Freeman & Lockyer (A Firm) v. Buckhurst Park Properties (Mangal), Ltd. (1964)

Turquand tells an outsider that he may assume the company's internal proceedings were regular. It does not tell him when a particular person may speak for the company at all. That is the work of apparent authority, and Freeman & Lockyer is the case that states the doctrine in a form you can apply mechanically, because Diplock LJ reduced it to four conditions that a claimant must satisfy.

It is also the case that puts constructive notice in its place. Diplock LJ's account of it — a negative doctrine, which stops a contractor saying he did not know the constitution, but does not entitle him to rely on a provision he never in fact relied on — is the most precise statement of the rule in the syllabus.

The plaintiffs were architects and surveyors. They sued for fees of £291 6s. for work done in the autumn of 1959 on the Buckhurst Park Estate at Sunninghill, which belonged to the defendant company. They had been instructed in August 1959 by the second defendant, Mr Kapoor, who was at all material times a director of the company. The work was done and the amount was not disputed. The only question was whether the company or Kapoor was liable.

Kapoor was a property developer whose practice was to form a company for each property he bought. In September 1958 he contracted to buy the estate for £75,000 and found he lacked the cash. A Mr Hoon agreed to advance about £40,000. By a written agreement of 11 October 1958 the two agreed to form a private limited company with a nominal capital of £70,000, to be subscribed in equal shares, the directors to be themselves and a nominee of each.

The company's constitution mattered:

• Article 12 made the directors Kapoor, Hoon, Mr Cohen (Kapoor's nominee, in fact a managing clerk at his solicitors) and Mr Hubbard (Hoon's nominee, a managing clerk at Hoon's solicitors).
• Article 14 provided for alternate directors.
• Article 19 fixed the quorum for board business at four.
• The articles conferred full powers of management on the board and contained powers to delegate the functions of management to a managing director or to a single director.

No managing director was ever appointed. Hoon went abroad before the company was even formed and was out of the country throughout except for a short period from June to August 1959, leaving Hubbard to protect his interest. It was never contemplated that he would take a material part in management. In substance, as Willmer LJ put it, the transaction was a loan by Hoon to Kapoor to let him buy and resell the estate at a quick profit to be shared equally.

The intended quick resale never happened. It was agreed between Kapoor and Hoon that, pending resale, Kapoor personally would meet the running expenses and be reimbursed out of the profit; the board appears to have accepted this without ever resolving it. In the summer of 1959 Kapoor instructed an architect to apply for planning permission, and then instructed the plaintiffs. There is no minute of any board resolution authorising their employment, and Hoon, though in the country at the time, was not consulted.

An awkward fact for the plaintiffs. Throughout the correspondence the company's name was never mentioned. The planning appeal was submitted in Kapoor's name, and the plaintiffs certified under s. 37 of the Town and Country Planning Act, 1959 that Kapoor was the estate owner. Mr Freeman's explanation in evidence was that he "simply identified the second defendant in his own mind with the defendant company". The county court judge nevertheless specifically accepted his evidence that he had been instructed by Kapoor on behalf of the company, and that finding was not challenged on appeal.

The judge gave judgment for the plaintiffs. The company appealed, arguing that there was no evidence of apparent authority, no evidence that the plaintiffs relied on any such authority, and no evidence that Kapoor acted as managing director to the board's knowledge.

Was the company bound by a contract made in its name by a director who had never been appointed managing director, where no board resolution authorised the contract?

Appeal dismissed. The company was bound. Kapoor had been permitted by the board to act as managing director, and the engagement of surveyors to obtain planning permission for the company's only asset was within the ordinary ambit of such a person's authority.

