SMC Electronics vs Akhter Computers & Others: Court of Appeal Decision

SMC Electronics Limited v. Akhter Computers Limited & Others Court of Appeal (Civil Division) Lord Justice Henry Lord Justice Latham and Sir Murray Stuart-Smith Lord Justice Henry: Introduction 1 The Claimant, SMC Electronics Ltd, (“SMC”), and the Defendants (all part of the Akhter Group of companies (“Akhter”)), both sell power supply units (“PSUs”). PSUs are printed circuit boards with capacitors and other components soldered on to them. This is Akhter’s appeal from the decision of HHJ Green dated 31st March 1999, sitting in the Central London County Court, allowing SMC’s claim and declaring that SMC was entitled to 50% of the profits that Akhter had made on sales of certain PSUs to Pitney Bowes Plc (“Pitney Bowes”).

This entitlement is said to arise under a commission agreement made on 26th July 1993, under which Akhter promised to share their profits with SMC, in consideration for the introduction to a major new customer for PSUs, Pitney Bowes.

This is a case about the authority of the third party to these proceedings, David Bennett, to enter that commission agreement on behalf of Akhter, his employers, who now seek to avoid having to pay any commission by challenging his authority to make the contract.

The background facts 3 In July 1993, David Bennett was employed by Skynet, a division of Akhter, as “Director PSU Sales”. In fact, he was not a director of any company in the Akhter Group. He worked from a small sales office in Basingstoke with two other people, his assistant, Andy Wall, and a secretary.

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David Bennett’s primary duty was to promote sales and he was paid large commissions when he was successful. The judge found that he was given a very high degree of autonomy. He even had the habit, known to and permitted by his employers, of writing on Skynet notepaper and describing himself as “director”. This Skynet notepaper, in breach of s. 351 of the Companies Act 1985, omitted to contain the registered name, company number and address of Akhter, leaving the reader no indication as to whom David Bennett might answer. In July 1993, Pitney Bowes, a large UK manufacturer, was interested in buying large quantities of PSUs and approached, among others, SMC in order to get a quote. SMC thought the job was too big for them, and so Merhzad Koranki of SMC approached David Bennett to suggest that Skynet quote for the business. Merhzad Koranki suggested that, if Skynet’s tender was successful, it should share the profits of the Pitney Bowes’ deal equally with SMC under a commission agreement, in return for the introduction.

Having checked with Andy Wall that Skynet did not already know about the invitation to quote, David Bennett agreed with the proposal. At a meeting with SMC, David Bennett brought with him a letter containing draft terms of contract. After some negotiations, Merhzad Koranki then handed him the contract document, addressed to David Bennett at Skynet. This became the commission agreement. It provided: “Dear Dave, (1) Further to our telephone conversation this morning, I would like to confirm what we discussed and agreed with regard to customer projects. 2) SMC Electronics Ltd will do its utmost to sell and distribute Skynet products as part of our range, however on the occasions where we would have to pass on the project to Skynet Electronics, we agree to do so based on our agreement that the total profit will be shared equally (50% SMC Electronics, 50% Skynet Electronics) (3) This will not only apply to the current project, but any future projects and orders generated from the customer identified. 4) We anticipate a lifetime of customer designs to be in the region of five years plus, therefore any agreements made would have to cover at least the running period as well as the lifetime of the products. (5) Could you please make a record of the following customer for which the project is passed on to yourselves in order to complete for the order. (6) Of course, SMC Electronics will work along with you to help with the housekeeping with regard to costing. Mr P J Dewey Pitney Bowes” 5 After a lengthy process of development, Pitney Bowes awarded the project to Skynet and the Akhter Group now supply Pitney Bowes with a large quantity of

PSUs. The questions on appeal 6 There were four questions on this appeal: (1) What was David Bennett’s actual authority under his contract of employment with Akhter, and did it give him express authority to enter the commission agreement, or, on the other hand, was he expressly prohibited from entering the commission agreement? (2) Did David Bennett have the implied authority, under his contract of employment, to enter the commission agreement? (3) If David Bennett did not have actual authority, express or implied, did he have ostensible authority to enter into the commission agreement? 4) Finally, if Akhter are liable to SMC, on which projects is SMC entitled to a share of the profits, on a proper construction of the commission agreement? Actual authority — the terms of David Bennett’s contract of employment 7 The judge found that David Bennett had no actual authority to make the commission agreement, saying there was simply no evidence of actual authority. I am unable to agree with this, having regard to the express terms of David Bennett’s contract of employment. Clause 3 of David Bennett’s “Terms of Employment” with the Akhter Group (Holdings) Plc provided: “Job Title: Director PSU Sales

