What type of authority is based on the external appearance of authority due to the principal's actions?

The correct answer is based on the concept of how authority is perceived externally. Apparent authority arises when a principal's actions lead a third party to reasonably believe that an agent has the authority to act on behalf of the principal. This can occur even if the agent does not have actual authority granted by a contract or any formal agreement. For example, if a company allows an employee to act in a certain capacity and interact with clients, the clients may assume the employee has the authority to make decisions, based solely on the employer's behavior and communication.

This concept is essential in business relationships because it protects third parties who may rely on the representations made by the principal through their agents. The principle ensures that even when there is no formal express or implied authority established, the principal can be held accountable for the actions of the agent if it can be demonstrated that the principal led the third party to believe the agent was acting within their authority.