A Director Of A Company Has Ostensible Authority To Enter Into An Agreement With An Employee That Is Binding To The Company
September 20, 2016
A Director of a Company has ostensible authority to enter into an agreement with an employee that is binding to the company
In the matter between Kenneth Nkosana Makate and Vodacom (Pty) Limited
Constitutional Court of South Africa
Case CCT 52/15
Mogoeng CJ, Moseneke DCJ, Cameron J, Jafta J, Khampepe J, Madlanga J, Matojane AJ, Nkabinde J, V.Westhuizen J, Wallis AJ and Zondo J
April 26, 2016.
Reported by Linda Awuor & Kevin Kakai
Commercial law – contracts – capacity to enter into contracts – contracts by agents – actual and ostensible authority of an agent – ostensible authority – whether the director had ostensible authority to enter into an agreement with the Applicant on behalf of the Respondent – Whether the agreement between the Applicant and the director on the Applicant’s remuneration for his idea was binding upon Vodacom
Civil Practice and procedures —pleadings — ostensible authority — Distinction between ostensible authority and estoppel — whether it was necessary to plead ostensible authority in replication
Constitutional law — interpretation of the Constitution – interpretation of legislation – interpretation of the word debt – Constitution of The Republic of South Africa, section 39 (2), Prescription Act 68 of 1969(South Africa), Sections 10(1), 11(d), 12(d)
Commercial law – prescription of debts – extinction of debts by prescriptions – periods of prescription of debts – when prescription begins to run – whether the Applicants claim prescribed – Prescription Act 68 of 1969(South Africa), sections 10 (1), 11 (d) and 12 (2) and (3)
Commercial law –Agency – contracts by agents – essential elements of contracts by agents –defenses in contracts by agents – estoppel – whether the Respondent was estopped from performing its obligation under the contract entered into by the Applicant and the director
The Applicant, Mr Kenneth Nkosana Makate, was a former employee of the Respondent, Vodacom (Pty) Limited (Vodacom). During the year 2000, the Applicant was employed by Vodacom as a trainee accountant. The Applicant came up with an idea in terms of which a cellphone user who did not have airtime would be able to send a request to another cellphone user who had airtime to call the former. The idea was reduced to writing and the Applicant consulted his superior and mentor at Vodacom for advice on how he could have sold it to any of the cellphone service providers, including Vodacom.
His mentor, Mr Lazarus Muchenje, advised him to speak to the Director of Product Development and Management, Mr Philip Geissler(director). The Applicant and the director negotiated and agreed that Vodacom would use the Applicant’s idea to develop a new product which would be put on trial for commercial viability. If the product was successful then the Applicant would be paid a share in the revenue generated by it. Although the Applicant had indicated that he wanted 15% of the revenue, the parties deferred their negotiations on the amount to be paid to the Applicant for a later date. However, they agreed that in the event of them failing to agree on the amount, Vodacom’s Chief Executive Officer (CEO) would determine the amount.
Based on the Applicant’s idea Vodacom developed a new product which was called, “Please Call Me” (product). The product enabled a cellphone user with no airtime to send a message to the other cellphone user, asking that person to call. Vodacom’s internal newsletter stated that thanks to the Applicant who suggested the service to the product development team, which took up the idea, Vodacom had launched a new product called ‘Please Call Me’. The newsletter also declared its success. The service was offered for free for a limited period from the date of its launch, later Vodacom charged for it. Despite the fee charged it was an instant hit with customers and raked in a lot of money for Vodacom.
It was customary within Vodacom to make and implement business decisions before they received the approval of the board, the product was also launched before Vodacom’s Board approved it on March 15, 2001. Despite the product being a success, Vodacom did not negotiate compensation for the use of the Applicant’s idea. Instead, Vodacom’s Chief Executive Officer (CEO) and the director created a false narrative pertaining to the origin of the idea on which the product was based. They dishonestly credited the CEO with the idea.
(i) Whether ostensible authority relied on by the Applicant was established.
(ii) Whether ostensible authority was properly pleaded.
(iii) Whether the common law on estoppel based on apparent or ostensible authority ought to have been developed in circumstances.
