Companies and organisations depend on the notion of agency to conduct their business: they require natural persons to make decisions and enter into agreements on their behalf. So who can enter into binding transactions on behalf of a company?
Generally speaking, a company will be legally bound by a contract where it is entered into by a person, or people, who are duly authorised by the company to make such decisions and/or conduct the type of business to which the contract relates. This type of authority is often labelled as ‘actual authority’. Certain employees of a company may be granted actual authority to contract on its behalf, but it is commonly a responsibility given to directors. Of course, there will still be limits as to what a director or employee has the authority to do and it is only when acting within the authority given that the company will be bound by their actions.
The above is subject to an important exception: it may be possible for a counter-party to enforce an agreement entered into on behalf of a company where the person executing it did not have actual authority, but where it appeared to the counter-party that the individual(s) did have authority to act. In other words, even in the absence of actual authority, the company may be bound if the employee or director was perceived to have actual authority. This type of authority is often labelled as ‘apparent authority’.
Directors are often perceived as having authority to act on behalf of a company. This is reinforced by s44 of the Companies Act, which provides that every director and company secretary are ‘authorised signatories’ of a company and consequently where a document is validly executed by two such individuals, it will have the same effect as if it had been executed under the company’s common seal.
More often than not, those that negotiate and enter into agreements on behalf of a company will do so for the right reasons and in the best interests of the company. However, there may be times where a deal goes wrong and the individual’s motives are called into question. This situation arose in a case that was recently before the High Court: LNOC Ltd v Watford Association Football Club Ltd [2013]. The decision of Judge Mackie QC has provided us with a useful opportunity to consider the legal principles to be considered in such a case, and the way in which they are applied.
FACTS OF THE WATFORD CASE
Mr Laurence Bassini was the de facto managing director and beneficial owner of Watford Football Club (the Club). He owned Watford FC Ltd (WFCL), which acquired Watford Leisure Plc, which in turn owned 96% of the Club’s shares. The Club’s board was small and consisted mainly of non-executive directors. Mr Bassini was largely given free rein to run the Club as he saw fit.
Mr Bassini entered into negotiations with Mr Nigel Weiss to obtain funding, ostensibly to carry out development work on a stand at the Club’s stadium. Mr Weiss ran companies which acted as intermediaries in the provision of funding to football clubs. The claimant in the action, LNOC Ltd, was one of Mr Weiss’s clients, and ultimately provided finance to the Club at the request of Mr Bassini.
The financing was to be provided in two separate transactions, both of which involved the selling of future debts for a discounted amount up front, also known as ‘forward funding’.
The ‘Transfer Fee Transaction’
The first transaction involved the forward funding of two instalments the Club was owed following the sale of a player, Danny Graham, to Swansea. Swansea owed the Club £1m in future fees and it was agreed that LNOC would pay £951,041 to the Club in exchange for two promissory notes payable at deferred dates with a combined value of £1m.
The Transfer Fee Transaction was executed by Mr Bassini on behalf of the Club on 7 September 2011. On 19 September 2011 the promissory notes were collected from Swansea, and Mr Bassini and the Club’s company secretary endorsed the notes. Subsequently, LNOC transferred the funds to WFCL (not the Club).
It ultimately became apparent – and it was disputed as to whether Mr Bassini would have known at the time of entering into the transaction – that the Transfer Fee Transaction failed to comply with the Football League Regulations (the Regulations). The Regulations stipulated that any contract giving a football club or other party the right to receive payments in respect of a football player should be subject to the approval of the Football League board.
The ‘Football League Transaction’
On 9 September 2011, Mr Bassini agreed with Mr Weiss that LNOC would provide further forward funding in respect of future payments the Club would receive from the Football League. It was agreed that LNOC would immediately pay to the Club £1,701,642 in exchange for the assignment to LNOC of the next nine monthly payments of £200,000 due to the Club (the Agreement).
According to the Regulations, any football club that had entered into an assignment of the club’s entitlement to distributions from the Football League would be subject to a transfer embargo, whereby they would be unable to register any players without written consent of the Football League executive.
