East Africa: Court of Appeal

EMCO PLASTICA INTERNATIONAL LIMITED. . ……………. . . . . . . . . . APPELLANT

SYDNEY LAWRENCE FREEBERNE . . . ………….. . . . . . . . . . . . . . RESPONDENT

         (Chanan Singh, J.) dated 9^th December, 1970 in Civil Case No. 1129 of 1969]

19^th August, 1971.

The following Judgments were read:-

LUTTA,J. A.

The appellant company (which expression I shall use to include its predecessor Dodhia Plastica International Limited) employed the respondent on the terms set in a letter dated 5^th October, 1965 (hereinafter referred to as "the contract").

These terms were that the appellant company ,would .pay the respondent a salary of 3,000 per annum, house rent in excess of shs.800/= per mensem, medical expenses (including those of the respondent's wife), a bonus at the end of each year (at the discretion of the appallant ); in addition the respondent was entitled to local leave of three weeks per annum and overseas leave of one month for each year of service with passages paid to the U.K and to payment of 1,000 on termination of service and a monthly retirement benefit of shs.3,500/...

The respondent was required to work for the entire Dodhia Group of Companies but in fact worked only for the appellant company, the contract commencing on' the 5^th October, 1965, and was to last for a minimum period of 5 years with a proviso that either party was entitled to terminate it by giving 12 months' notice in writing. On the 26^th May, 1968 the appellant company's Managing Director wrote to the respondent terminating his services with effect from 31^st May, 1968. The letter stated, inter alia _,

"It is with deep sorrow and very great regret that we have to inform you that the company Board of Directors decided during the last Board meeting to close the Nairobi offices, which has resulted in the necessity of advising you of the termination of your services, effective from 31^st May, 1968 ..."

The respondent, on 27^th May 1968, wrote to the Managing Director in reply stating, inter alia,

The appellant company did not reply to this letter and on the 13^th June, 1968 the respondent wrote again to the Managing Director of the appellant company stating, inter alia_,

There was again no reply to this letter and it appears that the respondent took no further action until the 17^th March, 1969 when his advocates, Messrs Archer and Wilcock wrote to the appellant company claiming loss of salary in the sum of 10,033 in respect of unexpired period of 3 years, four months and 4 days at the rate of 3,000 per annum, 1,000 terminal bonus, medical expenses incurred by the respondent until 4^th October, 1971, 30 a month for the use of the company car until 4^th October, 1971, 496 being the minimum of one return passage to the U.K. for the respondent and his wife, and the sum of 15,750 for 7 years at the rate of 2,100 per annum by way of pension.

Messrs J.J. Patel and Co. advocates replied to the letter from Messrs Archer and Wilcock expressing surprise at the contents of the latter's letter and stating further that their clients had not been aware of the alleged contract.

The respondent on 28^th August, 1969 filed his plaint claiming damages for breach of the contract. The total amount claimed was 27,866 10sThe appellant company filed a defence in February 1970 denying liability for breach of the contract and alleged that Mr. Dhanani was not Managing Director of the appellant company and had no authority or power to make an offer on behalf of the appellant company in terms of the contract.

The appellant company also alleged that the respondent as Secretary of the appellant company knew that Mr, Dhanani Rid not have authority to make an offer to him as stated in the contract. The learned judge held that Mr. Dhanani had the authority as Managing Director of the appellant company and had the authority not only just to offer to the respondent these terms and conditions of appointment contained in the contract but also had power to enter into contract on behalf of the appellant company, and he awarded to the respondent 9,058 and 298 in respect of two air tickets from Kenya to the United Kingdom. The appellant company appealed against that decision to this Court and the grounds of appeal were inter alia that the learned judge erred in law in holding that Mr. Dhanani had authority to enter into the contract on behalf of the appellant.

Mr. Georgiadis for the appellant company argued that the respondent was acting as the company secretary throughout the material period and was paid a salary but they had no knowledge of the contract, and that in any case Mr. Dhanani did not have the authority and powers to enter into such a contract on behalf of the appellant company.