(iv) Whether estoppel could amount to apparent authority
(v) Whether ostensible and apparent authority are different
(vi) Whether the agreement between the Applicant and the director on the Applicant’s remuneration for his idea was binding upon Vodacom.
(vii) Whether the Applicant’s claim had prescribed and was due to be paid to him by the Respondent.
(viii) How a debt could be extinguished under the Prescription Act 68 of 1969(South Africa)
Relevant provisions of law:
Constitution of The Republic of South Africa
Section 34 – Access to courts
Everyone has the right to have any dispute that can be resolved by the application of law decided in a fair public hearing before a court or, where appropriate, another independent and impartial tribunal or forum.
Section 39 – Interpretation of Bill of Rights
(2) When interpreting any legislation, and when developing common law or customary law, every court, tribunal or forum must promote the spirit, purport and objects of the Bill of Rights.
Prescription Act 68 of 1969(South Africa)
Section 10 – Extinction of debts by prescription
(1) Subject to the provisions of this Chapter and of Chapter IV, a debt shall be extinguished by prescription after the lapse of the period which in terms of the relevant law applies in respect of the prescription of such debt.
Section 11 – Periods of prescription of debts
(d) save where an Act of Parliament provides otherwise, three years in respect of any other debt.
Section 12 – When prescription begins to run
(1) Subject to the provisions of subsections (2) and (3), prescription shall commence to run as soon as the debt is due.
(3) A debt shall not be deemed to be due until the creditor has knowledge of the identity of the debtor and of the facts from which the debt arises: Provided that a creditor shall be deemed to have such knowledge if he could have acquired it by exercising reasonable care.
Held by majority of the Court (with Wallis AJ Cameron J, Madlanga J and V.Westhuizen J concurring):
- Interference with the factual findings made by the Trial Court was neither necessary nor justified. Ordinarily appeal courts were reluctant to interfere with factual findings made by trial courts, more particularly if the factual findings depended upon the credibility of the witnesses who testified at the trial.
- In the system, as was in many similar systems of appeal, the cold record placed before the Appeal Court did not capture all that occurred at the trial. The disadvantage was that the Appeal Court was denied the opportunity of observing witnesses testify and drawing its own inferences from their demeanour and body language. On the contrary, that was the advantage enjoyed by every trial court. Hence an appeal court must have deferred to the Trial Court when it came to factual findings.
- The deference afforded to a trial court’s credibility findings must not have been overstated. If it emerged from the record that the Trial Court had misdirected itself on the facts or that it came to a wrong conclusion, the appellate court was duty-bound to overrule factual findings of the Trial Court so as to do justice to the case
- Actual authority and ostensible or apparent authority were the opposite sides of the same coin. If an agent wished to perform a juristic act on behalf of a principal, the agent required authority to do so for the act to bind the principal. If the principal had conferred the necessary authority either expressly or impliedly, the agent was taken to have actual authority. But if the principal were to deny that she had conferred the authority, the third party who concluded the juristic act with the agent may have pleaded estoppel in replication. In the context, estoppel was not a form of authority but a rule to the effect that if the principal had conducted herself in a manner that misled the third party into believing that the agent had authority, the principal was precluded from denying that the agent had authority.
- The same misrepresentation may have also led to an appearance that the agent had the power to act on behalf of the principal. That was known as ostensible or apparent authority in the law. While that kind of authority may not have been conferred by the principal, it was still taken to be the authority of the agent as it appeared to others. It was distinguishable from estoppel which was not authority at all. Moreover, estoppel and apparent authority had different elements, barring one that was common to both. The common element was the representation which may have taken the form of words or conduct.
- The presence of authority was established if it was shown that a principal by words or conduct had created an appearance that the agent had the power to act on its behalf. Nothing more was required. The means by which that appearance was represented needed not be directed at any person. In other words the principal needed not make the representation to the person claiming that the agent had apparent authority.
- Ostensible or apparent authority was the authority of an agent as it appeared to others. That underscored the distinction between it and estoppel. The features of estoppel made the distinction even more noticeable. The essential elements of estoppel in the field of agency were the following:
(a)A representation made in words or by conduct, including silence or inaction.
