Agent’s Cloak of Authority Binds Principal to Unknown Side Loan
June 9, 2016
If you let someone look like they have power to act for you, they can bind you to deals – even to deals you don’t know about.
In a recent Massachusetts Appeals Court case, Fergus v Ross a lender used an agent who brought in many loan proposals. Often the loans were backed up by real estate.
The agent in this case, “set everything up”. He brought in a borrower who wanted a loan for a low value piece of real estate but who wanted a bigger loan than was supported by value of the property. The agent, it turns out, was taking a “side loan” for his own purposes. The borrower knew this and expected that the lender did too. The agent did not get his customary fee from the proceeds of this loan. The loan paperwork created by the lender based on the agent’s information, did not mention the side loan.
Shockingly, the agent did not repay his part of the loan, the lender looked to the borrower for repayment in full. The borrower said – you made that agent look as if he could bind you as lender and that is what I, as borrower, thought was going on.
The Court said since the lender used this agent so completely and so often and didn’t make any show of limiting his ability to bind the lender, the relatively innocent borrower here prevails.
The acts of the principal in cloaking the agent with apparent authority empower others to think the agent has the power to bind.
The lesson of the case is to cabin the authority of your agents.
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