Tan Cheng-Han, Estoppel in the law of agency LQR 2020, 136(Apr), 315 PDF

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An essential article for answering questions on Watteau v Fenwick [1893] 1 QB 346...

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Estoppel in the law of agency, L.Q.R. 2020, 136(Apr), 315-333

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Estoppel in the law of agency Tan Cheng-Han*

Table of Contents I. Introduction II. Apparent Authority III. Estoppel to Deny Existence of Agency Relationship IV. Intentionally or Carelessly Causing Belief V. Failure to Act Despite Notice of a Third Party’s Belief VI. Watteau v Fenwick Estoppel? VII. Conclusion

Journal Article Law Quarterly Review L.Q.R. 2020, 136(Apr), 315-333 Subject Agency Other related subjects Jurisprudence Keywords Agency; Apparent authority; Estoppel; Jurisprudence

Cases cited Watteau v Fenwick [1893] 1 Q.B. 346; [1892] 12 WLUK 29 (QBD)

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*L.Q.R. 315 I. Introduction True or paradigmatic agency arises where a principal and agent agree that the latter shall have power to act on behalf of the former. Such agency is succinctly defined in Restatement, Third in the following manner:1 "Agency is the fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act." Restatement, Third goes on to state that an agency relationship arises only when these elements are present.2 This definition is a relatively narrow one, confined as it is to a relationship of mutual assent with the agent being subject to the principal’s control where the agent acts on the principal’s behalf. To the above definition it may usefully be added that: "[In respect] of what the principal has assented to, the agent is said to have authority to act; and this authority constitutes a power to affect the principal’s legal relations with third parties." 3 This external dimension gives the law of agency much of its legal relevance; the law of agency does not apply to all intermediaries and is concerned only with intermediaries/agents who have the power to affect their principal’s legal relations, usually in contract, vis-à-vis third parties.4 It is possible to conceive of a law of agency that is concerned only with cases involving mutual assent between the principal and agent. The law of agency would then be relatively simple with little conceptual difficulty. It is likely, however, to be much less useful and interesting. This is because such agents, narrowly conceived, are only a subset of the variety of intermediaries that people interact with regularly. Intermediaries are an essential aspect of modern life. Being able to rely on intermediaries is highly convenient and, in the field of commerce, economically productive. Intermediaries allow us to expand our presence in space and time which facilitates economic activity for the overall benefit of society. *L.Q.R. 316 Indeed the principal forms of business organisation, the partnership and corporation, could not have become viable vehicles for business activity without the use of intermediaries. The term intermediary is a broad and even ambiguous one that encompasses different types of activity. It can range from the mundane such as a person facilitating introductions, to a senior employee of a firm who is the representative par excellence of the firm and has authority to enter into contracts on its behalf. The sheer range of intermediaries and consequences from using intermediaries has made it impossible for there to be a unified law governing such persons. Instead the law relating to intermediaries has to be gathered from many distinct fields, including contract, tort, equity, laws relating to enterprises, employment, and agency. As regards the law of agency, its role goes beyond true or paradigmatic agency. For instance, agency law through estoppel can ascribe legal consequences to principals in relation to the unauthorised acts of intermediaries, whether such intermediaries are agents with some more limited authority or are non-agent intermediaries with no authority at all. As such, the broader the role of estoppel within the law of agency, the greater is agency’s reach in the framework of legal rules that apply to intermediaries. This paper considers three areas of estoppel operating within the law of agency which expand or potentially expand agency’s reach well beyond its paradigm sense. Within these areas only apparent authority is well established. It will be suggested that the other two areas of estoppel do not exist independently, and that some of the cases attributed to them can be rationalised within the framework of apparent authority, while other cases are better explained outside the law of agency.

II. Apparent Authority The clearest instance of estoppel operating within the law of agency is the doctrine of apparent authority. Apparent authority substantially enlarges the reach of agency law as it allows a principal to incur legal obligations even when the principal has expressly prohibited the agent from acting in the manner that the agent did. The doctrine is a broad one that applies within a contractual context which accounts for most of the cases, and also outside contract, e.g. in relation to transfers of property, in tort and with respect to questions of notification.5 On the face of it this is objectionable as it flies in the face of respect for personal autonomy for a person to incur legal obligations to another against the former’s will. For this reason, the doctrine of apparent authority must be kept within strict and clearly defined limits, and its justification is traced back to the act of the "principal" that has induced a third party to believe that