(b)The representation must have been made by the principal to the person who raised estoppel.
(c)The principal must have reasonably expected that her conduct may mislead the representee.
(d)The representee must have reasonably acted on the representation to his own prejudice.
Therefore, it was clear that, even if the representee was not an outsider, under apparent authority the principal could still have been bound.
- The Trial Court had adopted an incorrect approach to pleadings. It held that the Applicant should have pleaded estoppel in replication. The Applicant had alleged in his particulars of claim that the director had ostensible authority. The Respondent denied that fact in its plea. Consequently, ostensible authority became one of the issues to be determined at trial, as properly defined by the pleadings. In the circumstances the Trial Court erred in holding that apparent authority was not pleaded, because it was not introduced by means of replication.
- The concept of apparent authority was introduced into law for purposes of achieving justice in circumstances where a principal had created an impression that its agent had authority to act on its behalf. If that appeared to be the position to others and an agreement that accorded with that appearance was concluded with the agent, then justice demanded that the principal must have been held liable in terms of the agreement. It could not be gainsaid that on the facts, there was a yearning for justice and equity.
- The Applicant had established that the director had apparent authority to bind Vodacom. That finding made it unnecessary to consider whether the common law should be developed. Estoppel applied to a contract of agency based on apparent authority in as much as it applied to a contract based on actual authority.
- The law had always treated estoppel in the field of contracts as distinct. For example, if a person conducted herself in a manner that would have reasonably caused another to believe that she was assenting to contractual terms proposed by the latter, and acting on that belief the latter entered into a contract with her, she would be bound as if she had intended to agree, even though that may not have been her intention. Her liability may have been based on either estoppel or the principle of objective theory of contract.
- In the law that kind of contract was known as the apparent agreement because it did not have consensus as its foundation. What was clear though was that the objective theory of contract was not construed to mean estoppel, even though they both applied and arose from the same facts.
- Both apparent contract and apparent authority derived their existence from the conduct of the party to have been held liable. They came into being from what reasonably appeared to be the position. Therefore, if a distinction was drawn between estoppel and the objective theory of contract in the case of the apparent agreement, the same should have been the position in respect of apparent authority and estoppel in contracts of agency.
- It was apparent that estoppel and ostensible authority were different, even though there may have been some overlap between them. Ostensible authority was the power to act as an agent indicated by the circumstances, even if the agent may have not truly have been given the power. Whereas estoppel, as was observed in West, was the rule that precluded the principal from denying that she gave authority to the agent.
- The approach that collapsed apparent authority and estoppel into the same thing was not underpinned by principle, let alone an established one. Instead that approach lacked the precision of thought and expression. There was no doubt that the law had recognised estoppel and circumstances under which it applied for a century. But that did not mean estoppel was apparent authority.
- Section 39(2) of the Constitution of the Republic of South Africa on the interpretation of Bills of Rights, introduced to the law a new rule in terms of which statutes must have been construed. It also appeared from the same statement that the new aid of interpretation was mandatory. That meant that courts must have at all times bore in mind the provisions of section 39(2) when interpreting legislation. If the provision under construction implicated or affected rights in the Bill of Rights, then the obligation in section 39(2) was activated. The court was duty-bound to promote the purport, spirit and objects of the Bill of Rights in the process of interpreting the provision in question.
- The objects of the Bill of Rights were promoted by, where the provision was capable of more than one meaning, adopting a meaning that did not limit a right in the Bill of Rights. If the provision was not only capable of a construction that avoided limiting rights in the Bill of Rights but also bore a meaning that promoted those rights, the court was obliged to prefer the latter meaning.
- It could not be disputed that section 10(1) on the extinction of debts by prescription read with sections 11 on periods of prescription of debts and 12 on when prescription begins to run, of the Prescription Act limited the rights guaranteed by section 34 of the Constitution on access to courts. Therefore, in construing those provisions, the High Court was obliged to follow section 39(2) on the interpretation of Bills of Rights, irrespective of whether the parties had asked for it or not. That was so because the operation of section 39(2) did not depend on the wishes of litigants. The Constitution in plain terms mandated courts to invoke the section when discharging their judicial function of interpreting legislation. That duty was triggered as soon as the provision under interpretation affected the rights in the Bill of Rights.
