The recent ‘Please Call Me’ judgment, in finding Vodacom liable to Makate (the former employee responsible for the innovation), has produced a number of interesting legal precedents. One of the arguments advanced by Vodacom in defence of the claim was that there was no valid contract that was binding on Vodacom. This was because the employee who agreed that Makate would be paid a share of the proceeds from the product, Mr Geissler (Vodacom’s Director Product Development), was not authorised to contract on the company’s behalf. In this article we examine the concept of authority, the law of agency and the impact of the judgment thereon.
What is the Law of Agency?
Agency occurs where a person (“the agent”), acting on the authority and on behalf of another person (“the principal”), creates a legal relationship between the principal and a 3rd party. Authority then, is the delegated power an agent must have in order to bind the principal he or she is purporting to represent. There are 3 types of authority:
- Actual Authority
This is authority in its truest sense and is a legal relationship based on a consensual agreement, either express or implied, between the agent and its principal. Where the agent acts under actual authority as above, his contracts with third parties will be binding on the principal.
- Usual Authority
This authority is based on the office the agent holds and the assumptions associated with that position. For example, a managing director of a company is presumed to have the authority necessary to contract on its behalf. This means that a 3rd party, dealing in good faith with such agent, is entitled to assume that the managing director has all the powers which someone in his position would usually have.
- Ostensible / Apparent Authority and its Relationship with Estoppel
Previously, our law referred to the case of NBS Bank Ltd v Cape Produce Co (Pty) Ltd which found that where a principal made a representation to a 3rd party, by words or conduct, that an agent has authority and the 3rd party relies on this representation, the principal would be estopped or prevented from denying liability based on lack of authority.
However, the Constitutional Court, in its majority ruling in Makate v Vodacom (Pty) Ltd appears to have overruled elements of the NBS judgment, finding that the court had erred in conflating the concepts of estoppel and ostensible / apparent authority.
Initially, Makate had attempted to use estoppel as part of his claim that Geisler’s actions were binding on Vodacom. On procedural grounds, the High Court found that estoppel cannot be pleaded; it can only be used as a defence (or shield) against a party who is denying authority. Accordingly, his claim was dismissed.
The Constitutional Court, distinguished between the concepts of estoppel and ostensible / apparent authority, saying that although the two may overlap, they represent entirely separate legal concepts. The court also listed different factors used in determining the presence of the two concepts, as quoted from Schutz JA in NBS on the one hand and Lord Denning MR in Hely-Hutchinson v Brayhead Ltd and Another on the other.
In short, the court clarified that while estoppel can be used as a defence to prevent the party denying actual authority from doing so, ostensible / apparent authority, is “the power to act as an agent indicated by the circumstance, even if the agent may not truly have been given the power” or “the agent’s authority as it appears to others”.
As the court in Makate says, the two will often present themselves in the same set of facts. The position now, however, allows 3rd parties to not only rely on estoppel as a shield to the defence of a lack of actual authority, but to plead ostensible / apparent authority, in the absence of actual authority.
In our next article we will look at various relationships between agents and principals and how you can protect yourself when contracting with such persons.
This article should not be used or relied upon as professional advice and is for information and marketing purposes. Please consult with one of our attorneys should you need legal assistance relating to this area of law.