The Legal Foundations of Apparent Authority.

• Date: 22 June 2019
• Author: Barnes, Victoria

Abstract 649 I. Introduction 649 II. Background: The Basis of Agency Law 650 III. Who Could Become an Agent 652 IV. Sources of an Agent's Power and Authority 654 V. Implied Authority 657 VI. Recognition of Apparent Authority 660 VII. Conclusion 664 I. INTRODUCTION

Agents pay a crucial role in coordinating transactions and connecting producer to consumer in today's markets. A significant development in Anglo-American law of agency came with the establishment of apparent authority in the 19th century. In his 1891 article on agency, Oliver Wendell Holmes, Jr. explained that "the obvious consequence of the principal's own conduct in employing an agent is that the public understand him to have given the agent certain powers." (1) In this statement, Holmes explained the function of the doctrine of apparent authority. An agent acts with apparent authority when he or she transacts without the express authority of the principal, but the third party has a reasonable basis for assuming the agent has authority. Although this doctrine is well-documented, its intellectual and legal foundations have long been disputed. (2) One strand of thinking links the origins of apparent authority to estoppel: as stated by Webb and Bianco, "if the principal, by words or conduct, represents or holds his agent out as having certain authority, he will be estopped" from denying that the agent had actual authority. (3) A second view sees apparent authority as an independent class of authority. It ties apparent authority to the objective approach in modern contract law where the courts adopt the position of a reasonable person in order to interpret how others would have seen the intention of the parties. (4) This article provides new insights into this debate as it traces the emergence of apparent authority back to its legal foundations.

The Anglo-American law of agents was forged in the 18th and 19th centuries by English judges and legal commentators; it was then adopted and revised by their American counterparts. (5) We argue apparent authority has little or no historical roots in equity as a form of estoppel. Rather, the doctrine began as an independent form of authority as part of the movement from subjective to objective reasoning. The emergence of the objective approach occurred first in agency law, much earlier than has traditionally been thought, and arrived later in contract law. This article begins by providing some background and context on early agency law with a discussion of commercial and mercantile custom as independent from the rules of private law. We then consider the sources of an agent's power and how the courts construed authority. Finally, this article explains how the law of agency--as a distinct body of commercial rules--gathered pace and became accepted in the Anglo-American legal world.

2. BACKGROUND: THE BASIS OF AGENCY LAW

   The late 18th and early 19th centuries were a richly formative era in the history of Anglo-American law. International commercial trade had expanded, (6) despite formidable logistical inhibitors. For merchants and traders, neither the telegraph nor the railway had yet arrived, and poor communication meant information asymmetries were rife. (7) Factors and brokers had become essential in order to coordinate between spatially separated markets and to act as conduits between producer and consumer. (8) As the business of intermediaries flourished, the modern legal rules of agency law began to appear. The doctrine of apparent authority, first articulated in the early 19th century, remains an important part of agency.

   It is not surprising that developments in agency law first took place in Great Britain. With its far-flung colonial Empire and its network of merchants, (9) Britain served as the fulcrum of international commerce and the epicenter for new concepts that were passed on to its colonies and so became embedded within American legal thought. The issue of the scope of an agent's authority frequently arose in the English common law courts at nisi prius, predominantly before the judges of the Court of the King's Bench. Lords Mansfield, Kenyon, and Ellenborough served successively as Chief Justice for over half a century, from 1756 to 1818. The Court of the King's Bench, together with the two other common law courts (Common Pleas and Exchequer) collectively conducted thousands of jury trials annually, many of which dealt with issues of contract, tort, and commercial law. (10)