- It followed that the Trial Court attached an incorrect meaning to the word debt. A debt contemplated in section 10 of the Prescription Act on extinction of debts by prescription, did not cover the claim. Therefore, the section did not apply to the claim.
- The law considered the parties’ freedom of contract to be sacrosanct and that the parties’ consensus must have been reached freely. The position in the common law was that an agreement to negotiate in good faith was enforceable if it provided for a deadlock-breaking mechanism in the event of the negotiating parties not reaching consensus. Whether an agreement to negotiate in good faith was enforceable where there was no deadlock-breaking mechanism remained a grey area of the South African law.
- The agreement to negotiate in good faith the amount of the compensation payable, contained a deadlock-breaking mechanism. The parties had agreed that in the event that they disagreed on the amount to be paid, Vodacom’s CEO would determine the amount. While choosing the CEO may not be regarded as a delegation of power to a third party, the choice still constituted a deadlock-breaking mechanism. It was how the parties in their wisdom formulated the relevant clause and their choice must have been respected and given effect. That was what they had bargained freely and consequently they must have been held to it.
- It was not only difficult in the circumstances but also undesirable to have laid down an objective standard of good faith bargaining which the parties must have undertook. What the parties were precluded from doing was to negotiate in bad faith. They were not allowed to enter into those negotiations just to go through the motions, for that would not be what they had agreed to do but a charade. Both sides must have entered into negotiations with serious intent to reach consensus.
- Vodacom may have been entitled to raise the legal defences it advanced. As a party, it was entitled to have had its day in court and have had those defences adjudicated. That was guaranteed by section 34 of the Constitution on access to courts. However, it was ironic that in pursuit of its constitutional right, Vodacom had invoked legislation from the height of the apartheid era, to prevent the Applicant from exercising the same right.
Wallis AJ, Cameron J, Madlanga J and V. Westhuizen J concurring:
24. It was settled law that ostensible authority where there was no actual authority was a form or instance of estoppel, which was why it was commonly referred to in judgments and textbooks as agency by estoppel.
25. Estoppel was a wide-ranging equitable concept that found application in a number of different settings, not only where issues of authority or agency arose. Ostensible authority was merely one more instance of estoppel. It was not by any means the only one, but it was one that cropped up frequently in practice, where there was no authority, express or implied. There were cases in which ostensible authority coincided with actual authority arising by implication and in that event. Actual authority and ostensible authority would be two sides of the same coin, but this was a case where it was accepted that there was no authority at all, express or implied, that took it into the realm of estoppel.
26. It was inappropriate to have been asked to interfere with the factual findings by the Trial Court. Whilst, there may have been a few cases where it was appropriate and necessary for it to make factual findings on the basis of material in the record, where on a particular issue necessary for the proper determination of the case the Trial Court had not made a factual finding, in general the Court should have proceeded on the basis that the factual findings by the court from which the matter emanated were correct.
27. Where the issue of authority had been pertinently raised before the commencement of the action it was usual for ostensible authority to have been pleaded in the particulars of claim. Where the plaintiff alleged authority and was denied in the plea, ostensible authority was raised by way of a replication.
28. It was pointless to say that, where there was no actual authority, either express or implied, the plaintiff must have nonetheless alleged authority and waited for the inevitable denial in order to raise what was all along the real issue, namely, ostensible authority.
29. Where a plaintiff was aware that the defendant would, or would probably, raise a defence of lack of authority, there could be no criticism of them for pleading ostensible authority from the outset, either as an alternative to actual authority, or on its own. Estoppel was a shield and not a sword. Where a party sued on a contract concluded with an agent whose authority was denied, proof that they had ostensible authority was as much part of their cause of action as would be proof of actual authority, and that would undoubtedly have needed to be pleaded from the outset. Estoppel served two purposes. It either placed an obstacle in the path of a case that might otherwise have succeeded, or it removed an impediment in the path of a case that might have failed without its removal.
