A contract may not be enforceable if it is executed and/ or made by a person who lacks authority. The determination as to whether a person has the requisite authority is governed by common law and statutory provisions. Even though there are certain legal protections for third parties contracting with organisations, when dealing with corporate transactions it is always prudent to check that authority has been properly delegated and exercised.
The acts of an agent should generally be enforceable by a third party against the principal of the agent if the agent has actual or ostensible authority.
Actual authority means that the agent has been given authority, whether express or implied as a consequence of the agent's position, to act on behalf of the principal. An example of express authority includes copies of corporate board and/ or shareholder resolutions approving and setting out the scope of an agent's authority.
Implied actual authority may arise, as between principal and agent, where an agent can be considered to have authority:
1. To do what is necessarily or normally incidental to that which he is expressly authorised to do, such as a chief executive officer of a law firm who will have implied actual authority to do all such things as fall within the usual scope of that office.
2. To do what is usual or customary for an agent to do in materially similar circumstances, provided that this is lawful and reasonable.
3. To do what has been done in a previous course of dealing between the parties.
Ostensible authority is the authority of an agent as it appears to others and may arise as follows:
1. Where someone is held out as holding an office or position and there is a reasonable expectation that such a person would have authority to act on behalf of the principal.
2. On the basis of estoppel, where a body with actual authority has held out a person (by words or conduct) as having authority to act in a particular manner and has induced a third party to contract with the organisation in reliance on this.
A third party can generally rely on ostensible authority provided it does not have knowledge of a relevant restriction or lack of authority and there are no suspicious circumstances. The question then arises as to what are the precise circumstances in which the third party might lose the protection of the ostensible authority rule and you should consult your corporate solicitor for guidance.
The UK courts have referred to the judgment of Lord Neuberger of Abbotsbury NPJ in the Hong Kong case of Thanakharn v Akai Holdings Limited [2010] HKCFA (a solicitor's actions will be outside the scope of his client's apparent authority if the belief in the apparent authority was dishonest or irrational). Therefore protection is lost if the third party acted dishonestly, in bad faith, or irrationally in relying on the agent.
Under the doctrine of constructive notice, anyone dealing with a company is deemed to have notice of its memorandum and articles. The reason being that these documents are a matter of public record. However, the doctrine of constructive notice has been effectively abolished by:
1. The rule in Turquand's case which protects third parties dealing with corporations.
2. Section 40 of the Companies Act 2006.
Summerfield Browne Solicitors have offices in London, Birmingham, Oxford, Cambridge, Northampton and Leicestershire.