You must perform such duties as may be reasonably associated with your job title” 8 That clause therefore delimited the scope of duties that were within David Bennett’s express authority. However, in order to try and establish an express prohibition on entering commission agreements, Mr Norris relied on a document entitled “Akhter Group — Purchase of Goods and Services”, said to be incorporated into David Bennett’s contract of employment. That document stated, at clause 3: “Purchase Requisition. A purchase requisition is required for any item not normally held in stock or for any Service of Capital equipment required by the company. .. Purchase requisitions for capital items and services must be signed by the Managing Director. ” 9 Mr Norris submitted that the commission agreement was in truth a purchase of information, that Skynet were “buying the introduction” from SMC, and that therefore, if it was to be authorised, a purchase requisition was required to be signed by the Managing Director, Mr Mughal. 10 Reading the provisions of his employment contract together, David Bennett had the express authority to perform duties “reasonably associated” with being “Director PSU Sales”, but was not allowed to make “purchase requisitions” without the signature of Mr Mughal.

In my judgment, the commission agreement was clearly a deal made in the discharge of the duties reasonably associated with being Director PSU Sales. It is ingenious, but highly artificial and quite unreal, to classify the commission agreement as a “purchase requisition for capital items and services” and I reject Mr Norris’ submission to that effect. 11 The purpose of David Bennett in entering into the commission agreement was to make more sales for Akhter (“… 50% of something is better than 100% of nothing. “). The commission agreement was reasonably associated with that purpose.

Therefore, in my opinion, the proper and clear construction of the employment contract is that David Bennett had the actual authority of his employers to enter the commission agreement, and accordingly his employers, Akhter, are bound by it. Even if clause 3 of the Terms of Employment were to be considered ambiguous, which I think it is not, the act of entering the commission agreement, if done in good faith by David Bennett, and if justified by any possible construction, would be authorised by the ambiguous clause (see Bowstead & Reynolds on Agency, 16th Ed. , 1996, Article 26). 2 The finding that David Bennett had express authority is enough to dismiss the appeal on liability. Nonetheless, in deference to the careful arguments of counsel, I continue to consider briefly implied authority and ostensible authority, both of which would also merit the dismissal of this appeal. Implied authority to enter the commission agreement 13 Mr Norris, submitted that, the contract being otherwise complete, the court can only imply a term on the basis of the well-known tests laid down in The Moorcock (1889) 14 PD 64 and Liverpool CC v Irwin [1977] AC 235.

Furthermore, he says that the term to be implied is not capable of precise formulation, which militates against any implication. 14 Implied actual authority of agents is dealt with in Bowstead & Reynolds on Agency, 16th Ed. , 1996, Articles 27-32. Articles 27 and 30 set out the test for implication in this context, and also provide the answer to Mr Norris’ argument that the implied term cannot be formulated with reasonable precision, by doing just that: Article 27 provides: “An agent has implied authority to do whatever is necessary for, or ordinarily incidental to, the effective execution of his express authority in the usual way. Article 30 provides: “An agent who is authorised to do any act in the course of his trade, profession or business as an agent has implied authority to do whatever is normally incidental, in the ordinary course of such trade, profession or business, to the execution of his express authority, but not to do anything which is unusual in such trade, profession or business, or which is neither necessary for nor incidental to the execution of his express authority. ” 15 So the implied authority arises from the nature of the general occupation of David Bennett.

Indeed, there is a striking similarity between the implied terms as formulated by Bowstead & Reynolds and the express term contained in Clause 3 of David Bennett’s Terms of Employment with Akhter, which supports my opinion that David Bennett had express actual authority to enter the commission agreement. 16 In finding that David Bennett had implied authority to make the commission agreement, the judge correctly relied on several matters, which all show that the making of the commission agreement was ordinarily incidental to David Bennett’s activities.

