Manager Chuck Barry smelled a rat when Shipping called to tell him that his long-time customer wanted them to send a truck over to pick up the entire order of supplies they'd delivered the week before”.

Chuck's company was locked in a life-or-death struggle with a discount supplier that was expanding into the area. For Sam--a customer for 10 years--to return supplies he always ordered and certainly needed was a very bad sign.

"Did they say there was anything wrong with the goods?" Chuck asked the shipping clerk.

"No, nothing like that," the clerk replied. "It just says on the invoice that the order wasn't authorized."

Chuck jumped in his car and drove to the customer. One look around confirmed his worst fears. Many items, clearly from their new competitor, were visible in the inventory he observed. The account was apparently lost, but he wasn't going to give up on last week's order.

"You ordered those supplies," he told Sam. "There was nothing wrong with them. You've got to pay for them."

"I didn't order them," Sam replied. "Sally did. She's a clerk and had no authority to place an order."

"Sally's been ordering things for you for months," Chuck pointed out. "And you've been paying for them. As far as I'm concerned, you owe us for that order. Either you pay or we sue!"

Does Chuck have a case?  Scroll down for the answer and our analysis.

Answer and Analysis

Chuck has a case because Sally, although just a clerk, had "apparent authority" to place the order.

The term "apparent authority" is used in situations where a particular party may not have the "actual authority" to bind a business to a commitment or agreement but, because of past actions or behavior, is believed by the seller to have this authority. The most notorious problems associated with apparent authority occur when the purchaser has allowed or encouraged the seller to believe that an agent has purchasing authority that in fact, the agent does not have.

Businesses use agents for a wide variety of purposes. There is no question that an officer is an agent of a corporation, a partner is the agent of a partnership, and a salesman is an agent for the sale of merchandise. Individuals or businesses may also act as agents of other businesses. An attorney, an accountant, or a real estate broker are all agents of other businesses. In all these situations, the agent has the actual authority to act on behalf of the business.

Key Concept

The Best Protection
Doing business with an agent is the same as doing business with the principal. Sometimes agents are appointed for all business transactions and other times for limited or specific transactions. When dealing with an agent, the best protection is to obtain the written authority of the principal. If a written agreement cannot be obtained, you may rely on the apparent authority of the agent to act for the business.

The scope of the employee's duties may entitle a seller to rely on the apparent authority of that employee as an agent of the business. The classic example is dealing with the purchasing or sales manager, depending on whether you are selling or buying from the business. Even if the purchasing manager or sales manager is not an officer of the corporation or a partner in the partnership title, the title of sales manager or purchasing manager would probably be considered adequate apparent authority to bind the business to a sale of the merchandise.

The third-party dealing with the business must evaluate the duties, the title, and the activity of the particular party with whom he or she is dealing. If all the circumstances indicate that this party has the authority to bind a corporation or the partnership, the court probably will consider that the party had the apparent authority. If there is apparent authority, then there is actual authority, and the business will be bound by the action of that particular party.

Relying on Prior Dealings
The other method of binding the business is to rely on prior dealings in which past orders were accepted and delivered. One of the classic examples is when the owner states that the individual is no longer employed and therefore the creditor had no right to rely on the employee's authority to order. The fact that the employee is no longer employed by the corporation or partnership has absolutely no relevance to whether the party had the apparent authority at the time the merchandise was ordered or the contract was entered. The key is whether at that particular time the employee did have the apparent authority.

The fact that the prior activities enabled a reasonable businessperson to rely on the representation of the employee that he or she had the actual authority to enter the contract is a key ingredient in many of these disputed situations. If the employee ordered in the past and the bills were paid, the obvious conclusion would be that the employee had apparent authority. If a similar employee with similar duties ordered in the past--but this was the first time that this employee, with similar duties, ordered--the conclusion would still be that he or she had apparent authority.

For example, a waitress in a restaurant regularly ordered the paper products for the restaurant. But if in this particular instance a different waitress ordered the paper products, the businessman could reasonably rely on the new waitress, since all prior dealings were with an individual who had the same duties. The same thing would be true if the bookkeeper of a manufacturer consistently ordered materials from a seller and, in this particular instance, a different bookkeeper or an assistant bookkeeper placed the order for the same materials over the telephone. Certainly, the seller can reasonably assume that a bookkeeper is a proper party to place the order.

Accepting the benefits of a transaction will also support apparent authority. Suppose, for example, that a driver for a trucking company calls a supplier to order protective mats. Since the supplier knows that prior orders for these mats were made by drivers, it makes the delivery. In this case, however, the trucking company refuses to pay, contending that the drive was not authorized to place the order.

The seller may recover on the grounds that the trucking company had accepted the benefits of mats used in loading and unloading the trucks. Even if this was the very first order that this particular truck driver had placed, the fact that the trucking company accepted and used the mats entitles the seller to recover for "unjust enrichment" in addition to breach of contract.

Certainly, the trucking company was unjustly enriched and their claim that the order for the merchandise was unauthorized must fall; the benefits of the contract were accepted when the protective mats were used rather than immediately returned. And even if the mats were returned immediately, there would still be a question of fact as to whether the seller was reasonable in relying on the order placed by the truck driver.

Get It in Writing
When you are dealing with professional agents such as real estate brokers, attorneys, accountants, or stockbrokers, different situations present themselves. These particular types of agents are independent contractors but often act on behalf of a client. In those instances, it is wise to have the particular professional agent represent in writing that he or she is acting as agent for the client. Failure to obtain authorization in writing may result in more serious problems than when the agent is an employee of the business or partnership. Nevertheless, even in these situations, if the professional agent has conducted himself or herself in such a way that a third party has a reasonable basis to believe that the firm is the proper agent for the business or partnership, the third party may be able to sustain the apparent authority of the professional agent.

Accordingly, when the business or partnership alleges that the party did not have the authority to order and immediately wishes to return the product to the party, we recommend that you consult with counsel to consider whether you should or should not accept their statement as fact. Since Sally had ordered before and the bills were paid, Chuck should consult counsel for a suit (unless he doesn't wish to get Sally in trouble).