Apparent Authority Sufficient to Bind Lessee

In the recent case of CRJ Services Limited v Lanstar Limited [2011] EWHC 972 (TCC) the lessee disputed liability under 3 Lease Agreements on the grounds that the signatory did not have authority to enter into the Agreements.

The problem for the lessee was that although the signatory was not an employee, he was engaged as a consultant and given the title “Landfill Manager” to run a landfill site operated by the lessee. It was common ground that in this capacity he had actual authority to enter into short term Hire Agreements with the Financier for various items of plant, but it was the lessee’s case that he had no actual or implied authority to enter into long term hire contracts. Nevertheless the signatory entered into two 3 year contracts and a 2 year contract for the hire of plant all of which contained terms that if the lessee terminated the arrangement before the expiry of the fixed period of hire it would be liable to pay 60% of the agreed hire rates for the remaining periods of hire.

The lessee claimed that it had no knowledge that these 3 long term contracts had been signed, and had effected payments on the assumption that as with the short term hire contracts rentals were payable on a monthly basis but without any long term commitment.

When the signatory left his engagement with the lessee as a result of an acrimonious dispute the lessee’s solicitors did not improve the lessee’s prospects of being able to avoid liability by writing to the Financier and stating inter alia that the signatory “…was the Landfill Materials and Recycling Facilities Manager…[and] was required to “run things by” the Finance and Managing Directors”.

The court had little difficulty in rejecting the lessee’s arguments that the signatory to the Hire Agreements lacked the necessary authority to bind the lessee. There was no suggestion that the lessee had taken any steps to inform the Financier that there were limits on the signatory’s authority, and at no stage had the lessee protested or withheld any payments during the periods of hire before termination. Thus although the signatory had no actual authority to contract for long term hire, he clearly had apparent authority on the principles set out by the Court of Appeal in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480:-

“An “apparent” or “ostensible” authority…is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent” authority, so as to render the principal liable to perform any obligations imposed upon him by such contract…

The representation which creates “apparent” authority may take a variety of forms of which the commonest is representation by conduct, that is by permitting the agent to act in some way in the conduct of the principal’s business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal business has usually “actual” authority to enter into.”

Comment

The key point in this case is that the lessee by its conduct in allowing the signatory to enter into short term hire contracts effectively clothed him with apparent or ostensible authority to enter into long term hire contracts as well. It would have been different if the signatory had no actual authority to enter into short term contracts either.

An agent or employee cannot clothe himself or herself with authority: the essential point is that it must be the lessee itself which has done some act or made some statement which has the effect of clothing the agent or employee with apparent or ostensible authority.

Thus it is good practice to ensure that in any case of doubt as to the actual authority of a signatory to a Hire Agreement there should be some communication with the Directors or others with senior management responsibility to confirm that the proposed signatory has indeed authority to contract on behalf of the lessee.

Even in cases where actual or ostensible authority in the signatory is lacking it may still be possible to establish liability if the lessee subsequently ratifies its involvement in an Agreement, for example by using the equipment and making payments with knowledge of the lack of authority in the signatory.