ostensible authority

Ostensible authority is the power of an agent to legally bind its principal with a third party, where the agent does not have the actual authority of the principal to bind the principal in the circumstances. The authority to bind the principal is “ostensible”, because it is perception of the third party in respect of the apparent power of the agent which binds the principal.

When an agent holds themselves out as a having authority to other businesses or the world at large and does not inform the third party of a limitation of the actual authority to third parties, the principal may be bound as a result of the ostensible authority represented by the agent to the third party.

Holding Out with Authority

The holding out is satisfied by appointing a person to a particular position within a company particular office or by producing him with the indications of authority, such as letterhead, notepaper, business cards, email footer, knowing that the agent is purporting to represent the company. All these involve the company permitting the agent to purport to act on behalf of the principal entity, such as a company, a partnership, joint venture or association.

When Ostensible Authority arises

In Freeman & Lockyer v Buckhurst Park Properties (1964) Diplock LJ in explained the requirements for ostensible authority arise:

1. a representation is made (whether by a statement or conduct) that the agent had authority to enter into on behalf of a principal the kind of contract sought to be enforced;
2. a representation was made by a person who had actual authority to enter into contracts on behalf of the principal either generally or in respect of those matters to which the contract relates;
3. the third party was induced by the representation, and relied on it to enter into the contract;
4. the principal had power generally to enter into the sort of contract which is sought to be enforced (in the case f a company, the articles of association).

Cases commonly arise where:

1. the principal has placed the agent in a position which in the outside world is
   generally regarded as carrying authority to enter into transactions of the kind in question.
2. the agent has had a course of dealing with a particular contractor and the principal has acquiesced in this course of dealing and honoured transactions arising out of it.

Ostensible authority does not arise where the person alleging that he relied on the representation knows that the agent's authority is limited so as to exclude entering into transactions of the type in question, and so cannot have relied on any contrary representation by the principal: Russo-Chinese Bank v. Li Yau Sam [1910] AC 174.

Impact of Ostensible Authority

The agent is liable to the principal for exceeding their power, as it is a breach of contract to exceed one’s authority to act for another. The third party is not bound by the principal unless the principal ratifies the contract.

Directors

Directors of companies are in a special position in respect of the affairs of the companies to which they are appointed. A presumption arises whereby the director is presumed to have power to bind the company where the third party acts in good faith. The members and the company are entitled to obtain injunctions to prevent those without actual authority from holding themselves out as having authority to do so.

Transactions entered by a company are voidable at the option of the company except where:

1. restitution of money or assets transferred in the transaction is no longer possible (restitutio in integrum);
2. the company has an indemnity for the loss or damage resulting from the transaction;
3. a bona fide purchaser for value without notice of the directors' exceeding their powers by a person who is not party to the transaction would be affected by the avoidance.

Where directors exceed their authority, they are liable to pay to the company for any gain made directly or indirectly by the transaction, and to indemnify the company for any loss or damage resulting from the transaction.

Continuation of Authority

Ostensible authority may continue after actual authority has terminated and the principal has revoked the actual authority of the agent. This continuation of power to bind the principal may arise where a third party has acted in good faith on prior conduct and does not have notice of the termination of the actual authority of the agent.

Examples of Ostensible Authority

It might be that the Director of Sales has no authority to sign any document on behalf of the company, or the Director  of Sales has actual power to sign a specified class of documents (such as purchase orders up to a value of £1,000 but not more than £1,000) and exceeds their authority. Instances of a person having ostensible power takes place include:

1. The agent represents themselves to third parties as a director of the principal a company, such as a Director of Sales, when in fact the person is not actually formally appointed as a director of the company.;
2. An employee represents that they have authority to bind the company or person, when they do not have actual authority.