The judge found support in the facts that David Bennett was allowed to the use the grandiloquent title “Director PSU Sales” and was allowed to describe himself as simply “director”. He further relied on the facts that David Bennett took an important part in making the annual budget estimate for Skynet and that Pat Swabey, an employee of Skynet, said that if anyone asked her who Skynet was she would have said “David Bennett”. The judge added, with some hesitation, that the use of Skynet notepaper, which infringed s. 51 of the Companies Act 1985, led SMC to believe that there was no-one more senior than David Bennett at Skynet. 17 Two further factors were relied on heavily by SMC to establish David Bennett’s implied authority, first, the fact that denial of his authority was not the first reaction of Mr Mughal, David Bennett’s employer, and secondly, that David Bennett had previously negotiated an allegedly similar deal with Lion Cabinets, the so-called “Lion deal”. They both support a finding of either express or implied authority. 8 When SMC first approached David Bennett for their share of the profits, they were told there were no profits yet and thereafter SMC were met with a prolonged campaign of evasion, misleading and procrastination. At a meeting on 26th July 1996 and subsequently, Mr Mughal, managing director and major shareholder of Akhter, failed to make the objection that David Bennett lacked the authority to enter the commission agreement, instead relying on previous business that had been done with Pitney Bowes to try and show that the introduction had not been of any value. Mr Mughal then offered ? 5,000 to ? 0,000, because “David Bennett was my employee”. I agree with the judge that this was travelling a long way from a mere denial of authority and that Mr Mughal’s failure to challenge David Bennett’s authority, when he first learned of the claim, is indicative of the latter’s implied authority. I do not think, as Mr Norris suggests, that Mr Mughal would have been deterred from raising an objection by any assertion of David Bennett, who sought to renege on the deal, that the commission agreement was “not a real agreement”. 19 In the “Lion deal”, Lion Cabinets had been buying PSUs from Skynet, who sourced them from Skynet Taiwan.

David Bennett arranged for Skynet Taiwan to sell directly to Lion Cabinets, with Skynet receiving 4% of Skynet Taiwan’s turnover on these sales. David Bennett thus cut out the problems for the intermediary, Skynet. While Mr Norris is correct that the “Lion deal” was different from the commission agreement, being a rearrangement of an existing sales contract, rather than a new contract granting commission to an introducer, I agree with the judge that it shows the wide degree of authority and responsibility which David Bennett was given. 0 Therefore, I agree that the commission agreement was normally incidental to the execution by David Bennett of his duties as “Director PSU Sales”. This is the same as saying that it was reasonably associated with his duties, under the express authority given to him. One way or another, David Bennett was employed to promote sales, and if this necessitated offering commission to an “introducer” or “fixer” in return for a lucrative contract, then that was a step that David Bennett was authorised to take.

As indicated above, I do not find that the implied term is incapable of precise formulation. The term has been formulated expressly in Clause 3 of David Bennett’s “Terms of Employment”, and is formulated with reasonable precision in the Articles from Bowstead & Reynolds quoted above. A certain spectrum of authorised acts must always be inevitable in such cases as this anyway, and so I do not think that the courts should strive to find unrealistic precision in such implied terms.

It is not necessary to ask whether David Bennett had the authority to enter the exact terms of this commission agreement, which with hindsight may seem foolhardy, but whether he had the authority to enter commission agreements generally, in the furtherance of his duty to promote sales. The answer is plainly yes. Did David Bennett have ostensible authority? 21 As the judge did, I have considered the ground of ostensible authority, even though it is not necessary to dispose of the appeal. 2 The judge correctly explained that ostensible authority is a form of estoppel by implied representation (see Freeman & Lockyer v Buckhurst Park Properties (Mangal) Limited [1964] 2 QB 480 per Pearson LJ at 498 and per Diplock LJ at 503). The judge relied on five representations. He repeated that David Bennett was described as both “Director PSU Sales” and simply “director”, and again relied on the fact that his name and number were on all Skynet adverts, that he was known to be in charge of the Skynet sales office and, again hesitatingly, that he was allowed to write on Skynet paper without the information required by s. 51 23 I do not agree that the judge was wrong to find that David Bennett could also have had ostensible authority. In the absence of full argument, it is not appropriate for me to elaborate on the precision required to find an implied representation amounting to an estoppel, in order to give rise to a finding of ostensible authority. I do not gain assistance from the fact that SMC initially issued against David Bennett personally, which, so Mr Norris says, shows that SMC were aware of his lack of authority to enter into the commission agreement and therefore shows that SMC cannot have relied on any representation to the contrary.

