Implied Authority

The ability an individual has to make a legally binding contract on behalf of an individual or organization

What is Implied Authority?

Implied authority is a legal term that is used in contract law and refers to the ability an individual has to make a legally binding contract on behalf of another person or organization.

Implied authority is not written on paper; rather, an agent is assumed to possess authority in order to conduct business transactions and contracts for the principal party in question.


Implied Authority


Types of Authority

In business transactions such as real estate, there are three types of authority that can be used – implied, apparent, and expressed.


1. Implied Authority

Implied authority is a type of authority that occurs when an individual is assumed to be authorized to make a legally binding contract on behalf of a principal.


2. Apparent Authority

Apparent authority is a type of authority that occurs when an individual is believed to have authority when it may not have been expressed or implied. It occurs when a principal’s action requires a third party’s evaluation to which they would understand why the agent would have the authority to act.

The agent (the one with apparent authority) must not give the third party a false or misleading impression of authority, or else the principal is not bound to the contract.

Apparent authority is also sometimes referred to as “ostensible authority.”


3. Expressed Authority

Expressed authority is a type of authority that occurs when it is clearly declared or granted verbally or in writing by the principal to the agent.

For example, expressed authority relates to when an agent is given permission by the principal (in writing or verbally) to act or complete transactions on their behalf.


Examples of Implied Authority

Implied authority is a somewhat odd concept to grasp due to the fact that authority, in such cases, is not directly written on paper. In order to gauge an extensive understanding of the concept, we will provide an assortment of different situations where implied authority may occur in your day-to-day lives.


Example 1

If an individual were to go to a retailer and the clerk were to tell the individual that if they purchased a TV, they would receive a free cable box. In doing so, the clerk makes a contract with the individual on behalf of the business by which they are employed.

Considering the clerk claimed that a router comes free with the TV, it is implied that the clerk’s been given authority to offer the deal to the individual.

If the clerk was making the transaction up, they are under legal obligation due to the Implied Authority of Contract, which may result in the employee being penalized by management.

Now, this is not to say it is a lucrative idea to sue a store clerk because they offered a made-up deal. However, the most likely outcome would be a store apology to the customer and some form of punishment on the employee by management for unreasonable use of implied authority.


Example 2 

When two individuals enter a business agreement and become partners in an organization, implied authority is bestowed on each of them.

In such a case, each partner has the implied authority to act on behalf of the organization.

Within the business, each partner has the implied authority to buy and sell goods, issuing bills, accepting debt repayments, and accumulating liabilities (such as loans).

More extensively, each partner has implied legal permission to act on behalf of their business. When a partner buys inventory, they are entering a legally binding contract in the sense that the business is responsible for paying back the amount owed for inventory.

However, the above example comes with limits.

Implied authority does not allow a partner to submit any arbitration claims against the business, withdraw/proceed in a legal allegation, purchase property for the business, or go against the company in a legal case.

Implied authority does not turn the partner into an authorized lawyer; instead, it allows the partner to make decisions and execute certain transactions on behalf of the organization.


Example 3

When a real estate agent provides services for a friend who is looking for a home, they may enter into an implied authority scenario without knowing it.

For example, if an individual with a real estate license helped their friend look for homes but was not directly hired for them, they will enter an implied authority position once continued work is completed.

If the individual were to successfully find their friend the desired dream home the latter was looking for, the individual is now representing their friend on their behalf.

Since the individual is doing it out of kindness, they are not expecting any sort of remuneration; thus, the agreement is not in writing, making authority implied.


Additional Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)® certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

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