Directors Duties from View of Agency Law

5239 words (21 pages) Essay in Business Law

02/02/18 Business Law Reference this

Last modified: 02/02/18 Author: Law student

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The crux of this question mainly lies on the assessment of the director’s duties as an agent from the view of the agency law. It also seeks for a rigorous discussion on the impact of the recent Companies Act 2006 (hereinafter referred to ‘CA2006’) on whether the corporate social responsibilities lie (hereinafter referred to ‘CSR’) on the agents (directors) have been improved. However, it is pivotal to first understand the nature of agency though. It is claimed that it would be an uphill task in defining the law of agency to its elusive nature. [1] Nonetheless, as eloquently espoused by Bowstead and Reynolds, an agency could be defined as a fiduciary relationship where one acting on behalf on another subject to the consent and instruction by the principal. [2]

Significantly, as crafted by Lord Cranworth in Aberdeen Railway Co v Blaikie Bros [3] , the director of a company is deemed to be an agent of the company (principal). As stated in Great Eastern Railway Co v Turner [4] , they will therefore, enter into the transaction on behalf of the company which results them being placed onerous duties on the director’s part. [5] Over the decades, there have been voluminous of criticisms that director as an agent is fallacious. [6] Nevertheless, Romer J [7] had reconciled this issue by expressing, be it so controversial, it is still a valid legal concept. [8]

It would also be wise to take cognizance on Armstrong v Jackson [9] by Lord McCardie that, their role as an agent will impose them a strict and salutary rule due to the fiduciary relationship. [10] That would then lead to the assessment of the ‘stringent’ common law rules on agency with regards to the director’s duties. In elucidating part one of this question, it will be divided into two categories i.e.: contractual duties and fiduciary duties on whether these rules are really stringent. [11] Plus, in consideration the recent CA 2006, which may even ‘improve’ the CSR on them as an agent. A question could be raised as to, should the screw be tightened when it is already screwed. Before reaching the conclusion, it must first be known if there is indeed an improvement that will be discussed in part two of this work.

Part 1: Assessment on the duties of director’s with regards to common law rules on agency

Furthermore, having known agency law is a complicated relationship that it is ‘chose suprenante’ which a outsider may come into participation of the agreement. [12] Therefore, it is a very important step for the law to develop to regulate the agent’s behaviour. During the Anglo Saxon era, the church had been putting efforts in promoting the development of agency law. [13] However, it appears to be a need in protecting the principal (the company) though it might be commercially convenient. A major concern expressed by Gower, there could be some fraudulent behaviour by the agents. [14] It is more astonishing whereby, as held by Lord Wilberforce, a shareholder can never control the director. [15] It is therefore, incontrovertible that Parkinson’s statement is judicious, that it is paramount to impose pressure for high quality performance by imposing fiduciary controls on managerial discretion.

Fiduciary duties

In relation to fiduciary duties, it is submitted that the fiduciary duty of a director has long been established. [16] In the judgement of Lord Millet in Bristol West Building Society v Mothew [17] , his Lordship stated that not every breach of duty will result in breach of fiduciary. The word ‘fiduciary’ owes its genesis from the Latin word ‘fiducia’ which means trust and confidence. [18] It is to be distinguished that a fiduciary means, there must be a breach of loyalty. [19] That appears to be the core obligation in fiduciary duties that eventually affirmed by the novel case of Clark v Trustees of the BT Pension Scheme [20] which delivered by Henry J [21] These should include ‘no conflict rule’, ‘duty not to make unauthorised profit ‘and, etc., which will be discussed below. [22]

Duty of disclosure

Primarily, with regards to the duty of disclosure of the director as an agent, it is suggested that an agent has an obligation to disclose the information obtained. [23] In the light of Fulham Football Club Ltd v Tigana [24] , whereby it was held that the director will bear a duty to disclose whatever information to the company (principal) in which he considers best. However, this is controversial as when it comes to a point where the director would be reluctant to disclose the information simply because it might be dropped on the hand of outsiders which may have pernicious effect to the company. [25] The thorny problem exists when the duty has to be breached in the consideration by the director it is the best interest of the company. However, surprisingly, in the case of Item Software (UK) Ltd v Fassihi [26] , Arden LJ has carved her decision on a policy basis that the director’s duty of loyalty will require the director as an agent to disclose. Her Lordship was of the opinion that non-disclosed information will lead to a harmful consequence. It is opined that they seemed to have more interest in the loyalty of the director rather than the best interest of the company.

