The Issue of Authority and Apparent Authority

The main issue which has been identified in this case is the authority which the directors have over the company’s affairs in relation to contract. The doctrine of apparent authority is established on the principles of estoppels (Keay 2014).  Thus if a representation has been provided by the principle with respect to the authority of an agent either in expressed or implied form than the existence of an agency cannot be denied (Sharrock 2016).  Apparent authority in law means the authority of an agent which is visible to others. When it comes to Company law apparent authority of officers, agents and directors of a company are known as ostensible authority (Lee 2014). Ostensible authority is just a set of rules which have been derived from apparent authority with respect to corporate law (Bichat and Jonas 2016). 

Authority means a situation when a reasonable third person will assume that an individual had an authority to cat on behalf of someone else (Kelly 2013). In this case the court takes the side of the party who has relied on the apparent assurance provided by the principle to get into a legally binding agreement with a third party (Gerner-Beuerle, Paech and Schuster 2013).

In this case the managing director has indulged into a contract with Muskan in order to acquire a property. It has to be determined that whether or not Muskan has the right to legally enforce the contract which she has entered into with Salim acting on behalf of Al sawadi Ltd even when the other directors claim that he had no authority to do so.

In the case of Freeman and Lockyer v Buckhurst Park Properties the court provided a clear distinction between actual and apparent authority. In this case the defendant had entered into a contract to work as architect on the park of the plaintiffs through their managing directors. The defendants claimed that the managing directors was not appointed properly by the articles of association and had no right to enter into a contract on behalf of the company. It was ruled by the court in this case that managing director had an apparent authority to act on behalf of the company thus they the company is bound to the contract entered upon by it. The decision of the lower court was appealed in the higher court where the court upheld the decision provided by the lower court.

Relevant Apparent Authority Cases

In the case of Royal British Bank v Turquand (1856) 6 E&B 327 it was ruled by the court that when a party deals with the company in relation to a contract it can assume that the company’s representative have complied with the internal rules of the company even if in reality they have not. The rule is known as the Turquand’s rule or the indoor management rule and is used all around the world as a major common law.

In this case the executive of the defendant company had taken loan from the plaintiff bank. The company was not able to recover its businesses and ultimately was not able to pay back the loan. When the loan was claimed by the plaintiff it was argued by the company that the internal rules of the organization does not allow the executive to take loan on behalf of the company. It was held by the court that the contract of loan was binding on the company as the internal rules of the company were irrelevant when the representation of authority was made.

In the case of Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) it was ruled by the court that only if the contract entered upon by an agent of the company is against the purpose of the company as provided in the articles of association can a company can rescind the contract in case of an apparent authority. In this case the defendant had entered into a contract which was ultra virus thus the court held that the contract was void.

In the case of Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 the court ruled that even if a person has fraudulently entered into a contract on behalf of the company and a proper representation was made by the company in expressed or implied form than the contract is binding on the company. In this case the company secretary of the company had entered into a contract in order to higher cars such as jaguars and rolls-royce’s for the use of the company. It was found that they cars were hired for his personal use rather than that of the company. He was sued for fraud but the car owner sued the company in relation to the outstanding amount. The company claimed that the secretary had no power to enter into a contract on behalf of the company.  It was held by the court that as the car owner had relied on the representation of the person as a company secretary to enter into the contract the contract was legally binding on the company.

Recommendations for Compliance with Apparent Authority Provisions

In the case of Armagas Ltd v Mudogas SA [1986] AC 717 it was ruled by the court that when a representation by word or conduct is provided by the employer to another person that an employee of the organization is authorized to do what is is wanting to do than the actions of the actions of the employee would make the employer liable.