Issuing against David Bennett personally was merely an attempt by SMC to flush out the true defendant and principal to the commission agreement, upon which David Bennett was being sued. Had SMC sued David Bennett for breach of warranty of authority, then it would be arguable that they had always doubted his authority, but they did not, instead basing their claim on the very commission agreement that they sought to enforce. The extent of SMC’s entitlement to an account of profits 24 The judge ordered that the account extended to cover “… he B900 project and any other projects in which P Dewey of Pitney Bowes has ordered goods from them”. This question of the construction of the contract determines whether SMC can recover for other projects in addition to the B900 PSU, which Akhter supply to Pitney Bowes. 25 Mr Norris says that the only project falling within the terms of the commission agreement, if they are liable thereunder, was the B900 project, and the account of profits should be limited accordingly, and I agree. 6 In my opinion, construing the agreement as a whole, it is necessary to read the words of paragraphs 2 and 3 of the commission agreement together. Paragraph 2 envisages the “occasions where SMC would have to pass on the project to Skynet”. Paragraph 3 extends the ambit of the commission agreement, saying “this will not only apply to the current project, but any future projects and orders generated from the customer identified”. The agreement clearly means that SMC may recover commission on future projects, but only where they have agreed to pass them on to Skynet.

The word “this” in paragraph 3, refers to the “occasions” where an introduction has been made and a project passed on. The agreement does not mean that SMC can recover commission on any project which Skynet subsequently negotiate directly with Pitney Bowes or even Peter Dewey at Pitney Bowes, and which is not passed on by SMC. That would be an extraordinary construction, given the previous dealings that Akhter had already had with Pitney Bowes, and given that it would appear to make SMC money indefinitely, on deals to which they had contributed nothing. 7 Therefore, I would vary the terms of the judge’s order to hold that SMC are entitled to an account by Akhter of all profits on the B900 project and any other projects with Peter Dewey of Pitney Bowes which SMC have passed on to Akhter, and that Akhter should make disclosure accordingly. There is evidence that Akhter supply Pitney Bowes with a project code-named F350, but there is no evidence that SMC introduced this or any other Pitney Bowes project to Akhter, and so the effect of this judgment will be, we are told, to limit SMC to a share in the profits of the B900 project. David Bennett appearing as third party 8 David Bennett was originally a defendant to the action brought by SMC. After his employers, Akhter, were substituted for him, they then reinstated him in the action as a third party, so that if Akhter lost this action on the basis of ostensible authority alone, they could claim an indemnity against him for exceeding his authority in breach of his contract of employment. As the decision of the judge on authority has been upheld, primarily on the ground of actual authority, David Bennett cannot be liable to either Akhter or SMC. 29 I have read the judgment of Sir Murray Stuart-Smith, and am in total agreement with it. Conclusion 0 In my judgment, the answers to the four questions in this case, are as follows: (1) there was express authority, rather than any express prohibition, given to David Bennett to enter the commission agreement, under the terms of his contract of employment, (2) there was, in any event, implied authority for David Bennett to enter the commission agreement, (3) therefore, it is not necessary to make any finding on ostensible authority, although there seems no reason to interfere with the reasoning of the judge that, if he was wrong on actual authority, then David Bennett had ostensible authority to enter the commission agreement, (4) the commission agreement only extended to cover those projects with Peter Dewey of Pitney Bowes which SMC had introduced to Akhter, and therefore it is for SMC to show that they had assisted in passing on projects for Pitney Bowes other than the B900 PSU to Akhter. 31 For those reasons, I would dismiss the appeal. Lord Justice Latham: 32 I agree that the appeal on the first issue fails, but succeeds on the second. Like Henry LJ and Sir Murray Stuart Smith I consider that Mr Bennett had, by reason of the terms of his employment contract, express actual authority to enter into the commission agreement. It was intended to, and did, secure a sale for his employers.

