Actual Authority vs Apparent Authority

“Actual authority and apparent authority are quite independent of one another. Generally they coexist and coincide but either may exist without the other and their respective scope may be different.”

(Lord Diplock in Freeman and Lockyer v Buckhurst Park Properties)

Critically discuss Lord Diplock’s statement.

Introduction

Under the law of agency, there are many vague definitions which are doubtful and accepted as it is. They prove to be useful when construing contracts or statutory enactments, but their doubtful validity can be misleading when they are used to interpret an entire subject into explanatory sentence in order to construe its precise meaning. (Munday, 1998)

In this age of increasing economic (trade) conflicts, the concept of Agency has gained a lot of significance in Commercial field. The practise of business is expanding and for the smooth functioning, agents are employed by the businessmen to save time and money. Commercial activities would come to standstill if business practitioners could not hire agents for their work and were supposed to manage on their own. In fact, the agent also known as “middleman” plays a vital role in almost every field of commerce such as insurance agents, real estate agents, shipping agents, travel agents, etc. (Bradgate, Commercial Law, 2000)

“An agent is one appointed to transact business and to make contracts with third persons in place of and on behalf of the person appointing him, known as the principal. Agency has a two-fold aspect. It is on one hand, a contract between principal and agent, which does not differ as to the fundamental principles from other contracts; on the other hand, it is a means of bringing the principal into contractual relations with persons with whom in the point of fact he has had no personal dealings.” (Page, 1919)

The agent possesses two types of authority, namely actual authority and apparent authority. These two types of authority are defined by many authors, but still there was lack of understanding these concepts. There was uncertainty around the interpretation of the agent’s authority until the judgement of the benchmark case of “Freeman and Lockyer v Buckhurst Park Properties”, (Bradgate, 2000) in which the Court of Appeal has distinguished between ‘actual’ and ‘apparent’ authority of an agent.

Lord Diplock in this case emphasizes the statement “Actual authority and apparent authority are quite independent of one another. Generally they coexist and coincide but either may exist without the other and their respective scope may be different.” (Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd and Another., 1964)

Case Summary

The famous case of Freeman and Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd. and Another revolves around the matter of determining the scope of the authority of a managing director, who is not duly appointed according to the articles of association to contract with the third party. In this case, Freeman and Lockyer was a firm carrying on the business as architects and surveyors and Buckhurst Park Properties (Mangal) Ltd. formed the defendant company. Mr Shiv Kumar Kapoor and Mr Nimarjit Singh Hoon along with a nominee of each formed the defendant company. This case was first filed in the Westminster County Court, where the Honourable Judge Herbert placed his final decision in the favour of plaintiffs and found that, despite the fact that Mr Kapoor was never been appointed as a managing director by the board, he had acted as such within the knowledge of the directors of the defendant company. The defendant company was not satisfied by the decision of the County Court Judge and appealed that decision in the Court of Appeal which was dismissed by Lord Diplock emphasizing that it was not for the plaintiffs to inquire that the power to appoint Mr Kapoor as a managing director was contained in the articles of association and whether he was appointed as such. In the light of the decision of the Court of Appeal, the defendant company was liable for the payment of fees to the plaintiffs. (Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd and Another., 1964)

Lord Diplock’s Judgement

Lord Diplock in his judgement supported the findings of the County Court Judge which are as follows:

• that the plaintiffs intended to contract with Mr Kapoor as agent for the company and not on his account;
• that the board of the company intended that Mr Kapoor should do what he could to obtain the best possible price for the estate;
• that Mr Kapoor, although never appointed as managing director, had throughout been acting as such in employing agents and taking other steps to find a purchaser;
• that Mr Kapoor was so acting was well known to the board”.

He felt the necessity to differentiate between ‘actual’ authority on one side, and ‘apparent or ostensible’ authority on other side. He defines “actual authority as a legal relationship between principal and agent created by consensual agreement to which they alone are parties”. The scope of an agency agreement is to be discovered by following ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade and the course of business between the parties. “An apparent or ostensible authority is a legal relationship between the principal and the contractor created by a representation, made by the principal to the third party, intended to be and in fact acted on by the third party, that the agent has authority to enter on behalf of the principal into the contract of a kind within the scope of the apparent authority, so as to render the principal liable to perform any obligations imposed upon him by such contract.”

The following four requirements should be satisfied by the contractor in order to enforce a contract against the company entered by an agent without actual authority to do so.

• a representation by the company made to the contractor that the agent had authority to enter on their behalf into a contract of the kind sought to be enforced;
• such representation was made by a member of the company who had actual authority to manage the business to which the contract relates;
• the contractor was persuaded by such representation to enter into the contract and in fact relied upon it;
• 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 the agent.

Lord Diplock in this judgement makes a critical statement “Actual authority and apparent authority are quite independent of one another. Generally they coexist and coincide but either may exist without the other and their respective scope may be different.” (Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd and Another., 1964)

Criticism Of The Above Statement

It is true that actual authority and apparent authority are quite independent of one another. An actual authority is a legal relationship between the principal and agent created by an agreement to which they alone are parties. It may be express, when it is given by express words like passing of resolution by the board of directors authorizing a director to employ architects. It is implied when it is concluded from the conduct of the parties or the circumstances of the case, such as when the board of directors appoint one of them as managing director. On the other side, apparent authority is the authority which an agent appears to others to have as a result of some representation or conduct by the principal intended to be acted upon the third party. (Shum, 1989)

From the above passage, it is clear that actual authority depends upon the agreement between the principal and the agent, whereas apparent authority depends upon the representation made by the principal to the third party. Hence, both types of authority are not dependant on each other.

