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Summary Company Law UoN - Critics on Separate Legal Personality & Limited Liability
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Company Liability: CriticalApparent Authority: Doctrinal Underpinnings and Competing Policy Goals –
Ji Lian Yap
Introduction/Fundamentals
Issue: primarily the fault of the agent and neither the third party, nor the
principal are at fault
Third party’s perspective:
o If third party could not sue, this would go against the reasonable
expectations of the third party
o There is a need for third parties to be able to rely on communications
received from officers of companies
o It may be unfair or impractical to expect third parties to seek confirmation
directly from those whose approvals are required for the transaction
o Thus, third party must be entitled to assume, especially when dealing with
an agent in a senior position, that the agent has obtained the relevant
approvals and followed necessary procedures
o E.g. Skandinaviska (Singaporean case) regarding First Energy: impractical
to expect each customer of the Manchester branch of the principal to
check with the London head office as to the authority of the agent
whenever a transaction was entered into
o In large corporations the third party would often rely on the agent
o Requiring the third party to confirm every time would defeat the purpose
of delegating the function of communicating such approval to agents
Principal’s perspective:
o It is reasonable to expect principals to exert some degree of oversight
over agents, principals should not be expected to micro-manage every
aspect of an agent’s activities
o Impractical burden on principals (i.e. principals being excessively or
unjustly bound by the acts of their agents)
o Reduction in employing agents
o Protecting the interests of the principal: where the representation is made
by the principal, it is justifiable to impose liability on the principal, but
where the representation is made by the agent, to impose liability on the
principal would tilt the balance too far in favour of the third party
This is the issue with the decisions in Kelly v Fraser and First
Energy
Reynolds: “to allow a person known to have no authority in effect
to give himself authority by wrongly purporting to notify a decision
of someone else that the act is authorised is virtually to abandon
the idea that the doctrine of apparent authority rests on
manifestation by the principal”
Tan: First Energy has been described as “an example of a difficult
case possibly making bad law” – but it was supported by Kelly v
Fraser
Court’s perspective: has to deal with a contest between two innocent parties
(although, sometimes, either party may be at fault too)
No point in third party suing the agent as they usually adequately lack the funds
to compensate the third party
Consequence: it would be both inefficient for the third party and the principal for
the courts to not recognise apparent authority to a certain level
Estoppel Theory
The justification of apparent authority is based on estoppel, in its weak form since
the representation giving rise to the estoppel may merely be a very general one
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, (such as appointing the agent to his position in the organisation) and also
because the detriment incurred by the representee may be small.
o E.g. First Energy: branch manager was found to have apparent authority
to communicate the approval of the principal of the relevant transaction.
Chronology of events: Principal has represented that the agent has authority to
communicate approval/enter into a transaction, then there has been reliance on
this representation the principal would be estopped from denying that the agent
had the authority to communicate approval of the transaction/enter into the
transaction
Unconscionability is the underlying basis for estoppel:
o Thus, where the representation is merely is that the agent is authorised to
communicate approval of the transaction (especially if this is purely based
on the appointed position of the agent), then the element of
unconscionability is far less clear
‘Reasonable reliance’: Was it reasonable for the third party to believe that the
agent was duly authorised without verifying this with the principal (in Kelly v
Fraser and First Energy)?
o Kelly v Fraser: reasonable reliance as the transferred funds were invested
and reflected in the subsequent benefits statements
o First Energy: in light of the usual authority associated with the position of
a senior manager, the senior manager had apparent authority to
communicate that relevant approval had been granted
o Courts would take a comprehensive view of the case facts and look at a
wide variety of factors in coming to a decision about ‘reasonable reliance’
Strong policy reasons supporting the view that the principal should be held liable
where the third party reasonably relied on the apparent authority of the agent
and where this authority may be traced to a representation from the principal
Objective Consent Theory
Alternative theory to apparent authority: the objective consent theory
o One of the fundamental bases for agency law is consent, i.e. that in most
cases the principal willingly authorises the act on his behalf and that this
provides justification for the principal being bound by the acts of the agent
This is an extension of the objective theory of contract law
o I.e. In contractual relationships, each contracting party is bound by what
he says rather than by what he intends
This theory, within the context of apparent authority, would focus on the
objective appearance of consent manifested by the representations and conduct
of the principal
If the objective consent is for the agent to have apparent authority to enter into
transactions, then the principal being bound makes sense
However, if the agent does not have apparent authority to enter into transactions
but merely authority to communicate that the transaction has been approved, but
the agent enters into a transaction, then it would not be logical for the principal
to be bound
o I.e. there would be a “disjoint” in the principal’s objective consent (that is,
communication) and agent entering into a transaction
Kelly v Fraser (case where agent had apparent authority to communicate
approval): arguable, that the later acquiescence/agreement in the fund transfer
(i.e. the transaction) may be interpreted as objective consent by the principals
o Acquiescence included: transfer funds being received, invested and
referred to in subsequent benefits statements
Current Position
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