English High Court Confirms High Bar for Reliance on Apparent Authority

Facts

In 2009 Phytos Stavrinides, a property developer and certain companies owned by him entered into facility agreements with Cyprus Popular Bank (Laiki Bank) totaling £4.95 million to develop various properties in London. The projects were all delayed, mainly due to difficulties with obtaining planning permission. By March 2011, the facilities were in default and Laiki Bank started imposing penalty interest and default charges.

As a result of the Cypriot financial crisis in 2013, most of the assets of Laiki Bank were transferred to Bank of Cyprus Public Company Limited (BoC), the defendant.

In September 2013, a letter was found in Laiki Bank’s files that purported to be dated March 15, 2013, allegedly recording an agreement between Laiki Bank and Stavrinides to accept £1.65 million in settlement of the total liabilities (the March Letter). This letter had been signed by the Laiki Bank relationship manager assigned to the claimants’ accounts and referred to other letters relating to the same accounts. The March Letter directly contradicted other documents that Laiki Bank had on file, including an internal memorandum dated July 2013 (written by the same relationship manager) that recommended extending the facilities to allow Stavrinides time to repay them.

The claimants claimed that the March Letter was genuine and had passed through the relevant channels of authority at Laiki Bank. BoC’s case was that the March Letter was a forgery and that none of the individuals who the claimants claimed had authorized its terms had the authority to do so. The claimants further contended that they were entitled to rely on the ostensible or apparent authority of the relationship manager.

The claimants sought an order for specific performance to compel BoC to honor the terms of the March Letter. BoC counterclaimed for the total amount of the facilities plus interest (just under £6 million). The judge found that the March Letter must have been a forgery, dismissed the claimants’ claim and awarded BoC’s counterclaim in full.

Analysis

The judge found on the facts that the relationship manager had no actual authority to convey the terms of the March Letter and release BoC’s security over the loans. He was not authorized to write off any amount of debt (let alone several million pounds). Laiki Bank had strict internal credit procedures that involved its head offices in London and headquarters in Cyprus. None of these procedures had been followed in this case, and BoC’s factual and witness evidence pointed to the March Letter being a forgery.

The judge noted that that there was a difference between issues of substantive authority and what he described as “conduit authority.” In the former, the issue is whether the agent who lacked actual authority to enter into a transaction was held out by the principal as having the authority to do so. However, the agent may also be held out as having authority to communicate decisions made by those with actual authority, as a “conduit.”

A person who relies on a representation of substantive authority will be able to enforce the contract or claim expectation losses for breach. A person who relies on a representation of conduit authority will be able to only claim reliance losses.

The judge found that the claimants came nowhere close to establishing either type of representation. Laiki Bank had held out the relationship manager as nothing more than that. Stavrinides, being a long-standing customer, was well aware of Laiki Bank’s internal procedures. Further, all correspondence from the bank on matters of substance concerning his facilities had been signed by both the relationship manager and his superior. Following well-established Court of Appeal authority, Stavrinides would have been on notice that the terms of the March Letter constituted an extraordinary transaction for which the relationship manager, a low-ranking employee, lacked authority.

Further, the court confirmed that there is both a subjective and objective component to reliance. Given the above, objectively speaking the claimants could not reasonably have relied on any apparent authority of the relationship manager, even if they could have pointed to a representation made by the bank as to his substantive or conduit authority.

The claimants also failed to show that they had, subjectively speaking, relied on a representation made by the bank. The evidence showed that Stavrinides did not inform anyone of, or act on, the terms of the March Letter until September 2013. The judge found that the only plausible explanation was that Stavrinides knew the relationship manager did not have the authority to send it, and he had to wait until it was unlikely to be challenged by other employees.

The judge concluded that the March Letter was an attempted fraud by Stavrinides and the relationship manager acting in concert and constituted a “dishonest try-on by two men who had their own separate grievances against Laiki Bank.”