#19679 - 7. The Company’s Dealings With Outsiders The Authority Of Its Agents - Company Law

TOPIC 7

THE COMPANY’S DEALINGS WITH OUTSIDERS: THE AUTHORITY OF ITS AGENTS

Reading:

Dignam and Lowry ch.12, paras 12.21 – 12.27; 12.33 – 12.34.

7.1 INTRODUCTION

We’re looking here at the issues that arise when a company enters into a contract with a third party, but those who make the company enter into this contract lack the authority to do so. This topic involves a bit of new material. But it’s also partly revision, applying law we have looked at already, but now in a different context.

So: where someone purports to make a contract as the agent of a company, but lacks the authority to do so, the most obvious issue that arises is whether that contract is valid and enforceable. This question – which is sometimes called ‘the external issue’ – is something we haven’t looked at before and is the new material that Topic 7 introduces.

However, unauthorised contracts can also raise two other issues, separate from the validity of the contract itself. These additional issues are sometimes called ‘internal issues’, for they concern the position of ‘insiders’ within the company, namely directors and shareholders. If directors act beyond their authority, do they breach their duties to the company? And what rights does a shareholder have if her directors are acting beyond their authority? We have, of course, already looked at directors’ duties, and shareholder rights, in two earlier Topics, so hopefully considering them again, in the context of unauthorised transactions, will serve as useful revision.

Finally, by way of introduction, I want to emphasise that even the new material we’re looking at here is very limited, and in two ways. First, most of the rules governing the authority of a company’s agents are drawn from general agency law; they apply to all agents and are not specific or peculiar to company agents. But since this is a company law module, not a module on commercial law/agency law, we’re going to skim over these general principles of agency law very quickly. You won’t be tested on this general agency law in the exam. We’re really only going to focus on one specific provision (section 40 CA 2006) which is peculiar to companies/company law, and which you do, therefore, need to understand.

The other way I’ve limited the material here is by focusing only on the ‘authority’ of the company’s agents and missing out discussion of what’s usually called ‘the capacity of the company’ or ‘ultra vires’. This issue of corporate capacity/ultra vires is quite close to questions of authority, and often taught alongside it. But it has become, in recent years, of very little practical importance, and I’ve chosen to omit it from our module. For anyone wanting to get a very basic sense of what it’s about, there’s a text box at the end of this Topic.

7.2 THE ALLOCATION OF AUTHORITY: AGENCY LAW IN A NUTSHELL

As noted above, the question of who has authority to act on behalf of companies – for example, to enter into contracts on their behalf – is largely answered by the general law of agency. We can summarise this law very briefly, before turning to a ‘gloss’ on this general law that applies only to companies.

Express authority

Firstly, agents might have express authority to act on behalf of the company. One obvious source of express authority is the company’s constitution. Thus, as a starting point regulation 3 of the Model Articles gives, expressly, general managerial authority to the board as a whole. So, if a company has Model Articles, and if the board has decided on the transaction in hand, there is usually little problem of authority.

If third parties always dealt with the boards of companies, things would usually be simple. But of course, they don’t. Imagine demanding a board meeting every time you bought something at Tesco! Third parties often deal with individuals, lower down in the company eg. individual directors, managers, or other employees. So how do these individuals acquire authority to act as agent for the company?

They may also do so expressly. So, boards typically in turn expressly delegate much of their authority to individuals below the board – to individual directors, to managers, or to other employees. The board might, for example, delegate to the personnel director authority to appoint almost all new members of staff. And the personnel director might then, in turn, expressly authorise her assistant to appoint say lower grade employees (but not senior ones, that being a task reserved for the personnel director herself), and so on. The CEO (‘chief executive officer’) or ‘managing director’ will often be given virtually limitless authority. In this way, express authority cascades down the company structure, from the board downwards. The Model Articles expressly allow boards to delegate authority to individuals (see Reg.5).

Implied authority

Whilst Reg 5 allows the board to delegate its extensive powers, Reg 5 does not itself expressly delegate such authority. And because express delegation takes time and effort, it’s understandable that boards, or others, will often fail to do so. Individual directors, managers, and other employees may well, therefore, do things which they have not, in fact, been expressly authorised to do. What then? In such cases, agency law will often help. Individuals, even where they lack express authority, will be treated as enjoying some implied authority - the authority which is normally enjoyed by a person occupying the position they occupy. This is the authority that’s reasonably assumed to be held by someone because it usually goes with the job they’re doing. Note this does not only apply to directors. Obviously, a CEO, or a human resources director, has implied authority, and a good deal of it. But so too does an employee operating a checkout in Tesco - although much less.

As an illustration of a case turning on implied authority, see Hely Hutchinson v Brayhead Ltd [1967] 3 All ER 98.

Ostensible authority

Finally, an individual who is doing something for which they lack express authority, and which is beyond their implied authority, may sometimes enjoy ostensible (also called ‘apparent’) authority. Essentially, this occurs where someone with authority themselves (of whatever sort) holds out another person has having authority, and where the third party dealing with the company reasonably relies on that holding out: see eg Freeman and Lockyer v Buckhurst Properties [1964] 1 All ER 630.

7.3 SO WHEN MIGHT THE COMPANY’S AGENT LACK AUTHORITY?

To understand what follows, you need to pause here and understand the two most likely situations where someone may lack authority to act for a company.

Situation 1: too lowly to have express or implied authority

The first is where they are so ‘low down’ in the company’s hierarchy that they lack both express and implied authority (and there’s been no representation made that could trigger ostensible authority either).

Example 1: Tess works in the post room at X Ltd. You agree, with Tess, that X Ltd will lend you 80,000. Does Tess have authority to bind X Ltd to this transaction. Very unlikely that T would have been expressly given authority to make such contracts. And, more significantly, very unlikely T would enjoy implied authority here: it doesn’t seem reasonable for you to assume that someone doing the job she’s doing would be given authority to make such a significant transaction on behalf of the company. This first situation is not, in fact, restricted to agents acting for companies; and the general law of agency, and especially the way it decides what authority can be ‘reasonably’ implied, deals with it.

Situation 2: Constitutional limitations on usual authority:

The second situation is specific to companies. It arises not because someone’s position is ‘too lowly’, but rather because of something unusual in the company’s own constitution.

Example 2: You agree, now with the board of X Ltd, to borrow 80,000 from X Ltd. You would reasonably assume that the board would have been authorised to make such a loan, and agency law would ordinarily imply the board had such authority. Suppose now, however, that the company’s constitution includes the following regulation:

‘any decision of the board to lend over 50,000 must be approved by the shareholders’.

Assuming there was no shareholder approval of your loan, the effect of this regulation would be to limit the board’s authority. It stops the directors having the authority which, as a matter of general agency law, the board would ordinarily be implied as enjoying.

This second situation is peculiar to companies (with ‘limitations’ on the authority of their directors buried in their constitutions). But there seems to be a much stronger argument here to say that company law should do something about it – to reflect the reasonable expectations of third parties dealing with companies, and to protect them from being surprised by constitutional provisions that outsiders can hardly be expected to have read.

So, having understood the authority that agents generally enjoy, the two typical situations where agents...