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21st May 2013

When does a director have authority to bind a company?

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Picture the scenario: you have entered into negotiations with the director of a company and you agree with him a contract between you and that company. That company has indicated to you that the director has authority to negotiate and finalise the contract.

Several months down the line, a disagreement arises over a significant term in the contract whereby you are due millions of pounds, the owners of the company refuse to honour the term and they state that the director you dealt with had no authority to agree to that specific term. This is exactly what happened in the recent high profile case of Henning Berg v Blackburn Rovers Football Club & Athletic plc [2013] EWHC 1070 (Ch).

Legal Background

Generally, the question of whether a director has authority to bind a company to a contract boils down to agency law. The acts of an agent (director) will bind a principal (company) where the agent has express or implied actual authority, in words or in writing, derived from his appointment. A director may have ostensible authority where the company represents to the third party contracting with the director that he has authority, which in turn renders the company liable to perform its duties under that contract. There is also established case law which states that a Managing Director of a company has an implied or usual authority to make decisions for the company in the ordinary course of its business.

Case law is underpinned by statute. The Companies Act 2006 states that where a person is dealing with a company in good faith, the power of the directors to bind the company is deemed free of any limitation under the company’s constitution, and the person dealing with the company is not bound to enquire as to any limitation on the powers of the directors to bind the company or authorise others to do so.

Factual Background

Derek Shaw (Mr Shaw) was and remains (as at the date of this article) Managing Director of Blackburn Rovers Football Club (the Club). Under the Club’s Articles of Association, its directors are responsible for the management of Blackburn’s business. Under Mr Shaw’s service agreement with the Club, and subject to the Club’s Articles of Association and any specific instructions from the Club’s owners, he is responsible for the general control of the Club’s business. The Club is owned by an Indian company which is in turn controlled by Mrs Anuradha Desai and her brothers Mr Balaji Rao and Mr Venkatesh Rao (the Owners).

Henning Berg (Mr Berg) was offered the position of the Club’s football manager on 31 October 2012. A service agreement (SA) was negotiated between Mr Shaw, Mr Berg and Mr Berg’s agent and solicitor. It was not disputed by the Club that Mr Shaw had authority to negotiate and complete the SA, which was eventually signed on 16 November 2012 and was to last for a fixed period of three years. Mr Berg was to be paid a basic annual salary of £900,000. Crucially, clause 15.3 of the SA permitted the Club to terminate the SA at any time upon written notice, provided that Mr Berg was paid a sum equal to the basic pay he would have received during the remaining unexpired term of the SA.

The Claim

Mr Berg was sacked by the Club on 27 December 2012 and subsequently claimed £2.25 million under clause 15.3 of the SA. The Club refused to pay, with one of its arguments being that Mr Shaw did not have actual authority to complete the version of the SA in fact signed and completed. The Club argued that the Owners had wanted clause 15.3 to limit any sum paid to 12 months rather than the remaining unexpired term of the SA, and that Mr Shaw did not have permission to agree the more generous version of clause 15.3, therefore his authority was limited. The Club also argued that Mr Shaw would have made clear to Mr Berg and his representatives during negotiations that the Owners’ approval of clause 15.3 was necessary.

The High Court found in favour of Mr Berg, finding that at no stage was Mr Berg informed that Mr Shaw’s authority was limited in the manner suggested, and that it was unarguable to suggest that the Managing Director of the Club did not have implied or usual authority to sign employment contracts on the Club’s behalf. The judge stated that, whilst there may have been an arguable case between the Club and Mr Shaw as to whether he had actual authority, the claim between Mr Berg and the Club was based upon whether Mr Shaw had implied authority to enter into the SA on behalf of the Club, upon which the judge felt Mr Berg was entitled to rely.

Thoughts

The Berg case perhaps serves as a warning to anybody entering into a contract with a company that it might be better to double-check that the director they are dealing with has the necessary authority to agree and execute the contract in its entirety on behalf of the company. Any major transaction should be approved by the board which will normally authorise the execution of the necessary documents. One could request a certified copy of the relevant board resolution (stating that it has been duly passed at a meeting of the board duly convened and held).

For further information on this case or if you require any company law advice, please contact David Browne on 01604 233233 or click here to email David.