The doctrine of ostensible authority with reference to “Nkosana Makate v Vodacom (Pty) Ltd

The point of departure in this article has to be a brief outline of the law of agency, which is the branch of law from which the doctrine of ostensible authority find its roots and application. The law of agency refers to the relationship between an agent that acts on behalf of another natural person or juristic person usually called the principal. An agency is formed when a principal names someone as an agent through a contract leading to the responsibility of the principal for actions made by the agent while the agent’s actions are akin to those of the principal. This form of agency can be and often is enforced by written agreements made through a power of attorney.

The reciprocal rights and liabilities between a principal and an agent reflect commercial and legal realities. A business owner often relies on an employee or another person to conduct a business. In the case of a corporation, since a corporation is a fictitious legal person, it can only act through human agents. The principal is bound by the contract entered into by the agent, so long as the agent performs within the scope of the agency.

The agent’s authority may be actual or ostensible (apparent) authority. If the principal deliberately advises express and implied powers to the agent to act for him or her, the agent has actual authority. When the agent exercises actual authority, it is as if the principal is acting, and the principal is bound by the agent’s acts and is legally responsible for them.  If the principal either knowingly or mistakenly, authorizes the agent or others to assume that the agent holds authority to carry out specific actions when such authority does not exist, this is known as ostensible authority. If other persons believe in good faith that such right exists, the principal remains liable for the agent’s actions and is unable to rely on the defense that no actual authority was established. The scope of an agent’s authority, regardless of whether it is apparent or actual, is considered in determining an agent’s legal responsibility for his or her actions.

In the matter of Nkosana Makate v Vodacom (CCT52/15) [2016] ZACC 13 (26 April 2016) the court dealt with the doctrine of ostensible authority amongst other things.

Factual background

Makate was employed by Vodacom in the finance department as a trainee. During his tenure at Vodacom Makate was involved in a long distance relationship, as a result he experienced difficulties communicating with his companion who was a student at that time due to lack of finances. In endeavoring to find a solution to his problem, Makate came up with an idea where one Vodacom user without airtime can send a message to the other user requesting them to call back. He shared this idea with one of his seniors Muchenje. The latter informed Makate to pitch his idea to Geissler Director of Product development and Management at Vodacom. Makate reduced his idea in writing and pitched same to Geissler.

Geissler liked Makate’s idea very much. They discussed amongst other things how Makate will be remunerated for his idea which was to be called “please call me”, Makate suggested that he wants 15% of the profits. The idea was launched pending the approval of the board as it trite at Vodacom to test drive before the board’s approval. The product received a warm welcome and it has since raked in billions for Vodacom. Once the   product was a success, the board sent out e-mails to staff applauding what Makate had done.

However Makate never received any compensation form Vodacom as result he approached the High court as well as the Supreme Court of Appeal. Makate found no remedy in both courts and as a result he approached the Constitutional court.

Legal issue

The Court held as follows “…two main issues arise here. The first is whether the ostensible authority relied on by the applicant was established.” In view of the High Court’s approach, two subsidiary questions also occur. These are whether ostensible authority was properly pleaded and whether the common law ought to be developed in present circumstances.

The trial Court had held that “…the applicant must have pleaded ostensible authority in replication.” The Court regarded as insufficient the allegation in Makate’s particulars to the effect that Geissler had ostensible authority. But, the Court proceeded to hold that on the evidence placed on record, the applicant had failed to show a representation by Vodacom itself, giving rise to an impression that Geissler had authority to conclude the agreement on its behalf.

In addressing the above the court further held that “…the trial Court here adopted an incorrect approach to pleadings.” That Court held that Makate should have pleaded estoppel in replication. It will be recalled that Makate had alleged in his particulars of claim that Geissler had ostensible authority. Vodacom denied this fact in its plea. Consequently, ostensible authority became one of the issues to be determined at trial, as properly defined by the pleadings. In the circumstances the trial Court erred in holding that apparent authority was not pleaded, because it was not introduced by means of replication.

Court findings

In making its founding the court further held “…that Geissler had authority to negotiate all issues relating to the introduction of new products at Vodacom. Those issues included agreements under which the new products would be tested before approval by him and once approved, the agreement in terms of which the new product would be acquired by Vodacom and the amount to be paid for it. After all, owing to his technical skills, he was best placed to determine the worth of a new product.”

I am of the opinion that Makate had established that Geissler had apparent authority to bind Vodacom. This finding makes it unnecessary to consider whether the common law should be developed.

Why Doctrine of Ostensible Authority

To protect parties like Makate in the above matter and to facilitate commercial trade, the law recognizes the doctrine. Ostensible authority can operate both in enlarge actual authority and to create where none exists. It is important to note that a third party is however barred from claiming ostensible authority if the circumstances reasonably called for greater investigation of the actual authority of the agent. Claims on ostensible authority are sometimes denied when the third party is found to have put the agent to enquiry. And goes without saying that there are agents and principals who will attempt to overreach themselves like in the above matter and a prudent third party can always find remedy in this doctrine.

by Sada Raulinga
sada@dyason.co.za