Courts Holds That An Intermediary Was Not An Agent With Authority To Bind The Principal

• Posted on: Aug 9 2017

In business, relationships are important. One relationship that is essential to successful businesses is the principal-agent relationship.

A principal-agent relationship may be established by evidence of the consent of one person to allow another to act on his or her behalf and subject to his or her control, and consent by the other to act, even where the agent is acting as a volunteer. 5015 Art Fin. Partners, LLC v. Christie’s Inc., 58 A.D.3d 469, 471 (1st Dept. 2009) (quotation marks and citation omitted).

In simple cases, the principal is an individual who asks another individual to perform a task. In more complex cases, the principal may be a corporation, a nonprofit organization, a government agency or a partnership.

An agency relationship may be based on the actual or apparent authority of the agent to act on behalf of the principal. Actual authority may be based on an express or direct grant of authority to the agent or may be implied based on the principal’s “manifestations which, though indirect, would support a reasonable inference of an intent to confer such authority.” Greene v. Hellman, 51 N.Y.2d 197, 204 (1980). Implied actual authority must be based on a showing that the principal “performed verbal or other acts that gave [the agent] the reasonable impression that he had authority to enter into the [transaction].” Site Five Hous. Dev. Fund Corp. v. Estate of Bullock, 112 A.D.3d 479, 480 (1st Dept. 2013). See also Greene, 51 N.Y.2d at 204.

Apparent authority must be based on “words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction. The agent cannot by his own acts imbue himself with apparent authority.” Hallock v. State of New York, 64 N.Y.2d 224, 231 (1984). “‘Rather, the existence of “apparent authority” depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal — not the agent.’” Id. at 231 (citing Ford v. Unity Hosp., 32 N.Y.2d 464, 473 (1973)). “Moreover, a third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable.” Id. See also Wen Kroy Realty Co. v. Public Nat. Bank & Trust Co., 260 N.Y. 84, 92-93; Restatement, Agency 2d, § 8, Comment c. Thus, “[k]ey to the creation of apparent authority is that the third person, accepting the appearance of authority as true, has relied upon it.” Greene, 51 N.Y.2d at 204 (citing Restatement, Agency 2d, § 27, and Comment a).

Even if the agent possessed no actual authority and there was no apparent authority on which the third person could rely, the principal may still be liable if s/he ratifies or adopts the agent’s acts before the third party withdraws from the transaction. Ramsay v. Miller, 202 NY 72, 75-76 (1911). Ratification usually relates back to the time of the undertaking, creating an agreement after-the-fact as though it had been formed initially. To ratify the acts of another, the principal may expressly tell the parties concerned or, by his/her conduct, manifest his/her willingness to accept the benefits of the transaction as though the acts were authorized. La Candelaria E. Harlem Community Ctr., Inc. v. First Am. Tit. Ins. Co. of N.Y., 146 A.D.3d 473, 473 (1st Dept. 2017). Silence or a prolonged failure to object to the act can constitute ratification. E.g., Matter of Cologne Life Reins. Co. v. Zurich Reins. (N.Am.), Inc., 286 A.D.2d 118, 126-28 (1st Dept. 1991); Clark v. Bristol-Myers Squibb & Co., 306 A.D.2d 82, 85 (1st Dept. 2003) (holding that “plaintiff implicitly ratified the settlement by making no formal objection for months after she was told about it”).

A common question that arises in the principal-agent relationship is who is liable for the violations of law and/or the breaches of duty or contract committed by the agent. Typically, the principal will be held liable for the agent’s misconduct or illegal activities when the agent is acting within the scope of his/her authority, and has been specifically instructed to perform the act on the principal’s behalf.  However, the principal will not be held liable when the agent acts outside the scope of the authority granted.

Though these principles seem straightforward, their application is not. Disputes over who is liable for the wrongs committed against third parties by an agent are common place. One such dispute was recently resolved on August 1, 2017, by Justice Friedman of the Supreme Court, New York County, Commercial Division in Arnon Ltd (IOM) v. Beierwaltes, 2017 NY Slip Op. 31605(U). There, Justice Friedman held that an intermediary negotiating on behalf of a trust was not an agent with the authority to bind the trust with respect to the purchase of an ancient statue.

Background

At its core, Arnon is a breach of contract action based on the alleged wrongful refusal by the defendants to sell an ancient Greek statue – known as the Kore – to the plaintiff Arnon Ltd (IOM), a company owned by a British trust, which holds the artwork of David Sofer (“Sofer”), a British and Israeli citizen residing in London (“Arnon” or the “Trust”). According to the complaint, the defendants entered into a contract to sell the sculpture to Arnon for $650,000, but within days of entering into the agreement, cancelled it without any basis in the contract.

Arnon sued the defendants for breach of contract, and after discovery, both parties moved for summary judgment.

