Q: Can an independent contractor (IC) sign contracts that bind my agency? If not, why is a hotel hounding us for cancellation penalties under a group contract that the IC signed in our agency's name? If so, what can we do to make sure that the IC never does so without my consent?
A: You have identified a recurring legal issue in the agency business: the authority of the IC to bind the agency to a contract that the agency did not want to sign. As you can imagine, the views of the agency and the other contracting party often differ.
The general legal rule is simple: A person has no authority or right to bind another person to a contract without authority to do so.
The same rule applies to a person's ability to bind a company, or one company's ability to bind another company.
An IC is a separate legal person from the travel agency. Therefore, an IC has no right to bind the agency unless one of the following exceptions applies:
First, you can give an IC permission to sign one or more contracts in your agency's name if that is what you want to do. You can give such authority orally or writing.
This is called "express authority."
Second, if the IC has signed other contracts with the same supplier in the past, and your agency has performed all the duties required of it, then your course of conduct shows that the IC has the necessary authority to continue to bind your agency.
This is called "implied authority."
Third, if the IC carries a title implying that he or she is a higher-level staffer of your agency, and if you are aware of what title the IC is using and acquiesce in its use, the IC can bind your agency if the other party reasonably believes that your IC has authority based on his or her title.
This is called "apparent authority."
In my experience, the biggest and most common problems occur under the apparent authority exception, as many agencies mistakenly give their ICs titles that clearly give contracting parties the impression that they are officers or employees of the agency.
I have seen titles such as chief financial officer, vice president, director or manager.
Regardless of legal theory, in practice, every hotel and other travel supplier will take the position that any contract that names your agency as a party will bind the agency, no matter who signs it.
It will then be up to you to try to repudiate the contract by showing that the IC has no express, implied or apparent authority to have signed it.
If the hotel or other travel supplier continues to insist otherwise, you may need to settle the claim rather than have the supplier sue your agency, as litigation is quite expensive, even if you win. Hotels often settle for far less than 100 cents on the dollar.
For the future, you can help ensure that these problems don't occur by having a written contract with your IC covering: (a) what title the IC must use, (b) a total prohibition on signing contracts for the agency without your written consent and (c) indemnification by the IC against all claims arising out of the IC's activities.