More problems with corporate identity

The service by a tenant of a break notice in the context of a commercial lease is a tricky business.  Notice clauses are complex, and it is often not clear which of the requirements are mandatory and which are not.  A recent decision of Lord Hodge in the Outer House, Batt Cables plc v Spencer Business Parks Ltd [2010] CSOH 81, considers this issue, and contains interesting arguments relating to agency law.     

As is often the case, the landlords' interest in the property had been transferred between different companies within a company group.  In effect, the tenant served the break notice on a related company of the landlord (SH plc), rather than the landlord (SBP Ltd).  SBP Ltd and SH plc shared registered offices, and so the notice was served to the correct address, but was addressed to the wrong company within the group.  The confusion was perhaps not surprising.  The new landlords, SBP Ltd, had written to the tenants to welcome them as tenants of SBP Ltd, but had managed to do so on headed notepaper of SH plc.  The landlords argued that the break notice had been incorrectly served.  The tenants countered by arguing that the only mandatory requirement in the notice clause was that the notice be in writing and be served on the landlords.  The notice clause did not, the tenants argued, require the notice to be addressed to the landlords. 

Lord Hodge indicated that he was bound by the Inner House case of Ben Cleuch Estates Ltd v Scottish Enterprise [2006] CSOH 35; 2008 SC 252 (Inner House), leading him to conclude that, aside from any question of agency, the notice had not been properly served on the landlords.  This illustrates the strict test which notices of this type must comply with.  To quote Lord Hodge in para [24]:

   "First, when a contract confers on a party a right, such as an option, by notice unilaterally to alter the rights of the parties and imposes conditions or requirements as to its exercise, the party seeking to exercise that right must comply strictly with those agreed conditions or requirements. See Scrabster Harbour Trustees, Sir David Edward QC at para 43, Ben Cleuch (Outer House) Lord Reed at para 122. The reason for the rule is to enable the parties to be certain whether the event which alters the parties' rights or legal relationship has or has not occurred. See United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, Lord Diplock at p.929 and Lord Simon of Glaisdale at p.945; Muir Construction Ltd v Hambly Ltd 1990 SLT 830, Lord Prosser at pp.833-834."

To have any validity, the notice had to be served on SH plc acting as agent of the real landlord, SBP Ltd.  On the agency point Lord Hodge stated:

"To demonstrate that the agent was so authorised often means that the person seeking to uphold the notice has to show that the agent was a general agent in the sense that the agent has authority to do anything in relation to the subject-matter of the agency. See Townsends Carriers Ltd v Pfizer Ltd, Peel Developments (South) Ltd v Siemens plc and Lemmerbell Ltd v Britannia LAS Direct Ltd. I accept that in the absence of express authority creating a general agency, there must be clear evidence to support the inference of such agency."

This provides us with a helpful reminder of the concept of a general agent, i.e. an agent engaged to carry out all the business of a particular principal, or all the business of a particular type (Stair Memorial Encyclopaedia Reissue, Agency and Mandate, 2002, para 55). 

Lord Hodge's latter statement in the quote above is of especial interest.  He indicates that where one is seeking to make an inference of agency, this will require clear evidence.  This is in stark contrast to Lord Drummond Young's decisions a group of cases decided over recent years.  Lord Drummond Young had, in effect, created a concept which he called ad hoc agency.  This concept he applied in the following cases:  Whitbread Group plc v Goldapple Ltd 2005 SLT 281; Laurence McIntosh Ltd v Balfour Beatty Group Ltd and the Trustees of the National Library of Scotland, [2006] CSOH 1907; and John Stirling t/a M & S Contracts v Westminster Properties Scotland Limited [2007] CSOH 117; [2007] BLR 537.  Inferences of agency were made in those cases on very little evidence of intention to create an agency relationship.  Broadly, the problem in these cases resembled the problem in the case at issue: either the wrong company within a group had taken a particular legal step, or a newly incorporated company had taken a step which ought to have been taken by the previous incarnation of the company (a partnership).  Lord Hodge does not appear to have been addressed on ad hoc agency.  It may be that it will not flourish as a concept.  If that is the case, that is a welcome development.  Agency is sometimes referred to as a contract, or as a consensual relationship arising from contract.  Whichever method is used, its cornerstone is consent.  Real evidence of consent must be available in order to establish implied agency. 

Lord Hodge decided that the notice had been successfully served on a Mr Dempsey, acting as an agent of the true landlord, SBP Ltd.  He was the person charged with receiving letters on behalf of SBP and acting on them, either by himself or by referring them to others (para [39]).  He was an agent acting with express authority.  The fact that the notice was addressed to him at SH plc did not invalidate his power to receive the notice as an agent for SBP Ltd (para [39]).  

The value of this decision for agency lawyers does not end there.  Lord Hodge was addressed on the issue of apparent or ostensible authority.  Had SBP, by sending various letters and communications, held out Mr Dempsey or SH plc as their agents either generally or for the specific purpose of receiving break notices (para [41])?  This question was answered in the negative.  What is significant is Lord Hodge's search for either a manifestation or a representation by SBP Ltd that SH was so authorised.  As all students of the ordinary course in business entities at Edinburgh Law School will be aware, apparent authority requires a representation of the extent of the agent's authority from the principal (see Stair Memorial Encyclopaedia Reissue, Agency and Mandate, 2002, paras 75-81 or D Busch and L Macgregor, 'Apparent authority in Scots law: some international perspectives' (2007) Edin LR 349).  A representation from the agent as to the extent of his own authority is not sufficient.  Use of the word "manifestation" is also interesting, given that this is the language of the equivalent US concept in the Restatement (Third) Agency.  Apparent authority was not established.  No matter – the tenants were able to prove that the notice had been sufficiently served on an agent, acting with the express authority of the actual landlord.   

