Relations with Third Parties and Doctrine of Apparent Authority

A principal is bound by acts within the agent's actual authority, and also by acts within his apparent or ostensible authority where the principal's representation induced a third party to deal with the agent (S.226 to S.229, S.237).

The purpose of agency is to enable one person to affect another's legal relations with third parties. The central question in disputes is therefore whether the principal is bound. The answer turns on authority, which may be actual, apparent, or supplied retrospectively by ratification.

Legal Framework

Provision	Subject	Key Rule
S.226	Effect of contracts made through an agent	Have the same legal consequences as if made by the principal in person
S.227	Principal bound when agent exceeds authority	Where the authorised part can be separated from the excess, the principal is bound by the authorised part
S.228	Principal not bound where excess cannot be separated	Where the authorised and unauthorised parts cannot be separated, the principal may repudiate the whole transaction
S.229	Notice given to agent	Any notice given to or information obtained by the agent in the course of the business has the same effect as if given to or obtained by the principal
S.237	Liability of principal by estoppel	When an agent has, without authority, done acts or incurred obligations, the principal is bound if by his words or conduct he induced the third party to believe such acts were within the agent's authority
S.238	Effect of misrepresentation or fraud by agent	Misrepresentations or frauds by an agent in matters within his authority have the same effect on agreements as if made by the principal

Kinds of Authority

Kind	Source	Effect
Actual express authority	Words, spoken or written	Binds the principal
Actual implied authority	Conduct, course of dealing, trade usage, the nature of the position	Binds the principal
Apparent or ostensible authority	The principal's representation to the third party	Binds the principal by estoppel under S.237
Authority by ratification	Subsequent adoption under S.196	Binds the principal retrospectively

Why apparent authority is not really authority at all: Apparent authority is a rule of estoppel, not of consent. The agent may have no authority whatsoever, and may even be acting against express instructions. The principal is bound because his own words or conduct led the third party to believe otherwise, and it would be unjust to allow him to resile from an appearance he created. This is why S.237 speaks of the principal being "bound" rather than of the agent having authority.

Apparent Authority (S.237)

When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by those acts or obligations if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent's authority.

Requirements

Requirement	Explanation
A representation by the principal	Made by words or conduct, including placing the agent in a position that ordinarily carries certain powers
Made to the third party	The representation must reach the party who relies on it
Reliance by the third party	The third party must have acted on the belief created
Third party acting in good faith without notice	Knowledge of the want of authority defeats the claim
Alteration of position	The third party must have dealt with the agent on that footing

Why the representation must come from the principal: If the agent's own assertion of authority sufficed, any impostor could bind a stranger simply by claiming to represent him. The estoppel operates against the principal only because the principal created the appearance. An agent who overstates his own authority is liable personally under S.235 and for breach of warranty of authority, but does not thereby bind the principal.

**Watteau v Fenwick (1893)** Queen's Bench Division

Facts: The owner of a hotel employed a manager whose name appeared over the door and who held the licence. The owner expressly forbade him to buy anything except bottled ales and mineral water. The manager bought cigars on credit from a supplier who believed the manager was the owner.

Issue: Was the undisclosed owner bound by a purchase made contrary to express prohibition?

Held: The principal was liable. Where a person is put in a position which ordinarily carries authority to do acts of a particular kind, the principal is bound by such acts even if he has privately restricted the authority, as against a third party who did not know of the restriction.

Relevance: The classic illustration of usual authority attaching to a position. Cite where a private limitation on an agent's normal powers is asserted against an unaware third party.

**Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964)** Court of Appeal

Facts: A director of a company, without any formal appointment as managing director, acted as such with the board's knowledge and acquiescence, and engaged architects on the company's behalf. The company denied liability for their fees.

Issue: Was the company bound by the acts of a person the board had permitted to appear as managing director?

Held: The company was bound. Diplock LJ set out four conditions for ostensible authority: a representation that the agent had authority, made by someone with actual authority to manage the business, on which the contractor relied, and which the company had capacity to enter into.

Relevance: The leading modern statement of the requirements of ostensible authority. The four-condition framework is the standard analytical tool.

Usual Authority Attaching to a Position

Where a principal appoints a person to a recognised position, the third party is entitled to assume the agent has the powers usually exercised by persons in that position, unless the third party knows otherwise.

Position	Usual authority ordinarily includes
Manager of a business	Purchasing supplies, engaging staff, receiving payments in the ordinary course
Partner in a firm	Acts done in the usual course of the firm's business (Partnership Act S.19)
Factor or commission agent	Selling goods in possession, giving warranties usual in the trade
Broker	Negotiating contracts, but ordinarily not receiving payment
Auctioneer	Selling and receiving the price for goods put up for sale
Wife managing a household	Pledging the husband's credit for necessaries

Effect of the Agent's Fraud and Misrepresentation (S.238)

Misrepresentations made, or frauds committed, by an agent acting in the course of his business for his principal have the same effect on agreements made by the agent as if they had been made or committed by the principal. But misrepresentations or frauds in matters which do not fall within the agent's authority do not affect the principal.

