Armagas Ltd v Mundogas SA (The Ocean Frost)

Ostensible authority rests on estoppel. It arises only where a principal, by words or conduct, represents that an agent has authority and the contractor relies on that representation. A contractor who knows that the agent lacks general authority for the transaction cannot rely on the agent’s own assertion that specific approval was obtained. Ostensible authority to communicate approval is not distinct from ostensible authority to make the transaction.

For an employee’s fraudulent misrepresentation, an employer is vicariously liable where the injured party changes position in reliance on a belief, induced by the employer, that the employee was acting within actual or ostensible authority. Employment giving an opportunity for fraud is insufficient. The fraud need not benefit the employer, but reliance on the employee alone does not impose liability.

Mundogas authorised its chartering manager, Mr Magelssen, to arrange a straightforward sale of a vessel. It did not authorise him to agree to a three-year charter back. Mr Magelssen and a shipbroker fraudulently induced the principals behind Armagas to believe that specific authority for the charter had been obtained. After Mundogas redelivered the vessel at the end of what it understood to be a 12-month charter, Armagas claimed damages for breach of the purported three-year charter and, alternatively, for deceit on the basis of vicarious liability.

Staughton J, [1985] 1 Lloyd's Rep. 1, found no authority to conclude the charter but held that Mr Magelssen had ostensible authority to communicate Mundogas’s approval. He therefore found Mundogas contractually liable, while rejecting vicarious liability for deceit. The Court of Appeal, [1985] 1 W.L.R. 640, reversed the contractual ruling and upheld the rejection of vicarious liability. The central issues were whether Mundogas was bound through ostensible specific authority and whether it was vicariously liable for its employee’s fraud.

1. Disposition. The appeal was dismissed unanimously and the Court of Appeal’s order was affirmed. Lord Keith of Kinkel delivered the leading speech. Lord Brandon of Oakbrook, Lord Templeman, Lord Griffiths and Lord Oliver of Aylmerton expressly agreed with his reasons.
2. Ostensible authority. Per Lord Keith, ostensible authority is founded on estoppel. The principal must, by words or conduct, represent that the agent possesses the requisite actual authority, and the contractor must enter the transaction in reliance on that representation. Ostensible general authority cannot arise where the contractor knows that the agent’s authority excludes transactions of the relevant kind.
3. Specific authority. Per Lord Keith, specific ostensible authority may conceivably arise where the principal has represented that the contractor may rely on the agent to act only after obtaining the principal’s approval. Such cases will be rare. The supposed authority of an agent to communicate the principal’s approval is not conceptually distinct from authority to enter the transaction. An agent’s own assertion of authority cannot bind the principal without a relevant representation from the principal’s responsible management. Mundogas made no such representation, and the circumstances of Mr Magelssen’s appointment and previous dealings could not establish reliance by Armagas.
4. Vicarious liability for deceit. Per Lord Keith, the governing principle from Lloyd v Grace, Smith & Co. [1912] AC 716 requires the injured contracting party to have altered its position detrimentally in reliance on a belief, induced by the employer, that the employee was acting within actual or ostensible authority or as part of the employee’s job. In this category of fraud, acting in the course of employment and acting within actual or ostensible authority do not provide separate routes to liability. The fraud need not be committed for the employer’s benefit. Mere employment-created opportunity is insufficient.
5. Application. Mr Magelssen lacked authority to enter the three-year charter. Such a charter was outside the usual authority of an employee in his position, as Armagas knew. Its belief in specific authority arose from the conspirators’ false representations, not from anything said or done by Mundogas. Authority for a straightforward sale did not extend to the materially different transaction of a sale supported by a three-year charter. Mundogas was therefore neither contractually bound nor vicariously liable for the deceit.
6. The Danish-law and bribery issues were unnecessary to decide. The appeal was dismissed with costs.

• House of Lords: The House unanimously dismissed the appeal, affirmed the Court of Appeal’s order and ordered Armagas to pay Mundogas’s appeal costs.
• Court of Appeal: In [1985] 1 W.L.R. 640, the court reversed the finding that Mundogas was contractually liable and upheld the rejection of vicarious liability for deceit. Opinions favourable to Mundogas were also expressed on bribery.
• High Court: Staughton J, reported at [1985] 1 Lloyd's Rep. 1, held that Mr Magelssen lacked authority to enter the three-year charter but had ostensible authority to communicate Mundogas’s approval. Mundogas was held liable for breach of contract. The alternative deceit claim and Mundogas’s bribery case were rejected.