However, Mr. Georgiadis conceded that it is possible that the Board of Directors had approved the respondent's appointment and left the details of the contract to be worked out by Mr. Dhanani. He submitted however that this contract was so unusually generous as to require the approval of the Board of Directors, and that the respondent as Secretary of the appellant company had full knowledge of Article 14 of the Articles of association and its limitation and restrictions and as such was fixed with notice of the powers of directors and should consequently, have known that Mr. Dhanani did not have authority to enter into such a contract on behalf of the appellant company.

He further submitted that the respondent having been fixed with notice of powers and of the limitation and restrictions thereon imposed by the said Article 14, cannot hold the appellant company responsible for breach of the contract as the fixing of contractual terms was a responsibility of the Board of Directors.

He contended that as the respondent was an insider, with full knowledge of the Articles of Association and an officer of the appellant company, the rule in the Royal British Bank v. Turquand - 6 F & B 327 did not apply to this case.

He further contended that the cases of Rama Corporation Ltd v. Proved Tin General Investments Ltd. - 1952 1 All E.R. 554 and Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd. - 1964 1 ALL E.R. 630 were distinguishable from the present case in that in both the latter cases those concerned were outsiders and third party outsiders respectively whereas in the present case it was an insider who was concerned and that it was actual knowledge of the irregularities rather than the status of the respondent which should have put the respondent on inquiry, in the absence of ratification of the contract by the Board of Directors.

Mr. Salter, for the respondent, contended that the contract was genuine, valid and enforceable as the terms thereof had been discussed before the first meeting and that either the other directors knew that some terms had been agreed or they were not interested in the matter as they had left the management of the day to day business of the appellant company to Mr. Dhanani who had authority to manage the general business of the appellant company and that Mr. Dhanani was the person on whom the respondent was entitled to rely, whether he was an insider or outsider. Mr. Salter submitted that there was a strong inference that Mr. Dhanani wss the main person through whom the appellant company acted during the initial period and as such he had authority to enter into the contract on behalf of the appellant company, and that every thing he did would have been within his ostensible authority as agent of the appellant company.

He submitted further that so long as the respondent was satisfied that his contract had been discussed by the Board of Directors, whether outside or within, at a meeting of the Board, it was immaterial whether he was an outsider or an insider. He relied on the case of Hely - Hutchinson v. Braymead - 1967 3 All E.R. 98.

It seems to me that the question to be determined here is whether Mr. Dhanani had actual or ostensible authority to enter into the contract with the respondent and on behalf of the appellant company. Article 1 of the Articles of association of the appellant company incorporates regulations contained in Part II of Table 1 in the First Schedule to the Companies Act - (Cap.486).

Regulation 1 of Part II provides that regulations contained in Part I of Table A shall apply, with the exception of regulations 24 and 53. Regulations 80 – 106 inclusive of Part I deal with the powers and duties of directors and regulation 110 deals with appointment of the Secretary.

A meeting of subscribers to the memorandum and Articles of Association of the appellant company was held on 1^st October, 1965. At this meeting Mr. Dhanani was appointed Chairman of the appellant company "until otherwise resolved" and the respondent was appointed Secretary "of the company to hold that office until otherwise resolved". The position then was that on 1^st October, 1965 the subscribers to the Memorandum and Articles of Association and the directors of the appellant company by a resolution appointed the respondent as Secretary.

They did not, in that resolution, specify the terms and conditions of the appointment. There is no resolution specifically giving Mr. Dhanani authority to enter into an agreement with the respondent on the terms contained in the contract. In its Articles of Association no specific power or authority is conferred on the Chairman or director in regard to the transaction of the business of the appellant company. There was thus no actual authority on the part of Mr. Dhananias Chairman, or director, to offer the respondent those terms.

