Trading Assistance: An employee’s apparent authority

An employee’s actions within the scope of employment are binding under the concept of apparent authority.

Here’s what that looks like:

Question: We are a wholesaler located in Chicago. We ordered a full truckload of watermelon at 28 cents per pound. Upon arrival, we noticed the melons were overripe. While discussing the problem internally, one of our reps (who does not have permission to negotiate prices) agreed to a price adjustment with the shipper reducing the price to 18 cents per pound when a far greater adjustment was warranted. This “agreement” is improper, because our management makes it clear to all sales staff (buyers and sellers) that they are not to agree to any price adjustments without a supervisor’s approval. Are we bound to a price adjustment that was made improperly?

Answer: The acts of your employees, as agents of the company, are considered the acts of the company (the principal) when the act in question is within the scope of the employee’s role within the organization. This rule is rooted in the common law of agency and codified in regulations promulgated under the Perishable Agricultural Commodities Act (7 C.F.R. 46.41).

In the scenario you describe, even though your representative did not have the actual authority to make price adjustments, as a buyer and seller of fresh produce he or she likely did have what is called apparent authority.

Apparent authority to make price adjustments is created when an employee or representative is allowed to buy or sell produce on the company’s behalf, thereby giving third parties the reasonable impression that this individual had the authority to negotiate price adjustments.

Because your employee was allowed to buy and sell produce on behalf of your company, and because your supplier was never expressly told this employee was not authorized to make price adjustments, it was reasonable for the supplier to believe this employee acted within the scope of his or her employment.

Such adjustments are, after all, common in produce transactions where the perishable nature of the product commonly leads to variances in the condition of the delivered product.

It should be noted, however, that just because an agent has the power to bind his or her principal to a price adjustment by virtue of apparent authority, this does not mean the agent has the right to do so.

In theory, an agent could be personally liable to its principal for binding it to an agreement without actual authority. That said, in the scenario you describe, it is not clear to us that your company was damaged by the price adjustment in question.

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