When alternative dispute resolution agreements meet agency law

Businesses often rely on arbitration agreements in their contracts with clients/customers to reduce the expense of potential litigation. When done correctly, these are legally binding contracts and, as noted in Kindred Hospitals Limited Partnership v Luttrelly, 2006-CA-000221-MR (July 27, 2007)(to be published), Kentucky law favors enforcement of such agreements. In fact, the U.S. Supreme Court has stated: “‘any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration . . . .’ Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983).” Id. at 9.

So, Kindred Hospitals thought they were on solid ground when they sought enforcement of an arbitration agreement signed by Susan Luttrell. Susan had signed the agreement on behalf of her mother, Altha Duncan upon admission to Liberty Care Center (owned by Kindred). However, Susan did not have power of attorney and the only authority her mother had granted her was that of cashing checks and depositing money into Altha’s savings account. This meant that Susan did not have actual authority to bind Altha under the arbitration agreement.

Kindred next argued that Susan had either implied or apparent authority. Kentucky defines these two concepts as:

Implied authority is actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary to carry out the duties actually delegated. Estell v. Barrickman, Ky.App., 571 S.W.2d 650 (1978). Apparent authority on the other hand is not actual authority but is the authority the agent is held out by the principal as possessing. It is a matter of appearances on which third parties come to rely. Estell v.Barrickman, supra. Mill Street Church of Christ v. Hogan, 785 S.W.2d 263, 267 (Ky.App. 1990). Id. at 11

So, the implied authority of an agent covers those situations where things were not spelled out, but the authority follows in line with what the agent is supposed to do. For very simplistic example, a purchasing agent for a company may specifically be authorized to buy certain products, but no one said he or she could authorize payment of shipping costs. Well, you cannot get the product unless you can have it shipped so the authority to authorize payment for shipping is implied. Since none of Susan’s actual authority came close to covering the signing of contracts, implied authority could not exist.

Apparent authority was probably Kindred’s best shot, but they failed to establish that either. Apparent authority would have arisen if Altha had done something, or failed to act where one normally would have acted, that would have lead a reasonable person to believe Susan had authority to sign such a contract. For example, if Altha had been present and in a competent state of mind when the agreement was signed and she said nothing to indicate Susan lacked authority, apparent authority would have arisen and she would have been bound to it.

Now, business associations professor, Bif Campbell, may argue with the precise definitions of implied and apparent authority, but the real point would remain the same. Always check to see if the person signing your arbitration agreement, or any contract really, has the authority to form such a contract.