A recent case in the High Court has served as a reminder to businesses, when dealing with an employee of a firm, to request proof of authority to make decisions on behalf of the employer from the employer themselves.

In this particular case, a Bank’s local relationship manager (hereafter referred to as the Agent) was found to have no actual or ostensible authority to write off its borrowers’ significant debts, despite appearing to do so in a letter which had been initialled by the agent.

What is Actual and Ostensible Authority?

Actual authority requires a third party to have been officially granted the authority to act on behalf of a company whereas ostensible (also known as apparent) authority does not require an official granting of power. Ostensible authority would come into play where a “reasonable third party would understand that and Agent had the authority to act”.

In this case, it is interesting how the court came to the decision that the agent had no ostensible authority because:

  • The Bank had not made any representation on the facts that its local manager had authority to write off debts of any scale. On the contrary, the Bank had clearly demonstrated by its actions during its 10-year dealings with the borrowers that the authority of the bank’s employees was circumscribed. Its actions had also clearly shown that any significant decisions about the borrowers’ facilities would require referral up to the Bank’s general manager.

  • Even if the Bank had made the requisite representation, it was unreasonable for the borrowers to rely on it. The borrowers were familiar with the Bank’s approval processes, and admitted that they had not had any prior dealings with the local manager regarding changes to or issues with their loan facilities. The nature and terms of the letter purporting to write off the debt was also surprising, in that it was extraordinary that a local relationship manager would have the requisite authority to write off £3 million of secured debts.

  • That on its own was enough to put the borrowers on notice of the agent’s lack of authority.

This case is an important reminder to businesses involved in commercial relationships that where suspicions arise regarding an agent’s (employee’s) authority to make any decisions on behalf of their Employer (Principal) then it is advisable to request proof of authority from the Principal. This would be particularly important where the transaction or decision indicated deviates from previous practice, or is a significant transaction.

Where disputes arise out of an Agent’s authority, it is vital you seek legal advice at the earliest opportunity. Farleys Solicitors have a team of experienced commercial litigation specialists who can advise you on your next steps. Call 0845 287 0939 or contact us by email.

Case: Stavrinides and others v Bank of Cyprus Plc [2019] EWHC 1328 (Ch) (24 May 2019)