The Authority to Enter into a Contract on Behalf of a Business – Who Has It?

I was recently instructed in a claim which turned on whether an employee of the Defendant business had the requisite authority to enter into a contract on the Defendant’s behalf. In this article I will provide an overview of the circumstances in which an employee of a business can enter into a contract on its behalf.

The Law

In order for a contract to be enforceable against a business, the person who entered into it on business’ behalf must have had the requisite authority to do so. In reality, a wide range of people often have the authority to enter into contracts on behalf of businesses, but for the purposes of this article I will simply refer to the person seeking to enter into a contract on behalf of the business as ‘the employee’.

In the main, there are two forms of authority to contract that an employee can have:

1) ‘Actual’ authority; and
2) ‘Apparent’, or ‘ostensible’ authority.

In addition to these two forms of authority, there is also the principle of ‘ratification’. However, ratification works retrospectively in circumstances where the employee did not in fact have authority before entering into the contract but where the business wants to benefit from the contract anyway. This article is concerned with authority before entering into a contract, and so will consider ratification no further.

Actual Authority

An employee has ‘actual’ authority when the business has authorised their actions (Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480).

Actual authority can be express or implied. Express actual authority is often reasonably straightforward to identify and can include the employee’s contract setting out their ability to enter into contracts on behalf of the business. Implied actual authority, however, can be more difficult to establish, and arises where in the circumstances the business has authorised the employee even in the absence of express words. For example, where an employee has been given a promotion to a position within the business which is generally understood to confer authority upon them.

Apparent Authority

As ‘actual’ authority is likely to be relatively straightforward to identify, most disputes as to whether an employee had authority or not will come down to whether the employee had ‘apparent’ authority to enter into the contract on behalf of the business. Apparent authority arises when:

1) The business, in some way, represents that the employee had authority which is wider than the employee’s actual authority;

2) The employee enters into a contract on behalf of the business with a third party, within the scope of that wider apparent authority; and

3) The third party changes their position in reliance on that representation of the employee’s apparent wider authority.

There are a number of different cases in which the Courts have determined that an employee did have apparent authority before entering into a contract on behalf of a business. However, whether an employee did have apparent authority will always be a question of fact which will be determined on the specific circumstances of the case at hand.

If the Court is satisfied that the employee did have apparent authority before entering into the contract, then the business will be bound to the contract in the same way that it would if the employee had actual authority.

NB: there is likely to be some overlap between ‘implied actual authority’ and ‘apparent authority’. “Generally, they [implied actual authority and apparent authority] co-exist and coincide, but either may exist without the other and their respective scopes may be different” – Diplock LJ in Freeman & Lockyer at p.502.

The Facts of My Case

In the case that I was instructed in, the Claimant was a business involved in media production. The Defendant (who I was instructed to represent) required the production of videos for one of their campaigns. The Claimant’s brother was an employee of the Defendant, and he introduced the Claimant to the Defendant.

After initial meetings between the parties, the Claimant began producing a video for the Defendant. The Defendant intended to review the video, and then after a discussion decide whether they wanted the Claimant to produce any further videos. However, after those initial meetings, the Claimant’s brother produced a contract and signed it on behalf of the Defendant. It agreed to make a deposit and monthly payments to the Claimant. The Claimant continued producing that video, and then began to query where the deposit and first monthly payment were. The Defendant denied being liable to pay the Claimant pursuant to that contract on the basis that the Claimant’s brother, whilst being an employee of the Defendant, did not have authority to enter into a contract on the Defendant’s behalf.

As indicated above, this is a case which turned on whether the Claimant’s brother had ‘apparent’ authority to enter into the contract on the Defendant’s behalf.

Practical Considerations

A third party to a contract (the party other than the contracting business and their employee) should consider whether the employee of the business has the requisite authority to enter into the contract on behalf of the business. This is a consideration which should be taken even more seriously where there are objectively suspicious circumstances, such as where family is involved. This is because where there is a dispute as to the employee’s authority, the burden of proving that an employee did have the requisite authority will lie on the party making that assertion, and that will likely be the third party. If the third party cannot discharge that burden, then the contract will be unenforceable against the business that they entered into it with. To that end, a third party might wish to ask an employee who is seeking to enter into a contract with them on behalf of a business for evidence of their authority to do so.

For businesses, it may be prudent to clearly set out the extent of any employee’s authority to enter into contracts on behalf of it. Express wording is likely to put to bed any difficult questions about whether or not an employee had ‘apparent’ authority to enter into the contract on their behalf.

The Civil team at Becket Chambers can provide advice and representation in relation to a wide range of contractual disputes and issues. If you require such advice or representation, then please do not hesitate to contact our team at clerks@becket-chambers.co.uk.