Scottish Court of Session Decisions

At advising, on 26th April 1991, the opinion of the court was delivered by the Lord President (Hope).

OPINION OF THE COURT.—The question in this reclaiming motion is whether the Lord Ordinary erred in law in deciding not to sustain the defender's fifth plea-in-law, which was directed to averments added by the pursuers by amendment towards the end of art. 2 of the condescendence. He repelled this plea and allowed the parties a proof before answer of all their averments on record. Both sides are agreed that this interlocutor should have allowed the parties a proof before answer habili modo and that it should also have ordained the defender to lead at the proof, as had already been ordered by the interlocutor dated 6th December 1989 when it was agreed that this was the appropriate way to proceed in this case. But the parties are still in dispute, as they were in the debate before the Lord Ordinary, as to whether the averments in question should be allowed to go to proof, or whether they should be refused probation on the ground that they are irrelevant or in any event do not give fair notice to the defender of the point which the pursuers seek to make.

The pursuers claim payment from the defender of a sum of money which they say was advanced on loan in terms of a loan agreement entered into between the parties dated 4th March 1987. The defender maintains that the sum sued for was paid over to him not as a loan but as a grant to Malinair Ltd. of which he was a shareholder and a director. He avers that he agreed to enter into this transaction on the basis that he would receive a back letter from the pursuers which would negate any apparent obligation in regard to the purported loan and that there would be a "proper agreement" to the effect that the money was truly a non-returnable grant. He refers to and founds upon, amongst other documents, a minute of his meeting with representatives of the pursuers at which he maintains all this was agreed to, and a back letter or undertaking which he says was signed on the pursuers' behalf by two of their employees confirming that they would at no time seek or have recourse to the defender or his wife in regard to the so-called loan. The pursuers' response to this line of defence is that the signatures to the various documents on which the defender relies are forgeries and that they are not bound by any of them. But they added the following sentence by amendment which the defender has now challenged as irrelevant, or at least as lacking in specification, in terms of his fifth plea-in-law:

"Esto the said minutes and grant agreement were subscribed by Mr Haspel and the said back letter was subscribed by Mr Haspel and Mr Steinberg (which is denied), Mr Haspel and Mr Steinberg were not authorised to bind the pursuers otherwise than in terms of the said loan agreement."

As the Lord Ordinary pointed out, it is clear that until this averment was added by amendment the action was eminently suitable for a proof before answer habili modo, and indeed the parties were agreed at that stage that this was the appropriate form of procedure. He was invited to sustain the defender's fifth plea-in-law and to exclude this new averment from probation, but he declined to do so on the ground that, while there might be substance in the argument submitted for the defender that the pursuers' averment was defective because they do not say that the defender should have known that the persons named did not have authority to bind the pursuers, it would be better to postpone a decision on that question until the facts had been established. He rejected the defender's argument that the pursuers had given him insufficient notice as to why they say their employees had no authority to sign the documents on which he relies.

Counsel for the defender invited us to approach the defender's case on the basis that the back letter or undertaking was an integral part of the bargain comprising the so-called loan agreement, since on the defender's averments these documents were both signed at or about the same time by the same people and as part of the same transaction. He submitted that, if the pursuers' employees had no authority to subscribe the minute or back letter as averred by them, then the whole transaction must be regarded as having been entered into without authority. Accordingly, the pursuers' averment was destructive of their entire case, since it was not open to them to seek to enforce one part of the transaction while ignoring the other. He referred to Gloag on Contract, (2nd edn.), p. 407 in regard to the well-known principles about the interdependence of contractual provisions and to Claddagh Steamship Co. v. Steven & Co. 1919 S.C. (H.L.) 132 as an example of a case where what appeared to be separate contracts were treated as being all part of the same bargain. He also submitted that, since the pursuers' employees had apparently been authorised by the pursuers to negotiate on their behalf in regard to the provision of finance for the purchase of their aircraft, it was unnecessary for the defender to aver that they had ostensible authority to enter into the back letter. The onus, he said, was on the pursuers to explain how it came about that the authority of these employees was restricted in these circumstances and furthermore how the defender was supposed to know that this was the case. He maintained that they had failed to do this, since their averment that the employees were "not authorised" was so bland and lacking in detail as to give rise to substantial doubt as to what it was intended to mean. The absence of any express authority to execute the back letter was not in itself a sufficient answer to the defender's argument, because the question remained whether what the employees did was within their apparent or ostensible authority. Accordingly, the onus was on the pursuers to show that their employees lacked ostensible authority to sign the back letter on their behalf and to demonstrate that the defender had notice of this fact. In regard to the question of onus, he referred to International Sponge Importers Ltd. v. Watt & Sons 1911 SC (HL) 57, and in particular to Lord Ardwall's remarks in the Inner House at p. 66 and to the speech of Lord Shaw of Dunfermline at pp. 70 to 71. He referred us also, on the question of ostensible authority in general, to Diplock L.J.'s discussion of this point in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. [1964] 2 Q.B. 480 at pp. 502–505. Finally, he pointed out that the averment in question was not supported by any plea-in-law. The back letter was, he said, an ex facie valid undertaking signed by two employees on the pursuers' behalf, and one would have expected a plea-in-law in order to make it clear what the pursuers' argument was as to its effect in law. They should really be seeking to reduce the undertaking if their position was that it was of no effect.