The above statement is more precisely construed by Lord Denning in his decision of Hely-Hutchinson case. He finds this case quite similar to Freeman and Lockyer case. In that case, the chairman was held to have implied actual authority whereas, in latter case, Mr Kapoor was held to have apparent authority. Lord Denning MR held in the Hely-Hutchinson case that, “Ostensible or apparent authority is the authority of an agent as it appears to others. It often coincides with actual authority”. He identified it in Hely-Hutchinson v Brayhead Ltd that, the chairman acting as an appointed managing director by the board had apparent authority as well as implied actual authority. This case demonstrated that the two types of authority often overlap thus creating confusion between the scope of actual authority and apparent authority. (Maclntyre, 2008)

The statement made by Lord Diplock in Freeman Lockyer case seems to be doubtful, which is described by the Lord Denning in more better way. Lord Denning regards apparent authority as power of an agent as represented to others. He considered that both types of authority may correspond to each other and can even exist together.

Later on, it was regarded that ‘either may exist without the other and their respective scopes may be different’. Sometimes apparent authority exceeds actual authority. The factors for placing liability over the principlal in such situation have been based on the grounds of public policy, business efficiency, or equity. At times, Apparent authority is not really authority at all.According to Professor James Louis Montrose, “Apparent authority is really equivalent to the phrase ‘appearance of authority’. There may be an appearance of authority whether in fact or not there is authority”. Even after distinction between actual authority and apparent authority placed by Diplock L.J. in Freeman and Lockyer case, Lord Denning MR held in Barrington v Lee case that confusion between implied actual authority and apparent authority has not been resolved since past 30 years and is still persisting.

(Munday, 1998)

It is clearly analysed from above that when both types of authority exist without the support of each other, their scopes are different. Actual authority is quite reliable than ostensible authority. In certain circumstances, apparent authority overtakes actual authority. Some commentators consider apparent authority as no authority as it just appears but does not exist. This is really a vague concept because apparent authority is sought of indirect authority. With regards to differentiation between actual and apparent authority by Lord Diplock, Lord Denning has criticized it to be insufficient in its meaning thus adding to the uncertainty.

The original framework of initial cases dealing with apparent authority was established upon a holding-out principle, in which the principle directly makes an unambiguous representation to the third party and the latter relies upon it. Comparatively, this approach towards apparent authority was suitable for simple commercial transactions of the nineteenth century, but this structure is given more significance with the want of development in modern times.

The prototype of Lord Diplock in Freeman and Lockyer with regards to apparent authority is not suitable for the complex trade usage of twentieth century, where agent acts on behalf of multinational companies. In modern times, it is very difficult to establish that close link described by Lord Diplock in the above case. His judgement exemplifies agent as an inactive source between the principal and third party, however this concept is impractical in modern business world. It is quite justified in current corporate practise that, the third party relies more on the agent than the principal regardless of his awareness with respect to corporate existence of the principal.

Such reliance of the third party is almost mandatory, therefore it would be unfair to entail that the genuine third party should investigate regarding the internal system of commanding the agents in the company. (Brown, The agent’s apparent authority: paradigm or paradox?, 1995)

According to Diplock L.J., in actual authority, the third party is a stranger to the internal connection between the principal and agent whereas, in apparent authority, the agent is a stranger to the relationship between the principal and third party. This practical analysis of apparent authority is possible only if the principal makes a planned, exhaustive representation to the third party, but such unequivocal representation has been rarely made and it is quite unrealistic in impersonal, corporate commerce. The archetype of apparent authority in the nineteenth century has substantially failed to provide adequate protection to third party interests. (Brown, The significance of general and special authority in the development of the agent’s external authority in English law, 2004)

It can be deduced from the Brown’s analysis that Lord Diplock’s interpretation for the authority of agent is old and obsolete. It does not suit the needs of modern world. His critical statement is difficult to prove because in modern times, the third part depends more on agent rather than principal. The third party is not obliged to inspect the internal procedures of the company, when he places his reliance on the agent. It is difficult to expect clear representation of agent’s authority made by the principal to the third party in this fast-growing business world. It is not an efficient system to protect the interests of third party. So that statement has no practical application to some extent.

Conclusion

However, my conclusion states that the outcome in Hely-hutchinson case is much more preferred in England and in some law jurisdictions in the Commonwealth than that in Freeman and Lockyer with regards to determining the authority of an agent. It is quite obvious from the recent judgements that the protection offered by actual implied authority is much wider as compared to ostensible or apparent authority due to following reasons:

• the principle of implied actual authority protects insiders as well as outsiders;
• the third party is not obliged to prove that its reliance on the implied actual authority is due to the board’s representation of an apparent managing director as being competent to bind the company;
• evidence showing that board has conceded with director’s unauthorised activities which gives rise to both ostensible authority and implied actual authority. Such an acknowledgement of board is different from case to case. (Obadina, 1998)

Bibliography

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(2001). In E. Maclntyre, Business Law, Fourth Edition (p. 337). Essex, England: Pearson Education Limited.

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