Duty of non-delegation

Besides, as the Latin word goes, that remains greatly promulgated within the realm of agency law –‘delegatus non potest delegare’ has placed an obstacle on the director (agent) to delegate his power. [27] The rationale behind it again lies on the trust and confidence in which the director as an agent should be loyal to the task entrusted on him. [28] In another word, the law of agency put more weights on the intention of the principal’s consent and intention. The principal would have appointed another agent if he so wishes hence sub-delegation should be discouraged. In De Bussche v Alt [29] where it was held by Thesiger LJ that the agent must act and personally and not employ sub-agents in the sale of a ship. However, the stringency of this rule has been loosened by the court because it involves a matter of technical knowledge. It would be overburdened the agent if the law requires them to be capable in everything.

It is submitted that the door of exceptions must be opened to relieve the agents from being suffocated by the non-delegable duty. [30] In relation to this, it can be observed via case laws. The agent can delegate his duty so far if it is reasonable and intra vires during the usual practice in the trade, for instance, in Solley v Wood [31] has established that it is usual for solicitors to delegate their duty to town agent. [32] The duty is delegable too if the principal aware of the ‘sub-agency’ and didn’t object at the point of the creation of sub-agency as in the case of Quebec and Richmond Railroad Co v Quinn. [33] Besides, Privy Council in that case also expressed if the situation makes it a necessity for sub-delegation, it will be another leeway of the general rule. [34] Likewise in the De Bussche case [35] where there is a need to get somebody skilled to act behalf on the agent. Lord Thesiger in the case also claimed if the principle’s conduct implying the permission of delegation, it will not be deemed as unauthorised delegation. [36] Instead, it resembles the concept of trust and confidence whereby the principals’ will is followed. It is hardly a true exception.

Furthermore, a relief will also be given if the nature of work is of purely ministerial one. It is inconvincible that it is to be regarded as an exception as it is opined that it is understood that if the work does not require any confidence and discretion. It does not even breach the principal’s intention at the first place. A classical example would be Allam & Co v Europa Poster Services Ltd [37] by Buckley J, whereby it involves an agent to sub-delegate a task to give terminating notice that held to be a pure ministerial duty. In contrast, as illustrated in the case of John McCann & Co v Pow [38] , it was held that a delegation by the estate agents to another estate agents was not purely ministerial hence improperly delegated. In addition, it is propounded that a duty will become delegable if it is aimed to solve the unforeseen circumstances which in a way, leads to necessity.

Duty not to fetter the discretion

As repeatedly emphasised, a fiduciary duty of the director (as an agent) is fundamentally lying on the confidence given by the principal. [39] This simply indicates that the director will be entrusted to exercise his discretion to manage the company’s affair by the principal. In any event if the director does not exercise so, he is deemed to have breached his duty not to fetter his discretion. In another word, he must exercise his own independent judgement and shall not be influenced by others. [40] This is especially vital to note that his discretion will affect the principal’s interest, hence, it is said that this fiduciary obligation acts as a tool to control this discretion. [41] The law respects this relationship to the extent that it will not be interfering with any decision making as this is the director’s duty to consider and exercise his discretion as noted by Romilly M.R in Harris v North Devon Railway Co. [42] . It is observed that the director as an agent can never bind himself as to how he will exercise his discretion in the future. In short, in common law rules on agency, the director as an agent will have to make sure his decisions are made independently and take into consideration of on the proper time to exercise his discretion. [43]

Duty to benefit possible Beneficiaries equally and fairly

As the famous maxim tells, equality is equity. The director will bear the duty to treat its member equally and take reasonable step to ensure wealth is maximising. [44] In Greenhalgh v Arderne Cinemas Ltd [45] , Evershed MR had stated robustly on shareholder’s value. In another word, more weights are being placed on the beneficiaries in a situation of a fiduciary relationship. The director as an agent should not act in a totally unreasonable way as laid down in Tempest v Lord Cumoys [46] . As per Hindle v John Cotton [47] , the director should always make sure they act on the proper purpose.

Duty to avoid conflict of interest

As per Lord Herschell in Bray v Ford [48] that unless agreed by the principle, the director as an agent shall not be allowed to put himself in a position where his interest and his duty conflict. In the view to enhance loyalty, the duty to avoid conflict of interest is somehow mandatory even though without a contractual agreement mentioning it. Rather, in a situation of director as an agent, academics tend to assume it to be in a ‘trust-like ‘situation’. [49] Therefore, it ought to be strictly applied to ensure disinterestedness of the agent.

