Agency Flashcards
Major exception to the doctrine of privity
The company is the PRINCIPAL, the director or employee is the AGENT, provided that the agent had adequate authority to enter into that transaction on the company’s behalf
Section 43(1) of the CA 2006
Provide that a company can make a contract through its duly authorised agents. It states that a contract may be made:
(a) by a company, by writing under its common seal, or
(b) on behalf of a company, by any person acting under its authority, express or implied; and any formalities required by law in the case of a contract made by an individual also apply, unless a contrary intention appears, to a contract made by or on behalf of a company
Types of Authority
Actual authority
- Express
- Or implied
Apparent/ostensible authority
Delegation
• Article 3 of the Model Articles confer actual authority on the directors to act on the company’s behalf (act on behalf of and bind the company)
• Article 5 authorises those directors to delegate their authority downwards (appoint agents) and to confer actual authority on other agents of the company (including authority for those agents to themselves delegate some or all of their authority further down the corporate hierarchy)…
• So, through articles 3 & 5, the chain of actual authority flows downwards through the company.
• It is a question of fact whether such delegation of authority has taken place.
Problems arise, however, where a third party contracts with the directors, or an individual director, or an employee of the company and the company claims that those persons lacked actual authority to bind the company.
• Sometimes, for example, restrictions are placed on the authority of the company’s agents in the company’s constitution. (Company’s may choose to adopt Model Article 3 but insert limitations on the powers of the BoD e.g. contracts of certain amount of money need the permission of the GM…)
When an agent exceeds their authority
The resulting contract is voidable at the company’s behest - principal can choose whether to ratify the contract (adopt it) or to reject it.
• Contrast with ultra vires contracts beyond company’s capacity which are void (Ashbury Carriage)… never to have existed
• Third parties are at the mercy of the company
• Ratification may take place by BoD or GM
In what circumstances can third parties enforce contracts made by agents who lack actual authority?
- If it hasn’t third party may have to rely on ostensible or apparent authority
- However, as with the issue of capacity, statutory changes have been introduced to protect third parties so that they are not negatively affected by the corporate agent’s lack of authority as long as certain conditions are satisfied.
Panorama Developments (Guildford) Ltd. v. Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711
Implied authority tends to arise from holding a particular position/status within a firm
Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549
“…actual authority may be express or implied. It is express when it is given by express words …. It is implied when it is inferred from the conduct of the parties and the circumstances of the case, such as when the board of directors appoint one of their number to be managing director. They thereby impliedly authorise him to do all such things as fall within the usual scope of that office.” (per Lord Denning)
Brayhead had implied actual authority as the unofficial chair; they had made plenty of contracts previously that the BoD had not objected to.
Interesting as a case that could have been argued on apparent/ostensible authority… shows the distinction between them is less than clear
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (CA)
Leading case on apparent/ostensible authority;
• Court explained that actual authority was a relationship between a principal and an agent
• By contrast, “apparent” or “ostensible” authority involved a relationship between a principal and a third party – arises when a principal makes representations to a third party that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent” authority.
• Most common form of representation is conduct
• Diplock also pointed out that in the case of a company, the representations of authority must come from those within the company with actual authority (see AMB Generali holding AG v SEB Trygg Liv Holding Aktiebolag [2005] EWCA Civ 1237; [2006] 1 Lloyd’s Rep. 318).
• The BoD who had actual authority held it out that the “agent” has authority so the company was bound
Criteria for establishing apparent/ostensible authority:
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (CA)
A representation (by words or by conduct) that the agent had actual authority to enter contracts of this nature. • Representation made by someone with actual authority to enter into contracts of this nature: see British Bank of the Middle East v Sun Life Assurance of Canada (UK) Ltd [1983] BCLC 78 on second criterion. • Reliance by the Third Party on the representation. • Diplock also mentions corporate capacity to enter into a contract of this nature, but this is no longer relevant in the light of ss 31 & 39 CA 2006.
But what if the Third Party knew, or could have established, that the agent was acting in excess of his actual authority?
• C 19th doctrine of constructive notice (for application to JSC): persons dealing with a company deemed to have constructive notice of the company’s public documents (memo and articles) and therefore of any constitutional limitations contained in them.
The Turquand / Internal Management Rule
To mitigate potential unfairness of doctrine of constructive notice on third parties, the 19th century courts developed the Turquand or Indoor Management Rule - established in the case of Royal British Bank v Turquand (1855).
• Directors of company needed authorisation of the GM to borrow money
• Liquidator refused to repay the loan on the grounds that the loan was unauthorised without the permission of the GM
• Even if they are deemed to have actual or constructive notice, those dealing with a company in good faith are not normally required to satisfy themselves that the internal procedures of a company have actually been satisfied.
• See also Morris v Kanssen [1946] - Lord Simmonds: “But persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular.””
But note, for third party to claim Turquand protection, has to establish the existence of apparent/ostensible authority. NOT ACTUAL
Scope & Limitations of the Turquand Rule
• The third party has actual knowledge of the lack of authority – negates Ostensible Authority, which relies on appearances;
• The third party knew of facts which should have put him to enquiry (that agent lacked authority) but did not do so – undermine good faith.
See B Liggett (Liverpool) Ltd v Barclays Bank Ltd [1928]; A. L. Underwood Ltd v. Bank of Liverpool and Martins [1924]; Wrexham Association Football Club v Crucialmove [2007] BCC 139 (CA
Where the third party is a so-called insider (like a director)
o See Mahony v East Holyford Mining Co (1875) - protection offered to third parties by RBB v Turquand only applied to those dealing with the Co externally; see also Howard v Patent Ivory Manufacturing Co (1888); But directors not always deemed to be insiders: see Hely-Hutchinson v Brayhead Ltd [1968]
o Insiders usually means directors – generally cannot claim protection
Weaknesses of Turquand
Turquand rule had limitations and weaknesses, hence statutory reforms to enhance protection of third parties.
• But statutory framework has not completely replaced the common law. There remain residual cases where Turquand Rule may still offer protection third parties. (increase the protection)
• Key provision is s.40
But statutory provisions provide the first port of call for third parties.