We are not persuaded, however, that the Lord Ordinary was wrong to repel the defender's fifth plea-in-law and to allow a proof before answer on the whole averments. The pursuers' averment has to be seen in the light of the fact that the defender does not state expressly anywhere in his own averments or pleas-in-law that the pursuers' employees had authority to sign the back letter on the pursuers' behalf. That an averment and a plea-in-law to this effect are not always necessary can be seen from British Bata Shoe Co. Ltd. v. Double M Shah Ltd. 1980 SC 311 where, despite the absence of express averments on this matter, Lord Jauncey dealt with the question of ostensible authority after a proof and rejected this line of defence. In any event, in the present case, it is reasonably clear from his averments that the defender's position is that the pursuers' employees had ostensible authority to sign the back letter on the pursuers' behalf. Counsel for the pursuers told us that the sole purpose of the averment which is under challenge was to give notice to the defender that the question as to the authority of these employees to sign anything other than the loan agreement was in issue. It was not for the pursuers to prove anything in this regard, because the onus in this matter rested on the defender, who had to show that the documents on which he relied were binding on the pursuers. In any event, he said, the averment was concerned only with the question of actual authority. It was accepted by the pursuers that the lack of actual authority would not provide a sufficient answer if, in the end of the day, the court was able to conclude that the employees had ostensible authority. But counsel emphasised that the pursuers did not depart from their general plea to the relevancy, so the whole question as to what authority, if any, their employees had to sign the back letter remained under challenge at this stage.

We are content to accept this approach, which seems to us to be consistent both with the terms of the averment, which uses the phrase "not authorised", and the absence of any pleas-in-law related expressly to this averment. There is indeed no attempt by the pursuers to deal in this averment with the question of ostensible authority at all, and this being so we reject the criticism which was made of it on the ground that it did not give fair notice to the defender as to the limits of the employees' ostensible authority of which he was supposed to be aware. The only point which is being made in the averment is a simple one about the extent of the actual authority of the employees, which, as it happens, is not seriously in dispute in the case since the defender does not aver that they had actual authority to do what they did. The defender's case rests essentially upon ostensible authority, and that whole matter has already been put in issue by the pursuers' plea to the relevancy. Questions as to where the onus lies in regard to it are best reserved until after proof. In these circumstances we agree with the Lord Ordinary that sufficient notice has been given to the defender of the pursuers' position, and that, reading the averment in the way which counsel for the pursuers invited us to read it, it says all that the pursuers can reasonably be expected to say in order to make it plain to the defender that the question as to their employees' authority to subscribe these documents is in issue.

It is not necessary to deal in detail at this stage with counsel for the defender's argument that the back letter must be seen as an integral part of the entire transaction of which the loan agreement itself was only a part. Whether that is the correct approach to the case is, as the Lord Ordinary pointed out, a question which can be more effectively decided when all the facts have been established. It is not self-evident that the pursuers' employees, having been authorised to enter into a loan agreement on the pursuers' behalf, were authorised also to enter into the kind of arrangement which the defender describes which, in effect, involved giving the money away. As Diplock L.J. pointed out in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. at p. 503, apparent or ostensible authority is a legal relationship between the principal and the other party to the contract which is created by a representation that the agent has authority to enter on behalf of the principal into a contract of the kind within the scope of the "apparent" authority. By making this representation, he said, "the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal's business has usually ‘actual authority’ to enter into." At p. 505 he pointed out that the commonest form of representation by a principal creating an apparent authority of an agent is by conduct, namely by permitting the agent to act in the management or conduct of the principal's business. By doing this he represents to all persons dealing with the agent that the agent has authority to enter on behalf of the principal into contracts of a kind "which an agent authorised to do acts of the kind which he is in fact permitted to do usually enters into in the ordinary course of such business." But in our opinion, the more extraordinary the transaction the less likely it is that the agent has authority to enter into it, so questions of fact and degree may arise as to the proper limits of the apparent or ostensible authority. We mention these points only to stress that, while there may be force in the argument which counsel for the defender presented about the close relationship between the back letter and the loan agreement and that the pursuers cannot seek to enforce the one without giving effect to the other, this is not an argument which is capable of being decided as a matter of relevancy at this stage. The proper course is therefore, as the Lord Ordinary pointed out, for the facts to be established first so that these arguments can be considered in their proper context.

For these reasons we must refuse this reclaiming motion, and we shall adhere to the Lord Ordinary's interlocutor in so far as it repelled the defender's fifth plea-in-law. For the avoidance of doubt, however, we shall recall that part of the interlocutor which allowed a proof before answer since this appears to be inconsistent with the terms of the earlier interlocutor dated 6th December 1989. We shall instead, of new, allow to parties a proof before answer habili modo of their respective averments on record and ordain the defender to lead at the diet of proof.