As always, spell it out in writing
Published 12/24/05

When delegating dealings with customers, suppliers, or other third parties, clear instructions should be given as to the parameters of what your company's representatives can and cannot negotiate. Whether the individual you delegated to is an employee or an independent contractor, that individual is considered under the law as an "agent" of the business and usually can bind the business, his "principal", to certain obligations, sometimes even if he does not have the authority to do so.

For example, if a manufacturer hires a manufacturer's representative (whether he/she is an inside account representative or an outside salesperson) to sell its product, it may be natural in the industry for the retailer customer to assume the manufacturer's representative is authorized to bind the manufacturer to credit terms.

If it is justifiable under the circumstances for the retailer to make such an assumption and the manufacturer's representative agrees that the normal finance charge is waived and payment can be made over six consecutive equal monthly payments, the manufacturer may possibly be bound to those terms with the retailer even if the manufacturer had told the representative, but not the customer, that all credit decisions were to be solely made by the manufacturer. This is called "apparent authority" of the agent and is a legal theory which basically attributes the risk to a principal using an agent rather than the third party dealing with that agent when it is not made clear to the third party the limits of the agent's scope of authority.

It is for this reason that a principal should:

•  clearly define in writing to its agents what it has authorized to do and what they must obtain the consent of their principal to do; and

•  consider notifying third parties dealing with the principal's agent in writing of the limitations of the agent's authority, obviously with respect of the third party/agent relationship.

An agent should likewise:

•  confirm in writing with his principal what are the limitations of his authority acting on the principal's behalf including what terms of a deal he cannot agree to under any circumstances without consent of the principal;

•   in negotiations with third parties let them know up front what terms are subject to approval/consent by his principal so that the third party does not become frustrated trying to negotiate terms with the agent that the agent has no authority to agree to.

As to a third party dealing with an agent it should:

•   immediately ascertain what are the limitations of authority that an agent has to bind the principal and thereafter determine what, if any, terms of the deal it desires to negotiate directly with the principal rather than communicating an offer to be relayed by the agent.

Both principals and their agents should also consider under what circumstances it is prudent in fostering the relationship with the third party to allow direct access to the principal who is capable of saying "yes" to those critical business terms.

J. Daniel Marr is a director and shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and business persons on a variety of legal issues, including employment, and advocating on their behalf. You can reach Attorney Marr by e-mail at: dmarr@hamker.com

This information is general information and may not reflect the most current legal developments, verdicts or settlements. The information provided should not be relied upon as an indication of the actual state of the law or of future developments. The information contained on the Hamblett & Kerrigan website is for informational purposes only and does not constitute legal advice. If the information referenced may be of legal importance to you, you should consult with an attorney to provide you with legal guidance and opinion as the the effect of the current law upon your situation.