30. The proposition that estoppel may have only been used as a shield and not a sword did not relate to the manner in which it was pleaded, but to the use to which it was put. One of its proper uses was to remove an impediment to the successful prosecution of an action. Invoking it in relation to a plea that the representative of a contracting party lacked authority to conclude the contract was an obvious example. In that case it overcame the hurdle of absence of authority and bound the other party to the contract concluded without authority.
31. The finding by the Trial Court that ostensible authority was not pleaded, because it had to have been pleaded by way of replication was wrong. There was therefore no reason to say that ostensible authority was not a form of estoppel in order to hold that ostensible authority had properly been raised in the particulars of claim.
32. A more serious objection might have been that the issue of ostensible authority was not at any stage properly pleaded. The pleading was seriously deficient in detail and that the obligation to plead all the elements of estoppel had been ignored. But Vodacom initially sought particularity by way of a request for particulars for trial and, when the answer failed to disclose the requested particulars, no attempt had been made to compel a proper reply. When the case came to trial in 2013 Vodacom delivered a further very detailed request for further particulars for trial, but did not ask for any further information in regard to the question of ostensible authority.
33. It had not been shown that the course of the trial would have been any different had the pleading of ostensible authority been more detailed, or that Vodacom had in any way been prejudiced by the lack of particularity in regard to that aspect of the case.
34. In the law ostensible authority had always been treated as a form of estoppel, and that was the correct approach as a matter of principle. That ostensible authority was a manifestation of estoppel by representation was clear.
35. In English law ostensible authority was an estoppel by representation and that the earlier decisions the courts that said that ostensible or apparent authority was a form of estoppel were correct. That characterisation had not been challenged on the basis that it was inconsistent with the spirit, purport and objects of the Bill of Rights. Therefore, once the Applicant had accepted that the director did not have actual authority, whether express or implied, to conclude a contract with him on behalf of Vodacom, he had to show that Vodacom made a representation to him that the director had the requisite authority and that he reasonably acted upon it
36. The position in regard to representations of authority founding a claim of ostensible authority was that the statements or conduct constituting the representation must have been those of persons, individually or collectively, who had actual authority to bind the principal to the transaction in dispute.
37. The conduct may have included the appointment of an individual to a position ordinarily carrying with it a particular level of authority. If the appointment was made, but some of that authority was withheld or subjected to limitations, it was essential that that was made clear to persons dealing with that individual. Otherwise they would be entitled to hold the company to the representation of authority created by the appointment. A representation may have also been made by permitting the putative agent to engage in a course of dealing on behalf of the principal.
38. Representations by the agent alone without more were insufficient, whatever form they may have taken. But the conduct and statements relied upon may be those of the agent, provided the conduct or statements were themselves within the actual or ostensible authority of the agent. The statements and conduct must have, when taken as a whole, been such as reasonably to have conveyed to a person dealing with the agent the impression that they have authority to conclude the transaction in question, and thereby to induce the belief in that person that they had that authority.
39. The issue of the director’s ostensible authority must have therefore been viewed not only in terms of his positive conduct and that of others, but also in the light of the overall picture of the sources of authority created by Vodacom in relation to the conduct of its business and the identity of those to whom it delegated authority to act on its behalf and represented it in the conclusion of a contract of the type in issue.
40. The company would not have concluded an agreement on a revenue share basis but it would have agreed to pay an employee, who had generated, in his spare time and outside the scope of his ordinary duties, a highly profitable idea for a new product, a reasonable remuneration commensurate with the financial benefit enjoyed by the company. Vodacom’s business involved the exploitation of profitable concepts in the telecommunications industry. To have said that it would not contract with an employee, who had offered on a contractual basis to make such a concept available to it, because it was against its policy and it would not deal with an employee as it would have dealt with an outsider, flew in the face of common sense.
41. The CEO was aware of what was being discussed between the director and the Applicant, the chain of ostensible authority from the board to the director was complete and the estoppel was established.
