Allocating the Loss

Apparent authority and inherent agency power both decide whether a client is held to a lawyer’s deal. Apparent authority is the power to affect the client’s legal relations by transactions with third persons, professedly as the client’s agent, arising from and in accordance with the client’s own manifestations to those persons.¹ Inherent agency power comes from the agency relation alone, with authority, apparent authority, and estoppel set aside as sources, and it exists to protect persons harmed by or dealing with the agent.² Both definitions describe power, and neither asks whether the lawyer was entitled to use it. Each doctrine answers a question between the client and the outsider (is the client held to the deal?) and leaves open a question between the client and the lawyer (who finally pays for a deal the client never approved?).

The first loss falls on the client if the client is held to the deal, and on the outsider who relied on it if the client is not. Neither loss has to stay where it falls, because two claims run to the lawyer who caused it. A bound client sues the lawyer for acting without actual authority. An unbound outsider sues the lawyer for breach of the implied warranty of authority. The two claims answer opposite outcomes of the same apparent-authority question, so a lawyer who oversteps usually faces one or the other.

Together the claims trace the loss to the person whose conduct produced it. A lawyer who stays within actual authority faces neither claim; a lawyer who exceeds authority, or purports to hold authority the client never gave, answers to the client or to the outsider. The client’s claim comes first, because it follows most directly from the distinction between authority and power.

The Client’s Claim Against the Lawyer

A lawyer can bind a client and wrong the client in the same act. The earlier sections of this chapter traced the binding; this subsection traces the wrong, and the claim that moves the loss from the client back to the lawyer.

An agent owes the principal a duty to act only as authorized. Restatement (Third) of Agency § 8.09(1) requires the agent “to take action only within the scope of the agent’s actual authority,” and Restatement (Second) of Agency § 383 forbids the agent to act “except in accordance with the principal’s manifestation of consent.” The duty aims to minimize the risk that unauthorized acts of the agent will bind the principal.³ When the risk materializes, the remedy follows: an agent who lacked actual authority but still bound the principal, as where the agent had apparent or inherent authority, is liable to the principal for any loss the principal suffered.⁴

An insurance case shows the two relationships running in opposite directions. An agent is authorized to issue workers’ compensation policies for an insurer, and the agent issues a binder policy to a customer in a manner the agency agreement clearly prohibits. An employee of the customer is injured on the job. The insurer must pay the employee’s claim, because the agent acted with apparent authority, even though the agent exceeded actual authority. The agent is then liable to the insurer for the amount of that claim and for the costs the insurer incurs in opposing the customer’s claim.⁵ The agent’s liability matters because binding the principal protects the outsider but leaves the principal holding a loss the agent created without permission. The duty to act only as authorized would have little force if an agent who overstepped answered to no one.

The same structure governs lawyers. A client held to an unauthorized settlement has lost the argument against the other side, and the client’s remaining recourse runs against the lawyer who settled without actual authority. The agent’s general standard of care is, for lawyers, supplemented or displaced by the more specific law of legal malpractice, so a client may frame the complaint in those terms too.⁶

The claim exists only when actual authority is missing, and a client’s conduct can supply actual authority more readily than clients expect. In Pohl v. United Airlines, discussed with settlement authority earlier in this chapter, the lawyer phoned the client several times during the negotiation, each call close in time to a call with opposing counsel. When the lawyer wrote to confirm the settlement, the client replied with something like “okay, great, they settled it,” and the court found implied actual authority. A client in that position has no claim for exceeding authority, because the lawyer stayed inside what the client’s conduct communicated. The client in the hypothetical differs on exactly that point: she gave an explicit instruction, nothing she did afterward approved the clause, and the lawyer’s act lay outside actual authority.

Ratification also ends the client’s claim. Ratification is affirmance of an act done by another, which gives the act effect as if an agent with actual authority had done it, and a person ratifies by conduct that justifies a reasonable assumption of consent, such as accepting the benefits of a contract with full knowledge of its material terms.⁷ Once the settlement is treated as one made with actual authority, the premise of the client’s claim, that the lawyer acted outside it, disappears.

A bound client’s claim therefore turns on two questions: whether the lawyer in fact lacked actual authority, express or implied, and whether the client later affirmed the deal. If the lawyer lacked actual authority and the client did not ratify, the claim lies against the lawyer. The outsider’s separate claim against the same lawyer, taken up next, arises in the opposite situation, when the client is not bound.

The Lawyer’s Warranty of Authority

When the client is not bound, the outsider holds a deal that no principal has to honor, and the law gives the outsider a second defendant. An agent who purports to contract on behalf of another makes an implied warranty of authority to the other party: the warranty is that the agent has the power to bind the principal.⁹ The previous subsection ran from a bound client to the lawyer; this one runs from an unbound outsider to the same lawyer.

