Leonard A. Bellavia, Esq.

Senior Partner, Bellavia Blatt, PC

Suppose an employee, who is not an officer of your company at your business, signs an agreement with a vendor to extract customer information from your database and mail offers to these consumers over a six-month period.  The employee quits around the time you receive the first bill from the vendor.  When you refuse to pay the vendor, he counters that your company entered into a binding agreement.  Does the vendor have an argument to hold your business to performance of the contract?

The answer is likely ‘yes’ because of the doctrine of “apparent authority.”  Apparent authority describes a relationship between employer/employee and binds the employer to fulfill obligations entered into by the employee with a third party when the third party, such as the vendor in this case, reasonably believes the agent has the authority to act on behalf of the principal.

In the opening example, the vendor would likely argue that, as the employee in a certain department, the employee therefore has the authority to enter into agreements relating to the employees’ job description, such as advertising.  Therefore, the vendor could sue the employer for breach of contract if the business refuses to pay the vendor for services rendered.

There are several steps you can take to reduce the likelihood of unauthorized personnel entering into agreements that may obligate your dealership to performance.  First, your employee handbook and other documents should express which staff has authority to act on behalf of the business in regards to contracts with vendors.  Your staff should acknowledge this authority, or lack thereof, in writing.  You should notify each vendor in writing regarding who has your authority to act on behalf of the company.  If you own several businesses, you should consider consolidating responsibilities for review and execution of contracts to a limited number of individuals instead of allowing each store to act independently.  Doing so has several benefits, including more oversight of vendor contracts, monitoring of pricing and terms for each business, and improved leverage when negotiating specific terms of each agreement.

If you need help creating your employee handbook or making sure that you have the proper procedures in place to prevent abuses of apparent authority, please call us at 631-224-7000.