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Smith on Inherent Authority

Gordon Smith offers an interesting post on the place of inherent authority in (or, more precisely, not in) the Restatement (Third of Agency). Money quote:

Restatement (Third) of Agency abandons inherent agency power, purporting to subsume all of the cases covered thereby with the expanded notion of apparent authority. Nevertheless, the logic of apparent agency does not extend to cases involving so-called “undisclosed principals,” which traditionally were decided under the logic of inherent agency power. Courts and the Restatements have long distinguished between “disclosed principals” and “undisclosed principals.” This distinction is important because “apparent authority is not present when a third party believes that an interaction is with an actor who is a principal.” Restatement (Third) of Agency §2.03, comment f. In other words, apparent authority cannot exist in cases involving an undisclosed principal.
The drafters of the Restatement (Third) of Agency plugged the hole left by the absence of inherent agency power by creating a new section with “no precise counterpart” in the Restatement (Second) of Agency. The new section (§ 2.06) would make undisclosed principals liable for the actions of their agents – acting without actual authority – if a third party detrimentally relies on the agent and the principal does not take reasonable steps to notify the third party of the misplaced reliance. This new section also describes something that looks suspiciously like inherent agency power:
An undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent’s authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed.
So it seems that inherent agency power still lives, if only in a dimly lit corner of agency law.

Indeed. As I explain in my short treatise Agency, Partnership & Liabilitiy Companies:

Although it has been around for almost half-a-century, inherent authority remains highly controversial. Judge Frank Easterbrook, for example, once referred to the “new brand of ‘inherent’ authority” as a form of “bootstrapping.” The drafters of the Restatement (Third) now appear ready to bury the entire concept.
The Restatement (Third) drops the phrase “inherent agency power.” Instead, it offers a revised and broader version of apparent authority, making clear that conduct such as placing an agent in a position of authority can create apparent authority to do what is customary. This new refinement will adequately address cases like Kidd. To deal with cases like Watteau, the Restatement adopts a new concept called “estoppel of an undisclosed principal.” The rule is essentially the same as old Restatement (Second) § 195.

I go on to opine that:

Former Restatement (Second) § 161 suggests that the issue with respect to inherent authority is whether the third party reasonably believes that the agent had authority to make the contract and whether such contracts usually are incidental to the sorts of conduct the agent has authority to do. Accordingly, the issue of whether the agent’s acts were of the sort that “usually accompany or are incidental to transactions which the agent is authorized to conduct” is to be analyzed from the third party’s perspective rather than that of the principal.  Even if it is not customary in the industry in question for agents to exercise the power in question, inherent authority thus can still exist if the third person reasonably believes it is customary for agents of this sort to commit such acts.
It would make more sense to ask whether the agent’s deviation was reasonably foreseeable by the principal.  In other words, we should focus on the question of whether it was reasonably foreseeable by the principal—rather than the third party—that the agent would enter into such contracts even despite instructions to the contrary. This approach makes for an appealing symmetry: actual authority depends on what the agent reasonably believes; apparent authority depends on what the third party reasonably believes; and inherent authority depends on what the principal believes. The main justification for this approach, however, is (again) based on the cheaper cost avoider principle. If we assume that the agent’s misconduct was reasonably foreseeable to the principal, we might reasonably assume that the principal is in a better position to control the agent’s conduct than is some third party.