New Scottish Agency Case

Recent Scottish cases on agency law are few and far between.  Halifax Life Limited v DLA Piper llp [2009] CSOH 74, a recent decision from Lord Hodge, sheds light on what can be a significant practical issue: the effect of acting on behalf of a non-existent principal.  What follows is some initial thoughts on the case – a more considered blog post/article may follow in due course.    

Essentially, the issue in this case can be summarised as follows: what is the legal position where solicitors as agents purport to conclude a contract on behalf of a client/principal which does not actually exist?  The non-existent principal cannot, of course, be bound by this contract.  Is the solicitors’ firm bound instead?

The defenders in this case, DLA Piper llp, had issued an offer to purchase subjects at 227 West George Street, Glasgow.  The purchaser was defined as “the Members of the 227 Syndicate.”  The offer received an unqualified acceptance.  Unfortunately, the 227 Syndicate did not exist and did not come into existence at any point following acceptance of the offer.  The pursuers raised an action seeking (i) declarator that the defenders were personally liable to implement the contract and damages for breach of contract, and, in the alternative, (ii) damages for loss caused by negligent misrepresentation.  The case came before Lord Hodge on 29 May this year.  Losses could be relevantly claimed, the pursuers argued, given that the subjects had eventually been sold to a different purchaser at a much reduced price. 

Before analysing Lord Hodge’s judgment, it is perhaps useful to summarise existing Scottish analysis on acting on behalf of a non-existent principal.  Perhaps the most well-known example of this phenomenon occurs where the agent is a promoter acting for an as-yet-unincorporated company.  In such a situation the agent is personally bound under s51 of Companies Act 2006 (although this section reflects the pre-existing common law position as seen in the case of Kelner v Baxter 1866 LR 2 CP 174). The company, once formed, cannot ratify the actions of the promoter.  This is because of the retrospective nature of ratification: successful ratification means that the principal (the unincorporated company) is treated as being bound by the contract from the moment at which the agent purported to conclude the contract on the principal’s behalf.  This is, of course, an insurmountable problem for an unincorporated company acting as principal – it lacks legal capacity at this moment.  Interestingly, this is not the position in many countries in the rest of Europe and beyond, where the attitude is much more relaxed, and the company once formed can ratify the agent’s actions (see D Busch and L Macgregor (eds), The Unauthorised Agency: Perspectives from European and Comparative Law (2009) pp 435-438; and D DeMott, ‘Ratification: Useful but Uneven’, (forthcoming) 2009 European Review of Private Law.)

Outside the immediate context of company law, the Scottish case-law seems to point to a similar result, i.e. that the agent is personally bound, see, for example, the Scottish case of McMeekin v Easton (1889 16 R 363).  In this case a minister, a farmer and a doctor, who were members of a congregation of the Reformed Presbyterian Church, granted the pursuer a promissory note "in the name and on behalf of" the congregation.  The court held the defenders personally liable on the promissory note.

Some writers have concluded, on the basis of Kelner and McMeekin, that, as a general rule, an agent acting on behalf of a non-existent principal is personally bound under a contract with the third party.  Within this class one would place Gow (The Mercantile and Industrial Law of Scotland, (1964, p. 154)) and the present blogger as author of the Agency and Mandate title of the Stair Memorial Encyclopaedia Reissue, (2002, para 165).  Gloag’s position on this point is not entirely clear (Contract, 2nd edn, 1929).  He merely notes the specific factual instances in case law, and avoids stating a general rule.
The principal argument advanced on behalf of the defenders was based on construction of the missives, namely that the defenders could only be liable if  the intention of both contracting parties as revealed in the contract was that the defenders, despite purporting to act on behalf of the syndicate, should be bound as principals (para 5).  On a proper construction of the missives, they argued, there was no question of the defenders' having contracted to incur personal liability under the contract. They did not seek to establish a general rule that an agent was personally bound, but rather relied on later cases which, they argued, indicated that the correct approach was to ascertain the intention of the parties by construing the particular contract.  Where the contract revealed no intention that the purported agent should be the principal, the remedy open to the other party against the agent was one of breach of warranty of authority (para 6, relying on Scott v J B Livingston & Nicol 1990 SLT 305).

Counsel for the pursuers, not surprisingly, sought to establish a general rule that an agent acting on behalf of a non-existent principal was personally bound under the contract with the third party.  Like counsel for the defenders, they sought to base this argument on rules of interpretation of contract (para 8).  This allowed them to make reference to the surrounding circumstances, which included, they suggested, the knowledge of the purported agent that the principal did not exist. They supported this with averments that where the principal did not exist, there was, in fact no agency, despite the terms of the missives which narrated that DLA Piper acted on behalf of the consortium.  Taking an objective perspective, and assuming that the defenders intended to create a binding contract, they themselves were bound by that contract.      

