Michael Joyce, Partner, Norton Rose Fulbright
Given the fast paced nature of the fuel distribution, wholesaling and retailing business, directors often rely on subordinates to arrange marketing, purchases and sales. While this may be necessary, and can promote efficiencies, there is a danger that directors can inadvertently allow their subordinates to develop a type of authority which can bind the company, even in circumstances which may run against what the directors had anticipated.
Under section 126(1) of the Corporations Act, the power to make binding contracts can be exercised by an individual acting with the company’s express or implied authority and on its behalf. In these circumstances, the person acting on behalf of the company is termed its “agent”.
There are broadly two types of authority: “actual” or “apparent”. Each should be clearly understood by directors to ensure that the company has validly given authority to those agents it supports, while limiting the circumstances and pitfalls when authority is accidently granted.
Actual authority can be conferred in two ways: either expressly or implied through conduct.
Express actual authority is the clearest and strongest way for a company to grant authority to an individual. The usual example of how this is conferred is by the company (through the directors) passing a resolution which empowers the agent to bind the company to certain contracts. The advantage of express actual authority is that the company has made the scope of the authority clear, making it easy to identify when the agent has stepped too far.
Implied actual authority does not rely on a specific document, such as a company resolution. Instead, the authority is implied from the conduct of the company and the individual who is the potential agent. The most common circumstance is when a person is placed in a management position. It has been long held in Australia that a manager has the implied authority to do all the acts that a person in their particular position customarily has. For fuel industry companies, care should be taken when appointing a manager, as the reference point for assessing actual authority will be what authority a manager in the fuel industry customarily has.
Directors should also be aware that they have a key role in limiting circumstances of implied actual authority, especially in cases where managing directors have been appointed. If directors do not take steps to review and control the actions of a managing director (such as reviewing and correcting transactions) they may be taken to have granted implied actual authority to act as the company to the managing director. This issue often arises in larger companies where there may be difficulty in maintaining continual oversight. Effective board management policies are crucial to prevent inadvertent granting of unwanted authority.
Apparent (also known as “ostensible”) authority, is subtler than actual authority. This involves an agency relationship being created through the appearance of authority conferred on the agent. No agreement between the company and agent is required. The test for apparent authority is where a reasonable person believes the supposed agent had authority to act. This depends on the circumstances which give rise to the transaction being entered into. For apparent authority to exist, the following must occur:
- a representation to the other contracting party that the person purporting to act on the company’s behalf has authority;
- this representation must come from the company itself, or from someone who has actual authority; and
- the other contracting person must have relied on the representation.
Fortunately, there is a limit on apparent authority in that a person with apparent authority cannot grant further authority on anyone else.
For companies involved in heavy contracting, such as the fuel industry, apparent authority is an important risk that needs to be controlled. Companies are advised to continually review who is listed in documents, websites and the like as having authority to enter into contracts to ensure that outside parties are not misinformed. While this takes vigilance, the alternative is binding!
This article was written by Michael Joyce, Partner at Norton Rose Fulbright. firstname.lastname@example.org.