Whether in time of economic growth or decline, all businesses must be mindful of potential liability. The nature and extent of liabilities has a direct effect on profits, which can hamper business growth and require cutbacks, among other things. Knowing where and how liabilities arise can prevent negative effects on profits, avoid litigation premised on unintended and unknown acts, and promote overall business well-being.

An agency relationship is created when a business manifests assent to another person (an “agent”) that they shall act on the business’s behalf and subject to the business’s control, and the agent consents to act. Though not limited to the following, an agent could be a current or former employee, an independent contractor, or an individual or entity that acts on behalf of the business. There need not be an agreement between a business and an agent specifying an agency relationship. The law will look at the conduct of both parties and not simply their intent or words. However, as a general rule, an agent may only bind a business for acts that are within the agent’s actual or apparent authority.

In New Jersey, an agent’s authority to hold a business liable can be established through one of four means: (1) actual authority; (2) implied authority; (3) apparent authority; and (4) agency by estoppel. Actual authority occurs when a business wishes an agent to act on its behalf. Actual authority is demonstrated through a business’s affirmative expressions of a desire to act, whether written or verbal. Stemming from these affirmative expressions, implied authority arises from the nature or extent of the function to be performed, the general course of conducting the business, or from particular circumstances in the case. In essence, implied authority covers all acts which are necessary for an agent to carry out the acts to which they are actually granted authority.

While actual and implied authority are viewed from the perspective of a business or an agent, apparent authority is viewed from the perspective of the third party seeking to hold a business and an agent liable. Apparent authority is therefore based upon the reasonable expectations of a third party with whom an agent deals. Specifically, the analysis centers on whether a third party possesses a reasonable belief that the agent has authority to act on behalf of the business and whether that belief is traceable to a manifestation by the business, which could be fairly innocuous. Some examples can be as simple as the use of business letterhead. Though this may seem to create a lot of exposure to businesses, courts view apparent authority in light of the totality of the circumstances.

Though not as widespread in New Jersey case law, the final theory of agency liability is agency by estoppel. Generally, agency by estoppel arises when a business, by its culpable negligence in failing to supervise the affairs of its agent, allows the agent to exercise powers not granted to him, and so justifies others in believing he possesses the requisite authority. While this sounds similar to apparent authority, agency by estoppel commonly involves a receipt of benefits without repudiation.

Whatever the source of authority, businesses should be aware of the acts of their agents and should seek to minimize exposure to liability. If you are a business that faces this exposure or is already subject to potential liability for the acts of an agent, it is strongly recommended that you consult with an attorney. Likewise, if you are a business or individual that seeks payment on a contract with the agent of a business, it is strongly recommended that you consult with an attorney. The attorneys at Stark & Stark are very familiar with these issues and would be happy to guide you through the process.