The warranty operates against even an innocent agent, one who in good faith believes the authority exists and later discovers that the power to bind the principal was missing.¹⁰ Two lines of reasoning support that severity. In Collen v. Wright (1857), the court stated that the agent’s “moral innocence, so far as the person whom he has induced to contract is concerned, in no way aids such person or alleviates the inconvenience and damage which he sustains.” Restatement (Third) of Agency § 6.10, comment b, adds that the agent “is better able than the third party to ascertain the truth at the time of making the representation.”¹¹ The promise is limited to power: absent express agreement, an agent does not warrant the principal’s honesty or solvency.¹² The outsider keeps the ordinary risk that a principal will not perform.

The warranty and apparent authority divide the cases between them. An agent with apparent authority has the power to bind the principal, and that power is exactly what the warranty promises; the principal is bound, the outsider’s contract runs against the principal, and the agent has breached nothing.¹³ The warranty claim therefore becomes live only when the principal is not bound.

The two claims part company on the outsider’s reasonableness. In Husky Industries v. Craig Industries, Husky’s expectation that D.C. Craig was authorized was unreasonable, and Husky lost its claim against the corporation. Husky nevertheless won against Craig personally for breach of the warranty of authority: Husky did not know that Craig lacked authority, and the unreasonableness of its expectation did not defeat the suit.¹⁴ The likely reasoning is that, of the two parties, the agent is more at fault. Apparent authority requires a reasonable belief; the warranty falls only to the outsider’s actual knowledge.

A fur sale shows the claim at work. Hilda brought a raccoon coat to Fab Fur to sell. Marge was on vacation, so Nick inspected the coat, agreed that Fab Fur would sell it, settled on a price with Hilda, and gave her the same form she had signed when she sold a mink coat there a few years earlier, a coat Nick had also inspected and registered.¹⁵ Suppose Fab Fur refuses to honor the arrangement, and a court holds that Nick had neither actual nor apparent authority. Hilda cannot enforce the deal against the store, but if she did not know that Nick lacked authority, she can recover from Nick on his warranty. Her failure to wait for Marge would not defeat the claim. Had Nick told her, “If I am authorized to do this,” the warranty would never have arisen.

Three circumstances remove the warranty and leave the risk of missing authority with the outsider:

The outsider actually knew that the agent lacked authority.¹⁶
The agent fully disclosed the sources of the agent’s authority, provided the agent took care not to vouch impliedly for the genuineness of any document shown.¹⁷
The agent disclaimed the warranty, as by saying, “If I am authorized to do this.”¹⁸

Actual knowledge is the line. An outsider who should have known, or had reason to know, can still recover.¹⁹

Hypothetical Illustration

A lawyer retained only to register a client’s trademark tells a buyer’s counsel that she can commit the client to sell its entire product line for $2 million, and she signs a letter agreement to that effect. The client has never said or done anything to suggest that the lawyer could sell the business, so the client is not bound. Buyer’s counsel had no idea that the lawyer lacked authority, and the buyer recovers from the lawyer on the warranty.

Change the facts. The lawyer instead hands buyer’s counsel the client’s one-page engagement letter, which covers the filing and nothing more, and says she is not representing that it reaches a sale. Buyer’s counsel reads the letter and signs anyway. The lawyer disclosed the source of her authority and disclaimed the rest, so the buyer took the risk of its own reading and has no warranty claim.

Actual knowledge can come from the client directly. If opposing counsel holds a letter from the client saying that no settlement is final without the client’s signature, and the lawyer signs a settlement anyway, opposing counsel knew that the lawyer’s signature alone could not commit the client and has no warranty claim. The loss stays with the party that knew.

When the warranty claim succeeds, the outsider recovers the benefit it would have received had the principal been bound. Where the contract would not have benefited the outsider even then, because the principal was insolvent or had a defense to the contract, “the contract would not be of benefit to the third party had the principal been bound” and there are no damages.²⁰ Ratification by the client also ends the claim. Affirmance gives the act the same effect as one done by an agent with actual authority, so the client is bound and the agent has the power the agent purported to have.²¹

Read with the client’s claim, the warranty completes the picture of a lawyer’s exposure. If the client is bound, the client recovers the loss from the lawyer who exceeded actual authority; if the client is not bound, the outsider recovers from that lawyer on the warranty. A lawyer who acts without actual authority therefore faces one claim or the other, unless the client ratifies or the outsider knew, was shown the source of authority, or accepted a disclaimer.

Exam Analysis Steps

Test a warranty claim against a lawyer in the order the questions arise:

Ask whether the client is bound, through actual authority, apparent authority, or ratification. If so, the lawyer had the power purported and breached nothing.
If the client is not bound, ask whether the lawyer purported to act for the client, in words or by conduct.
Ask whether the outsider actually knew that authority was missing. Reason to know does not defeat the claim.
Ask whether the lawyer fully disclosed the source of authority or disclaimed the warranty. Either one leaves the risk with the outsider.
If a claim remains, measure damages by the benefit the outsider would have received had the client been bound, and award nothing where that contract would have been worthless to the outsider.

Step three is where the warranty departs from apparent authority: carelessness by the outsider can defeat apparent authority but leaves the warranty claim intact.