Actual Authority

Actual authority is the power that resides with an agent, typically in the insurance industry, to act and make decisions on behalf of the principal. These powers and abilities are specifically directed to the agent. At the same time, it is also based on the principal's behavior and the agent's subjective understanding.

The actual authority can be given either verbally or in a written document form; however, a written form is preferred by an agent. There are two subtypes: express and implied. It is common for large corporations to use it as owners are busy with other business tasks and operations.

Actual authority is the official permission to act on behalf of the principal. The authority gives the right to an agent to operate, make decisions, and represent an individual legally and in an official capacity. It is most commonly observed in insurance industries, where the agent has the right to act on behalf of the principal. It can be short-term or long-term based on the arrangement between the agent and the principal. At the same time, it can be both written or oral confirmation.

An agent's powers are limited to a reasonable extent, along with the instructions guided by the principal. Although it is also gauged by judging the principal's words and behavior, agents prefer a written form of consent to avoid future legal issues. The scope can be broad or limited, providing the agent with particular or general operating powers.

In a company, such authority is offered through bylaws and policies carried out by directors and in executive meetings. If an agent with this authority enters a third-party agreement, the contract obligates and creates rights between the principal and the third party. It is common among many large corporations where directors and executives appoint an agent to carry out duties as they are busy with other management tasks.

The types of actual authority are -

1. Expressed Actual Authority - refers to a scenario where the principal explicitly directs and tells the agent that they possess the authority to take specific actions and make decisions on behalf of the principal. It is mainly in a written document and works like a piece of evidence that the agent had the right to act on behalf of the principal.
2. Implied Actual Authority - this type of authority resides with the general behavior and understanding of the principal and agent. It is called implied authority because the person's actions are parallel to the circumstances implying it. It is also referred to as usual authority. Such authority is granted to let an agent perform necessary tasks and carry out operations that the principal has explicitly expressed.

Let's understand the concept with the help of some examples.

Example #1

Suppose Sarah owns a small business and hires John as her sales manager. Sarah explicitly informs John that he has the authority to negotiate and finalize sales contracts with clients on behalf of the company. This verbal agreement constitutes expressed actual authority.

One day, John encounters a potential client interested in a long-term partnership. Without consulting Sarah, John negotiates and signs a contract with the client, agreeing to favorable terms for the company.

However, when Sarah learns of the agreement, she discovers that the terms are less beneficial for the company than she had hoped. She questions John's decision and accuses him of overstepping his authority. In response, John argues that he was acting within the bounds of his authority, as Sarah had explicitly granted him the power to negotiate and finalize sales contracts. In this hypothetical scenario, the dispute arises from the interpretation of John's actual authority as granted by Sarah.

Example #2

Imagine a property owner, Emily, who hires a property manager, Mark, to oversee the rental of her vacation home. Emily explicitly authorizes Mark to handle all aspects of renting the property, including advertising, screening tenants, and managing rental agreements. This verbal agreement establishes Mark's expressed actual authority.

One day, Mark receives a request from a potential tenant to modify the terms of their rental agreement. Without consulting Emily, Mark agrees to the tenant's requests and makes the necessary adjustments to the contract. This action falls within the scope of Mark's expressed actual authority, as he is empowered to manage rental agreements on behalf of Emily.

The key differences between actual and apparent authority are –

• Actual authority is the absolute authority given to an agent by the principal to act on their behalf. It can be explicit (express authority) or implicit (implied authority). In contrast, apparent authority is what a third party reasonably believes an agent has based on the principal's actions, even if the agent doesn't actually have such authority.
• Actual authority is legally binding and can be granted through written or oral consent. In contrast, apparent authority is based on the perception of authority and may not necessarily be legally binding.
• Actual authority involves direct authorization from the principal and typically does not involve third-party interference. In contrast, apparent authority arises when a third party reasonably believes that the agent has the authority to act on behalf of the principal, often due to the principal's conduct or representations.