To bind a company by a contract made by an agent who lacked actual authority, the contractor must show:

| | Condition | On these facts | |---|---|---| | (a) | A representation was made to the contractor that the agent had authority to enter on the company's behalf into a contract of the kind sued on | The board knew Kapoor had throughout been acting as managing director in employing agents and taking steps to find a purchaser, and permitted him to do so | | (b) | The representation was made by a person or persons with actual authority to manage the business, either generally or in respect of the matters to which the contract relates | The articles conferred full powers of management on the board | | (c) | The contractor was induced by the representation to enter into the contract, that is, he in fact relied on it | Finding Kapoor acting in relation to the property as the board allowed him to act, the plaintiffs were induced to believe he was authorised | | (d) | Under its memorandum and articles the company was not deprived of capacity either to enter into a contract of that kind or to delegate authority to that agent | The articles contained powers for the board to delegate management functions to a managing director or a single director |

The judge's findings satisfied all four, and so Kapoor had apparent authority to contract for the plaintiffs' services in connection with the sale of the property, including obtaining development permission.

Actual and apparent authority are independent

Diplock LJ began by restating the branch of law "on a rational basis". Actual authority "is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties", and its scope is found by construing that agreement. The contractor is a stranger to it and may be wholly ignorant of it.

Apparent or ostensible authority is the mirror image: "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 on by the contractor, that the agent has authority to enter on behalf of the principle into a contract of a kind within the scope of the" apparent authority. To that relationship the agent is a stranger; he need not even know of the representation. When acted on, the representation "operates as an estoppel, preventing the principal from asserting that he is not bound by the contract", and it is irrelevant whether the agent had actual authority.

Two consequences follow that students routinely get wrong. First, the agent cannot create his own apparent authority: where he has no actual authority, "the contractor cannot rely on the agent's own representation as to his actual authority." Second, the commonest representation is not words but conduct — "by permitting the agent to act in the management or conduct of the principal's business."

Two features peculiar to companies

Because the principal is a corporation, Diplock LJ added two qualifications.

• Capacity. A corporation's capacity is limited by its constitution, and under the doctrine of ultra vires that limitation "is absolute." Hence no representation can estop a company from denying authority to do an act it could not do itself; and since conferring actual authority is itself a corporate act, the company cannot be estopped from denying that it delegated what its constitution forbade it to delegate. This is condition (d).
• Agency. A corporation can make a representation only through an agent. So the representation that creates apparent authority must come from someone with actual authority from the corporation to make it — the board under the constitution, or someone to whom the board may delegate that power. This is condition (b).

Constructive notice, correctly stated

Diplock LJ preferred to explain condition (d) as a direct consequence of ultra vires rather than of constructive notice, and his reason is the sentence to quote whenever constructive notice is discussed:

constructive notice is not a positive, but a negative doctrine, like that of estoppel of which it forms a part.

It stops the contractor from saying he did not know the constitution. "It does not entitle him to say that he relied on some unusual provision in the constitution of the corporation, if he did not in fact so rely."

Willmer LJ made the same point through Lindley LJ's older formulation, that persons dealing with an apparent managing director "must look to the articles, and see that the managing director might have power to do what he purports to do" — which he read as meaning not that they must actually read the articles, but that, being affected with notice, they must have regard to them. Had the articles conferred no power to appoint a managing director at all, the plaintiffs could not have been heard to say the company held Kapoor out as one.

Why the earlier cases did not help the company

The company relied on Houghton, Kreditbank Cassel and Rama Corporation. Willmer LJ distinguished all three on a single ground: each was a case of "most unusual transactions, which would not be within what would ordinarily be expected to be the scope of the authority of the officer purporting to act". In none of them could the plaintiff say the officer was acting within the scope of authority a person in his position would be expected to possess, and in none did the plaintiff even know of the articles. They are therefore illustrations of the ordinary rule that a party setting up an estoppel must show that he in fact relied on the representation.

The plaintiffs here did not need the articles to make their case; they relied on the board's conduct. Pearson LJ added the practical objection to the contrary view: to require a contractor in a normal transaction to obtain and study the articles and Table A to check the power of delegation "would be an absurd example of legal pettifoggery."