Steps a Supplier Can Take to Protect Itself From an Unauthorized Purchase Defense

Breach of Contract Claims Can Be Complicated By Poor Record Keeping

Some of our firm’s longest standing clients are suppliers of building materials who extend credit to contractors, both large and small. As business dispute attorneys, we regularly file suit on behalf of these suppliers, in many cases to enforce credit agreements against customers whose accounts have become delinquent. One issue that has the potential to seriously complicate a business dispute of this type arises when orders are placed verbally and detailed written records are not kept that show who placed the order. While orders are placed in this fashion every day without incident, when an account becomes delinquent, and filing suit becomes necessary, the customer may try to use this to their advantage. We recently prevailed at trial in the Superior Court of New Jersey on behalf of a supplier who was faced with this situation.

Lack of Authorization as a Basis to Avoid Liability

The question of whether or not orders were authorized by the customer was one of the defenses raised by the customer in our recent trial, which also involved claims under New Jersey’s Construction Lien Law and the Uniform Commercial Code. The customer claimed that the person who placed the orders with the supplier was not authorized to place them and faulted the supplier for accepting the order on the customer’s account. In New Jersey, whether or not a person or company’s agent is authorized to act on behalf of the person or company is determined by the doctrines of actual authority and apparent authority.

The Doctrines of Actual Authority and Apparent Authority

A person acts with actual authority when the “’written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal's account.'" Jennings v. Reed, 381 N.J. Super. 217, 231 (App. Div. 2005) (quoting Restatement (Second) of Agency § 26 (1958)).

A person acts with apparent authority "when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal's manifestations." New Jersey Lawyers' Fund for Client Protection v. Stewart Title Guaranty Co., 203 N.J. 208, 220 (2010). The doctrine of apparent authority "focuses on the reasonable expectations of third parties with whom an agent deals." Id. In the situation facing our client, the supplier, the question was essentially whether the customer’s behavior reasonably caused the supplier to believe that the person who placed the orders was acting with authorization on behalf of the customer.

Apparent authority is found to exist when evidence shows: “1) conduct by the principal that would lead a person to reasonably believe that another person acts on the principal's behalf -- i.e., conduct by the principal 'holding out' that person as its agent; and 2) acceptance of the agent's [representations] by one who reasonably believes it is rendered on behalf of the principal.” Estate of Cordero ex rel. Cordero v. Christ Hosp., 403 N.J. Super. 306, 315 (App. Div. 2008). Application of the doctrine of apparent authority is intended to prevent "a principal from 'choos[ing] to act through agents whom it has clothed with the trappings of authority and then determin[ing] at a later time whether the consequences of their acts offer an advantage.'" Id. at 312 (quoting Restatement (Third) of Agency, supra, § 2.03 comment c).

How a Supplier's Strong Records Can Neutralize the Lack of Authorization Defense

In our case, the court determined that the supplier reasonably believed that its customer’s agent had authority to place the orders. The court based its determination on the supplier’s diligent and careful documentation of deliveries, and its timely provision of invoices and statements to its customer, all without any objection, complaint or inquiry. The court found this evidence caused the supplier to believe that the customer authorized the orders that were placed on the customer’s account. As a result, the court found that our client’s customer and its owner were responsible for paying our client for the materials, along with contractual interest and attorney’s fees.

Every case is different and must be evaluated on its own merits. However, if any lesson can be taken from our client’s experience, it is that careful documentation of all aspects of the processing of orders, through delivery and invoicing, can be extremely important if a transaction ever faces scrutiny in a courtroom. Even if some information is missing, like explicit, written authorization that an agent is authorized to place an order, if all of the other paperwork is convincing, the supplier’s credibility may be strengthened, and a judge or jury convinced to accept the supplier’s position. In this way, whether one is a supplier of building materials or some other type of goods, the client may be able to protect itself from a delinquent customer’s attempt to evade responsibility.

The New Jersey business lawyers at the Law Office of Bart J. Klein advise clients on issues relating to New Jersey a broad range of business disputes and commercial disputes, including breach of contract and commercial collection cases. We represent both creditors and debtors and are well versed in the law governing judgment collection. We welcome you to call us at (973) 763-6060, email info@bartjkleinlaw.com, or complete our online contact form for more information.

 

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