What is the difference between “actual authority” and “apparent authority” in agency relationships?

The distinction between actual authority and apparent authority is a fundamental concept in agency relationships. Actual authority is the power that an agent has been explicitly granted by the principal, which can be either expressed in writing or orally. It is the authority that the principal has intentionally conferred upon the agent, allowing the agent to act on the principal's behalf.

In contrast, apparent authority arises when a third party reasonably believes that the agent has the authority to act for the principal, even if the principal did not explicitly grant such authority. This perception is based on the principal's representations to the third party. For example, if a principal allows an employee to act in a certain way and communicates that to others, the employee may be perceived to have authority based on those representations, even if the principal never directly authorized it.

Understanding these distinctions is crucial because they influence the legal obligations and responsibilities of the parties involved in a transaction. Actual authority is grounded in the intended relationship between the principal and the agent, while apparent authority often involves the perceptions of outside parties regarding that relationship.