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Authority to act
21/03/2006 The Star By BHAG SINGH
In doing business it is not always possible to do everything on your own.
The others involved may be agents, employees, partners or fellow directors
in a company. On occasion, one of these parties may enter into an
arrangement with a third party, with which the rest do not agree with. What
is the effect of such a transaction when rights of third parties have been
created?
To appreciate the position, it becomes necessary to be aware that such acts
can cause dissension. Where one party has made a commitment, are those who
disagree the majority or minority? Are they shareholders or employers?
A business, if it is incorporated as a company, would be represented by an
individual or individuals. What happens when a transaction has been entered
into by someone representing the business and the owner later decides
against the transaction?
Here, the answer would depend on whether the transaction was authorised or
was initially authorised but there was a change of mind. In the latter case,
the business would be bound. In law, an agreement entered into cannot be
unilaterally abandoned.
However, more acute difficulties arise when a person enters into a
transaction when he is not authorised to do so or one that is beyond what he
was authorised to do. Where a person representing a business is expressly
authorised to act, a third party will rarely have any difficulty in
enforcing the transaction.
Whether a person is authorised to act or not is an internal matter. And
where a person is expressly authorised, the third party may depend on
implied authority on the part of the person making the representation.
There are, of course, situations where a person is deemed to have authority
by reason of legal provisions. Such would be the case where the business is
a partnership. The law recognises that a partner binds his co-partner or
co-partners.
Section 11 of the Partnership Act provides: “Every partner in a firm is
liable jointly with the other partners for all debts and obligations of the
firm incurred while he is a partner; and after his death, his estate is also
severally liable in due course of administration for such debts and
obligations, so far as they remain unsatisfied but subject to the prior
payment of his separate debts.”
On the other hand, if a restriction is placed on a partner's authority and
the restriction is known to the third party, it would certainly not be open
to such party to assert a claim in view of the restriction being known.
The matter takes a different complexion when dealing with managers or
directors of a company. In ordinary situations, a transaction in day-to-day
dealings would appear to be within the scope of a manager or director who
would be deemed to have apparent authority .
However, there are situations where the company's rules and regulations may
require a proper resolution for the transaction to be entered into. In such
a case, is it necessary for a third party who is dealing with a
representative to confirm whether the appropriate resolutions are available?
If a resolution is made available, is there a duty to enquire about the
validity of such a resolution? It would appear that there are several
aspects of internal management which come into play.
Similarly, where a third party is dealing with an employee, the rights of
the third party could be affected if the employee has no express authority.
When such authority is absent no rights will be created.
On some occasions, employees can be regarded as agents. On other occasions,
an agent may not be an employee. The extent to which agents are responsible
is provided for in the Contracts Act 1950 under the part covering “Agency”
as a subject.
Insofar as the employer of an agent is concerned, referred to in the Act as
a Principal, authority may be conferred on an agent expressly or impliedly.
However, once appointed, acts of the agent within the scope of the
appointment bind the principal. Section 179 of the Contracts Act 1952
states: “Contracts entered into through an agent, and obligations arising
from acts done by an agent, may be enforced in the same manner, and will
have the same legal consequences as if the contracts had been entered into
and the acts done by the principal in person.”
There can be difficulties when an agent acts outside his scope of authority.
Here, the position would depend on what is done outside the scope of the
authority. Thus, Sections 180 and 184 provide: “When an agent does more than
he is authorised to do, and when the part of what he does, which is within
his authority, can be separated from the part which is beyond his authority,
so much only of what he does as is within his authority is binding as
between him and his principal.
“Where an agent does more than he is authorised to do, and what he does is
beyond the scope of his authority cannot be separated from what is within
it, the principal is not bound to recognise the transaction.”
Therefore, it is particularly significant that parties dealing with agents
take adequate care to ensure that the agent, whether an employee or not, has
the requisite authority .
Of course, authority may be deemed to be conferred by conduct. Thus, where
an agent has entered into a contract which, in the past the principal has
ratified, the employer may, by his conduct, have conferred authority on the
agent in the eyes of others.
Can third parties take advantage of a situation to get dishonest directors
to sign documents which are to the company's detriment? Here, the matter
becomes complex and other issues such as fraud and conspiracy will come into
play.
The eventual outcome that the matter takes will depend on the facts. If the
third party has been in collusion with the directors, signing without
authority or conspiring to bring about the transaction, then such third
party may not be able to insist on his/her rights. |