Before the Football League Transaction was executed, Mr Weiss sent the draft assignment to a representative of the Football League in accordance with the conditions precedent of the Agreement. There followed a telephone call between Mr Bassini and the Football League representative during which Mr Bassini was warned that the Club would be subject to a transfer embargo if the transaction proceeded. At that time, the Football League was unaware of the Transfer Fee Transaction.
Following the warning from the Football League, Mr Bassini indicated that he wished to restructure the Football League Transaction in such a way as to avoid the need for assignment of the league payments unless the Club defaulted in its repayments to LNOC. Consequently, the Club was to make two repayments of £900,000 to LNOC and non-executed assignments were held by Mr Weiss in escrow for LNOC and were only to be used if the Club failed to make payment. The documents required to effect the Football League Transaction were executed by Mr Bassini and the Football Club’s company secretary. Again, the payment was made to the bank account of WFCL rather than the Club.
The defaults
The Club initially defaulted on all four of the repayments it was due to make under the two forward funding transactions. The first instalments due under the Transfer Fee Transaction and the Football League Transaction, on 1 January and 1 February 2012 respectively, were ultimately paid. However, the default on the second instalment of the Transfer Fee Transaction resulted in LNOC pursuing Swansea for the debt pursuant to the endorsed promissory note and this resulted in the Football League being informed of the transaction. The league consequently suggested that the Transfer Fee Transaction may have breached the Regulations.
The second repayment in respect of the Football League Transaction was never made by the Club. By the time it became payable on 1 September 2012, Mr Bassini had sold his interest in the Club. When LNOC approached the Club for the £900,000 it was owed, it claimed that it was not aware of the transaction. LNOC accordingly commenced proceedings for the recovery of the £900,000.
LEGAL AND FACTUAL ISSUES
Mr Mackie QC recognised that the Club had a prima facie obligation to repay the monies. However, the Club argued in its defence that Mr Bassini had lacked the authority to enter into the forward funding transactions on behalf of the Club, basing its position on four propositions:
- the transactions breached the Football League Regulations and the potential sanctions for such breaches were severe;
- the Club had not needed to obtain cash and the Club did not receive any benefit from the transactions;
- the transactions had not been in the Club’s best interests; and
- Mr Weiss had known that Mr Bassini lacked the authority to enter into the transactions on behalf of the Club.
The effect of establishing these propositions would be to establish that Mr Bassini lacked both actual authority and apparent authority to enter into the transactions. Unsurprisingly, it was LNOC’s position that Mr Bassini had actual, or at least apparent authority to enter into the transactions.
Actual authority
In considering the relevant law on actual authority, Mr Mackie QC’s starting point was to acknowledge that a board of directors is vested with the authority to manage the affairs of the company, and authority for particular matters can be delegated either expressly or impliedly. He also noted, as per Lord Denning MR in Hely Hutchinson v Brayhead [1968], that a managing director will have implied actual authority to do all such things as fall within the usual scope of that office, which Mr Mackie QC said was the case even in the absence of a formal appointment process. However, he also pointed out that actual authority cannot extend to cover acts carried out by a director where the director does not consider it to be in the company’s best interests.
Mr Mackie QC referred to s172 of the Companies Act. This stipulates that a director:
‘… must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members’.
While Mr Mackie QC held that negligence alone will not vitiate a transaction where a person has actual authority, he said that the result of s172 was that actual authority cannot exist to cover an act where the person acting does not consider, in good faith, that it is in the company’s interest.
Mr Mackie QC further clarified that, in accordance with the decision in Extrasure Travel Insurances Ltd v Scattergood [2002], the test is subjective not objective. Accordingly, the question is whether the director honestly believed the transaction was in the best interests of the company, not whether the court considered it was in the best interests of the company.
There was no dispute as to Mr Bassini’s role within the Club. The only issue was whether Mr Bassini had considered, in good faith, that the forward funding transactions were in the best interests of the Club.
