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Representations of agents: Beware [inadvertent] exposure to liability

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27/09/2016

The High Court recently considered whether a company was induced to conclude an agreement by way of misrepresentations made by a third party and, if so, whether the other party to the agreement was liable for the consequences. Gwendoline Davies considers the judgment and the practical implications.

Background

In Monde Petroleum SA v Westernzagros Ltd [1] Monde entered into a consulting services agreement (CSA) with Westernzagros (WZL) concerning the negotiation of an oil exploration and production sharing agreement with the Kurdistan Regional Government (KRG).  Monde had the option, under the CSA, to acquire a 3 per cent interest.  The consulting services were provided by a Mr Al-Fekaiki, the son of a prominent Iraqi politician.

Following alleged rumours that Mr Al-Fekaiki had “fallen from favour” in the region, WZL served a termination notice in relation to the CSA. After initially resisting, Monde subsequently concluded a termination agreement with WZL under which, in consideration of the payment by WZL of US$ 700,000 (for which Monde had already invoiced WZL), Monde agreed that the CSA was at an end and the parties released each other from all further liabilities.  The 3 per cent interest had not vested by this time.

In proceedings in England’s Commercial Court, Monde claimed that its signature was procured by misrepresentation and/or economic duress (the duress plea was later withdrawn). The misrepresentations were alleged to have been made on WZL’s behalf by a Mr Bafel Talabani (Bafel), son of the then President of Iraq and a public official who appeared to have influence over the award of public contracts to WZL.

Monde alleged that Bafel had represented to Mr Al-Fekaiki in a series of telephone conversations that, if Monde agreed to sign, WZL would not only pay the US$ 700,000 (which it otherwise intended to withhold), but would also enter into a new agreement under which Monde would be given the chance to share in WZL’s profits.  Monde sought to set aside the termination agreement and/or claim damages.  WZL denied making any misrepresentations or that Bafel had any authority to act or speak on its behalf.

The issue

Was Monde induced by WZL to conclude the termination agreement by misrepresentation?

Judgment

It was evident that Monde had various business arrangements with Bafel, including accounting to him for the majority share of the sums it received from WZL (an arrangement of which WZL was unaware); also that WZL often used its own direct channel of communication with Bafel (bypassing Monde and Mr Al-Fekaiki); and that Bafel was involved directly in negotiations between WZL and the KRG.

The factual background is detailed and the judgment lengthy. As a general comment, the judge’s impression was that none of the witnesses of fact – on both sides – told him “the whole, unvarnished truth”.

The judge was satisfied that Bafel had made a number of calls to Mr Al-Fekaiki at the relevant time, during which Mr Al-Fekaiki was persuaded to sign the termination agreement. He also accepted Mr Al-Fekaiki’s evidence that, during the first of those calls, Bafel had told him that the key WZL executives were present, and that he had been asked by them to tell Mr Al-Fekaiki that, if Monde did not sign, WZL did not intend to pay the outstanding invoices.

The judge concluded that Bafel had made the representations, in substantially the same form as alleged. It was Bafel’s promise of securing Mr Al-Fekaiki’s interests, together with the promise of payment of the invoices, which persuaded him to sign.

There was no direct evidence to prove that Bafel made the representations on behalf of WZL. In order to establish that WZL was legally responsible, Monde had to show that WZL either actually authorised Bafel to make the representations, or by its words or conduct represented or permitted it to be represented to Monde that Bafel had that authority.  The only direct evidence on the point came from WZL, but the judge found it unsatisfactory and not credible.  He noted, however, that the conferring of such authority can be inferred instead from circumstantial evidence.  This includes things said by the agent to the other party.

In addition to what Bafel had told Mr Al-Fekaiki about the presence of the WZL executives on the first call, it was also probable that Bafel had heard about the termination notice from WZL – there was no evidence that Mr Al-Fekaiki had told him about it or asked him to get involved. Having considered this, all of the other evidence and the parties’ arguments, the judge found it more probable than not that Bafel was trying to negotiate a new arrangement with WZL for himself and that, during those negotiations, WZL asked him to “clear the decks” by getting Mr Al-Fekaiki to sign the termination agreement.  Bafel was therefore acting at WZL’s request, and so with its actual authority.  He was not acting on his own, or on Monde’s, behalf.

The judge went on to say that, to the extent Bafel had said more than he was authorised to say, he was simply performing – in an unauthorised manner – the specific task set by WZL. This meant that WZL remained liable for his words and actions.  There was clearly a “sufficient connection” between that task and Bafel’s statements to Mr Al-Fekaiki, to make it just that WZL should be held legally responsible [2].

Ultimately, WZL’s wrong caused Monde no substantial recoverable loss. WZL’s termination notice had been defective, because it did not comply with the required notice period.  However, since WZL could have served an effective termination notice immediately, that would be sufficient to bring an end to the CSA and, with it,  Monde’s three per cent interest.

Other issues

The court was asked to consider a number of other allegations, including that the termination notice was invalid by reason of breach of an implied term of utmost good faith. Please refer to our earlier article for a discussion of this issue.

Points to consider

On a practical note, this case serves as a reminder of the importance of being very clear and careful when dealing with agents, and of being alive to any conduct which could potentially expose a party to liabilities it had not bargained for. This is especially significant when relying on agents operating in unfamiliar territory.

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[1] [2016] EWHC 1472 (Comm)
[2] It is an established principle that liability by way of vicarious responsibility can arise even where the conduct complained of falls outside the agent’s authority.  A sufficiently close connection is required between the conduct and the agent’s authorised acts.  This “sufficient connection” test is seen in the context of employers being held vicariously liable for the acts of their employees, where there is a sufficiently close connection between the employee’s wrongdoing and the nature of his or her role.

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