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Company Law

Analysis - guidance - compliance

18 JUL 2013

Ostensible authority - the scope of the reliance requirement

Law on ostensible authority

According to Diplock LJ's well-known statement of the law on ostensible authority, a company is bound by a contract entered into on its behalf by an agent who does not have actual authority if the third party relied on a representation by a person with actual authority that the agent did in fact have the necessary authority (Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480).

Plainly, a third party who knows that the agent does not really have authority cannot claim that he relied on any such representation, and so cannot hold the company to the contract. What, though, is the position where the third party does not know that the agent lacks authority, but the circumstances are such as to indicate that the agent may not have the necessary authority? In other words, to what extent (if at all) is a third party debarred from basing a claim on ostensible authority on the ground that he must be treated as having known of the lack of authority?


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The law on this point appeared to be well settled in favour of the view that if there were suspicious circumstances, a third party who failed to make reasonable enquiries about the agent's authority could not rely on the latter's ostensible authority. In 2010, however, the Court of Appeal suggested in Quinn v CC Automotive Group Ltd t/a Carcraft [2010] EWCA Civ 1412 that the test was somewhat more subjective, in that a third party would be prevented from relying on the agent's ostensible authority only if he had turned a blind eye to the possibility that the agent lacked authority, and the blind eye approach has been accepted subsequently in several High Court decisions, including Acute Property Developments Ltd v Apostolou [2013] EWHC 200 (Ch).

Background

That the reliance requirement will not be satisfied if the third party knows that the agent lacks the necessary authority to enter into the contract is uncontroversial. Thus, according to Lord Scott in Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28: ‘If a person dealing with an agent knows that the agent does not have actual authority to conclude the contract or transaction in question, the person cannot rely on apparent authority. Apparent authority can only be relied on by someone who does not know that the agent has no actual authority.'

The notion that a third party may be prevented from taking advantage of the agent's ostensible authority despite not knowing that he lacked actual authority was to be found historically in the courts' application of the rule in Turquand's case. In Mahony v East Holyford Mining Co (1875) LR 7 HL 869, Lord Hatherley noted that the rule was subject to the requirement that the third party had acted with due care. In his words:'All those ordinary inquiries which mercantile men would, in the course of their business make, I apprehend, would have to be made on the part of the persons dealing with the company.' A similar point was made by Lord Simonds in Morris v Kanssen [1946] AC 459, and Slade LJ noted in Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246 that ‘even if persons contracting with a company do not have actual knowledge that an irregularity has occurred, they will be precluded from relying on the rule if the circumstances were such as to put them on inquiry which they failed duly to make'.

This approach was not, however, confined to the application of the rule in Turquand's case. In Hopkins v TL Dallas Group Ltd [2004] EWHC 1379 (Ch), Lightman J held as follows: ‘Where an agent is acting within the usual authority of a person in his position, the third party will normally not be expected to inquire as to the details of his authority unless the transaction is abnormal or there are other circumstances giving rise to suspicion. If there are suspicious circumstances or abnormalities, then the third party should'make such inquiries as ought reasonably to be made' to ensure that the authority is sufficient to bind the principal.' In Wrexham Association Football Club Ltd v Crucialmove Ltd [2006] EWCA Civ 237, too, the Court of Appeal took the view that a third party who was on notice that the agent was entering into the transaction for an improper purpose, but who had not made enquiries as to the scope of his authority, could not argue that the agent had ostensible authority.

The position, therefore, seemed to be that an attempt by a third party to hold a company to a contract on the basis of the agent's ostensible authority would be defeated either by a finding that the third party knew that the agent lacked authority or by a finding that the agent failed to make enquiries despite the existence of suspicious or abnormal circumstances.

Thanakharn v Akai Holdings

Shortly before Quinn was decided, the law in this area was reviewed by Lord Neuberger, sitting as a non-permanent judge in the Court of Final Appeal of the Hong Kong Special Administrative Region, in Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (in liquidation) [2010] HKCFA 64. Lord Neuberger concluded in that case that the third party in question would be precluded from relying on the agent's ostensible authority only if its belief that the agent had the necessary authority was ‘dishonest or irrational (which includes turning a blind eye and being reckless)'.