The Club’s first three propositions relate to whether the transactions were in the best interests of the Club, and are all germane to the question of whether Mr Bassini had actual authority. Mr Mackie QC concluded that there was nothing odd about seeking the funds from the forward funding transactions, as they were intended to be used for the development of the stadium. As to the Transfer Fee Transaction, no evidence was found that Mr Bassini had turned his mind to whether the transaction would have breached the Regulations, and even if he did, he may have thought it was a risk worth taking to complete the stadium development. Mr Mackie QC also found that although the board had not been informed of the transactions, the deals had not been arranged in secret or otherwise hidden by Mr Bassini. Furthermore, he found that there was no evidence that Mr Bassini stood to gain personally from the transactions.
On the basis of those findings, Mr Mackie QC concluded that it could not be established that, when entering into the forward funding transactions, Mr Bassini had not been acting in what he honestly believed to be the best interests of the Club.
Apparent authority
Even though Mr Mackie QC found that Mr Bassini had actual authority, he also considered whether he would have had apparent authority.
LNOC’s position was that the transactions had been executed by a director and the company secretary of the Club and this had the same effect as if the documents had been executed under seal of the company in accordance with s44(3) of the Companies Act. Consequently, LNOC said that was sufficient to give Mr Bassini apparent authority. It said that it did not need to rely on s44(5) of the Companies Act, which protects a purchaser in good faith where a document purports to have been signed by two authorised signatories under s44(2). However, Mr Mackie QC decided it was necessary to consider whether LNOC had acted in good faith.
Mr Mackie QC accepted that the statutory presumption of apparent authority in favour of a purchaser in good faith under s44(5) should be treated in the same way as the common law presumption of apparent authority as set out by Lord Neuberger in Thanakhard Kasikord Thai Chamkat (Mahacon) v Akai Holdings Ltd (in liquidation) [2010]. This entailed that, in a commercial context, a person should be entitled to rely on what it is told, absent any dishonesty or irrationality. Accordingly, a person is entitled to rely on apparent authority unless that belief was dishonest or irrational, which included turning a blind eye.
The Club sought to rely on the judgment of the Court of Appeal in Wrexham Association Football Club Ltd v Crucialmove Ltd [2008] in support of its argument that a failure to make enquiries could equate to turning a blind eye. Mr Mackie QC viewed this approach as moving away from good faith and towards constructive notice. He clarified that the test was not whether matters might have caused a reasonable person to make enquiries but rather whether the purchaser’s belief that the agent had actual authority was dishonest or irrational. In other words, only if Mr Weiss had been aware of facts that would have made it irrational for him to believe Mr Bassini did not have actual authority would this have negated his apparent authority. Mr Mackie QC found on the facts that Mr Weiss believed that Mr Bassini had actual authority and that this belief was not dishonest or irrational. Consequently, Mr Bassini had apparent authority to enter into the transactions on behalf of the Club.
COMMENT
It is clear from the decision in LNOC v Watford that directors will usually have actual authority to enter into transactions on behalf of their company unless it has been made clear that certain powers have not been delegated to them. However, a director is under a duty to act in the company’s best interests and it cannot therefore have actual authority to enter into any transaction that the director does not honestly believe to be in the best interests of the company. This provides a sensible check on directors’ abilities to burden a company with obligations it would never had intended to have.
LNOC v Watford demonstrates that in the absence of actual authority, an agent may still legally bind their principle if the counter-party believes, in the absence of dishonesty and irrationality, that the agent had actual authority.
The decision in the case is logical: Mr Bassini was de facto managing director and was given free rein to run the Club. Where such freedom is given to one person, the company should not be in a position to complain if that person’s actions are ultimately undesirable.
It does provide a warning to companies to ensure there are adequate checks and balances on directors’ and employees’ powers to enter into legally binding transactions. Not only should the company ensure it is made clear what its employees can and cannot do, but it should also take measures to ensure those contracting with the company are also aware of this.
By Christopher Pease, associate, and Richard Tyler, associate, Edwards Wildman Palmer UK LLP.
E-mail: CPease@ edwardswildman.com; RTyler@edwardswildman.com.