South-Western Legal Studies in Business

Third Party May Rely on Apparent Authority of Agent to Enter Into Binding Contract
Description Appeals court held that when an agent has apparent authority to enter into a contract on behalf of his client, the third party has the right to rely on the representations of the agent and enter into a binding contract, even if the agent lacked express authority.
Topic Agency
Key Words Apparent Authority; Express Authority; Attorney; Settlement
C A S E   S U M M A R Y
Facts Hannington, a Ph.D. student at the University of Pennsylvania (Penn), sued the university for breach of contract regarding how much he owed in tuition and fees. Prior to trial, attorneys for both sides said they were near a settlement and would work out final details rather than go to trial. Hannington's attorney sent Penn a final version of the settlement and also notified the court that a settlement had been reached. Before paperwork was completed, Hannington refused to sign the agreement, hired a new attorney, and wanted to proceed with trial. The trial court refused to allow a trial, holding that Hannington's attorney had authority to settle the dispute. Hannington appealed.
Decision

Affirmed. "The doctrine of apparent authority permits a settlement agreement to be enforced where a third party reasonably believes that the principal's lawyer, the agent, has the authority to settle the case." This is so even if the lawyer does not have express authority to finalize the settlement. Penn, negotiating in good faith, could presume that Hannington's attorney had authority to negotiate the settlement. Negotiations went on for six months, so Penn had reason to believe that the attorney had express authority to authorize an agreement. If Hannington's attorney exceeded the scope of his authority, that is a dispute between Hannington and his attorney that should not affect Penn.

Citation Hannington v. Trustees of the University of Pennsylvania, 809 A.2d 406 (Super. Ct., Pa., 2002)

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