In Regal (Hasting) Ltd v Gulliver [50] , the directors were held to be liable simply because of their interestedness that led them making profit without the approval of the shareholder. In Knight v Earl of Plymouth [51] , Lord Hardwicke had explained, a fiduciary means an act of kindness. The classical case of Boardman v Phipps [52] best illustrating this, where Boardman clearly stood in a fiduciary position as a solicitor but it was decided by Lord Wilberforce with a 3:2 majority, that Boardman is to be treated equally as a constructive trustee. Even though he was acting in good faith but what he did was in fact had portrayed the conflicted interest. This case again has shown the stringency of this rule. It may be astonishing to note that, it is a romanticised rule whereby it can hardly determine a company’s interest when a company is merely a legal creature of the court. [53]

Duty on not to take unauthorised profit

In accordance with Lord Goulding in Chase Manhattan Bank v Israel British Bank, the court will impose a fiduciary duty on a party if it is observed that he is unjustly enriched. It simply denotes that, an unauthorised profit is strictly prohibited. It is submitted that the director as an agent shall not be interested in making secret profit in which just stand against the principle of disinterestedness and loyalty. In Lord Denning’s judgement in Boardman case [54] , it is stated the agent will be accountable if he made profit without the principal’s consent. [55] Furthermore, in the light of Burdick v Garrick [56] , the agent took the proceeds of sale of a property and deposited it into his own account was held to be a secret profit making. Hence, as Lindley LJ carved in Lamb v Evans [57] that such a usage is contrary to the good faith that underlies the whole agent’s obligation. The reason being, the property or whatever profits are belong to the principal.

Additionally, as per Lord Templeman in AG of Hong Kong v Reid [58] , a director is not supposed to take any immoral gift – bribe. [59] A tentative definition has been given by Slade J in Industries and General Mortgage Co. Ltd v Lewis [60] that it means a payment of secret commission. The court will sometime blurred the distinction between a bribe and a secret profit, a remarkable case would be Russell J in Williams v Barton [61] . In the similar vein, as taken place in Lister v Stubbs [62] ,where a large amount of commission had been given to the agent is said to be bribe receiving though it was decided that was of merely a debtor and a creditor relationship. The case was later dismissed in the AG case [63] .

The undivided loyalty rule and duty to account

Importantly, it is known that loyalty is the heart of the fiduciary duties. Thus it would be paramount to realise that, the loyalty has to be an undivided one. This means the director, as an agent must not put himself in a situation which is conflicting with his another capacity, for example, a trustee. He is required to be loyal to both. As stated by Lord Cottenham LC in Foley v Hill [64] , a fiduciary has a duty to account for the loss of the principal that resulted from the breach of fiduciary duties.

Contractual duty

Flip another side of the coin, another elephant in the living could be discovered from the contract. Hence, it is doubtless that an agent of the company (director) will owe a duty to perform and obey the instruction to the principal. Superficially, the duties will be imposed expressly and impliedly that derived from the agency agreement. [65] In this context, the agreement will invariably be the constitution of the company.

Duty of Obedience

In the statement of Lord Cranworth in Pole v Leask [66] , it was stated that no one can become the agent of another except by the will of that another. This indicates the will of the principal is very vital. Therefore, it demands the need for the agent to obey its instruction given. It is well illustrated in Turpin V Bilton [67] , there was an insurance broker in that case failed to exercise the promise he made to the principal. The broker was supposed to arrange insurance for the ship and he failed to perform his instruction as agreed.

Duty of care, skills and diligence Lord Campbell had once delivered his judgement in Fray v Voules [68] , the agent would be liable if he goes against the express instruction given by the principal. Also, it is worth noting on the principle laid down in Ireland v Livingston [69] that an agent will not be obliged to exercise illegal act. Nevertheless, it is less plausible for a director to experience such a scenario because the constitution will be scrutinised by registrar at the beginning. [70]

With regards to duty of care, it has been aforementioned that a duty could be imposed impliedly and expressly. However, an action could be initiated by the principal to the director through a tortious claim or a contractual claim. In Midland Bank Trust v Hett [71] , it was held that a tortious claim could only be succeeded when there is proper communication between the relevant parties. In the judgement of Stuart-Smith J in Chaudry v Prabakar [72] , his Lordship has made it clear that the standard of care is of a question of fact. It can also be observed from William v Natural Life Healthfood [73] that duty of care will therefore, be owed by the director if once established special knowledge and sufficient reliance. Amusingly, it is opined that if a trust affair exists (here, between principal and director) the duty is such a draconian one that they have to make sure they are the skilled people. Besides, it is worth digging as to whether the changes have been brought by the recent CA2006 as below.