Lord Hodge did not find this final argument on behalf of the pursuers to be persuasive (para 10).  He distinguished cases such as McMeekin which could have formed the basis of a general rule of the liability of the agent.  In his view, such cases could be classified as cases in which it would be apparent to both contracting parties that the agents were adopting personal liability.  Describing McMeekin he stated:

Lord Young and Lord Rutherford Clark decided the case on the basis that, because, as would have been apparent to all parties, the congregation could not be the debtor on a promissory note, the document should be construed as meaning that its signatories undertook personal liability but could seek relief from the congregation.

Lord Hodge’s approach, like that of counsel on both sides, has as its touchstone the rules of interpretation of contract.  He quoted from the judgment of Oliver LJ in Phonogram Ltd v Lane (p.945D-E):
The question I think in each case is what is the real intent as revealed by the contract? Does the contract purport to be one which is directly between the supposed principal and the other party, or does it purport to be one between the agent himself – albeit acting for a supposed principal – and the other party? In other words, what you have to look at is whether the agent intended himself to be a party to the contract.

Drawing on this passage, Lord Hodge emphasised the knowledge which the law of contract would attribute to both of the contracting parties, derived from the terms of the contract and the factual matrix, so far as material (para 13).  Lord Hodge drew support for his approach from cases taken from the common law: from New Zealand and Australia (Hawkes Bay Milk Corporation Ltd v Watson [1974] 1 NZLR 236, a case decided by the Supreme Court of New Zealand in which Wild CJ quoted with approval from Black v Smallwood (1966) 117 CLR 52, a case decided by the High Court of Australia.); and from England (Cotronic (UK) Limited v Dezonie [1991] BCC 200, Badgerhill Properties Limited v Cottrell [1991] BCC 463, Coral (UK) Limited v Rechtman and Altro Mozart Food Handels GmbH [1996] 1 Lloyd's Rep 235).

Applying normal rules of interpretation requires an objective approach, in terms of which “…the court may have regard to the knowledge which would reasonably have been available to persons in the situation of the parties at the time of the contract.” (para 16).  Adopting this approach, Lord Hodge suggested that “…knowledge which was reasonably available only to the soi disant agent would not form part of the factual matrix which could assist the court in the construction of the contract” (para 17).  This enabled Lord Hodge to focus almost exclusively on the terms of the missives and find that there was no indication therein of any intention other than the normal intention of a solicitor to bind his client only (para 19). 

It is perhaps to state the obvious to say that where agency is used, three actors are involved, those three actors entering into different bilateral contracts.  One such contract is that existing between principal and agent, and another is that existing between third party and another party, whether that be the principal or the agent.  It should be recalled that there are several situations in which agency in a sense, goes wrong, and the agent ends up bound in a contractual relationship with the third party.  This occurs where the principal is undisclosed, a phenomenon known only to common law and mixed legal systems such as Scotland and South Africa (see the comparison of the latter two systems by L Macgregor, ‘Agency’ in H MacQueen and R Zimmermann,  European Contract Law: Scottish and South African Perspectives (Edinburgh University Press, 2006) pp.123-150).  In such situations, the third party is unaware of the existence of a principal, and, also, inevitably, also unaware of the principal’s identity.  Analysis of the contractual relationships existing in this situation differs.  In English law it has been argued that the principal is the third party’s contracting party from the outset, despite the fact that the principal is utterly concealed (Cheng-Han Tan, LQR).  In Scots law I have argued that where the principal is concealed the more logical approach is to see the contract as being concluded initially between agent and third party, but with the principal retaining a right to “step-in” to that contract.  An agent may also be personally bound where he acts on behalf of a disclosed but unnamed principal, i.e. where it is clear that he is an agent, but where the name of his principal is not disclosed (more detailed discussion of this particular method can be found below.)  An agent may also be personally bound  where he signs a contract on behalf of his principal but without making his role as agent clear, which could be achieved by using the phrases “on behalf of” or “per procuration.”  So, in conclusion on this issue, it is not beyond the bounds of possibility that the agent should be bound in a contract with a third party, even though that agent may be singularly unable to perform that contract (for example, because the subject of the contract is heritage owned by his principal). 

Accepting for the moment that agents may be personally bound, the important question is, of course, how we are to determine in which situations this personal liability arises.  Lord Hodge answered this question by applying interpretative rules.  However, those rules are fashioned to deal with bilateral contracts.  As this case perhaps illustrates, they can be applied to situations involving three actors only with difficulty.  The rules dictate that we seek the intention of the parties objectively analysed.  But which parties?  In the case there was much discussion of whether the knowledge of the agents of the non-existence of the principal was part of the factual matrix, Lord Hodge finally concluding that it was not, and focussed exclusively on the terms of the missives.  Lord Hodge therefore excluded from consideration perhaps the most significant fact in the case, namely the non-existence of the principal.  This approach is surely misconceived. 

