CONTRACTING WITH A COMPANY: FORMS OF AUTHORITY – PART 2

Background:

This article is the second installment in a three-part series exploring fundamental legal principles pertinent to transactions involving companies. The series aims to illuminate aspects that all parties engaged in such transactions should understand. This particular article will concentrate on forms of authority, a concept within agency law (discussed in part 1).

Types of Authority

Authority in agency law can be divided into two main types – actual authority and ostensible authority. Actual authority can either be expressed or implied. Actual authority is expressed when explicitly granted either verbally or in writing. Implied actual authority arises in three primary ways:

  1. Incidental authority – is implied when necessary for the agent to carry out their expressed authority effectively. For example, if an agent is authorised to finalise an offer to purchase on behalf of a principal, they also have the implied authority to handle related tasks, such as obtaining necessary compliance certificates.
  2. Authority by position – is implied based on the nature of the agent’s role or position. For instance, a managing director has the implied authority to perform duties typically associated with that office, including signing contracts on behalf of the company.
  3. Authority from the principle’s conduct – is implied when a principal’s behavior suggests approval of the agent’s actions.

On the other hand, ostensible authority arises when a principal, through words or actions, creates the impression that someone is their authorised agent, leading a third party to reasonably believe and act on that assumption. The principal’s behavior or statements can prevent them from later denying the agent’s authority if a third party has relied on that representation. However, if the third party knows the agent lacks actual authority, they cannot claim ostensible authority.

Requirements for reliance on ostensible authority

The South African courts have held for an individual to rely on ostensible authority, the following requirements need to be satisfied:

  1. a representation should have taken place, whether by words or conduct;
  2. such representation should have been made by the principle (individual with actual authority), in such a manner that the principle reasonably have expected that outsiders would act on the strength of the representation;
  3. reliance of the third party on such representation;
  4. the reliance must have been reasonable; and
  5. there must be prejudice stemming from such reliance to the third party.

English and South African case law have firmly established that ostensible authority is grounded in the principle of estoppel. Estoppel prevents a person (the representor) from denying the truth of a representation they have made if another person has relied on that representation and, as a result, suffered prejudice. However, in the case of Makate v Vodacom (Pty) Limited (2016) ZACC, the Constitutional Court departed from this long-established view laid down in South African case law by concluding that ostensible authority and estoppel are not based on the same elements. The reasoning and commentary on this decision are too extensive to cover in this article

Distinction between implied actual authority and ostensible authority

A distinction must be made between implied actual authority and ostensible authority. Implied actual authority arises from a consensual agreement between the principal and agent, to which the third party is not a party. Consequently, if implied actual authority exists, contracts made by the agent bind the company regardless of the third party’s reliance or good faith.

In contrast, ostensible authority is based on the relationship between the principal and the third party, with the agent being a stranger to this relationship. If the principal makes an implied representation to the third party that the agent has authority, the third party must show that they reasonably relied on this representation for ostensible authority to be established. This creates a situation where the third party can rely on estoppel, preventing the principal from denying the agent’s authority.

Concluding remarks:

In conclusion, understanding the distinction between actual and ostensible authority is crucial for all parties involved in company transactions. Actual authority, whether expressed or implied, is rooted in the direct relationship between the principal and the agent, binding the company to the agent’s actions regardless of third-party reliance. On the other hand, ostensible authority hinges on the principal’s representations to third parties, allowing them to rely on the agent’s perceived authority, provided their reliance is reasonable and results in prejudice. This differentiation underscores the importance of clear communication and representation in agency relationships, which can come into play when contracting with a company.

VDMA’s team of experts is at your disposal for any company law assistance that you or your business may require.

Published 5 September 2024