Criterion Properties plc (Appellants) v. Stratford UK Properties LLC (Respondents) and others

The enforceability of a contract executed on a company’s behalf depends on whether the signatories had actual or apparent authority under ordinary principles of agency and company law. A counterparty cannot rely on apparent authority if it knew that actual authority was absent. Its knowledge that the transaction was contrary to the company’s commercial interests may also undermine any asserted belief in actual authority.

The creation of rights under an executory contract is not a receipt of assets for the purposes of knowing receipt. Consequently, unconscionability is not the test for deciding whether such a contract binds the company. Where material facts concerning authority remain unresolved, enforceability should be determined at trial rather than by summary judgment.

Criterion Properties plc and Stratford UK Properties LLC, referred to as Oaktree, participated in a property investment joint venture. A supplementary agreement granted Oaktree a financially onerous put option if specified events occurred, including a change of control of Criterion or the departure of either of two senior officers. Two Criterion directors executed the agreement as a deterrent to an unwelcome takeover.

After one triggering event occurred, Oaktree exercised the option. Criterion sought a declaration by summary judgment that the agreement was unenforceable. Hart J granted the declaration, but the Court of Appeal allowed Oaktree’s appeal and held that a trial was required: [2002] EWCA Civ 1783.

The central question before the House was whether the available evidence established that the agreement could not bind Criterion, or whether unresolved issues concerning the signatories’ actual or apparent authority required determination at trial.

1. Appeal dismissed unanimously. Lord Scott of Foscote delivered the leading speech. Lord Nicholls of Birkenhead, Lord Rodger of Earlsferry and Lord Carswell agreed with his reasons. Lord Walker of Gestingthorpe agreed with Lord Scott and Lord Nicholls. The Court of Appeal was therefore correct to set aside the summary declaration and permit the dispute to proceed to trial.

2. Per Lord Scott, the courts below had approached the dispute through the doctrines of knowing receipt and knowing assistance. That approach confused the enforceability of an executory contract with the recovery of assets already transferred under a transaction. Contractual rights created by an executory agreement are not assets received from the company for the purposes of knowing receipt.

3. The decisive issue was authority. If the directors who signed the supplementary agreement had actual authority conferred by a person or body competent to confer it, or had apparent authority, the agreement could bind Criterion. If they had neither, it was not Criterion’s contract, although the signatories might be liable for breach of warranty of authority. The rule in Royal British Bank v Turquand and sections 35A and 35B of the Companies Act 1985 were potentially relevant.

4. Per Lord Scott, apparent authority cannot be relied upon by a counterparty which knows that the agent lacks actual authority. Knowledge, or reason to believe, that the transaction is contrary to the principal’s commercial interests may make it difficult for the counterparty credibly to assert a belief that actual authority existed. The counterparty’s conscionability was not, however, an independent test of contractual validity.

5. Lord Nicholls considered that the Court of Appeal in Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 erred by applying an unconscionability test to want of authority as well as knowing receipt. If a contract is valid, there is no misapplication of the company’s assets. If it is set aside, proprietary and restitutionary consequences may follow, but personal restitutionary liability is not dependent upon fault or unconscionable conduct and remains subject to change of position.

6. The evidence did not establish whether Criterion’s board approved the agreement, who participated in its approval, or whether the board or signatories possessed the necessary authority. The legality and scope of authority to adopt this form of poison-pill arrangement also raised important questions which had not been adequately argued below. Those matters could not properly be resolved on the summary judgment application.

1. House of Lords: The appeal was dismissed unanimously. The Court of Appeal’s decision setting aside the summary declaration remained in force, leaving the authority issue for trial or a further appropriate application: [2004] UKHL 28.

2. Court of Appeal: Brooke LJ and Carnwath LJ allowed Oaktree’s appeal and set aside Hart J’s declaration because the dispute required a trial: [2002] EWCA Civ 1783.

3. High Court: Hart J granted Criterion summary judgment and declared the supplementary agreement unenforceable against it. No citation is stated in the judgment.