A salesperson signs a $75,000 purchase order on company letterhead. The CFO insists nobody authorized it. Whether the company is bound turns on which authority existed at signing.
Authority is the legal power to bind another person. Every agency question reduces to one chain: which authority existed, and what does it mean for contract liability? Four routes bind a principal: actual, apparent, estoppel, ratification. None apply → the agent is personally liable instead.
Actual authority is the authority the agent actually has, communicated by the principal to the agent. It has two forms.
Express authority is whatever the principal explicitly tells the agent, oral or written. "You may sign contracts up to $10,000" is express. A written power of attorney is the classic form.
Implied authority covers whatever is reasonably necessary to carry out the express authority, plus whatever is customary for the agent's position. A store manager has implied authority to order inventory and hire clerks even without written instruction. The test: what would a reasonable person in that role believe is included?
Common mistakes
- Treating the agent's own claim as apparent authority. The agent says "I am authorized" but the principal said nothing to the third party. Trap: "Bound under apparent authority." Correct: agent acted alone, personally liable.
- Ratifying when the principal lacked capacity at the original act. Pre-incorporation contracts cannot be ratified. Trap: "The corporation ratified." Correct: the corporation adopted, a different doctrine.
- Partial ratification. Trap: "The principal can ratify the favorable parts." Correct: ratification is all-or-nothing. The principal who pockets the bargain is locked into the overpriced item too.
Bottom line
- Actual authority flows principal to agent (express words or implied necessity); apparent authority flows principal to third party (the principal's conduct creates the appearance).
- Estoppel binds a principal who knew an unauthorized person was acting and stayed silent.
- Ratification is retroactive consent requiring full knowledge of material facts, capacity at the original act, and acceptance of the entire transaction.
- Ratification is all-or-nothing; accepting benefits is implicit ratification, so a principal cannot keep the bargain and reject the overpriced item.
Exam shortcut
When a question asks whether the principal is bound, walk the decision tree: actual express, actual implied, apparent, estoppel, ratification. Stop at the first match. If none match, the principal walks and the agent owes the third party. Watch two trap patterns: the agent's solo claim of authority (never apparent) and partial ratification (never valid). Memory aid: A-A-E-R for the four routes: Actual, Apparent, Estoppel, Ratification.
The full lesson (about 2,057 words, 14 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.A1
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