**Lloyd v Grace, Smith and Co (1912)** House of Lords

Facts: A managing clerk of a firm of solicitors, acting within the apparent scope of his employment, fraudulently induced a client to transfer property to him and misappropriated it for his own benefit. The firm knew nothing and gained nothing.

Issue: Is a principal liable for the fraud of an agent committed for the agent's own benefit?

Held: The firm was liable. Liability does not depend on the principal benefiting from the fraud. What matters is that the agent was acting within the apparent scope of the authority entrusted to him, so that the client was induced to deal with him as the firm's representative.

Relevance: Establishes that the principal answers for an agent's fraud within the apparent scope of authority even where the fraud was purely for the agent's own gain.

Notice to the Agent (S.229)

Any notice given to, or information obtained by, the agent in the course of the business transacted by him for the principal has the same legal consequence as if given to or obtained by the principal.

Why knowledge is attributed to the principal: The principal has chosen to act through another. If he could disclaim knowledge that reached his agent, he would enjoy the benefits of delegation while avoiding its burdens, and third parties could never be sure that notice had been effectively given. Attribution keeps the principal in the same position he would have occupied had he acted himself.

Limitation: Attribution applies only to information obtained in the course of the agency business. Knowledge the agent acquired privately, or which he is under a duty to conceal, is generally not imputed.

Excess of Authority (S.227, S.228)

Situation	Provision	Result
Authorised and unauthorised parts are separable	S.227	The principal is bound by the authorised part only
Parts are inseparable	S.228	The principal may repudiate the whole transaction

Illustrations

Usual authority overriding a private restriction: The manager of a restaurant, whose name appears as licensee, is privately forbidden to buy anything but soft drinks. He buys tableware on credit. Applying Watteau v Fenwick (1893), the owner is bound, because the position ordinarily carries authority to buy such goods and the supplier did not know of the restriction.
Ostensible authority of a de facto managing director: A company's board allows a director to act as managing director without appointing him. He engages consultants. Applying Freeman and Lockyer (1964), the company is bound: the board, having actual authority to manage, represented by acquiescence that he had such authority, and the consultants relied on it.
Separable excess: A authorises B to buy 100 bags of cement. B buys 100 bags of cement and, without authority, 50 bags of sand from the same supplier under one order. The items are separable. Under S.227 A is bound for the cement and may reject the sand.
Inseparable excess: A authorises B to buy a specific machine. B buys the machine bundled with an installation and five-year service contract at a single inseparable price. Under S.228 A may repudiate the whole transaction.
Fraud within apparent scope: A managing clerk of a solicitors' firm defrauds a client of property for his own benefit while apparently acting for the firm. Applying Lloyd v Grace, Smith and Co (1912) and S.238, the firm is liable, and it is irrelevant that it neither knew of nor benefited from the fraud.
Fraud outside authority: The same clerk, in a purely private capacity and unconnected with any firm business, borrows money from a client on a false pretext. The firm is not liable, because the fraud was not in a matter falling within his authority.
Notice to agent binds principal: A tenant serves notice to quit on the landlord's rent collecting agent, whose function includes receiving communications. Under S.229 the notice is effective against the landlord even if the agent never passes it on.

Recall Check

Why is apparent authority described as a rule of estoppel rather than of authority?
State the four conditions for ostensible authority laid down in Freeman and Lockyer.
Is a principal liable for an agent's fraud committed solely for the agent's own benefit?

Key Cases

Watteau v Fenwick (1893) Watteau v Fenwick 1893
Issue: Whether an undisclosed principal is bound by a purchase made by his manager contrary to express prohibition.
Rule: A person placed in a position ordinarily carrying certain powers binds the principal in respect of acts of that kind, as against a third party unaware of any restriction.
Held: The principal was liable for the cigars bought by the manager.

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964) Freeman and Lockyer v Buckhurst Park Properties 1964
Issue: Whether a company is bound by the acts of a person permitted to act as managing director without formal appointment.
Rule: Ostensible authority requires a representation of authority made by someone with actual authority, relied upon by the contractor, in a transaction within the company's capacity.
Held: The company was bound to pay the architects' fees.

Lloyd v Grace, Smith and Co (1912) Lloyd v Grace Smith and Co 1912
Issue: Whether a principal is liable for an agent's fraud committed for the agent's own benefit.
Rule: Liability turns on whether the agent acted within the apparent scope of his authority, not on whether the principal benefited.
Held: The solicitors' firm was liable for its managing clerk's fraud.