Part 2: To what extent do these duties improve the CSR of directors in their role as agents?

It is of utmost vital to understand the nature of CSR before determining the CA2006’s impact on director’s duties as an agent. Having perused the common law duties on agents, the director duties so far concern only as to the relationship between the company and the director as the agents. A witty statement made by Wedderburn, all corporate decisions to buy church bells or create jobs, noble, though they both may be, are dispositions of social power and raise the issue of social accountability.CSR is of no stranger in this contemporary age, however due to its pluralism, it has led to many invention of definition. For example, Adam would define this as an important role of broader values for the choice of behaviour which inclusive of humanity, justice, generosity, and public spirit. [74]

Also, CSR could also be defined as a means of promoting integrity and responsibility through self-regulation and multi-stakeholder initiatives. It aims to take into account of the society, environmental and economic aspects of business performance. [75] The question is, is the duty of director as an agent thereby be increased? It too, might possibly alter the nature of law of agency in which, authorisation and consent is the bone of agency. Director will without going through the ‘normal agency route but still act as an agent of the society at large.

The academics seem to be rather dissatisfied with the common law agency rule on director. It is suggested that the scope of fiduciary duties should be extended so it covers the interest of non-shareholder groups.. Nonetheless it was argued that it provides no realistic effect as the managerial power in intractable which Sealy too think it will be unenforceable. [76]

The extent of its improvement, if at all

As Goode mentioned, the birth of CA2006 should be given a big applause that it is one of the gigantic codification. [77] Having noticed Lord Goldsmiths on Company Law Reform Bill, he claims the main purpose of this codifying act is to make it clearer on the director duties and to make the law more accessible to them and to others. He also stated it is a position of great responsibility which involves running the affairs of a company for the benefit of other people. [78] At the very first glance, it seems CA2006 should have been productive in improving the CSR whereby it is aimed to clarify the common law duties. [79] Whether or not it has improved director’s duties as an agent will be further discussed below.

First, the novel CA2006 introduced one of the very controversial provisions – s.172 CA 2006 [80] that is said to be a reformulation section. Previously in the common law, the director as an agent will only need to act in good faith in what they believed to be the best interest of the company. It appears the duties make the director’s duties role as an agent even a stricter and wider one. Director will now still be required to act in good faith with the aim to promote success of the company as a whole with regards to 6 matters. [81]

Having considered the fact that the director must nevertheless take employee into account, it is submitted that it seems to defeat the heart of the common law rule of agency. The gist of common law agency lies on the principle of loyalty; as held in Re Saul D Harrisons Plc [82] , it is now becomes a defensive weapon by director (agent) to shareholder. This new provision also urges to consider on the creditors in conjunction with s.214 Insolvency Act 1986 [83] . It is opined that it has definitely improved CSR in this sense but seems to have slightly diverged from the principle of loyalty. Now, a director as an agent not only owes duty to his principal but also others. It is utterly true that CA 2006 makes the company to be a good citizen however overwhelmingly burdened the directors.

Besides, in the recent enacted s.173 CA2006, it seems also to have affected the common law rules on agency that now the court is willing to consider ‘nominee director’ which has gone totally opposed the definition given by Bowstead [84] in which consent may not obtained to act on behalf of the principal. Instead of constructive trustee, it seems now the court has creatively opened another gateway – ‘constructive agent’. It has no legal relation with the principal per se. Rather, it is appointed by a particular class of security holder or creditor to protect their interest. This seems to be an awkward rule, that an agent of the company is appointed by another entity to protect another party’s interest. It is opined the court has gone too far for being extensively inventive. It makes the law of agency becomes the ‘law of aliens’ since it protects the outsiders more. As evidently taken place in Kuwait Asia Bank EC v National Mutual Life Nominee Ltd [85] , it was held that the nominee director will be held liable if there is a breach of duty. This also means CSR has been improved as the multi-stakeholder’s initiatives will be explicitly taken into account in the director’s duty as an agent. [86]


To recapitulate, the nature of trust-like relationship generally exists between director (agent) and the principal. Hence the common law duties has establis

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