A recent decision from the United States District Court for the Southern District of New York warns against allowing a single employee, of limited express authority, to engage in business dealings with another company which is unaware of the employee’s limited authority. According to the Southern District, an employee need only have apparent authority to bind his employer to all terms of an agreement, even one involving a $1 million liability. See Astra Oil Co., LLC v. Hydro Syntec Chems., Inc., No. 13-CV-08395, 2014 WL 630676 (S.D.N.Y. Feb. 18, 2014).
In September 2012, Hydro Syntec Chemicals, Inc. (“Hydro”) sold Astra Oil Co., LLC (“Astra”) 20,000 barrels of benzene pursuant to largely similar form contracts that each party sent the other. Hydro employee Kevin Callahan (“Callahan”) executed Astra’s form contract. In October, Callahan agreed by e-mail to repurchase the same benzene. In response, Astra e-mailed Callahan a new form contract that contemplated a bookout agreement¹ and contained an arbitration clause. Hydro did not execute, or even acknowledge, the new form contract.
Callahan did, however, send Astra an e-mail agreeing to a bookout agreement with Astra, allowing the parties to “offset … existing delivery obligations” created by the September and October 2012 sale agreements, and causing Hydro to owe Astra almost $1 million dollars. When Astra requested confirmation of the bookout, Callahan responded that he was “ok,” but he requested a change in the bookout’s effective date. Astra agreed to the modification. Callahan e-mailed Astra an invoice related to the bookout and copied Hydro’s finance representative.
Astra sent its own invoices related to the bookout to Callahan and other Hydro employees, none of whom contested the debt. When Hydro failed to pay the $1 million liability that Callahan had incurred, Astra commenced arbitration pursuant to the form contract that Hydro had received but never executed. Hydro did not participate in the arbitration, except to request an adjournment of the hearing. The arbitration panel gave an award to Astra, which Astra sought to confirm in the Southern District. Hydro cross-moved to vacate the award, alleging that no binding agreement to arbitrate existed between the parties. The district court granted Astra’s motion to confirm and denied Hydro’s cross-motion to vacate the award.
Hydro contested the arbitration award, alleging that: (1) Callahan, a trader, lacked authority to bind Hydro to either the October 2012 agreement or the bookout; (2) Hydro did not agree to the new terms proposed in the written confirmation sent by Astra in October 2012; (3) the parties reached no agreement regarding the bookout, as they were still negotiating price and method of payment; and (4) the disputed bookout agreement contained no arbitration clause and was thus not subject to arbitration.
The district court rejected Hydro’s arguments. First, it found that Callahan had “implied authority” to bind Hydro to the October 2012 and bookout agreements because Hydro “created in Callahan the appearance of authority” by appointing him as its only trader, its sole representative in contract negotiations, and its only signatory to the September 2012 agreement; by ratifying prior agreements; and by failing to inform Astra of Callahan’s limited authority.
Second, the district court held that the written confirmation of the October 2012 agreement became a part of the parties’ agreement because written confirmations of an agreement between merchants become part of their contract except under certain circumstances not alleged by Hydro. Besides, the district court said, Hydro ratified the October 2012 agreement when Callahan issued an invoice to Astra related to the bookout.
Third, the district court found that the parties reached an agreement regarding the bookout because there was no evidence of continuing price negotiations between the parties, and, under New York law, the method of payment is not a material term that requires resolution prior to the formation of a contract.
Finally, the district court held that the arbitration clause in the October 2012 agreement applied to the bookout agreement because the unsigned written confirmation (i.e., the form agreement sent to Callahan) stated that it governed “any and all differences and disputes of whatsoever nature” arising out of that contract.
This decision is a reminder to all employers to carefully consider their policies regarding employee communications during the negotiation and confirmation of contracts. Employers should ensure that safeguards exist to prevent an employee with limited authority from agreeing to broad contract terms. Employees should be encouraged to communicate the scope of their authority to all other parties at the earliest opportunity, and should be trained to avoid committing to potentially undesirable contract terms, just by sending an e-mail.