Distinctions

Basis	Actual Authority	Apparent Authority
Source	The principal's consent, express or implied	The principal's representation to the third party
Nature	Real authority	Estoppel; the agent may have no authority at all
Whose state of mind matters	Principal and agent	The third party's belief, induced by the principal
Effect of a private restriction	Limits the authority	Ineffective against a third party unaware of it
Provision	S.186, S.187	S.237

Basis	Apparent Authority (S.237)	Ratification (S.196)
Timing	Operates at the time of the act	Operates after the act
Basis	Principal's prior representation	Principal's subsequent adoption
Principal's choice	None; he is bound	Elective; he may refuse
Requirement that agent professed agency	Not essential	Essential (Keighley Maxsted)

Basis	S.227 (separable excess)	S.228 (inseparable excess)
Test	Authorised part can be distinguished	Parts cannot be separated
Principal's position	Bound as to the authorised part	May repudiate the whole
Third party's remedy for the excess	Against the agent personally	Against the agent personally

Flashcards

What is apparent or ostensible authority?

Authority which the principal, by his words or conduct, has led a third party to believe the agent possesses. Under S.237 the principal is bound even though no actual authority existed.

Must the representation of authority come from the principal?

Yes. An agent's own assertion of authority cannot bind the principal; it makes the agent personally liable under S.235.

State the four conditions from Freeman and Lockyer.

A representation that the agent had authority; made by a person with actual authority to manage the business; relied upon by the contractor; in a transaction the company had capacity to enter into.

What did Watteau v Fenwick decide?

A principal is bound by acts of the kind usually within the powers of the position he gave the agent, despite a private prohibition unknown to the third party.

Is a principal liable for an agent's fraud from which he did not benefit?

Yes, if the fraud was within the apparent scope of the agent's authority (Lloyd v Grace, Smith and Co, 1912; S.238).

What is the effect of notice given to an agent?

Under S.229 it has the same legal consequence as notice given to the principal, provided it was received in the course of the agency business.

What happens where an agent exceeds authority and the parts are separable?

Under S.227 the principal is bound by the authorised part only.

What happens where the excess cannot be separated from the authorised act?

Under S.228 the principal may repudiate the whole transaction.

Exam Scenario

Problem: Vikas owns a chain of electronics showrooms. He appoints Latika as manager of the Banjara Hills branch, and her name appears on the store signage as manager. He privately instructs her not to purchase any stock above Rs. 1 lakh without his written approval. Latika orders air conditioners worth Rs. 6 lakhs from a supplier who has dealt with the branch before and knows nothing of the internal limit. In the same period Latika, using the branch letterhead and in the course of dealing with a regular customer, fraudulently collects Rs. 2 lakhs as an advance for a bulk order she never places, and keeps the money. Vikas denies liability for both. Advise the supplier and the customer.

Step 1: Rule out actual authority first

Latika had no actual authority for the air conditioners. The purchase exceeded the Rs. 1 lakh limit and lacked the written approval Vikas required.

That disposes of actual authority only. It says nothing about how the position appeared to the supplier.

Step 2: Build apparent authority under S.237

Vikas placed Latika in the position of branch manager and displayed her as such on the signage. Purchasing stock is an act of the kind ordinarily within a showroom manager's powers, and the supplier had prior dealings with the branch and no notice of the internal restriction.

Apply Watteau v Fenwick (1893): a private limitation on the usual authority of a position does not bind a third party who is unaware of it.

Reinforce with the Freeman and Lockyer (1964) framework:

A representation of authority by Vikas, who had actual authority to manage.
Reliance on that representation by the supplier.
A transaction within Vikas's business.

Vikas is bound for Rs. 6 lakhs. Internally he may recover from Latika for breach of her S.211 duty to follow directions.

Step 3: The fraud under S.238

Apply S.238 with Lloyd v Grace, Smith and Co (1912). Collecting advances from customers on branch letterhead in the course of branch business falls within the apparent scope of a manager's authority.

Vikas is liable to refund the Rs. 2 lakhs.

Step 4: Locate the boundary of apparent authority

Latika's act	Connection to branch business	Provision	Vikas's position
Ordering stock worth Rs. 6 lakhs past a private internal limit	Within the usual powers of a showroom manager	S.237	Bound for Rs. 6 lakhs
Collecting Rs. 2 lakhs on branch letterhead from a regular customer	In the course of branch business	S.238	Liable to refund Rs. 2 lakhs
A private loan solicited with no connection to branch business	None	Outside apparent scope	Not liable

Three traps in this problem

The internal limit is invisible to the supplier. Watteau v Fenwick (1893) holds that a private limitation on the usual authority of a position does not bind a third party who is unaware of it.

The S.211 claim is not a defence. Vikas may recover from Latika for breach of her duty to follow directions, but that lies between principal and agent and is no answer to the supplier.

Self interest does not defeat S.238. That Latika acted for her own benefit, and that Vikas neither knew of nor gained from the fraud, is irrelevant.

Conclusion. Both the supplier and the customer succeed against Vikas, whose remedies lie against Latika.