apparent authority / ostensible authority

What is Apparent or Ostensible Authority?

Ostensible authority or apparent authority:

• is the power of an agent to legally bind its principal with a third party, and
• arises from conduct of a principal, by permitting the agent to make contracts of a particular kind on its behalf.

That’s done by holding out that a person has authority to deal with the company’s affairs on its behalf.

Some representation is made which suggests that the person has that power.

The underlying principle is when someone says another person has authority to represent them, that person can commit them to contracts which are within the scope of their authority.

Apparent authority is only effective until the third party is put on inquiry that the apparent authority may not exist.

Actual or ostensible authority is not a necessary requirement for an agent to breach their fiduciary duties to their principal.

 

Purpose of Apparent Authority

Ostensible authority allows businesses to interact with one another and:

• assume that the individuals or business they are dealing with have the authority to create legally binding commitments,
• where they have been led to believe it exists.

It is not available when circumstances arise that would cause a business to question whether the person has the authority which they think they do.

Business aren’t permitted to assume that things are as they believe they are if they are put on inquiry – whether those inquiries are made or not.

 

When does Apparent or Ostensible authority arise?

The following elements must be proved by a claimant:

• A representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor
• that the representation was made by a person or persons who had actual authority to manage the business of the company either generally or in respect of the particular matter to which the contract relates
• that the third party was induced by the representation to enter into the contract, and
• that under its memorandum or articles of association the company was not deprived of the capacity to enter into a contract of the kind sought to be enforced or to delegate authority to the agent to enter into a contract of that kind

 

The apparent authority is created by the representation of the principal that the agent has the authority on behalf of the principal to enter into a contract of a particular kind.

Reliance

The third party must have been in a position that it could - and did - reasonably rely on the representation that the agent had the necessary authority.

Estoppel

The representation, if acted upon by the contractor by entering into the contract, operates as an estoppel. That prevents the principal from denying that it is not bound by the contract.

 

Holding Out with Authority: How does it happen?

It’s the perception of the third party in respect of the apparent power of the agent which binds the principal.

The holding out can take practically any form, and includes:

1. the principal presenting a person or company that they have the authority to authorise transactions
2. appointing a person to a particular position within a company particular office, such as a “Director of Sales”, head of department or some other role; and
3. by presenting the person to third parties with the indications of authority, such as on:
   1. letterhead
   2. notepaper
   3. business cards
   4. email footers.

Any of the players – the principal, third party or agent could be an individual or entity with a separate legal personality.

 

Terminology Used

Typically, the principal is a company.

The third party is a business looking enter a contract to supply goods or services to the principal.

That will require formation of a contract between the principal and the contractor. The agent might be:

1. employee of the principal – director, middle management, junior employee
2. a consultant / independent contractor to the principal, which is:
   1. either a company in its own right or
   2. some other entity with separate legal existence,

which would have a human representative.

We’ll use the words "Principal", "Contractor" and "Agent" below for these different roles.

For the Agent to have authority to bind the Principal:

1. the Agent must have the authority to enter into the contract of the kind sought to be enforced by the Contractor;
2. a representation was made by a person who had actual authority for the Principal (ie to manage the business of the Principal) either:
   1. generally or
   2. in respect of the particular matter to which the contract relates
3. the Contractor was induced by the representation to enter into the contract. And did.

The rule has been given statutory force in section 161 of the Companies Act.

 

The Rule in Turquand’s Case: The Indoor Management Rule

The Indoor Management Rule is also known as the Rule in Turquand’s Case. It’s taken from a case named Royal British Bank v Turquand (1856) 6 E&B 327.

The Rule in Turquand’s Case (1856) 6 E&B 327 was summarised in Morris v Kanssen [1946] AC 459 like this:

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.

The Indoor Management Rule says that:

• third parties dealing with the company
• are entitled to assume that the internal rules of a company – the constitution of the company
• have been complied with.

Turquand’s Case

Turquand’s Case concerned whether the company could avoid liability because the internal steps requisite for the formal validity of the directors’ acts had not duly carried through. As the Contractor was dealing in good faith, and had nothing to suspect that it may not have been, the company was legally bound.

The Rule means that businesses in the position of a Contractor can assume that the affairs of Principals have been complied with, unless something has happened that would cause it to question that state of affairs.

When Principals say that a person has authority, it can be taken at face value.

 

Put on Inquiry

The Contractor is not entitled to rely on Rule in Turquand’s Case - the Indoor Management Rule - to say that the contractual relationship was formed by the acts of the Agent.

Apparent authority can’t be invoked if the Contractor is put upon inquiry.

That happens when circumstances arise that would cause the Contractor to query the authority of person dealing on behalf of a company.

Should the Contractor have asked questions whether things are really as they seem?

Lord Scott said in Criterion Properties plc v Stratford UK Properties LLC (2004):

if a person dealing with an agent knows or has reason to believe that the transaction is contrary to the commercial interests of the agent’s principal, it is likely to be very difficult for that person to assert with any credibility that he believed that the agent had apparent authority, and lack of such a belief would be fatal to a claim that he did.

A third party cannot presume in its favour that things are rightly done if the inquiry that he ought to make would tell him that they were wrongly done.