As far as the scope of the commission agreement was concerned, I again agree with Henry LJ and Sir Murray Stuart Smith that the meaning contended for by Mr Norris both accords with the natural meaning of the words used, and with commercial sense. Sir Murray Stuart-Smith: 33 Two issues arise on this appeal. The first is whether Mr Bennett had actual or ostensible authority to enter into the commission agreement of 26th July 1993. The second is what was the scope of that agreement, in particular to what extent it extended to further projects. The judge’s order is that the claimants are entitled to an account of profits not only on the B900 project but also on “… any other projects in which P Dewey of Pitney Bowes plc has ordered goods from them”. The judge answered the first issue in favour of the claimants holding that Mr Bennett had implied actual authority.

He also answered the second issue in their favour giving a wide interpretation to the contract. I agree that the appeal on the first issue fails, but succeeds on the second. I only add a few words of my own to the judgment Henry LJ, with which I agree, because I would uphold the judgment on the first issue on somewhat different grounds from those given by the judge, and because we are differing from him on the second issue. Authority 34 Actual authority can be express or implied. The judge held that it was not express; it was implied. I am not persuaded that he was right in this. When considering the scope of the agent’s authority one has to look in the first place at the express terms of the contract dated 30th November 1992.

Mr Norris contended that Mr Bennett was expressly forbidden from entering into a contract such as the commission agreement by virtue of the attachment to the contact of employment called “Purchase of goods and services”. Under the heading “Purchasing Procedures” it is said: “A purchase order must be issued to cover any expenditure incurred by the company. ” 35 This was not a purchase order; it is, with respect to Mr Norris, nonsense to describe the commission agreement as the purchase of information. 36 There is to my mind one provision of the employment contract which is of critical importance. It is in these terms: “Job Title: Director PSU Sales

You must perform such duties as may be reasonably associated with your job title” 37 So far as I can see this is the only provision in the contract which amounts to a job description or specification; it also defines the scope of Mr Bennett’s authority. The simple question is whether the entry into the commission agreement was “… reasonably associated with his job … ” as Director of PSU Sales. To my mind there can only be one answer to this question, namely “Yes”. The commission agreement was necessary to secure what promised to be an extremely lucrative sale for Skynet Electronics. A similar answer would have been given to the Lion contract. 38 Mr Norris frequently referred to Mr Bennett as a salesman; he was not so described in the contract; he is described as “Director” which must have a wider connotation.

But even if he was described as a salesman, it seems to me that the commission agreement was reasonably associated with his duties to sell Skynet Electronics products or merchandise. 39 I consider that Mr Bennett had actual express authority which was sufficiently clear. Even if it was ambiguous, it would not avail the defendants. Article 26 of Bowstead & Reynolds on Agency, 16th Edition, p116, provides at paragraph 3-106: “Where the authority of an agent is conferred in such ambiguous terms, or the instructions given to him are so uncertain, as to be fairly capable of more than one construction, an act reasonably done by him in good faith which is justified by any of those constructions is deemed to have been duly authorised, though the construction adopted and acted upon by him was not that intended by the principal. 40 It is clear that Mr Bennett thought he had authority; no-one has questioned his bona-fides at the time he entered into the contact, even if his subsequent conduct appears to have been evasive. Scope of the Commission Agreement 41 In his judgment, Henry LJ sets out the relevant parts of the agreement. The question is what does the word “this” at the beginning of the third paragraph refer to. Mr Norris submits that it refers to “… the occasions where we would have to pass on the project to Skynet Electronics, we agree to do so based on an agreement etc. ” 42 Mr Alliott submits that it applies only to the words “… we agree to do so based on an agreement etc. ” 43 In my judgment, Mr Norris was clearly right about this.

This fits the grammar of the two paragraphs. It also accords with the factual background of the agreement, namely that the claimants were asked to tender for a contract which was beyond their capability to perform by themselves. It is obvious that such a situation might occur in the future. Moreover this construction seems to me to make commercial sense, whereas that adopted by the judge would lead to a commercially unreasonable result. If the situation recurred where the claimants were asked to tender (and the defendants were not) they might well wish to enter into a similar arrangement in future and be confident they would do so on similar terms.

On the other hand, if the defendants, having given satisfaction on the B900 project, were asked by Mr Dewey to tender for some new and unrelated project, they would be in difficulty in competing with other tenderers, since their profit margin would have to be shared with the claimants. Where there are two possible alternative constructions, the Court will prefer that which makes commercial sense in preference to one which is unreasonable. Order: Appeal dismissed on issues. Going to the authority of David Bennett, but allowed on single issue on the construction of the agreement; minute of order to be agreed; technology & construction court most convenient