The defendants contended that Sofer, an intermediary who negotiated with the defendants to purchase the Kore on Arnon’s behalf, did not have the authority to enter into a contract to acquire the Kore, and that Arnon never ratified Sofer’s purported agreement to purchase the statue. Alternatively, the defendants contended that the parties never reached a meeting of the minds on “the time and method of payment” or that, if a contract was made, it was cancelled by the breach of the payment terms.

In opposition to the defendants’ motion and in support of its own motion for summary judgment, Arnon maintained that although “Sofer did not have formal agency powers” (i.e., he was not expressly appointed by Arnon to act as its agent), he had either implied actual or apparent authority with respect to the acquisition of the Kore. In addition, Arnon contended that the parties reached an agreement on material terms.

The Court’s Ruling

The Court found that Sofer did not have apparent or implied actual authority to purchase the Kore on Arnon’s behalf. The Court rejected Arnon’s argument that an email Sofer sent to the defendants, which was carbon copied to a representative of Arnon, demonstrated Sofer’s implied and/or apparent authority to bind Arnon in the purchase of the Kore:

[T]he silence of Ms. de Carte [Arnon’s representative] in response to the January 12 email is insufficient as a matter of law to manifest either implied actual or apparent authority. Ms. de Carte is neither directly addressed in the email, nor identified as a representative of Arnon.… Further, the email does not detail the terms of the sale of the Kore, and it affirmatively states that Arnon is part of Mr. Sofer’s trust and is managed by independent directors. Ms. de Carte’s failure to respond, within a very short time frame, to such an email could not have led a reasonable person in defendants’ position to conclude that Ms. de Carte, and through her, Arnon, bestowed on Mr. Sofor the authority to bind Arnon to a $650,000 contract.

… Ms. de Carte’s non-response to the January 12 email could not have given Mr. Sofer the reasonable impression that he had authority to enter into this one contract. At most, Ms. de Carte’s silence could be interpreted as manifesting agreement that Mr. Sofer was authorized to engage in intermediary discussions or negotiations, but that the independent directors referred to in the January 12, 2013 email must still make the final decision as to whether to bind Arnon to the purchase and must approve a formal written contract.

Arnon’s reliance on prior dealings is also insufficient to raise a triable issue of fact as to Mr. Sofer’s apparent authority to bind Arnon to the one Kore transaction. As a general rule, the mere creation of an agency for some purpose does not automatically invest the agent with apparent authority to bind the principal without limitation. An agent’s power to bind his principal is coextensive with the principal’s grant of authority. Further, the existence of apparent authority depends upon a factual showing that the third party relied upon the misrepresentations of the agent because of some misleading conduct on the part of the principal not the agent.

At most, said the Court, “the evidence supports a finding that Arnon bestowed on Mr. Sofer authority to recommend artworks to Arnon, but not to bind Arnon to the purchases.” In so holding, the Court rejected Arnon’s contention that the evidence demonstrated its intention to authorize Sofer to contract for the Kore on Arnon’s behalf. The Court noted that Arnon ignored the evidence that only it had the authority to enter into a contract for purchases of antiquities (even if Arnon may have effectively acted as a rubber stamp for Sofer’s recommendations). Significantly, observed the Court, Sofer never testified that he was authorized, or that Arnon even believed him to be authorized, to contract on Arnon’s behalf in the purchase of the Kore.

The court cannot ignore, however, that Mr. Sofer created a trust under which he was required to obtain Arnon’s approval of contracts for purchases in order to avail himself of the benefits … of the trust structure, and that he failed to do so before defendants cancelled the contract for the Kore.

Next, the Court examined the question whether Arnon ratified the alleged contract. After identifying the applicable principles, the Court found that even if Sofer had entered into an agreement with the defendants, “ratification of an agent’s acts requires knowledge of material facts [by the principal] concerning the allegedly binding transaction,” which the evidence showed could not be imputed to Arnon: “The January 12, 2013 email does not outline any details of the alleged agreement but, rather, explicitly anticipates a future document that would contain ‘the logistics of the sale (formal short agreement, invoice with photos etc.).’”

“More important,” said the Court, “any claim of ratification based on Ms. de Carte’s silence in response to the January 12 email would be plainly inconsistent with Ms. de Carte’s repeated testimony, that Arnon required compliance with a formal process in order to approve the contract.”

Takeaway

The key to determining whether a principal will be held liable for the acts of his/her agent is authority: was the agent authorized to act on the principal’s behalf? If a person has no authority to act as an agent, or an agent has no authority to act in a particular way, the question becomes can the principal be held liable for the wrongs perpetrated on a third party? As Arnon shows, the answer depends on whether the agent has apparent authority – that is, whether the third party reasonably believed from the principal’s words or conduct that s/he had in fact consented to the agent’s actions. And, as in Arnon, the answer to that question is often hotly contested.