It was explained further as follows:

It is a rule designed for the protection of those who are entitled to assume, just because they cannot know, that the person with whom they deal has the authority which he claims. This is clearly shown by the fact that the rule cannot be invoked if the condition is no longer satisfied, that is, if he who would invoke it is put upon his inquiry. He cannot presume in his own favour that things are rightly done if inquiry that he ought to make would tell him that they were wrongly done.

And then in another case:

If, however, the third party has actual or constructive notice that such steps had not been taken, he will not be able to rely on any ostensible authority of the directors and their acts, being in excess of their actual authority, will not be the acts of the company.

Even though the rule appears at section 161 of the Companies Act, like the case law, the section still does not validate acts in favour of a person who has notice of a defect in authority.

 

Continuation of Authority

Ostensible authority may continue after actual authority has terminated, by the Principal revoking the actual authority of the Agent.

This continuation of power to bind the Principal may arise where the Contractor has acted in good faith on prior conduct and does not have notice of the termination of the actual authority of the agent.

 

A Matter of Impression

The principal allows the agent to conduct the business of the principal that leaves the impression that the business of the principal may be conducted by the agent. The representation is made that the agent has the authority to  conduct the business of the principal.

As mentioned above, ostensible authority does not arise where:

• the contractor knew that the agent’s authority was limited to particular types of contracts
• and those classes of contracts did not include the sort of contract which the contractor relies upon.

If the contractor knew that the authority was limited, it cannot have relied on the authority of the agent, or any representation by the principal to enter into the contract.

 

Position of Directors

Directors of companies are in a special position in respect of the affairs of the companies to which they are appointed.

The director is presumed to have power to bind the Principal where the Contractor acts in good faith.

 

Ratification

When the apparent authority did not exist at the time, the Principal is not legally bound to the contract with the Contractor, unless the Principal ratifies the contract.

The Agent is liable to the Principal for exceeding their power, as it is a breach of contract to exceed one’s authority to act for another.

 

Remedies

The remedies for ostensible authority include:

• The shareholders and the company may be entitled to an injunction to prevent persons without actual authority holding themselves out as having authority
• A declaration - a type of court order - that the Principal is legally bound, or not bound.
• In the case that the Principal is not bound, the Agent is exposed to personal liability for the contract.
  Transactions entered on behalf of the Principal are voidable at the option of the Principal except where:
  1. restitution of money or assets transferred in the transaction is no longer possible (ie restitutio in integrum is not possible)
  2. the Principal is indemnified for the loss or damage resulting from the transaction
  3. a bona fide purchaser for value without notice of the Agent exceeding their power, who is not party to the transaction, would be affected by the avoidance.
• When directors exceed their authority, they may be ordered to pay the company for:
  • any gain made directly or indirectly by the transaction, and
  • to indemnify the company for any loss or damage resulting from the transaction.

 

Types of Cases

Cases that come to court involve typical categories of facts:

1. The Principal wishes to avoid the effect of a contract for want of authority to agree to its terms. The Contractor wishes to enforce it
2. Confusion exists with respect to:
   • the power and/or role that the signatory actually exercised
   • the scope of the power of the Agent to bind the Principal
3. The title given to the agent for the company (say, “Director of Manufacturing”) suggests power to bind the company, and the person does not in reality have the power to legally bind the Principal
4. The Principal which has placed the agent in a position - to the outside world - as being authorised to act for the Principal is generally regarded as carrying authority to enter into transactions of the kind in question
5. The Agent has had a course of dealing with a particular contractor and the Principal has acquiesced in this course of dealing and honoured transactions arising out of it

 

Example of Apparent Authority:

A cloud service provider has sales staff.

They go out to the market and sign businesses up to their services.

The sales staff though are independent contractors, and not employees or directors of the cloud service provider.

So the sales staff don’t have actual authority of the company to sign contacts on its behalf.

The representation operates as an estoppel to prevent the provider from contending that it is not bound by that contract.

 

Examples from Case Law

• A director and secretary of a football club executed as a deed a declaration of trust.
  The Deed said that the club held the freehold of the club ground as trustee for the defendant.
  The defendant was on notice that the director was entering into the transaction for an improper purpose and in breach of his fiduciary duty and so could not rely upon his ostensible authority.
• An auctioneer accepted a bid for a horse to conclude an auction.
  The price accepted by the auctioneer was below the minimum reserve price for the horse price which the auctioneer was authorised to accept for the horse.
  The auctioneer had the ostensible authority of the seller.
  The seller was legally bound to sell the horse to the successful bidder

 

Case Law

The leading and often cited statement of the law comes from Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2B 480, where it was said:

An "apparent" or "ostensible" authority…is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, 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, so as to render the principal liable to perform any obligations imposed upon him by such contract.
To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.

The representation which creates "apparent" authority may take a variety of forms of which the commonest is representation by conduct, that is by permitting the agent to act in some way in the conduct of the principal's business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal business has usually "actual" authority to enter into.

 

Agency Solicitors

We're business solicitors advising on the law and legal liabilities arising from transactions involving principals and agents in agency relationships, acting as service providers, suppliers, distributors and third parties.

We have advised businesses engaged in media and communications, manufacturing, distribution networks, and information technology: on both sides of agency relationships.

Amongst those include businesses that rely on commission-based sales programmes and sales representatives, commercial agents to do their job as they should, consultants trusted to do the right thing, recruitment agents and those where you first might not think that an agency relationship exists.

Call us on +44 20 7036 9282 or email us at contact@hallellis.co.uk for assistance.