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Agency Authority and How It May Affect Your Business

Permission is an important concept in our daily interactions.  Whether it is a parent and child arguing over curfew, or two spouses arguing about a large purchase, a misunderstanding of what is and is not permitted can lead to a lot of confusion and heartache.  When the disagreement shifts to what an employee/agent of your California corporation or business entity is permitted to do, however, you can add the pain of serious financial loss and legal risk to the list of possible repercussions.

What is Agency Authority and Why Does it Matter?

Authority is the term used to discuss the powers that an agent of a principal has to act on behalf of the business entity.  A principal can be many things: a corporation, a board of directors, a trust, or a manager.  An agent is another word for an employee, although in some cases, an agent does not necessarily have to be an employee.  This is an important concept because, as the city of Weed, California discovered last year, the level of authority that an agent has to bind a corporation will determine whether a business may be held liable for said employee’s actions.

For example, if an employee signs a contract with a third-party, and the directors of the corporation decide that the contract is not one that will benefit the corporation, the corporation may want to find a way to get out of the contract.  A corporation’s ability to distance itself from the contact will depend, in part, on the authority that the agent had in entering into the contract.

There are two main types of authority that an agent may have: actual authority and ostensible authority. Each of these might bind an employer to any contracts or legal liability stemming from the employee’s actions.   The following sections give a very basic explanation of the types of authority that exist under California agency law.

Actual Authority

California Civil Code Section 2316 states: “actual authority is such as a principal intentionally confers upon the agent, or intentionally, or by want of ordinary care, allows the agent to believe himself to possess.”

Essentially, actual authority would be the duties and tasks that you (as a supervisor) have expressly stated that an employee is allowed to carry out.  In looking at whether an employee has been granted actual authority, courts will look to employee contracts, memos, oral orders, and other factors that would suggest an express granting of permission to an agent.  In these cases, when looking at a situation solely in the context of authority, the actions of an agent would likely bind a corporation to whatever contract the agent has signed.

Ostensible Authority

California Civil Code Section 2317 states: “

[o]stensible authority is such as a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess.”

If you think that this sounds a bit convoluted, you are not alone.  The basic idea behind ostensible authority is that the principal (another name for the employer, director, or the party exerting control over the agent) has acted in such a way that a third-party would look at the agent’s actions and have no problem believing that the principal would allow this to happen.  In other words, because the principal has given the impression that the agent has the right to act on behalf of the principal’s behalf, the principal would be liable for the actions of the agent.

Make Sure That You Know the Facts

Filing the forms to start a new business is often the culmination of years or months of work and preparation.  It is in the best interests of you, your employees, and the corporate entity to make sure that you understand the powers that each of your agents has, and any liabilities that she or he may be able to assign to you in moving forward.  The level of authority that you and your agents act with can have significant impact on the financial health of your business.  For questions about liability of an agent, be sure to speak with an attorney.

Help With Starting Your Business

Are you or your colleagues considering starting your own LLC, Limited Partnership, Corporation, or similar business entity?  The filing process involved with starting a business can be long and complicated, and an extra, unneeded burden during an already complicated time.  The team at A People’s Choice has years of experience in preparing the extensive forms that go into taking your new venture off of the ground. Reach out to our offices today for more information on preparing the necessary paperwork, and find out how A People’s Choice can help you.

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By |2018-01-18T15:47:46+00:00February 21st, 2015|Business|0 Comments

About the Author:

Sandra M. McCarthy, founder of A People’s Choice Inc., has worked exclusively in the legal field since 1976. She served as the 2004-2005 President of CALDA (California Association of Legal Document Assistants). She obtained a Paralegal Certificate from the University of California, Santa Barbara. During her career in the legal field, she has worked as a freelance paralegal, law office manager and paralegal studies teacher, and has co-authored numerous legal publications and written hundreds of self-help legal articles. As a registered Legal Document Assistant, Sandy is dedicated to providing affordable, low-cost, self-help document preparation services for California consumers in all 58 counties.

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