In California, ostensible authority (also known as apparent authority) refers to a situation where a third party reasonably believes that an agent has the power to act on behalf of a principal, based on the principal’s conduct, representations, or failure to object to the agent’s actions. This type of authority is not granted directly by the principal to the agent but is instead created by the principal’s outward actions or lack of communication. For example, if a principal allows an agent to consistently negotiate contracts on their behalf and does not correct any misrepresentation about the agent’s authority, the third party may assume the agent has the authority to act in similar situations in the future. In such cases, the principal may be bound by the agent’s actions, even if the agent did not have express or implied authority to make a particular contract.
However, for ostensible authority to be valid, the third party must have reasonably relied on the belief that the agent had the authority to act, and that belief must be based on the principal’s conduct or representations. In California, if the principal’s behavior led the third party to reasonably assume the agent had the authority to enter into a contract, the principal may be held liable, even if the agent was not actually authorized. This doctrine protects third parties who act in good faith and rely on the appearance of authority, but it also places a responsibility on principals to avoid misleading others about the scope of their agent’s powers. If the principal can prove that the third party knew or should have known that the agent lacked authority, the principal may not be bound by the contract.