By: Kun Zhao, Esq.
In the course of conducting business, companies rely on their employees to carry out their duties. The relationship between company and employee is a principal-agent relationship. When employee is acting on behalf of the company within the scope of his authority, the company is bound to the employee’s decisions and activities dealing with third parties on behalf of the company. Disputes arise when employees act outside their scope of authority and third parties have no knowledge or notice that the employees were acting in such a manner.
Situations involving employees acting outside their scope of authority generally fall into three categories. Under the first scenario, an employee has no authority to perform certain actions on behalf of the company. For example, a salesman cannot dispose of his company’s real property. Where one deals with an agent who is apparently without authority to act, he must inquire into the agent’s authority to represent the company. If a third party fails to make such an inquiry, the company has no liability and the third party can only seek remedy against the employee agent.
Under the second scenario, an employee’s act is within the scope of his authority but his conduct is in fact unauthorized by the company and there is no surrounding circumstance that alerts the third person. For example, a salesman may have the authority to collect non-cash payments for transactions, but he has no authority to receive cash payments. In this situation, the company is accountable for the conduct of its agent acting within the scope of his authority even though the conduct is unauthorized and the company receives no benefit from it. The rationale underlying this doctrine is that even though the employee agent may have deceived the principal company, as well as the third person victim, it is more equitable to hold the company accountable rather than the innocent third party because the company placed its employee in a position to perpetuate the act.
The third scenario is identical to the second scenario except that there are circumstances that cause the third party to suspect something is amiss. For example, past payments may have been made by wire transfer, but the salesman suddenly demands substantial cash payment. Such circumstances serve to put the third party on notice and to charge him with the duty of making an inquiry. If the third party fails to make an inquiry and confirm the employee’s authority with the company, the risk shifts to him.
Multi-party relationships in the business world are normally inevitable. Thus, companies should be careful about giving authority to employees to properly notify employees about the scope of their authority. Companies should also firmly enforce their policies and procedures in dealing with third parties. Third parties should adhere to their customary dealings with company employees and make alert inquires if there are any deviations from past practices.