In the present scenario Salim is the chief executive of Al Sawadi Ltd. He is entitled to look after the regular day to day business of the company. A reasonable person who enters into a contract with the company would assume that Salim has the capacity to enter into a contract on behalf of the company. This in this case in order to ensure compliance with the the company must continue with the contract. The claim made by the company that the chief executive does not have power to contract on their behalf cannot be made according to law and the provisions relating to apparent authority as discussed above state that when an representation is made by the company like in the present case as Salim is the chief executive than the contract entered upon by the agent is binding on the company. Therefore Muskan is entitled to get her contractual terms with the company complied.

Conclusion

Concluding the paper it can be stated that the doctrine of apparent authority or ostensible authority in relation to company law has been made to protect innocent parties to a contract from suffering unnecessary detriment. The other party to the contract relies on the representation made by the principle in order to enter onto a contract with its agent. Once it has been established that an implied or expressed representation has been made by the principle the contract cannot be rescinded on the basis of capacity. This ensures that a company cannot escape its contractual liability by stating that it did not provide authority to its agent to enter into the contract.

It can be be clear from the Turquand case that a company cannot escape its contractual liability stating that the internal rules of the company that is the articles of association does not allow the agents to do so. The only exception to this rule is that when the company enters into a contract which is not in accordance to its original purpose a company is entitled to claim the contract as void as provided in the Ashbury case.  Even when the contract has been entered into by the agent fraudulently the company is liable to to the actions of the agent. In this case as there is no fault on the part of the other party to the contract the court does not allow it to suffer unnecessary detriments. Thus in this case muskan is entitled to the contractual terms with Al Sawadi Ltd.

The main issues which have been identified in this case are the provisions in relation to the duties of directors and the conflict of interest. A director of a company has a duty to avoid any conflict of interest which arises out of the company’s interest and his personal interest (Hill 2013). In case any such conflict arises the director must obtain approval from the shareholders and the board of directors (French et al. 2014). According to section 175 of the Companies Act the directors are not allowed to use any business opportunities for their personal gains which could have been used by the company (Quinn 2013.). The directors of the company are given the supreme control over its powers and functions and the shareholders have bestowed their faith in them so that they carry out the operations of the company towards its best Interest (Barker 2016). The stakeholders of the company invest a significant amount in the company and as they are not a part of the daily management they expect the directors to give priority to the company’s interest over their personal interest (Grove 2013). The core duties of directors are provided in Section 171 to 177 of the Companies Act 2006. The duties mainly state that the directors must make independent judgment, act within power, prioritize the success of the company use reasonable skill care and diligence towards operations and to avoid any conflict of interest (Kirby 2015). Thus in this case it has to determine that whether or not Abdullah has acted within his powers as a director towards the course of action taken by him.

In the case of Cook v Deeks three directors of the company took contract in relation to a railway line construction directly by themselves and not in name of the company so that the other director is not included in the contract. The directors in order to ratify their actions relied on their majority. However, it was held by the court in this case that the duty to avoid conflict of interest did not allow them to carry on with such actions and the actions are in breach of the director’s duty.  The directors must be loyal to the company they are working for and not use the resources of the company to make personal benefits for themselves.

In the case of Bhullar v Bhaullar one of the directors of the company had set up a new company in order to buy a car park adjacent to the company’s land. The family company had a provision that the company is not allowed to further invest in properties. The court in this case provided that even if the company resolved not to invest in property the director had the duty to disclose all actions which might fall in connection to the company’s business to the other directors. Therefore the court ruled that all profit gained from the property must be provided to the family company.

In the case of Parker V McKenna 1874 it was held the court that no agent during the course of agency is allowed to make profit without disclosing the fact and obtaining consent from the principle. The court does not consider the fact that such actions by the agent actually cased any injury or damage to the principle or not. This must be done so that no agent in any circumstances can put the principle in danger of a loss or injury.

In the case of Towers v Premier Waste Management Ltd [2011] EWCA Civ 923 it was ruled by the court that if a director acquires personal benefit from the clients of the company without disclosing it to the other directors and getting their approval he breaches his fiduciary duty to avoid conflict of interest.