A classic case for agency teachers!    


Insurance contract law – the broker’s liability to pay premiums

Today sees the publication by the Law Commissions of England and Wales and Scotland of another joint Issues Paper (No. 8) on insurance contract law (available here:  Under scrutiny this time is the rule contained in s53 of the Marine Insurance Act 1906, subsection 1 of which, in effect, makes a broker directly liable to the insurer for payment of the premium, whilst subsection 2 provides the broker with a lien over the insurance policy, allowing it to recover any money it is owed by the policy holder.  Although this point is not entirely free from doubt, the section seems only to apply to cases of marine insurance.  As with many aspects of the law of insurance, this area of law is ripe for reform, and it is difficult to disagree with any of the recommendations contained in the Issues Paper. 

Readers of the blog will already be aware of the workshop held on 2nd June this year at Edinburgh Law School for discussion of a previous Issues Paper on Damages for late payment of insurance proceeds and the insurer's duty of good faith (commented on here: Reading the Issues Paper on broker's liability, similar themes emerge.  One is the fact that this area seems dogged with legal fictions.  On the issue of damages for late payment of insurance proceeds, s11 of the Issues Paper explained:     "The English courts have held that insurance is an exception to the rule that the party breaking a contract should pay damages for foreseeable losses. This is based on the fiction that an insurer’s primary obligation is to “hold the insured harmless”. In other words, the insurer is said to promise that the loss will not occur. If it does, the insurer is then liable to pay the amount of the claim as damages. Thus an insurance payment is not a primary obligation to pay money, but a secondary obligation to pay damages. It is said that English law does not recognise an obligation to pay damages for a failure to pay damages."

So equally in the context of the broker's liability in marine insurance cases, we find the area governed by a legal fiction.  This time the fiction is to the effect that: "…the broker had paid the premium to the insurer, thus discharging the policyholder’s liability to pay, and that the insurer had lent the money back to the broker. This created a personal debt obligation between the broker and the insurer" (s8 of the Issues Paper).  The extent to which this legal fiction was amended with the attempt to codify the law in the Marine Insurance Act 1906 seems also subject to doubt.  The end result is anomalous considering the issue from an agency law perspective: a disclosed agent is not normally treated as primarily liable on a contract which he has concluded on behalf of his principal.

The reasons for the legal fiction, and the customs which have led to its development, are considered in the Issues Paper.  Also, the comments of respondents to a Joint Scoping Paper on this issue published in 2006 are telling, see, in particular those contained in the Issues Paper at 6.23.  In the past there may have been logic in holding the broker liable where communication was more difficult and the broker was more likely than the insurer to have knowledge of the creditworthiness of the insured.  This justification is similar to that which applied in Scots law to situations where the agent acted on behalf of a disclosed principal resident abroad. The agent became personally liable.  this was thought to be necessary because of the difficulties experienced in communicating or indeed suing that principal.  That attitude applied even though the agent had disclosed the existence and identity of his principal.  In effect, the law treated principals resident abroad in the same was as it treated undisclosed principals, i.e. the agent was primarily liable.  Although the rules on undisclosed agents remain in place, they are strictly interpreted by the courts (particularly in South Africa, see Cullinan v Noorkaaplandse Aartappelkernmoerkwerkers Kooperasie Beperk 1972 (1) SA 761 (A)).  Francis Reynolds has been bold enough to suggest that the concept of the undisclosed principal ought to be abolished ((2005) ICC International Court of Arbitration Bulletin, Special Supplement, UNIDROIT Principles: New Developments and Applications, 9-16).  If s53 is indeed repealed, one further exception to the general rule that the agent acting for a disclosed principal is not personally liable will disappear.  It may be that the concept of the undisclosed principal too has had its day.      

For students of agency law, the Issues Paper contains a very useful discussion of the different types of authority an agent can possess, illustrating each type by reference to cases from insurance law.  At 5.5 there is a useful analysis of express, implied and apparent authority.  At 5.22 in a quote from LJ Moore-Bick in Pacific and General Insurance Co v Hazell ([1997] BCC 400 at 413 and 415) we find implied authority in agency law being analysed in much the same way as an implied term in contract law:  "The evidence in this case does not support the conclusion that these market rules were intended to create legal relations between brokers and underwriters where none previously existed so as to render the broker personally liable for premium, either in conjunction with, or in place of, the insured… .A party seeking to establish a binding custom is really seeking to demonstrate the existence of an implied term which is known to and accepted as part of the bargain by all those who regularly involve themselves in the trade or market in question. It is for that reason that the custom must be shown to be certain, uniform, notorious and reasonable, since if it fails any of these tests it cannot be a term which all those in the market would accept as invariably forming part of the legally binding terms on which they do business… The evidence in this case falls far short of what is required to prove a binding custom."

Reference should also be made to the Outer House case of Halifax v DLA Piper [2009] CSOH 74, in which Lord Hodge refused to find an agent personally liable where he acted on behalf of a non-existent principal.  Again, the general principle that an agent is not liable where he acts within the confines of his authority for a disclosed and named principal was upheld.  As an exception to this general rule, and lacking any obvious practical justification, s53(1) of the Marine Insurance Act ought to be repealed. 

Responses to the Issues Paper are invited prior to 19 October 2010.