   The so-called foundational agency law cases, such as Ireland v. Livingston and Watteau v. Fenwick, date from late in the second half of the 19th century. (11) Yet, the rules that appeared in these cases would have been understood by the common lawyers much earlier. In the 18th and early 19th centuries, agency relationships, though regulated by law, were rarely studied by lawyers or understood in isolation from the rules of contract. As William Paley wrote in the first English treatise on the law of principal and agent in 1812, it "appears at first view to be founded upon principles so few and simple, and in general so easy of application, that a treatise upon such a subject may seem altogether superfluous." (12) Principles of agency were fundamental in many cases within contract and commercial law. Authors such as Ross and Pothier, who wrote about obligations and the sale of goods, found agency to be an indispensable component. (13)

   Traditionally, some have posited that commercial law, as such, did not exist in the early modern period, and that the mercantile community developed its own separate system of customary rules and regulations that came to be known as the lex mercatoria. (14) This view has not persisted without challenge. Kadens, for example, argues that early legal developments were important and a key driver in informing or regulating commercial practices. (15) During Lord Mansfield's 32 years as Chief Justice in the King's Bench (1756-88) the understanding of commercial law changed substantially. (16) Commercial rules and practices, once thought to be external to English law and understood by merchants only, became firmly embedded within the common law tradition. (17) English commercial law thus became more aligned with the customs of international commerce. As Lord Mansfield claimed soon after becoming Chief Justice, mercantile law was "the same all over the

   World." (18)

   Lord Mansfield was instrumental in this evolution because of his understanding of the commercial world (as, for example, an active investor in real estate mortgages) and his longevity in office. (19) Even so, in the process of internalizing and importing commercial practices, few judges in the common law courts, after Lord Mansfield, had significant business acumen. Lord Ellenborough was an exception but most judges felt the need for expert guidance when it came to commercial rules and custom. The use of arbitrators in lieu of judges is perhaps the best-known example, which shows how judges outsourced this problem. Arbitrators were often called upon to resolve disputes because of their experience in directly relevant trades or occupations. (20) Some contracts even specified that decisions would be taken to a particular arbitrator rather than a court of law. This was especially evident in disputes between or among partners. (21) Some judges pushed back and asked investors to manage their own conflicts without recourse to the law. (22) Moreover, when in the courtroom, judges drew upon the expertise of merchants as special jurors in order to understand the rules arising out of commercial honor, trade, and custom. (23)

3. WHO COULD BECOME AN AGENT

   The fusion of legal rules and commercial practices did not preclude discrepancies between the two worlds. Some differences in terminology remained, as with the concept of agency. For example, it has long been accepted within managerial and economic theory literature that the term "agent" could include both those working for the business as independent contractors, and persons who were part of the firm--and this remains true today. (24) For most lawyers, however, this term has a much narrower definition--generally an agent held an external role and operated outside of the business. Munday provides a recent critical discussion of the overbreadth of the word "agent" in commerce. (25) He shows that agents from within the firm who act on behalf of the principal to engage third parties, such as an employee or even a manager, would fall under the remit of employment law, or the law of master and servant, as it was known up until the 20th century. (26)

   Before the mid-19th century, limited liability in Great Britain was only available to those companies possessing a government-issued charter. (27) Thus, the question of who bore personal responsibility for unpaid debts was of great interest and particular consequence to merchants--especially as business failure was a typical experience. (28) Gerard Malynes, the "first English author to treat the Law Merchant as an entity in itself," (29) wrote that an agent "is bound to answer the loss which happeneth by overpassing or exceeding his Commission: whereas a Servant is not, but may incurre his Master's displeasure." (30) So, while an employee's mistake would be akin to his master's mistake, agents, Malynes said, "beareath the hazard of their actions" and were themselves liable for unauthorized transactions. (31) If not an employee, then, the other common "internal" position was that of a partner or owner, and would ordinarily be regulated by the laws of partnership, and later corporate law, rather than that of agency. (32)

   Nevertheless, while these relationships were governed by different branches of law, it was accepted that an agent, a servant, and a partner carried out similar functions, so the three areas of law overlapped. This point was evident in Paley's treatise when he explained the rules by using a number of cases involving masters and servants...