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the principal has authorised the agent’s action. The fact that the legal consequences for the principal flow from the principal’s conduct justifies the principal bearing such consequences. If this was not the case, a party would not be safe in contracting with the agent of an absent person because under no circumstances would an unauthorised act by such agent give rise to any legal obligations against the principal.6 Apparent authority therefore plays a fundamental role in ensuring the viability of the institution of *L.Q.R. 317 agency itself.7 In addition, a rudimentary law of agency limited to actual authority would not have sufficiently supported the desirable expansion of economic or contractual activities or the rules designed to overcome obstacles like distance, size or numbers.8 The doctrine of apparent authority therefore attempts to strike a balance between the protection of third parties who act reasonably when dealing with agents and the protection of principals who use agents, against the backdrop of the importance of agency in supporting economic activity. The law of agency in England9 and many other Commonwealth jurisdictions10 appropriates estoppel reasoning to fashion a reasonable approach to holding principals liable for non-authorised acts. The doctrine of apparent authority reflects a fusion of agency and estoppel which has its roots in equity.11 The estoppel is conventionally understood as common law estoppel by representation.12 It has been said that the doctrine "is no more than a familiar example of an estoppel which operates within the framework of agency principles".13 The estoppel arises from a representation of the principal by word or conduct. This requirement of a representation is an important control mechanism. Care must be taken not to subvert this approach. It is not enough for an agent to make representations as to the agent’s own authority. Accordingly, while an agent may in appropriate circumstances have apparent authority to represent a fact, even one that causes the third party to conclude reasonably that the agent was authorised, an approach that liberally comes to this conclusion will seriously undermine the basis of liability as being founded on the principal’s actions. An example of such a questionable approach may be seen in First Energy (UK) Ltd v Hungarian International Bank,14 where a branch manager was found to have apparent authority to represent that his principal had given authority for the transaction despite the third party knowing that the manager himself had no authority to approve such a transaction. Some commentators have expressed scepticism over the conclusion, principally on the basis that finding apparent authority on the part of the agent to communicate approval of the transaction by the principal comes uncomfortably close to undermining the rule that an agent cannot be the source of the representation.15 Such apparent authority should therefore be established only where the facts point clearly to this16 and it is submitted respectfully that First Energy was not such a case. Although the parties did enter into an ad hoc financing arrangement in respect of an earlier transaction, there *L.Q.R. 318 were two signatories to the letter of offer from the bank.17 Prior to this ad hoc arrangement, though it did not eventually give rise to a concluded agreement, a facility letter signed by two senior officers of the bank was sent to the plaintiff. Given these antecedents, it seems difficult to find that the branch manager could, acting solely by himself, have had apparent authority to sign and send letters on behalf of the bank which had the effect of giving rise to apparent authority to communicate offers binding on the bank. On the other hand, where it was the role of the manager of an employee pension plan to administer the plan and communicate important facts to employees, it is not surprising that the manager had apparent authority to communicate the fact of acceptance into the scheme even though only the trustees had the authority to admit new employees, which approval had not been given in the instant case.18 An insurance agent also has authority to make representations as to the type of policies offered by the insurance company that the agent represents even if the agent did not have authority to conclude any contracts on behalf of the company. As such, the insurance company was liable for the agent’s false representations which had contributed to the claimants remitting money to purchase a non-existent insurance product.19 Although cases such as First Energy and Kelly v Fraser push the boundaries of apparent authority, particularly the former, the doctrine may continue to be stretched. The Australian decision of Pacific Carriers Ltd v BNP Paribas 20 provides an example. In that case a manager of a bank who did not have actual authority to provide an indemnity stamped two letters of indemnity with the stamp used for the issue of letters of credit. The manager also signed the letters of indemnity although her signature was illegible. She had done so under the mistaken belief that she was only verifying the signature of the shipper, which was an act that fell within her actual authority. The indemnity was for the benefit of the carrier who did not know of the lack of authority. The claim by the carrier on the letters of indemnity was allowed by the Australian High Court. While the court said that the documents objectively construed were not verifications but amounted to indemnities, this was binding on the bank because it fell within the apparent authority of the manager.21

