Ostensible authority

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In law, ostensible authority refers to the apparent authority of an agent (usually a company director) of a company as it appears to others,[1] and it can operate both to enlarge actual authority and to create authority where no actual authority exists.[2] The law relating to companies and to ostensible authority are in reality only a sub-set of the rules relating to apparent authority and the law of agency generally, but because of the prevalence of the issue in relation to corporate law (companies, being artificial persons, are only ever able to act at all through their human agents), it has developed its own specific body of case law. However, some jurisdictions use the terms interchangeably.

In Freeman and Lockyer v Buckhurst Park Properties [1964] 2 QB 480 the director in question managed the company's property and acted on its behalf and in that role employed the plaintiff architects to draw up plans for the development of land held by the company. The development ultimately collapsed and the plaintiffs sued the company for their fees. The company denied that the director had any authority to employ the architects. The court found that, while he had never been appointed as managing director (and therefore had no actual authority, express or implied) his actions were within his ostensible authority and the board had been aware of his conduct and had acquiesced in it. Diplock LJ identified four factors which must be present before a company can be bound by the acts of an agent who has no authority to do so; it must be shown that:

  1. 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;
  2. such a representation was made by a person or persons who has 'actual' authority to manage the business of the company, either generally or in respect of those matters to which the contract relates;
  3. the contractor was induced by such representation to enter into the contract, ie. that he in fact relied upon it; and
  4. under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to an agent.

The agent must have been held out by someone with actual authority to carry out the transaction and an agent cannot hold himself out as having authority for this purpose.[3] The acts of the company as principle must constitute a representation (express or by conduct) that the agent had a particular authority and must be reasonably understood so by the third party. In determining whether the principal had represented his agent as having such authority, the court has to consider the totality of the company's conduct.[4] The most common form of holding out is permitting the agent to act in the conduct of the company's business, and in many cases this is inferred simply from allowing the agent to use a particular title, such as 'finance director'.

The apparent authority must not be undermined by any limitations on the company's capacity or powers found in the memorandum or articles of association, although in many countries, the effect of this is reduced by company law reforms abolishing or restricting the application of the ultra vires doctrine to companies.[5] However, statutory reforms do not affect the general principle that a third party cannot rely upon ostensible authority where it is aware of some limitation which prevents the authority arising, or is put on enquiry as to the extent of an individual's authority.[6] In some circumstances, the very nature of a transaction would be held to put a person on enquiry.[7]

Contents

[edit] The rule in Turquand's case

Main article: Royal British Bank v Turquand

The rule in Turquand's case does not enable a third party to hold the company to an unauthorised transaction per se. It allows a third party to assume that a transaction which is within the authority of the directors has been properly authorised, but it requires the third party to establish the fact of authority, actual or apparent, in the first place.

[edit] Ratification

It is always open to the board of directors to ratify an unauthorised act entered into by a director or other agent.

[edit] See also

[edit] Footnotes

  1. ^ Hely-Hutchison v Brayhead Ltd [1968] 1 QB 549 at 583
  2. ^ See First Energy (UK) Limited v Hungarian International Bank [1993] BCLC 1409
  3. ^ Armagas Ltd v Mudogas SA [1986] AC 717
  4. ^ Egyptian International Foreign Trade Co v Soplex Wholesale [1985] BCLC 404 at 411
  5. ^ For example, in the United Kingdom, see section 35A of the Companies Act 1985
  6. ^ A L Underwood v Bank of Liverpool [1924] 1 KB 775
  7. ^ For example, where a director paid cheques drawn in favour of the company into his personl bank account (see A L Underwood v Bank of Liverpool)