ACTUAL VERSUS APPARENT AUTHORITY - IT’S EASIER TO BECOME LIABLE THAN YOU THINK
By Attorney Robert A. Mich, Jr.
September, 2012
By Attorney Robert A. Mich, Jr.
September, 2012
Disclaimer: The information contained on this page is not legal advice. The information provided on this website is for general informational purposes and is not necessarily updated to account for changes in the law. You should consult with an attorney for legal advice regarding your individual circumstances.
Construction projects are routinely a whirlwind of activity. Contractors are working with subcontractors, designers and inspectors are interacting with the construction team, and owner’s representatives seemingly have a hand in everything. When so many people are engaging each other, often while assuming multiple roles on a project, it can be very easy to blur the line when determining whose directions are to be followed. The law in Wisconsin may render someone liable for a change order or an error or omission, simply because they were perceived to have had authority in the field for that particular activity. Let’s examine the meaning of actual and apparent authority under the law in Wisconsin.
The phrase “actual authority” refers to situations where someone has been expressly granted authority to act as an agent on behalf of a person or firm. Such authority can be granted either verbally or by written contract. This is the most common type of agency you’re likely to find in the field. For example, the owner of a contracting firm will have actual authority to tell his employees how construction work should be performed. A contractor may order the timing and scope of services to be performed by a subcontractor as detailed in their contract. Where things become more difficult are situations where actual authority has not been granted, but another party believes it has.
“Apparent authority” occurs when a person through their conduct leads another person to reasonably believe that they are authorized to exercise certain authority, even though such authority has not been granted by the apparent agent’s supervisor or firm (“principal”). The focus of this inquiry is not whether the third party believes that the directions provided by the apparent agent would help the third party perform his work, but rather whether the third person reasonably believes that the agent is acting within the ordinary course of his business. Apparent agency will require three elements: 1) an act by the apparent agent or his principal justifying a belief that an agency relationship exists, 2) the principal has knowledge of the general circumstances, and 3) a third party is reasonably relying on his belief in the apparent agency relationship.
There are many kinds of situations where such apparent agency can unintentionally bind a party to some activity they may not have intended. For example, a contractor may place a representative on the project site, who then approves a change order for a dollar amount far in excess beyond what the contractor intended to approve. Nonetheless, if the apparent agent is placed in such a position where a third party believes that the agent is authorized to consent to the larger change order on behalf of the contractor, the contractor may be bound for the larger amount. Apparent authority can also bind an engineer or owner’s representative where they direct changes to work in the field, even though they may not have contractual responsibility for directing such work but the performing third party contractor nonetheless reasonably relies on this direction.
The lesson to be learned from this body of law is that it is imperative for all firms who participate in a construction project to clearly lay out their representatives’ roles on the project and that such direction is expressly relayed to the representatives in the field who may interact with other parties. If it becomes known to a principal that an individual has exceeded their actual authority, efforts should immediately be made to correct any third party’s misinformed belief, lest the principal’s silence be subsequently deemed acquiescence in the apparent agent’s conduct. Documenting agents’ authority and sharing such documentation with all third parties who may come into contact with the field representatives is a prudent method of limiting exposure to unwanted claims down the road.
The phrase “actual authority” refers to situations where someone has been expressly granted authority to act as an agent on behalf of a person or firm. Such authority can be granted either verbally or by written contract. This is the most common type of agency you’re likely to find in the field. For example, the owner of a contracting firm will have actual authority to tell his employees how construction work should be performed. A contractor may order the timing and scope of services to be performed by a subcontractor as detailed in their contract. Where things become more difficult are situations where actual authority has not been granted, but another party believes it has.
“Apparent authority” occurs when a person through their conduct leads another person to reasonably believe that they are authorized to exercise certain authority, even though such authority has not been granted by the apparent agent’s supervisor or firm (“principal”). The focus of this inquiry is not whether the third party believes that the directions provided by the apparent agent would help the third party perform his work, but rather whether the third person reasonably believes that the agent is acting within the ordinary course of his business. Apparent agency will require three elements: 1) an act by the apparent agent or his principal justifying a belief that an agency relationship exists, 2) the principal has knowledge of the general circumstances, and 3) a third party is reasonably relying on his belief in the apparent agency relationship.
There are many kinds of situations where such apparent agency can unintentionally bind a party to some activity they may not have intended. For example, a contractor may place a representative on the project site, who then approves a change order for a dollar amount far in excess beyond what the contractor intended to approve. Nonetheless, if the apparent agent is placed in such a position where a third party believes that the agent is authorized to consent to the larger change order on behalf of the contractor, the contractor may be bound for the larger amount. Apparent authority can also bind an engineer or owner’s representative where they direct changes to work in the field, even though they may not have contractual responsibility for directing such work but the performing third party contractor nonetheless reasonably relies on this direction.
The lesson to be learned from this body of law is that it is imperative for all firms who participate in a construction project to clearly lay out their representatives’ roles on the project and that such direction is expressly relayed to the representatives in the field who may interact with other parties. If it becomes known to a principal that an individual has exceeded their actual authority, efforts should immediately be made to correct any third party’s misinformed belief, lest the principal’s silence be subsequently deemed acquiescence in the apparent agent’s conduct. Documenting agents’ authority and sharing such documentation with all third parties who may come into contact with the field representatives is a prudent method of limiting exposure to unwanted claims down the road.