During December 2015 we were approached by a client with a specific situation, however in looking at this situation we felt with the start of 2016 it would be valuable to highlight to our clients and the industry the potential for problems resulting from this type of situation that could arise in sales as well as property management.
An advertising salesperson (rep) attended the premises of our client to look to sell advertising space on an electronic advertising board which was located in a large fast food chain. The rep was referred to the agency sales team by one of the agency directors and subsequently one of the sales team took up the offer to advertise to promote himself in the area.
The salesperson was paying for the advertising from his personal credit card account.
After a period of time the salesperson, for a range of reasons, ceased paying the fee and the advertising company issued a letter of demand on the agency.
We don't propose to go into a discussion in relation to wether this charge to the agency was right or wrong. What we want to focus on is how could the advertising agency, by use of Ostensible Authority, look to hold the agency liable for the debt.
What is ostensible authority
In essence there are three types of authority, that can bind you, recognised at law
- actual authority
- implied or apparent authority
- ostensible authority or agency by Estoppel
Ostensible Authority can be defined as -
Authority that appears from the circumstances to exist, what ever the reality maybe.
Ostensibly authority refers to the situation we're it would be reasonable for a third party to assume/understand that a person/agent ( agent ) has authority to act on behalf of the principal/agency ( principal ) and so bind the principal to a binding contract. This means a principal is bound by the agents actions even if the agent had no actual authority, whether it was expressed or implied.
An example could be -
Telstra subcontract work to an outside contractor. This sub contractor drives a van with a Telstra logo and wears a uniform bearing a Telstra logo, under ostensible authority it can be deemed by a third party that the sub contractor has authority to act on behalf of Telstra and as such there actions can bind Telstra.
Using the issue that sought to bind our client, you have the rep who was introduced to an employee of the agency by a person in authority from the agency, the employee was, as was the case here, in the work environment and wearing the office uniform during discussions regarding contracting to take out advertising. Under ostensible authority the view of the court could well be that it was reasonable for the rep to assume that he was speaking with a person who had authority to enter into a contract that would bind the agency.
What can be done to prevent being caught in the Ostensible Authority web
1. in your employment agreement have a clearly defined claus stating that the employee has no authority and should not suggest that they have any actual, implied or ostensible authority to bind the agency;
2. all purchase orders should clearly state that the purchaser needs to confirm that the person placing the order has the authority to contract on behalf of the company or the agency for the goods or services being provided
3. ensure that the accounts department is vigilant in looking for new charges/invoices and clarifying those charges/invoices should they appear.