How "Apparent Authority" Can Bind You to a Contract

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It is well understood that an agent may bind a principal to a contract. For example, if you own a business and authorize one of your employees to sign a contract, the company is liable for any obligations under the contract. If you then fail to perform, the other party may sue you for breach of contract.

But what happens if you did not authorize the employee to sign the contract? Can you still be held liable? That depends on whether or not your employee had “apparent authority.” As explained by the New York-based Second U.S. Circuit Court of Appeals, “Where an agent lacks actual authority, he may nonetheless bind his principal to a contract if the principal has created the appearance of authority, leading the other contracting party to reasonably believe that actual authority exists.”

This means if your own actions—or “lack of ordinary care,” in the Second Circuit's words—lead a third party to believe an agent is authorized to act on your behalf, you are responsible for any transaction completed by the agent. The third party must prove it acted on a “reasonable belief” that the agent had apparent authority. The third party cannot recover under a breach of contract claim if it knew (or should have known) the agent was actually acting beyond the scope of his or her authority.

Actual Authority vs. Apparent Authority

Apparent authority is often cited in breach of contract cases where a party's “actual authority” is in doubt. Here is an illustration from an ongoing case. Two parties entered into a contract for the sale of a building in Manhattan. When the buyer refused to close the deal, the seller filed suit for breach of contract, seeking forfeiture of the down payment held in escrow.

What complicates matters is that the seller is a foreign government, specifically the New York consulate for the State of Qatar. Foreign states generally enjoy sovereign immunity, meaning they cannot be sued in United States courts without their consent. In this case, the buyer argues the consul general, acting on Qatar's behalf, waives sovereign immunity when he signed the contract.

Qatar maintains the consul general lacked “actual authority” to sign the contract on the government's behalf. This point remains in dispute. The judge presiding over the casesaid it was unclear whether New York or Qatari law even applied.

The judge also observed if the consul general lacked actual authority, “he may yet be able to bind [the government] under the doctrine of apparent authority.” This is also a disputed point, however. The Second Circuit is the only federal appeals court to apply apparent authority against foreign governments, and that court has been asked to reconsider its position in a case involving another country. Additionally, Qatar maintains a “lower level” official like a consul general cannot bind it even under New York's apparent authority doctrine. The judge has ordered additional discovery on this issue.

Need Help With a Contract?

Of course, most New York breach of contract cases do not involve foreign countries. Private parties must always be mindful of the apparent authority doctrine and their potential liability. An experienced New York business attorney can advise you on this and other areas of contract law. The attorneys at Waldhauser & Nisar can assist you with all types of contract matters.