What are the two types of authority in contracting?

In the context of contracting, the two types of authority are actual authority and apparent authority. Actual authority refers to the power that a party explicitly grants to another party to act on its behalf. This type of authority is clearly outlined in agreements, contracts, or through direct communication, allowing the agent to act with legitimacy according to the principal’s instructions.

On the other hand, apparent authority arises when a third party perceives that an agent has the right to act on behalf of the principal, even if this authority has not been explicitly granted by the principal. This situation can occur in cases where the principal's actions or omissions lead a third party to believe that the agent has authority to act. For instance, if a principal allows a person to behave as an agent without clearly stating the limitations of that role, the principal may be bound by the actions taken by that agent in dealings with third parties due to the appearance of authority.

The understanding of both types of authority is crucial in contracts to ensure that the parties are aware of the legitimacy of the transactions and that they are protected against claims that may arise from misunderstandings about who has the authority to make decisions or commitments.