THE APPARENT AUTHORITY OF THE UNAUTHORISED AGENT

• Author: LEE Pey Woan LLB (Hons) (London), BCL (Oxford); Barrister (Middle Temple), Advocate and Solicitor (Singapore); Associate Professor, School of Law, Singapore Management University.
• Citation: (2014) 26 SAcLJ 258
• Published date: 01 December 2014
• Date: 01 December 2014

Case Note

Kelly v Fraser

[2012] 3 WLR 1008

Can an agent who is not authorised to contract for a company nevertheless be clothed with ostensible authority to communicate the principal's approval? Conventional understanding of apparent authority may suggest not, for the representation as to the principal's approval may be no different from the agent's self-authorisation. However, the controversial case of First Energy v Hungarian International Bank Ltd[1993] 2 Lloyd's Rep 194 (“First Energy”) has held otherwise. Although the correctness of First Energy has been doubted, it has recently been unequivocally affirmed by the Privy Council in Kelly v Fraser[2012] 3 WLR 1008. This note considers how Kelly v Fraser may affect the reception of First Energy in Singapore.

I. Setting the scene —First Energy and The Ocean Frost

1 It is a rudimentary principle of agency law that an agent who acts without or beyond his actual authority may still bind the principal if those acts fall within his apparent authority. Apparent authority is established if the principal by words or conduct represents that the agent is authorised to act and a third party relies on such representation without notice of the agent's lack of authority. In the context of companies, there is the added requirement that the representation must be made by an authorised person since a company, not being a natural person, can only act through human agents. However, who this person ought to be is not always obvious. In this connection, a particularly knotty problem arises when the agent purporting to make the representation is not himself authorised to approve the transaction in question.1

2 The paradigm facts where this problem arises usually involve an agent with neither actual nor ostensible authority to transact on behalf of the company, but who then purports to inform the third party that the company has approved the transaction. Can a third party, whilst fully apprised of the agent's lack of transactional authority, seek to bind the company on the strength of the agent's representation? In Armagas Ltd v Mundogas SA2 (“The Ocean Frost”), the House of Lords expressed great scepticism for such a proposition. It reasoned as follows: if an agent has no actual or ostensible authority to contract, to say that he nevertheless has ostensible authority to communicate the principal's approval is effectively the same as saying that he has ostensible authority to contract. To hold that a third party may rely on such a representation of approval would therefore offend the fundamental principle that there is no concept of a “self-authorising agent” at common law. However, this negative stance has not deterred subsequent courts from taking a contrary view. In the famous but controversial decision of First Energy v Hungarian International Bank Ltd3 (“First Energy”), the English Court of Appeal found that an agent whose lack of transactional authority was known to the third party could nevertheless bind the principal by representing that the principal has approved the transaction in question. In that case, the agent was a senior manager at the only branch office of the defendant bank. Although he had informed the plaintiff that he had no authority to approve certain interim finances, he subsequently confirmed that the defendant had approved those transactions. The court found, distinguishing The Ocean Frost, that the agent as the highest-ranking personnel at the branch had the apparent authority to make representations of approval. There was, in the court's view, no reason why a principal may not only delegate to an agent the authority to communicate his approval without also delegating to the same agent the authority to approve that transaction.4 In so holding, the court was clearly influenced by considerations of commercial reality: it would defeat the very purpose of setting up a branch if its customers were expected to always seek the direct approval of the head office.5 However, First Energy has been criticised as a decision that was irreconcilable with The Ocean Frost, and perhaps also mistaken on the ground that:6

… 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.

Noting the criticisms levelled at First Energy, the Singapore Court of Appeal refrained from committing to any firm view as to its correctness in Skandinaviska Enskilda Banken AB (Publ), Singapore Branch v Asia Pacific Breweries (Singapore) Pte Ltd7 (“Skandinaviska”), but highlighted the doctrinal difficulties that would have to be overcome before the case could be regarded as good law in Singapore. By contrast, the Privy Council has unequivocally affirmed First Energy in the recent decision of Kelly v Fraser.8 This note sets out the facts and holdings of Kelly v Fraser and considers how it may affect the reception of First Energy in Singapore.

II. Kelly v Fraser—First Energy affirmed

3 The defendant joined a Jamaican company (“the company” or “ILI”) as its president and chief executive in 2000 and participated in its salaried staff pension plan (“the ILI Plan”). Having accrued some contributions under the pension scheme of his previous employee, the defendant consulted M, the head of the employee benefits division, to transfer the contributions accrued under that scheme to the ILI Plan. Under the terms of the trust deed constituting the ILI Plan, the discretion to accept funds from other schemes was vested in the trustees personally. Thus, no personnel in the employee benefits division (including M) was authorised to approve the transfer. The trustees could, however, delegate the day-to-day administration of the ILI Plan to the employee benefits division and this they did. The defendant's accrued contributions were then credited to the trustees for the ILI Plan but this was done without the trustees' approval or knowledge. Subsequent to that, the defendant received a letter from M “confirming” the transfer. He was also sent periodic statements reflecting the accumulated contributions that included the transferred amount.

4 In 2003, the ILI Plan was terminated following ILI's merger with another company. The trustees learnt of the unauthorised transfer in the course of determining the contributories' entitlements to the surplus of

the plan and applied to the court for a declaration that they were entitled to determine the defendant's share of the surplus on the basis of his original contributions rather than the accumulated contributions that included the transferred amount. When the matter came before the judicial committee, it was not disputed that the company had no authority of any kind to approve the transfer of contributions so the only issue outstanding was whether the company had the ostensible authority to make representations (through M's “confirmation” letter and the subsequent benefit statements) on the trustees' approval. If it did, the trustees would have been estopped from denying the approval and bound to compute the defendant's share of surplus by reference to the enlarged contributions.

5 At first instance, the trial judge had found that while the company could not have authorised the transfer, it did, as agents appointed to administer the plan, have the usual authority to inform the defendant of the trustees' approval.9 However, does not such a finding run counter to the very conception of apparent authority? In a unanimous judgment delivered by Lord Sumption, the committee categorically upheld this finding as conceptually sound and consistent with authorities. In its view, The Ocean Frost was not authority for the broader proposition that:10

… a person without authority of any kind to enter into a transaction cannot as a matter of law occupy a position in which he has ostensible authority to tell a third party that the proper person has authorised it.

In The Ocean Frost, the agent was the defendant's vice-president and chartering manager who the plaintiff knew had no authority to commit the defendant to charterparties. So that was a case where the facts precluded the finding of ostensible authority to communicate because “the agent was in reality holding out himself as having authority to do a specific thing that the third party knew he had no general authority to do”.11 Indeed, Lord Keith had in The Ocean Frost accepted the conceptual possibility of vesting in an agent the authority to communicate without also conferring on him the authority to transact, though he thought that such occurrences must by their nature be “rare and unusual”.12

6 Having so construed The Ocean Frost, the committee also confirmed that the decision in First Energy was entirely consistent with the principle identified in The Ocean Frost. In an important passage, Lord Sumption explained how the two cases were to be reconciled:13

Lord Keith's speech remains the...