How Apparent Authority Can Put Your Dealership In A Bind

Suppose a sales manager at your dealership, who is not an officer of your company, signs an agreement with a vendor to extract customer information from your database and mail offers to these consumers over a six-month period.  The sales manager quits around the time you receive the first bill from the vendor.  When you refuse to pay the vendor, he counters that your dealership entered into a binding agreement.  Does the vendor have an argument to hold your dealership to performance of the contract?

The answer is likely ‘yes’ because of the doctrine of apparent authority.  Apparent authority, typically arising from principal/agent and employer/employee relationships, binds the principal (or employer) to fulfill obligations entered into by the agent (or employee) with a third-party when the third-party reasonably believes the agent has the authority to act on behalf of the principal.  In this example, the vendor would likely argue that, as the manager of the sales department, the sales manager has the authority to enter into agreements relating to sales of vehicles, such as advertising.  Therefore, the vendor could sue the dealership for breach of contract if the dealership refuses to pay the vendor for services rendered.

There are several steps you can take to reduce the likelihood of unauthorized personnel entering into agreements that may obligate your dealership to performance.  A key step is making sure your employees clearly understand what they are and are not allowed to do.  Your employee handbook and other documents should express which staff has authority to act on behalf of the dealership in regards to contracts with vendors.  Your staff should acknowledge this authority, or lack thereof, in writing.  You should notify each of your dealership’s vendors in writing regarding who has authority to act on behalf of your business and instruct your staff to whom they should refer vendor inquiries.  If you own several dealerships, you should consider consolidating responsibilities for review and execution of contracts to a limited number of individuals instead of allowing each store to act independently.  Doing so has several benefits, including more oversight of vendor contracts, monitoring of pricing and terms for each dealership, and improved leverage when negotiating specific terms of each agreement.

Image Courtesy of Perfman HR Blog

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