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The difficulty with the outcome of Pacific Carriers is that the carrier appeared to have had no contact with the bank,22 as the indemnity was sought by the shipper of the goods for the carrier, and therefore it would seem that there was no sufficient representation or manifestation that could have given rise to apparent authority. The result has been criticised23 and it is difficult not to sympathise with the view of the New South Wales Court of Appeal, below, that apparent authority was not *L.Q.R. 319 made out because this was a case involving a self-authorising agent.24 If apparent authority is to be found, it may be by extending the cases relating to an agent’s ability in appropriate cases to communicate the principal’s approval of a transaction. On the facts, the manager was the "natural and appropriate person to whom [the carrier’s] request for signature of the documents by the bank was directed".25 She was the person who dealt with the request and who communicated the bank’s response to the carrier through the shipper. Such response would signify to a reasonable third party "agreement to what was requested",26 particularly where a stamp or other accoutrement intended to vest an act with a semblance of greater formality was used. In other words, Pacific Carriers may arguably be understood as a case where the officer in question, through the position that she held, had apparent authority to communicate the bank’s approval of the indemnity that was sought by the shipper. It is justifiable as a matter of conventional principle in the same way that First Energy (UK) Ltd v Hungarian International Bank 27 and Kelly v Fraser 28 are, even if there may be reservations about whether the right result was reached on the facts. Nevertheless this would be stretching the position. As has been pointed out, the third party in First Energy (and also in Kelly v Fraser) was aware of the status of the agent that the third party dealt with,29 while in Pacific Carriers the third party had no idea who the actual signatory was, and did not inquire. Only matters internal to the bank differentiated this situation from one where the signature was by an office cleaner who had found the form in a waste paper basket.30 While Pacific Carriers is a marginal case, it sits within a more contemporary issue. When businesses and enterprises were both simpler and more compact, rules relating to vicarious liability and agency worked relatively well. Today, with asset-light companies that have relatively few assets and employees for the scale of the business, or large conglomerates with layers of hierarchy, it is an open question whether the law strikes the right balance in relation to the imposition of intermediary liability. Indeed, as in Pacific Carriers, the two contracting parties may not even have dealt directly with each other, as the obligations arose out of a larger transaction involving multiple other parties. Such concerns were implicit in First Energy where Evans L.J. said that, if the bank was correct in its submissions, it would mean that the plaintiffs were bound to seek confirmation from the bank’s head office in London.31 Third parties could not always insist, if ever, on attending the board or management meeting that approved the transaction, or on speaking to the senior manager himself.32 Steyn L.J. in the same case opined that the idea that the plaintiffs should have checked with the managing director in London whether the bank had approved the transaction "seems unreal".33 Such modern business realities mean that the role of implied representations based on *L.Q.R. 320 the position and responsibilities of agents will continue to test and extend the margins of apparent authority. It is in this light that Pacific Carriers should be seen. Beyond the nature of the representation, which has been discussed earlier, there is also the question of how the representation could be said to have been transmitted. It is suggested that in a transaction involving a chain of parties where not all will meet face to face to negotiate the terms, a representation by party A to B on a matter that is for the benefit of C may in appropriate circumstances be relied on by C where B was procuring a benefit sought by C to A ’s knowledge. Thus in Pacific Carriers, while the bank did not make any representation directly to the carrier, it did so to the shipper who was procuring the indemnity for the benefit of the carrier. For this limited purpose the shipper was the carrier’s agent even though neither of them would have thought of their relationship in such terms.34 Any representation made by the bank to the shipper was therefore equivalent to a representation to the carrier. Such an explanation of Pacific Carriers would be relatively conventional.

III. Estoppel to Deny Existence of Agency Relationship In addition to apparent authority, Restatement, Third refers to a different type of estoppel in the following terms:35 "A person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person’s account is subject to liability to a third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the person’s account, if (1) the person intentionally or carelessly caused such belief; or

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(2) having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts."

Where the conditions are met, the principal is estopped from denying the existence of an agency relationship with another. The leading common law text on the law of agency recognises this category of estoppel cases under the heading "Estoppel in agency situations".36 Unlike apparent authority which relies on a form of estoppel with weak37 requirements special to agency, the orthodox estoppel doctrines can apply in the agency context38 where it may be difficult to say that the normal principles of apparent authority apply, whether by extending authority or creating it in a person who never had authority,39 including where there was no manifestation or representation as to such authority *L.Q.R. 321 on the part of such person.40 In The Bunga Melati 5 the Singapore Court of Appeal remarked "that the difference between agency by estoppel and apparent authority is not, as it were, that apparent".41 This was because agency by estoppel is said to be capable of existing even where it could not be said that a principal has made a representation or in some other way manifested that another person had authority to act on the principal’s behalf in relation to a third party. While it was unnecessary on the facts to arrive at a conclusion, the court doubted whether any of the authorities relied on for such a proposition truly supported a separate basis in estoppel giving rise to liability against a person as principal. In The Bunga Melati 5 the plaintiff through its brokers entered into two fixed price contracts and a spot contract with M to deliver bunkers to the defendant’s vessels. The plaintiff did not know that its brokers were dealing with M rather than the defendant. In its claim, the plaintiff contended that the defendant was estopped from denying that M was acting as its agent in relation to these three contracts. It was alleged that the defendant knew that M was conducting all of its transactions with all of its bunker suppliers on the basis that it was the defendant’s agent. Despite this, the defendant stood idly by and did not correct the plaintiff’s mistaken belief that M was the true contracting party. For this and other reasons the plaintiff submitted that equity would intervene to prevent the defendant from denying that M was its agent even in the absence of a positive representation of agency. The High Court had dismissed the plaintiff’s claim and the Court of Appeal affirmed the lower court’s decision. Silence or inaction would not amount to a representation unless there was a legal or equitable duty to make disclosure. On the facts, the plaintiff had not sufficiently proved that the defendant knew that M had entered into the contracts representing itself as the defendant’s agent. As regards the issue of whether there is a distinction between apparent authority and agency by estoppel, it is suggested respectfully that the view of the Singapore Court of Appeal is correct. There is already a clearly justified and established category of apparent a...