The judge's conclusion was based in part on the need for certainty in the commercial context (thus, in this context, a businessman should normally be able to rely on a representation by a company as to its agent's authority), and in part on the relevant case law. As to the latter, he felt that the enquiry test which the courts had imposed in cases involving the rule in Turquand's case should not be imposed when considering whether the agent had ostensible authority in the first place. Two points may be made in this connection.

  • Lord Neuberger's view that cases involving the rule inTurquand'scase are fundamentally different from those involving ostensible authority generally is open to debate. It might be argued, for example, that in both categories of case the question is, essentially, whether a third party should be able to hold a company to a transaction entered into by an agent who was acting outside his actual authority, and that therefore in both categories of case the third party should be obliged to exercise a degree of care above the bare minimum represented by the blind eye test.

 

  • Lord Neuberger did not address the dicta inHopkins v TL DallasorWrexham v Crucialmoveto the effect that the enquiry test was not confined to cases involving the rule inTurquand'scase. One suspects that he would have pointed out that in both of those cases the facts were such that the third party would probably have been found to have turned a blind eye to the agent's lack of authority, but his considered opinion on them would have been valuable.

Quinn v CC Automotive Group

In Quinn v CC Automotive Group Ltd t/a Carcraft [2010] EWCA Civ 1412, the Court of Appeal was faced, in essence, with a claim against a company on the basis that it was vicariously liable for its employee's deceit. The deceit involved the sale by the employee (who was a car salesman) to the third party of a car which the company did not own, and the question for the court was whether the employee had ostensible authority to sell the car.

At first instance, the judge found that the third party had never considered that the employee might have been acting outside his authority, but asked herself whether a reasonable person in the third party's position would, on the facts, have been put on enquiry as to the employee's lack of authority. Having concluded that such a person would indeed have been put on enquiry - and, in fact, that the particular third party in question ought to have been put on enquiry - when the employee requested the payment of an additional sum of £700 at the last minute, she held that the third party's claim failed.

The only reasoned judgment in the Court of Appeal was delivered by Gross LJ, who referred on a number of occasions to Lord Neuberger's decision in Thanakharn in the course of holding that the judge at first instance been wrong to apply an enquiry test. The key question, in Gross LJ's opinion, was whether the third party honestly believed that the agent had the necessary authority. As he put it:

‘Plainly, there can be no reliance on such a representation [ie a representation as to the employee's authority] if the third party did not have an honest belief in the employee's authority; so too, if the third party turns a'blind eye' to suspicions as to the apparent authority of the employee ... However, the touchstone is honest belief and, possibly,'irrationality' ...'

‘To my mind, an analysis founded on reliance and belief leaves little room for any consideration of whether the third party was'put on enquiry.' If there is proper scope for such consideration, it would seem to arise as an aspect of whether the third party turned a'blind eye' to his suspicions as to the employee's apparent authority; possibly too, there could be debate as to whether the third party was put on enquiry if the employee was acting outside of the usual authority of a person holding the position he holds ...'

On the facts, since the sale of a car was clearly an act which would fall within the usual authority of a car salesman, and since the third party had never doubted that the employee was acting within his authority, ‘there was neither room nor need for any "inquiry" test', and the third party's claim against the company succeeded. (Gross LJ noted that, in any case, he disagreed with the lower court's conclusion that the request for an additional £700 should have put the third party on enquiry.)

Case law since Quinn

The decision in Quinn has been cited in three cases to date.

In the first case, Gaydamak v Leviev [2012] EWHC 1740 (Ch), the court quoted key passages from Thanakharn and noted that Lord Neuberger's approach had been approved by Gross LJ in Quinn. Although the issue before the court concerning ostensible authority did not ultimately need to be decided, Vos J would have been content to apply Lord Neuberger's analysis, commenting that the question would have been whether the third party had been ‘dishonest or irrational (including turning a blind eye or being reckless)'.

The other two cases are perhaps slightly less straightforward, in that although they both accept the Thanakharn/Quinn approach, they also illustrate the complex nature of this area of the law.

