A question of authority

It happens all the time. An employer without the expertise to negotiate contracts for works with contractors employs a professional such as a quantity surveyor to do so on its behalf. The quantity surveyor, perhaps because it has acted in such a capacity for the employer over a number of years, believes that it knows backwards what terms are acceptable.

One day, a term emerges in a contract that has a serious negative impact on the employer's bottom line. The contractor believed that this term had been agreed, and having acted upon it, is not happy. The employer says that it did not, and would never have, agreed to such a term. The quantity surveyor fears that it may be left holding the baby.

The law of authority

Under English law the quantity surveyor can gain comfort from the fact that the employer does not need to execute the contract in order for it to be binding. On the other hand, the fact that the employer gave the quantity surveyor authority to negotiate the terms of the contract on its behalf does not mean that it has authority to bind the employer to the terms that it negotiated.

In order for the quantity surveyor to have authority to bind the employer, the latter must have specifically represented to the contractor that it has authority to act on its behalf. The mere fact that the employer has made such a representation is sufficient. The fact that the employer has not confirmed such authority to the quantity surveyor will not prevent it from agreeing a binding contract on the employer's behalf.

This is known as the doctrine of ostensible authority. It extends to any circumstances where the employer allows the contractor to believe that the quantity surveyor has its full authority to bind it, when in fact it does not.

Communication issues

The representation by the employer to the contractor does not even have to be by words. Conduct can, in certain circumstances, be sufficient.

What it does mean is that there must be direct communication between the employer and contractor that provides that the quantity surveyor has authority to bind the employer. A representation by the quantity surveyor to the contractor that it has authority to bind the employer will not be enough.

This becomes relevant in a situation where the quantity surveyor had, over a number of years, negotiated a series of contracts on behalf of the employer that were accepted without quibble. This would not in itself be sufficient evidence of there being a representation on the part of the employer that the quantity surveyor had authority to bind it, even if the contractor and quantity surveyor believed this to be the case. A simple belief is not enough.

In the absence of some kind of communication between the employer and contractor, such conduct would be insufficient to establish that the employer was willing to be contractually bound by the quantity surveyor.

There is a real danger that the employer may
be entitled to walk away from a contract that it decides it doesn’t like

The employer's role

Silence on the part of the employer over the extent of the quantity surveyor's authority, even over the course of several years, is not enough to establish that it has authority to bind the employer. The failure of the employer to tell the contractor that there is a limit to the powers that it has granted the quantity surveyor will not be enough for either party to allege that the employer had delegated full authority to the quantity surveyor to bind it under contract terms.

In summary, there is a presumption that a third party appointed by an employer to negotiate a contract on its behalf does not have authority to bind that employer. Only clear facts to the contrary can rebut this presumption.

Be prepared

In order to protect everybody's position and ensure that there are no misunderstandings in such situations some practical steps should be taken.

Before any negotiations begin between the appointed negotiator and the contractor, the employer and negotiator should set out in writing the precise terms of its appointment to act on behalf of the employer. These, most importantly, should include the limitations of the negotiator's authority.

It is crucial that such a document is provided to the contractor so that it understands the ambit of the negotiator's authority. It is equally important that the terms of the negotiator's authority are reaffirmed before the discussions for each new contract are commenced.

Otherwise, there is a real danger that the employer may be entitled to walk away from a contract that it decides it doesn't like. In such circumstances the contractor may be left with a contract that at least in part is unenforceable against the employer.

The contractor's only comfort in such circumstances is that it may have grounds for taking action against the negotiator to recover any losses that it has suffered.