The extent of the emphasis in this case on interpretation principles is perhaps surprising.  It is suggested that the better approach would have been to classify the purchasing solicitors as acting on behalf of a disclosed but unnamed principal: they were clearly acting as agents, but the real identity of the principal was unknown to the sellers.  “The Members of 227 Syndicate” is an opaque description, communicating little other than the mere existence of a principal.  This is not to say, however, that, had Lord Hodge been alerted to this possibility, his task would have been any easier.  Scottish case-law on this method, adopted by the agent, is scant.  In the Stair Memorial Title on Agency and Mandate I suggested that the best of the competing analyses of this method was that offered by Gloag.  The task, he asserted, lay in identifying whose credit the third party looked to in entering into the contract (SME paras 137-145).  Where the third party looks to the credit (by which is meant financial reputation) of the agent, then the agent is the third party’s contractual counter-party.  If the third party looks rather to the credit of the unnamed principal, then the principal is the third party’s contractual counterparty.  This suggestion received approval from the Inner House in 2008 in Ruddy v Monte Marco & ors ([2008] CSIH 47, see particularly para 23). In Ruddy, the Inner House reviewed several Scottish sources (Gloag, Contract; Wilson, The Scottish Law of Debt, Walker, The Law of Obligations (3rd edn); Macgregor, Agency and Mandate, Stair Memorial Encyclopaedia). Speaking of the agent, they concluded
in order to escape personal liability the first defender had to show that he expressly or impliedly negatived personal liability. In other words the circumstances required to be such that, consonant with the thinking of Dores v Horne and Rose, and also with Macgregor's preference (para 140) for the reliance on credit approach, it was evident that the pursuer did not trust to the credit of the first defender but to the credit of his unidentified principal.

Proceeding on the authority of Ruddy, the correct approach would have been for the court to ask on whose financial reputation the sellers were relying: was it the unidentified syndicate, or was it the solicitors acting for them?  Clearly this question can only be answered by detailed analysis of the facts of the case which is not available from the case report and could only be obtained through a proof.  Had a proof been held, this question could have been answered, and the contractual relationships drawn accordingly.  It seems likely that, following proof, the judge would have concluded that the sellers relied on the credit of an unknown principal, not the solicitors acting on their behalf.  The contract could only have been concluded with that principal.  The agent could not have been bound by it. 

The facts of the case as stated in the report are undoubtedly curious.  Missives appear to have been concluded even though the sellers were unaware of the identity of the purchaser.  The fact that the syndicate had not been formed became known to the pursuers over two months after missives had been concluded, in response to a request from the seller’s solicitors.  It seems highly unusual for a seller of commercial property to know so little about the purchaser.  One would expect the solicitors acting on behalf of the seller to have obtained information on the purchaser, for example, a set of accounts in the case of a partnership or Companies Search in the case of a company, including searches in the Register of Inhibitions.  By obtaining such searches, the seller ensures that time spent negotiating the terms of missives is not wasted. 

The application of Gloag’s approach could have led to a result similar to that achieved using Lord Hodge’s interpretative approach.  One might conclude from that fact that there is little difference in the method applied.  However, Gloag’s approach contains a difference of emphasis which is worth remark.  He takes the perspective of the third party: the essential question being whose credit the third party relies on.  That is perhaps indicative of a need to protect third parties from the unsatisfactory consequences of agency relationship which go awry.  The principles of agency developed throughout the 19th and 20th centuries, and, as as result, it is perhaps not surprising to note the focus in those rules on the interests of the principal.  A more balanced approach is required in a modern context, where much of the law of contract and commercial law generally focuses on the protection of the third party: the outsider to the agency relationship (the theme of third party protection is enlarged upon in the Introduction to Busch and Macgregor, The Unauthorised Agent: Perspectives from European and Comparative Law (2009)). After all, why should the third party suffer for the fact that the principal and agent have failed properly to achieve a fully operational agency relationship?  An approach based solely on interpretation fails to adopt this important protective perspective.

Essentially, the tentative conclusion I would make on this case is that Lord Hodge reached the right result, but by taking what is probably the wrong approach.  One factor which was admitted by both sides in the case was that the sellers could have adopted a different approach, and that was to sue the agents, DLA Piper, for breach of warranty of authority.  This is a contractual action, in terms of which the agent can be called upon to compensate the third party’s expectation losses caused through misrepresentation of the extent of the agent’s authority.  It may well be that the pursuers, having lost this case will raise such an action – only time will tell!