The surprising truth about who can bind your association to a legal agreement.
Q: How do associations know who holds authority to legally bind the association to agreements?
A: Agency is a consensual relationship in which the agent acts as a representative of or acts on behalf of another person (the principal) with power to affect the legal rights and duties of the principal. An agency relationship may take different forms.
Actual authority. Actual authority is created when the principal and agent consent to their association with each other. An officer possesses the authority specifically granted to her in a resolution, as well as implied authority, which is the proper, usual, and necessary authority to exercise the authority actually granted.
Apparent authority. Apparent authority arises when the principal has not actually granted authority to the agent, but the principal knowingly permits the agent to exercise authority, or through acts or declarations, holds the agent out as possessing authority.
However, the authority of the agent is not "apparent" merely because it looks as such to others. Apparent authority refers to a third party's reasonable belief that the principal has authorized the acts of the agent. It arises from the manifestations of the principal, not representations or acts of the agent. In the corporate setting, apparent authority can arise at various levels within an organization.
- Members and directors. Although a corporation's members elect and remove directors, directors are not members' or corporation "agents." Corporate statutes may require member approval for specific transactions, but corporate law generally invests managerial authority over corporate affairs in the board of directors, not members. Members ordinarily do not have a right to control directors by giving binding instructions to them. Directors' ability to bind the corporation is vested in the directors as a board, not in individuals acting unilaterally.
- Corporate officers. Most corporate officers are designated by statute or defined in bylaws and hold apparent authority to exercise powers associated with the office. In smaller organizations, the board president's operational responsibilities, and therefore her apparent authority, are likely to encompass more detail than in larger organizations. By contrast, a board vice president usually has no apparent authority to bind the corporation, but board vice presidents of functional areas like sales, manufacturing, and finance have a customary level of apparent authority over their area. Unless otherwise created by the corporation, neither a board secretary nor a board treasurer of a corporation has apparent authority to transact business or enter into contracts on behalf of the corporation.
- Executives. In some instances, duties of staff executives are not defined by statute or bylaws. Therefore, it's not always clear whether an executive possesses apparent authority. Absent a link to conduct of the corporation, a third party's belief in an executive's authority is not covered by apparent authority, particularly if it is based solely on the executive's own representations of authority. A link to the corporation may be a board directive requesting the executive to take some action, or if the executive customarily functions within certain responsibilities in corporate business.
- Employees. Absent another relationship with the corporation or evidence to the contrary, an employee who is not an executive or officer generally does not possess apparent authority to bind the corporation.
Estoppel. Closely related to the doctrine of apparent authority, under the doctrine of estoppel, a party knowingly permitting others to treat someone as his agent will be estopped to deny the agency. If an organization or its directors, intentionally or negligently, clothe an officer or agent with ostensible authority in a business or transaction, and persons deal with him or her in good faith, the organization will be bound to the same extent as if the authority were real.
Whatever an agent's authority is, risk of loss from an unauthorized act of a dishonest agent falls on the appointing organization and not the party relying on the agent's authority. It is impractical to require those dealing with agents to insist on receiving a resolution of the board and impossible for the organization's board to authorize every piece of business. Therefore, organizations should be aware of who has been given actual authority and who may be clothed with apparent authority.
Bryan K. Prosek is an attorney with Schottenstein Zox & Dunn Co., LPA, and a member of ASAE & The Center's Legal Section Council. Email: [email protected]