Ostensible authority of those who represent a company
Stavrinides v Bank of Cyprus (High Court) [2019]
Questions are often raised about whether a contracting party is able to rely upon the signature of the individual purporting to bind the contracting counterparty. This case deals with just that issue.
Facts:
Mr Stavrinides was a property developer who had a number of loans with a Cypriot bank, Laiki. In March 2013 Mr Stavrinides and his companies owed the bank around £4.65 million. However, by a letter dated 15th March which was on Laiki Bank headed note paper, the bank confirmed that it was prepared to accept the sum of £1.65 million (from the proceeds from the sale of a property) in full and final settlement of the indebtedness of the claimants. The commercial effect of the 15 March Letter would be that the bank agreed to write-off approximately £3 million of secured borrowing.
The letter was signed by a Mr Antoniou who was employed as a ‘relationship manager’ at the bank’s Business Centre in Finchley. The borrower argued that it was entitled to rely upon the ostensible or apparent authority of Mr Antoniou when signing the letter.
Decision:
The court decided that the letter of 15th March was actually a forgery created, probably, by Mr Antoniou (possibly in collusion with Mr Stavrinides) and that he had no actual authority to issue the letter. However, Laiki Bank could still be bound by the letter if Mr Stavrinides was entitled to rely on the apparent (or ostensible) authority of Mr Antoniou.
The court stated that the issue is one of so called ‘transactional authority’ i.e. was the agent [employee] who lacked actual authority held out or represented by the principal as having the authority to enter into the transaction in question? English Law does not permit self-authorisation. A contracting party may not rely on any representation by the agent as to his own authority. The contractor must point to some representation or holding out by the principal as to the authority of the agent in question. The representation may be an implied representation arising from the principal permitting the agent to act in a particular role or titled position within the organisation. It is irrelevant that the act in question may have constituted a fraud on the company.
The contracting party must have relied upon the representation. The reliance must have been reasonable. The grounds used to establish the representation of authority must be adequate to justify a belief that the agent had authority. For the reliance to be reasonable there must also be an absence of evidence that undermines what would otherwise be an adequate representation of authority.
No act done by an agent in excess of his actual authority is binding on the principal with respect to persons having notice that in doing the act the agent is exceeding his authority. This may be either express notice or implied if, from the circumstances, the person ought to have suspected that the agent lacked authority and was put on enquiry.
The court decided that the claimant in this case came nowhere near being able to establish their case for the following reasons:-
- All previous letters regarding the lending facility had been signed by both Mr Antoniou and his boss. The letter of the 15th had only been signed by Mr Antoniou;
- Based on a long relationship with the Bank, Mr Stavrinides was well aware that Mr Antoniou was at the lowest level of management whose job was to deal with customers. When he had discussed issues on his account in the past he had done so in meetings with more senior management.
- In the course of their dealings it was very apparent that the authority of local bank employees was very restricted and that all significant decisions involving facilities of this size and type had to be referred up to Head Office in Cyprus.
- The letter of 15th March should have itself put Mr Stavrinides on notice that something was wrong. There were two main reasons for this.
- The letter was written in response to a litigious letter threatening legal action. A reasonable business person would expect any response to come from the Bank's legal department or an external lawyer instructed by the Bank and not from a local relationship manager.
- The idea that a local relationship manager might have authority to agree to write off £3 million of secured debts in return for the receipt by the bank of funds which it was going to receive anyway in the form of a sale of a property over which it had a first legal charge was ‘extraordinary’.
Points to Note:
- These were somewhat exceptional circumstances but the principles apply equally to the execution of ordinary commercial contracts;
- If the person purporting to sign has the seniority that one would ordinarily expect and there is no history or other background circumstances to put one on notice that something may be wrong then a contracting party can proceed without making further enquiries. However, if that is not the case then appropriate enquiries should be made and assurances received.