42. Once agreement had been reached on the remuneration due to the Applicant, he would have had the right of action to have recovered that remuneration from Vodacom. That would have been a debt in respect of which prescription would have run. But no such agreement had been reached. The parties had not yet arrived at the point where there was anything that was owed or due: something (as was money, goods or service) which one person was under an obligation to have paid or rendered to another. If they had, then Vodacom would by its own actions have been able to discharge what was owed. Vodacom could not have extinguished its liability by paying the Applicant for the simple reason that the amount it would be liable to have paid had not been determined.
43. There was no debt that was due prior to the commencement of the litigation and there could accordingly have been no question of prescription. Section 10 of the Prescription Act provided that for a debt to have been extinguished by prescription. In terms of section 12(1) prescription began to run when the debt was due. The meaning that had been given to the word “debt” since the Prescription Act came into force had been , something owed or due, something (as was money, goods or service) which one person was under an obligation to pay or render to another or liability or obligation to pay or render something, the condition of being so obligated.
44. Section 12(1) of the Prescription Act on when prescription begins to run, provided that prescription would commence to run once the debt was due. If the debt was not due then prescription could not run. Debts become due when they were immediately claimable or recoverable. In the case of a continuing wrong there could be no question of prescription even though the wrong arose from a single act long in the past. The reason, which may have appeared somewhat artificial, but which was well established, was said to have been that while the original wrongful act may have occurred at a past time the wrong itself continued for so long as it was not abated. But the running of prescription in respect of any financial claim that arose from the same wrong would not be postponed. Accordingly, if financial loss had been occasioned by the original wrongful act, the debt in relation to that loss would become due and prescription would commence to run when the original wrongful act had occurred and loss had been suffered.
45. The obligation that underlined the existence of the debt must have been one that was capable of being discharged by one or other of these means. But doing so was not possible here because there was nothing determinate in existence that could be discharged by payment, delivery of goods or the rendering of services.
- Leave to appeal granted.
- Order of the Gauteng Local Division of the High Court, Johannesburg, set aside.
- Vodacom (Pty) Limited bound by the agreement concluded by The Applicant and the director.
- Vodacom to commence negotiations in good faith with the Applicant for determining reasonable compensation payable to him in terms of the agreement.
- In the event the parties failed to agree on the reasonable compensation, the matter was to be submitted to Vodacom’s Chief Executive Officer for determination of the amount within a reasonable time.
- Vodacom to pay the costs of the action, including the costs of two counsel, if applicable, and the costs of the expert, Mr Zatkovich.
- The negotiations mentioned to commence within 30 calendar days from the date of the order.
- Vodacom to pay the Applicant’s costs in the Court and in the Supreme Court of Appeal, which included costs of two counsel, where applicable.
Relevance to Kenyan Situation:
The Companies Act, 2015 under section 34 provides that a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is free of any limitation contained in the company’s constitution.
Kenyan Courts are yet to encounter a case where a director of a company enters into an agreement with an employee and thereafter denies that the official had authority to do so.
In Florence Wangu Mwangi & 2 others v British American Insurance Company Limited and 3 others, Civil Case 617 0f 2009 the High Court held that under Contract Law, when a third party was dealing with a company, he was entitled to assume that any transactions or obligations entered into by the company through persons who are held out to be its officers will be enforced against the company and the third party is not entitled to look behind the company dealings to confirm the regularity of the companies internal proceedings and they are not entitled to assume that all was being done irregularly.
In Kenya Pipeline Company Limited v Nyamogo & Nyamogo Advocates Civil Case 1142 of 2005 the Court held that a client’s advocate had ostensible and implied authority to enter into a consent on behalf of the client.
In NIC Bank Limited v General Motors East Africa Limited & Another Civil Suit No 186 of 2013 the Court held that Bearing in mind that Clause 2 (f) of the Hire-Purchase Agreement in permitted the 2nd Defendant to keep the said subject vehicle in good repair and maintenance while the said hire- purchase agreement subsisted, he was perfectly entitled to deliver the said vehicle to the 1st Defendant’s garage as he had ostensible authority to have the said vehicle repaired.
This case will go a long way in assisting Kenyans courts when faced with a similar situation as the one that faced the South African Court.