What is ostensible authority?

Ostensible authority, also known as apparent authority, refers to a situation where a third party reasonably believes that an agent has authority to act on behalf of a principal based on the principal's conduct or representations. This type of authority is not explicitly granted through formal documentation but is inferred from how the principal presents the agent to others. For instance, if a business owner consistently allows an employee to negotiate deals with clients without correction or limitation, clients might assume the employee has the authority to bind the business to agreements, even if that authority wasn’t explicitly granted.

This concept ensures that principals are held accountable for their representations and the implications of their actions, which helps maintain fair dealings in business transactions. Hence, the correct answer reflects the nature of ostensible authority as being reliant on the actions and conduct of the principal rather than explicitly documented authority or any authority derived from third-party contracts.