However, the learned judge made findings of fact as follows:-

(a) that the contract having been typed on the appellant company's letter head and the appellant company's name appearing "immediately above Mr. Dhanani's signature" sufficiently indicated that the contract was intended to be entered into on behalf of the appellant company;

(b) that the making of contracts of service was the responsibility of Mr. Dhanani or in his absence his alternate director; and

(c) that Mr. Dhanani having been appointed chairman was regarded by the board of directors as "Managing Director" and as such was the person "more likely" to sign contracts of service.

The learned judge held, in effect, that Mr. Dhanani had implied or ostensible authority to enter into the contract on behalf of the appellant company. The basis of this would appear to be that the appellant company held out Mr. Dhanani as the person who was managing its day to day business and therefore had authority to enter, on its behalf, into a contract with the respondent.

In my view, the learned judge's decision, on the facts of this case, was correct. Several acts of Mr. Dhanani suggest that the appellant company knew of Mr. Dhanani holding himself out as acting on the appellant company's behalf thus impliedly representing that he had authority to do so.

He was appointed Chairman of the appellant company on 1^st October 1965; someone had to represent the appellant company in the conduct of its business, particularly at the initial period, and such person must surely have authority to bind the appellant company.

Thus a third party dealing with the appellant company was entitled to assume that there was authority on the part of that person to bind the appellant company. The question as to whether or not the Articles of Association or a resolution of the board empowered the Chairman or any other director to enter into a contract binding the appellant company was not a matter into which a third party should have inquired as long as he acted on a representation that the Chairman or director had authority to bind the appellant company.

In my view, it is immaterial whether Mr. Dhanani had authority to enter into the contract.
The appellant company cannot repudiate the actions of the Chairman/director done within the scope of this ostensible authority.

The management and conduct of the business of the appellant company throughout the material period was in the hands of Mr. Dhanani. The board of directors by their conduct helped to create this impression or belief in the mind of the respondent, and, indeed, in the minds of other persons who dealt with the appellant company.

It is submitted by Mr. Georgiadis that the respondent was an insider and therefore was put on inquiry in regard to the powers of directors, particularly Mr. Dhanani's authority to enter into the contract; that the respondent should have known that Mr. Dhanani did not have power to offer the terms in the contract; that the board of directors had no knowledge of the contract and therefore by reason of the irregularity in his appointment the contract is not binding on the appellant company.

Regulation 80 in Part I of Table A provides that "the business of the company shall be managed by the director   and who may exercise all such powers of the company as are not…required to be exercised by the company in general meeting ...".

Regulation 102 gives power to the directors to delegate any of their powers to a committee.
Thus under the Articles of Association the board of directors had actual authority to appoint the respondent, or rather, could act on behalf of the appellant company in a matter of appointment of its officers.

Mr. Dhanani was Chairman of the appellant company and managed its affairs with full knowledge of the board of directors, that is, he performed the functions of the managing director, and as the contract was a contract of service, which a person performing the functions of the managing director would have power to enter into on the company's behalf, the respondent Was not, even though he was an insider, obliged to inquire whether or not the Articles of Association had been complied with before entering into the contract.

The respondent, in my view, was entitled to infer that the directors held out Mr. Dhanani as authorised to enter into the contract on behalf of the appellant company.

The appellant company had to have someone conduct correspondence on its behalf; such person surely must have authority to bind the company by letters written on its behalf.

Entering into a contract is a matter in which normally a managing director would have power to act. Mr. Dhanani being a director and Chairman and having been held out as the person managing the day to day business affairs of the company, the respondent was entitled to rely on his dots (Mr. Dhanani’s) as being those of the appellant company, and the latter must be responsible for those acts in respect of which they have held him out as having power or authority to perform.

In my opinion the learned judge came to the right conclusion when he held that the respondent, being Secretary of the company, was not placed in a position different from that of an outsider, who is entitled to assume in the absence of knowledge to the contrary, that a director signing a contract has authority to do so.

In my view the appellant company cannot dispute Mr. Dhanani's authority to enter into the contract, whether or not they actually conferred on him authority to do so. For these reasons I would dismiss this appeal with costs.
I would grant certificate for two advocates.