In the case of Boardman v Phipps [1966] UKHL 2 it was ruled by the court that the directors of the company must be competent enough to identify a situation from which a conflict of interest may arise and in no circumstances the duty in relation to the conflict of interest can be breached. The court ruled that directors automatically have a duty of loyalty towards the company’s operations as the major trust of the shareholders is bestowed in them.

In the case of Ex parte James (1803) 32 ER 385 the court ruled that the directors of the company has the utmost priority to avoid the conflict of interest.

In the case of Regal (Hastings) Ltd v Gulliver [1942] UKHL 1 the court ruled that the situation of conflict of interest may arise out of all operations which are a part of the company’s business. It held that the director’s personal contribution towards the sale of the cinema hall was a conflict of interest and the directors are liable to pay the profit made by them with respect to the shares back to the company and its shareholders.

In the case of Whelpdale v Cookson (1747) 27 ER 856 it was ruled by the court that the act of n trustee to purchase the property belonging to the trust is a breach of the duty of conflict of interest. This decision was made by the court as a trustee could easily manipulate the price of the property using his position.

It has been provided in the scenario that Abdulla is the managing director of the company. It is his duty to promote the success of the company and to work in the best interest of the company. He had the duty to disclose the other directors that his is going to use the glue invented by the company’s scientist and create a new company for its production. This action taken by Abdulla was based on his friend advice which is against the duty of making independent judgments. Using of the glue produced by the provisos company as a core product of the new company formed by him is also a violation of the duty to avoid conflict of interest. It was his duty to give priority to the interest of the previous company which he has clearly done in this case. He cannot defend himself by stating that the directors denied the use of the glue production according to the principles of the Bhullar case.

Conclusions

A conflict of interest refers to a situation when a person has to choose between the interest of the company and his personal interest. In this situation as a general rule the person must prioritize the company’s interest over personal interest. If a director thinks that a situation of conflict of interest may arise out of a course of action than he must disclose the situation and obtain proper consent from the other directors of the company. A director must also not make use of the assets of a company in a way which would benefit him personally regardless of the fact that the company is injured by such use or not.  In this case Abdulla has opened a new company with the help of relations arising out of the company’s affair and with the use of the glue produced by the company. Even if the glue was rejected by the board of directors it had still been produced by the previous company. Abdulla had the duty to disclose the fact that he is going to open a new company to the board of directors of Clean Ltd.

References

Armagas Ltd v Mudogas SA [1986] AC 717

Ashbury Railway Carriage and Iron Co Ltd v Riche (1875)

Barker, R., 2016. The Duties and Liabilities of Directors—Getting the Balance Right. The Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-Profit Board Members, p.249.

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Boardman v Phipps [1966] UKHL 2

Companies Act 2006

Ex parte James (1803) 32 ER 385

Freeman and Lockyer v Buckhurst Park Properties

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Gerner-Beuerle, C., Paech, P. and Schuster, E., 2013. Directors’ Duties and Liability in the EU. European Commission DG Markt.

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Hill, J.G., 2013. Evolving Directors’ Duties in the Common Law World.

Keay, A.R., 2014. Directors’ duties.

Kelly, C., 2013. Reconciling the Irreconcilable: Ostensible Authority after Kelly v Fraser. King’s Inns Student L. Rev., 3, p.1.

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Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711

Parker V McKenna 1874

Quinn, J., 2013. Companies Bill 2012-Directors’ Fiduciary Duties. Irish Bus. L. Rev., 1, p.57.

Regal (Hastings) Ltd v Gulliver [1942] UKHL 1

Royal British Bank v Turquand (1856) 6 E&B 327 

Sharrock, R.D., 2016. Authority by Representation–A New Form of Authority?. Potchefstroom Electronic Law Journal/Potchefstroomse Elektroniese Regsblad, 19, pp.1-21.

Towers v Premier Waste Management Ltd [2011] EWCA Civ 923

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