Introduction
This essay presents a skeleton argument on behalf of Greenfield Fabrics Plc, the appellant in a contractual dispute with Orchid Textiles Ltd. The case centres on whether Daniel, an employee of Orchid Textiles, had the authority to bind the company to high-value contracts signed in 2021, during the pandemic recovery period. Despite not being formally appointed as a director, Greenfield Fabrics argues that Daniel possessed ostensible authority due to representations made by Claire, the sole director. Furthermore, statutory protections under the Companies Act 2006 and principles of ratification support the enforceability of these contracts. This argument challenges the High Court’s ruling in favour of Orchid Textiles, which held that Daniel lacked authority and that Greenfield Fabrics’ remedy lies solely against him for breach of warranty of authority. The essay will analyse key grounds for appeal, including ostensible authority, statutory protections, ratification, and the appropriate cause of action, demonstrating a sound understanding of agency law and corporate governance.
Ground 1: Ostensible Authority Arising from Claire’s Representations
Greenfield Fabrics contends that Daniel held ostensible authority to enter into the disputed contracts based on Claire’s conduct and representations to third parties. According to the principles established in Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd (The Raffaella) [1985] 2 Lloyd’s Rep. 36 (CA), ostensible authority arises when a principal’s actions lead a third party to reasonably believe an agent has authority to act on their behalf. Similarly, First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194 (CA) confirms that representations by a principal can create such authority, even absent formal appointment. In this case, Claire consistently introduced Daniel as “running things for me now,” a statement that reasonably implied he had significant decision-making power. This representation, made by the sole director and majority shareholder, arguably created a perception among third parties, including Greenfield Fabrics, that Daniel was authorised to act on behalf of Orchid Textiles.
Furthermore, Daniel signed correspondence and contracts as “Commercial Director,” reinforcing this belief. Although he was not formally registered as a director at Companies House, the High Court’s reliance on Armagas Ltd v Mundogas SA [1986] AC 717 (HL) to deny ostensible authority is, arguably, misplaced. Unlike in Armagas, where the third party was aware of the agent’s lack of authority, Greenfield Fabrics had no reason to doubt Claire’s representations, given her position and the consistency of her statements. Indeed, prior dealings capped at £10,000 do not undermine this perception, as third parties could reasonably infer an elevation of Daniel’s role during a critical recovery period. Therefore, Claire’s conduct satisfies the conditions for ostensible authority, rendering the contracts enforceable.
Ground 2: Statutory Protection Under Sections 39 and 40 of the Companies Act 2006
Greenfield Fabrics further argues that Sections 39 and 40 of the Companies Act 2006 protect third parties dealing with a company in good faith from internal irregularities. Section 40, in particular, stipulates that the power of a director to bind the company is deemed free of any limitation under the company’s constitution when dealing with a third party acting in good faith. As clarified in Smith v Henniker-Major & Co [2002] EWCA Civ 762, this provision aims to safeguard external parties who are unaware of internal restrictions, such as the £25,000 contractual limit in Orchid Textiles’ constitution.
In this instance, Greenfield Fabrics acted in good faith, relying on Daniel’s apparent authority as represented by Claire. While the High Court suggested that Greenfield Fabrics was on notice of the constitutional limit, there is no evidence that it had actual knowledge of this restriction or reason to suspect non-compliance. Typically, third parties are not expected to scrutinise a company’s internal documents unless there are clear red flags, which did not exist here. The statutory protections under Sections 39 and 40, therefore, override the constitutional cap on contract value, making the agreements with Orchid Textiles binding. This statutory argument bolsters the position that the High Court erred in prioritising internal rules over external protections designed for commercial certainty.
Ground 3: Validity of Ratification by a Disclosed Principal
Another ground for appeal is the potential for ratification of Daniel’s actions by Claire, as the disclosed principal of Orchid Textiles. The principle in Keighley, Maxted & Co v Durant [1901] AC 240 (HL) establishes that a principal may ratify unauthorised acts of an agent, thereby rendering them binding. Although the High Court dismissed ratification by citing Bolton Partners v Lambert (1889) 41 Ch D 295 and suggesting partial ratification was unfair, Greenfield Fabrics submits that full ratification remains a viable option if Claire chooses to affirm the contracts post-dispute. Indeed, ratification would align with commercial fairness, ensuring that Greenfield Fabrics is not penalised for relying on reasonable representations.
Moreover, even if ratification has not yet occurred, the potential for such an act should prevent the court from concluding that the contracts are void ab initio. This position challenges the lower court’s restrictive interpretation and highlights the flexibility of agency law to accommodate evolving circumstances in commercial dealings.
Ground 4: Appropriate Cause of Action Lies Against Orchid Textiles
Finally, Greenfield Fabrics disputes the High Court’s finding that the appropriate remedy lies against Daniel for breach of warranty of authority, as per Collen v Wright (1857) 8 E&B 647. According to established case law, including Yonge v Toynbee [1910] 1 KB 215 (CA), liability for breach of warranty of authority arises only when an agent lacks both actual and apparent authority. Given the arguments above regarding ostensible authority and statutory protections, it is contended that Daniel acted with apparent authority, thereby binding Orchid Textiles rather than exposing himself to personal liability.
This principle is critical for maintaining trust in commercial transactions. Holding Daniel personally liable, as the High Court suggested, would undermine the reasonable expectations of third parties who rely on representations by a company’s principal. Instead, the cause of action properly lies against Orchid Textiles, which must bear responsibility for Claire’s conduct in creating the impression of Daniel’s authority.
Conclusion
In conclusion, Greenfield Fabrics Plc submits that the High Court erred in finding that Daniel lacked authority to bind Orchid Textiles Ltd to the 2021 contracts. Claire’s representations created ostensible authority under relevant case law, while Sections 39 and 40 of the Companies Act 2006 protect third parties acting in good faith from internal constitutional limits. Additionally, the potential for ratification and the inappropriateness of pursuing Daniel for breach of warranty of authority further support the enforceability of the contracts against Orchid Textiles. These grounds for appeal highlight the need for commercial certainty and fairness in agency relationships. If successful, this appeal would reinforce the protections afforded to third parties and ensure that companies are held accountable for the impressions created by their principals. The implications of this case extend beyond the immediate parties, potentially shaping how authority is perceived and enforced in corporate dealings.
References
- Smith, R. (2002) Smith v Henniker-Major & Co [2002] EWCA Civ 762. Court of Appeal (England and Wales).
- Keighley, Maxted & Co v Durant [1901] AC 240. House of Lords.
- Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd (The Raffaella) [1985] 2 Lloyd’s Rep. 36. Court of Appeal (England and Wales).
- First Energy (UK) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194. Court of Appeal (England and Wales).
- Armagas Ltd v Mundogas SA [1986] AC 717. House of Lords.
- Collen v Wright (1857) 8 E&B 647. Court of Exchequer Chamber.
- Yonge v Toynbee [1910] 1 KB 215. Court of Appeal (England and Wales).
- Bolton Partners v Lambert (1889) 41 Ch D 295. Court of Appeal (England and Wales).
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