  • InNewcastle International Airport Ltd v Eversheds LLP[2012] EWHC 2648 (Ch) (in relation to which an appeal is currently outstanding), Proudman J referred to Lord Neuberger's decision inThanakharnand concluded that ostensible authority is displaced ‘not only where the person seeking to rely on it knows of or turns a blind eye to lack of actual authority but also where the circumstances are such that it would be irrational to contend that he relied upon it'. In concluding, however, that the third party in the case before her was entitled to rely on the agent's ostensible authority, she adopted slightly different language, stating that ‘it was not irrationalor unreasonableon the facts of this case for Eversheds [ie the third party] not to have doubted whether what it was being told [ie by the agent] was true' (italics added), and that ‘Eversheds hadno reason to believethat any of his [ie the agent's] instructions were unauthorised' (italics added).

 

  • InAcute Property Developments Ltd v Apostolou[2013] EWHC 200 (Ch), a company had carried out building work for a third party, and an agent of the company instructed the third party to direct payments on account of the work to his (ie the agent's) wife and a business which he (ie the agent) owned. At least a portion of the sums so paid was never passed on to the company, and the question for the court was whether the third party could argue that the payments should be treated as having been made to the company, on the basis that the agent had ostensible authority to issue the instructions described above. On the facts, the matter was easily decided, because the court found that the third party had not relied upon any representation by the company, but had made the payments as instructed because he trusted the agent, who was his god-brother. However, the court took the opportunity to set out the principles underlying this area of the law. According to Mr N Strauss QC, who was sitting as a deputy judge, there is little room for an enquiry test once it has been established that the agent is acting within the usual authority of someone in his position. In accordance with theThanakharn/Quinnanalysis, the third party will be protected in such circumstances unless he does not believe that the agent has authority, turns a blind eye to his suspicions or acts recklessly. Interestingly, however, Mr Strauss also suggested that an enquiry test may form part of the initial question as to the scope of the agent's usual authority. Thus, in the case before him, the payment instructions were sufficiently abnormal that they would not have fallen within the agent's usual authority unless he gave a credible explanation for them, and since he had failed to offer an explanation, it would have been incumbent upon the third party to request one. Presumably, this latter point goes to the representation as to the agent's authority rather than to the third party's reliance on it.

Comment

In what circumstances, then, will a third party who does not know that the agent with whom he is dealing lacks authority nevertheless be precluded from relying on the latter's ostensible authority?

It is clear that there is no general duty imposed upon third parties to take steps to try to confirm that the agent does, indeed, have the necessary authority. Such a rule would place an intolerable burden on those doing business with companies and would be at odds with the trend towards increasing levels of transactional security.

It is equally clear that there are situations in which a third party will be treated as if he knows of the agent's lack of authority, and the current position must be taken to be as stated in Thanakharn and Quinn, namely that the third party must have been ‘dishonest or irrational (which includes turning a blind eye and being reckless)'.

The question arises as to whether the Thanakharn/Quinn approach differs from the approach adopted in Hopkins v TL Dallas and Wrexham v Crucialmove (ie to the effect that a third party will not be able to rely on the agent's ostensible authority if, despite the existence of suspicious or abnormal circumstances, he fails to make reasonable enquiries). Certainly, a third party who is dishonest or who deliberately turns a blind eye to suspicious circumstances will be caught whichever approach is adopted. The difference between the two appears to lie in the treatment of an honest third party whose behaviour falls below the level expected of a reasonable man, but cannot be described as irrational. Such a third party might have fallen foul of the Hopkins v TL Dallas test by virtue of his failure to realise that the circumstances were sufficiently suspicious as to warrant enquiries to be made as to the agent's authority; he would not, however, fall foul of the Thanakharn/Quinn test.

In Thanakharn itself, Lord Neuberger noted that ‘the distinction between turning a blind eye and being put on enquiry seems fairly slender', but accepted that ‘the former involves a more subjective exercise than the latter', and this assessment is surely correct. In many cases, the courts will reach the same conclusion on ostensible authority whichever approach they adopt. In some instances, though, an act which would have fallen outside the agent's ostensible authority if an enquiry test had been applied will, under the Thanakharn/Quinn approach, bind the company. To that extent, therefore, the test espoused in those cases seems to have changed the law subtly, tilting the balance against companies and even further in favour of third parties and the interests of transactional security.

See further, Gore-Browne on Companies, chapter 8[19].

http://www.jordanpublishing.co.uk/online-services/company-law/gore-browne-on-companies-online

 


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