March 20 2017
In a recent decision(1) the Supreme Court held, in line with prior case law, that apparent authority requires the circumstances on which the assumption of authority is based to be induced by the principal, not by the representative.(2) Although this is not new, the verdict has helped to clarify the boundaries of apparent authority.
In the case at hand, a proxy with collective representation power of Party A had allegedly entered into an agreement with Party B. When Party B tried to assert claims under the agreement, Party A invoked the defence of invalidity of contract due to lack of authority of its proxy.
Legal entities cannot act by themselves; they need natural persons to act on their behalf. Natural persons, too, can make use of representatives. Agency (ie, acting on behalf of someone else) requires:
Any legal act executed by the representative without or in excess of his or her authority is invalid, unless approved by the principal; the representative is liable as falsus procurator (unauthorised agent).
Authority can be granted by contract, under statutory law or under corporate law. Besides actively granted contractual authority (by contract or under corporate law), a principal may create the legal appearance of authority and thus create authority by implication or apparent authority.
The concept of apparent authority is recognised unanimously in Austrian legal writing and case law, despite a lack of general legislation in that respect; only some instances of apparent authority are governed by statutory law. One example of apparent authority that is codified in the Civil Code(4) is the presumed authority of an administrator: if the principal delegates the administration of an organisation or entity, a third party may rely on the fact that the administrator has also been granted authority to enter into legal transactions that are typically associated with the administration.
The representative has authority if the principal has adequately and negligently created such apparent authority (eg, by delegating the management of a branch office or the sales department, or by knowingly tolerating acts of representation); conclusions drawn from the representative's actions alone are insufficient. There may even be situations when the principal has an obligation to actively refute the apparent authority. For example, the principal has previously implicitly accepted acts of representation by a person without authority, the principal needs to clarify with respect to third parties that such person never had and in future will not have authority to represent; otherwise, there could be apparent authority.
In the decision referred to in the outset of this update, the court held (obiter) that it could be relevant if the proxy had been in charge of the project management relating to the presumed agreement. It did not have to rule on this aspect on the merits, as the court of the first instance had insufficiently established the underlying facts.
A third party may rely on apparent authority only if the individual transaction has specific legal appearance (eg, the possessor of a company stamp is not per se implied to have authority). Authority is denied if the legal transaction as such would not typically be covered by such legal appearance (eg, authority to act as broker does not grant authority to enter into agreements).
On the other hand, the third party must be acting in good faith: it must be aware of the appearance caused by the principal, but be ignorant of the lack of actual authority. Even slight negligence (ie, 'should have known') of the third party is harmful to its claimed good faith.
A special case of apparent authority is wrongful registration of a managing director or proxy in the Companies Register. A third party may be presumed to have relied on this and to be unaware of the falsehood. Unlike in regular cases of apparent authority, slight negligence of the third party is not harmful to its claimed good faith. The burden of proof rests with the principal.
Businesses are continually concluding legal transactions; however, the persons that act on their behalf are not always duly authorised. In practice, the concept of apparent authority may in many cases help 'cure' such deficiency. Nonetheless, certain key requirements must be met in order to establish apparent authority and thus allow the counterparty to rely on it.
For further information on this topic please contact Manuel Ritt-Huemer at Schoenherr Attorneys at Law by telephone (+43 1 5343 70) or email (firstname.lastname@example.org). The Schoenherr Attorneys at Law website can be accessed at www.schoenherr.eu.
(2) The person representing is hereinafter referred to as the 'representative' and the person represented as the 'principal'. The contractual counterparty of the principal is referred to as the 'third party'.
(3) Austrian law distinguishes between internal and external authorisation: 'authority' of the representative as used in this update refers to the power to represent externally (with respect to third parties), as opposed to internal permission (with respect to the principal).
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