Actual Authority

“An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent to so act.” Restatement (Third) of Agency § 2.01. In other words, if the principal says something or takes some action that causes the agent to reasonably believe the principal wants the agent to take a specific action, then the agent has actual authority. The tricks to look for are (1) whether the belief is reasonable and (2) whether the belief is based on the principal’s manifestations.

Test Drive Questions

3.3.1.1. Assume I am your administrative assistant at your bike store. You give me a five dollar bill and ask me to get you a cup of coffee. I purchase (on your account) a $12,000 Italian espresso machine so that you will always have good coffee at the ready. Will you be liable for the contract under actual authority?

3.3.1.2. Assume I am your administrative assistant at your bike store. I read in Bike Secretary Weekly that bike store owners typically want their administrative assistants to get them coffee. So I grab you a $5 coffee and ask the seller to bill you. Am I acting with actual authority?

Test Drive Answers

3.3.1.1. Probably not. To establish actual authority the agent must have acted reasonably based on the principal’s manifestations. Here, the principal manifested an intent for a cup of coffee. It’s likely unreasonable to respond to a $5 request for coffee with a $12,000 coffee system. So there is probably not actual authority.

3.3.1.2. Probably not. Actual authority must be a reasonable interpretation of the principal’s manifestations. I purchased the coffee based on a magazine article, not your manifestations, so I am probably not acting with actual authority. Could I argue that you manifested my authority to get you coffee by appointing me as your administrative assistant? We'll come back to this when we read about inherent authority.

Actual Authority: Express vs. Implied Authority

Actual authority may be express or implied. Express authority occurs when a principal expressly informs an agent that he or she has the authority to act on the principal’s behalf. Restatement (Third) of Agency § 2.01. Implied authority occurs when a principal does not expressly inform an agent that he or she has the authority to act on the principal’s behalf, but the agent nonetheless reasonably believes, based on the principal’s actions, that the agent has the authority to act on the principal’s behalf. Restatement (Third) of Agency § 2.01.

Does it make sense to make this distinction? As explained above, the trick is whether the agent’s belief is reasonable and based on the principal’s manifestations. It may be helpful then to understand the distinction between express and implied actual authority as recognizing that in some instances a principal must expressly inform the agent that the agent has authority. For example, if you pass by a stranger on the street, you would likely be required to expressly inform that stranger that he or she has the authority to act on your behalf. Otherwise, how could he or she reasonably believe he or she had the authority to act on your behalf?

On the other hand, if you hire folks as sales representatives, then they can reasonably infer that they have the authority to act on behalf of the company to sell bikes, even if you never expressly inform them. An agent may be able to reasonably infer that he or she has the authority to act on the principal’s behalf without the principal expressly stating so.