Short Reads

Unauthorized representation: commitment of the principal to the agreement

Unauthorized representation: commitment of the principal to the agree

Unauthorized representation: commitment of the principal to the agreement

22.06.2021 NL law

In Dutch commercial legal practice, contracting parties frequently act as representatives of a company. Generally, this representation is unproblematic, but intermediaries sometimes exceed their authority or act as representatives without the required authorization.

The general principle in Dutch law is that unauthorized representatives cannot bind parties. However, this can vary under certain circumstances. Legal proceedings on the merits of these circumstances have been instituted frequently in recent years.

The subject of this blogpost concerns the question under which circumstances the principal can be bound by a contract with a third party if the intermediary acted as a representative of the principal without the required authorization.

Confirmation (article 3:69 DCC) and appearance of authority to represent (article 3:61 (2) DCC)

The general principle is that unauthorized representatives cannot bind parties. However, this can vary under certain circumstances. Firstly, the principal can confirm an agreement made previously (article 3:69 DCC). An agreement between the principal and the third party exists following this confirmation.

Furthermore, article 3:61(2) DCC provides for another exception to this general rule: the appearance of authority to represent. Under certain circumstances, the principal may not invoke the fact that the intermediary acted as a representative without the required authorization. Briefly, this applies (i) if the third party has assumed and, in the circumstances, could reasonably assume that a sufficient procuration had been granted and (ii) this assumption is based on a declaration or conduct of the principal or on facts and circumstances that are at the principal’s own risk and from which, according to prevailing opinion, the appearance of authority to represent can be inferred (article 3:61 (2) DCC).

Whether or not there is, an actual and legitimate assumption, required under (i), depends on all the circumstances of the specific case. Based on settled case law and relevant Dutch literature, different circumstances play a role in this, including the nature and extent of the transaction and whether or not a confirmation of the assignment has been sent to the principal. For instance, the nature and extent of the transaction might lead to the result that the third party should have made enquiries with the principal itself about the competence of the intermediary, or that the third party should have checked the competence of the intermediary in the Trade Register.

Furthermore, this legitimate assumption of the third party must, under (ii), be based on “doing” or “action” of the principal (the principle of agency). Based on settled case law “doing” or “action” of the principal entails a declaration or conduct from the principal, or the maintenance of the status quo or otherwise “doing nothing” by the principal. See SC 9 August 2002  ECLI:NL:HR:2002:AE2380,  NJ 2002/543 (Van den Berg c.s./Balm). However, some writers are of the opinion that purely “doing nothing” by the principal would not be sufficient. They argue that a specific type of “doing nothing” is required i.e. doing nothing although action is required given the specific circumstances of the case.

However, in subsequent case law, the Dutch Supreme Court has ruled that “doing” or “action” i.e. a declaration or conduct of the principal is no longer required. It is sufficient if the third party has assumed and, in the circumstances, could reasonably assume that a sufficient procuration had been granted and this assumption is based on facts and circumstances which are at the principal’s own risk (the ‘risk principle’) from which, according to prevailing opinion, such appearance of authority to represent can be inferred. See SC 19 February 2010 ECLI:NL:HR:2010:BK7671  NJ 2010/115 (ING/Bera).

Thereafter, the Dutch Supreme Court put the aforementioned risk principle into perspective, i.e. the expectations which were created cannot be based exclusively on the declarations of the intermediary who acted as a representative without the required authorization. There should be facts and circumstances with reference to the principal as well. These facts and circumstances should justify that the principal bears the risk for unauthorized representation. See SC 3 February 2017 ECLI:NL:HR:2017:142  NJ 2017/78 (Tamacht/Hodenius) and SC 14 July 2017 ECLI:NL:HR:2017:1356  NJ 2017/326 (Ter Heide c.s./Metten c.s.).

Based on settled case law, it does not matter whether or not the appearance is created before or after the conclusion of the contract. See SC 24 April 2015 ECLI:NL:HR:2015:1119 , NJ 2015/221 (Hamers/Dronten).

Furthermore, the parliamentary history shows that it does not matter whether or not the principal who created the appearance was to blame. Under certain circumstances, the principal cannot invoke the fact that the intermediary acted as a representative without the required authorization, although the principal who created the appearance was in no way to blame (article 3:61 (2) DCC).

The existing case law on this topic – i.e. unauthorized representation – is however rather casuistic and vague. Therefore, it is difficult to predict whether or not the principal will be bound by a contract with a third party if the intermediary acted as a representative of the principal without the required authorization.

Conclusion

Based on settled case law and pursuant to Dutch law, exceptions to the general rule – to the effect that unauthorized representatives cannot bind parties – may occur under certain circumstances. In this blogpost, I have discussed these circumstances in brief.

As the existing case law is rather casuistic and vague, it is difficult to predict when these circumstances may occur. Therefore, it is recommended to clearly specify all competences in the Trade Register, and to take heed when dealing with any appearance of authority to represent.

Related news

07.06.2021 NL law
Climate case Milieudefensie et al. – The Hague District Court orders Shell to reduce CO2 emissions

Short Reads - On May 26, 2021, the District Court of The Hague rendered its judgment in the case between Milieudefensie and others against Shell. In this blog, a multidisciplinary team from Stibbe gives its first view of this ruling and explains why it could be a groundbreaking ruling.

Read more

30.06.2021 NL law
Breaking off negotiations: obligation to renegotiate

Short Reads - As long as a contract has not yet been concluded, the parties’ freedom of contract is paramount.  In principle, the parties are free to decide whether to continue or break off negotiations. Nevertheless, circumstances may arise under which breaking off negotiations is unacceptable. One of the remedies available to the injured party in such a case is to seek a court order to continue negotiations. This blog post discusses the chance of success of such a court order, and the factors involved.

Read more