Do Not Sign That Contract – The Doctrine of Apparent Authority

The Louisiana Second Circuit Court of Appeals recently decided an interesting case about the formation of contracts and arbitration agreements. Like so many contractual disputes, the devil is in the details. In this case, Bryce, a shop foreman at Fluid Disposal Specialties, signed a contract for UniFirst Corporation to supply work uniforms for 36 months at Fluid’s four locations at what he believed was a price of $3,000.00 per week. The contract contained an arbitration agreement. Once Fluid learned that the weekly charges were approximately $4,888 per week, it began to use a different company to supply uniforms. In response, UniFirst demanded that Fluid pay $809,000.00 for breach of contract and initiated arbitration proceedings. Fluid filed suit in state court for declaratory judgment and seeking injunctive relief barring arbitration.

After a hearing in which representatives from both companies testified, the trial court granted Fluid’s preliminary injunction and barred arbitration. The court found that Bryce did not have authority to enter into a long-term contract for Fluid and that there was no reasonable basis for UniFirst to believe otherwise.

On appeal, UniFirst argued that the trial court erred in failing to find that Bryce had apparent authority to enter into the contract. The Louisiana Second Circuit Court of Appeals noted that for an agent (Bryce) to have apparent authority to bind his principal (Fluid) in a transaction with a third person (UniFirst) the principal must make a manifestation that the agent is authorized to engage in the particular transaction. Moreover, for there to be apparent authority, it must be reasonable to believe the agent is authorized to enter into a transaction.

In upholding the trial court’s findings, the Court noted that there was nothing inherent in Bryce’s position as a shop foreman that would suggest he was authorized to enter into long-term contracts for Fluid. UniFirst’s sales representative never spoke to Fluid’s president to confirm if Bryce had such authority. Moreover, the Court observed that Bryce signed the contract in his name, rather than as Fluid’s agent. Accordingly, the trial court’s finding that both the contract and arbitration agreement were not manifestly erroneous.

From a practical standpoint, this case demonstrates that companies should, at a minimum, confirm that the employee or agent they are dealing with actually has authority to enter into a binding contract. This is especially the case when negotiating with an employee who doesn’t serve in a managerial capacity.

Fluid Disposals Specialties, Inc. v. Unifirst Corp.