LAW,JA

I have read the judgment prepared by Lutta J.A. in which the facts are fully set out. The respondent Mr. Freeberne was appointed secretary of the appellant company at the first meeting of the company held on 1^st October, 1965, which he attended by invitation.

Nothing was decided at that meeting as regards the respondent’s emoluments and terms of service. Clearly it was not intended that he should work without remuneration. It is common ground that the two American directors only came to Kenya to attend board meetings, and that the day-to-day management of the company was left in the hands of Mr. Dhanani.

Mr. Dhanani was appointed Chairman of the Board at the first meeting. He does not appear ever formally to have been appointed Managing Director, but he resigned from that position at a board meeting held on 15^th January, 1968, so that the inference is inescapable, to my mind, that his fellow-directors considered him to have been the Managing Director since the company's inception, and held him out as such, or they would not have accepted his resignation from that position.

It is clearly within the ostensible authority of a Managing Director to negotiate a contract of service with an employee of the company. Mr. Georgiadis for the appellant company has submitted that the negotiation of a contract of service of the unusually generous type offered to the respondent was "the business of the board", within the meaning of Article 14 of the company's Articles of Association, and as such required the approval of a quorum of the directors, and that it was the duty of Mr. Dhandni and of the respondent to ensure that the contract was placed before the Board for its approval.

It should be noted that it was originally pleaded that the contract was the outcome of fraudulent collusion between Mr. Dhanani and the respondent.

This allegation was unreservedly withdrawn at the trial. The position was thus that the respondent was appointed secretary at the first board meeting. A few days later he received a letter setting out the terms and conditions of his appointment, signed on behalf of the company by the director to whom, to the respondent's knowledge, the management of the company had been entrusted.

The respondent accepted those terms. In my opinion, he was entitled in those circumstances to look upon the letter as emanating from the Board, which had appointed him but left his conditions of service unspecified.

I agree with Lutta and Mustafa JJA. that Mr. Dhanani had ostensible authority to make the offer, and that the company is bound by it.

In these circumstances, whether the respondent was an insider or outsider in relation to the company, he was under no duty to refer the contract to the Board for approval.

I agree that this appeal fails. There will be an order in the terms proposed by Lutta JA.


MUSTAFA,J.A.

I have had the opportunity of reading the judgment of Lutta, J.A. in draft and I agree with him that the appeal must be dismissed.

I would only add a few words. The respondent was appointed secretary of the appellant company by the board of directors at its first meeting on 1^st October, 1965.

The Chairman of the board of directors, Mr. Dhanani, on 5^th October, 1965 wrote a letter on behalf of the board of directors offering a contract of service to the respondent which the respondent accepted.

The contract contained some generous terms, especially the provision relating to pension rights. Before the contract period expired the respondent's services were terminated by the appellant company which resulted in the action for loss of benefits and damages.

In its defence the appellant company had inter alia alleged fraud and collusion between the respondent and Mr. Dhanani in relation to the contract of service.

These allegations of fraud and collusion were then unreservedly withdrawn in the course of the trial. The appellant company then relied on its alternative defence which was based on the alleged breach of duty on the part of the respondent in failing to have his contract of service brought before the board of directors for ratification or express approval.

It seems to me that once the allegations of fraud and collusion were withdrawn the main basis of the defence fell away.

It may be that the appellant company would be entitled to seek some explanation from Mr Dhanani for having offered comparatively generous and unusual terms to the respondent, but that cannot affect the rights of the respondent.

In the absence of collusion or fraud there was no valid reason for the respondent, albeit the appellant company's secretary, to place the contract of service before the board of directors.
As the trial judge has rightly found, Mr. Dhanani in effect had ostensible authority to act for the appellant company in offering the contract of service to the respondent. There was no evidence adduced to indicate that the respondent knew or ought to have known that he was not entitled to rely on the contract of service offered him by Mr. Dhanani; in fact the evidence points the other way. The appeal fails. I concur with the order proposed by
Lutta, J.A.