OSTENSIBLE AUTHORITY

19 January 2010

Partner Curt Schatz reports that the extent to which managers and employees are authorised to bind the owner of a licensed venue to a contract with third parties is an issue that frequently arises in the operation of licensed premises. Licence holders must be able to rely on staff to order stock, other purchases and services. Associate Chris Hargreaves looks at the third party reliance on such arrangements, and Associate Nigel Inglis discusses employee management issues.

Third Parties

Licensees need to be able to trust their employees, in particular managers, to make rational decisions regarding the acquisition of furniture, fixtures, fittings and stock, as well as contracting for cleaning, waste management, IT and other services. Whether a director or board member of the licensee entity has the time and inclination to personally review, negotiate and agree to all contracts is something that will vary. However, in many cases these kinds of decisions are delegated to employees, and those employees are expected to make appropriate decisions.

The situation does arise, however, where an employee has stepped outside the bounds of their authority and entered into a contract with a third party for the acquisition of goods or services which they were not authorised to do. Whether or not the third party will be entitled to rely on that agreement is a question that will revolve around the facts in any particular case.

One relevant consideration is whether that employee or manager has habitually dealt with the service provider in question, and whether the service provider is accustomed to dealing with that particular employee for contracts. If there is an established track record of that employee making decisions in respect of that particular provider, the licensee might be hard pressed to convince a Court that they should not be bound by the contract when they have allowed the employee to deal with that situation on all previous occasions.

If, however, it is well known to the supplier that the licensee insists on personally reviewing every single agreement, there is a reasonable argument to suggest that the supplier should have known that the employee had no authority to bind the employer and, therefore, the supplier cannot hold the licensee to whatever agreement they are seeking to enforce.

The question, ultimately, is one of "actual or ostensible authority". If you have given an employee actual authority to do what they did, then you are unlikely to be able to wriggle out of the agreement (at least on this particular ground).

If, however, the employee has held themselves to be in a more lofty position than what they actually hold, or has represented to a supplier that they did have authority to enter into the agreement then the question will be much harder. Whether the supplier was entitled to, or could reasonably have, relied upon such a representation varies across the circumstances.

If you wish to avoid this situation arising, you should ensure that the appropriate levels of authority and the necessary sign offs are made clear to all of your frequent or habitual suppliers, and you should confirm who the authorised representatives are in writing to them so that they cannot have any confusion as to who they are to deal with when the time comes to make a deal.

Employees

Employees have the authority to do all things necessary to carry out their role including duties or tasks specified in an employment contract or position description. Additionally, any lawful and reasonable direction given by an employer to an employee will fall within that scope. However, a number of factors impact on the scope of this authority including the employee's skill and knowledge, and seniority.

An employee's authority will either be express (in a contract or policy), implied (from the nature of the role or seniority of the employee) or ostensible (apparent authority).

Ostensible authority generally involves some act or omission by the employee that suggests to a third party that the employee has the authority to bind the employer. This may be through previous dealings, where a third party has dealt with the particular employee before and based on those dealings, believes the employee continues to have the authority (which they may have legitimately had previously) to bind the employer.

Because of the issues with third parties set out above, it is best practice, and a sound risk management tool, to clearly define in the authority of the employee. This can be through a limit on the value of any contract an employee may be allowed to enter on behalf of the employer. If the contract is a "one off", then this should be clear.

The next practical step is to ensure that the scope of authority granted to the employee is clearly communicated to the employee. Regardless of what any contract may say, if the employee does not understand the limits of their authority, then costly questions may arise about whether, or to what extent, the employee had authority to bind their employer to a third party.

Consequences that can arise where an employee acts outside the scope of their authority and enters a third party contract on behalf of their employer that they shouldn't have include:

The employer may be bound to the contract and need to carry out what the contract provides. If not, the employer may be in breach of that contract and be exposed to a claim for damages.
The employer may terminate the employee.
The employer may be able to recover directly from the employee any losses arising from the contract, depending on what the employment contracts provides.

In summary, the extent to which your employees are authorised to negotiate or contract on your behalf should be clearly communicated, in writing, to both your employees and to your common suppliers. This type of risk management can help to avoid serious issues in the future.

If you wish to discuss employee authority or have issues with third party contracts, please contact:

Curt Schatz | Partner
Mullins Lawyers
t +61 7 3224 0261
f +61 7 3224 0230
cschatz@mullinslaw.com.au