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MAKATE v VODACOM, THE MODERN DAY DAVID v GOLIATH IN RELATION TO THE DOCTRINE OF AUTHORITY IN SOUTH AFRICAN COMPANY LAW.
Nicholas Petzwinkler
16 February 2021

The doctrine of authority has once again been brought to the forefront in the recent Constitutional Court case of Makate v Vodacom 2016 (4) SA 121 (CC) (hereafter referred to as the ‘Makate’ case).

In the Makate case an employee of Vodacom (at the time) came up with an idea (the idea that transpired into the famous ‘Please Call Me’ product) whereby one network user could notify another network user that the former user wanted to contact them. This would be expressed by way of a notification to the latter user. When Mr Makate expressed this idea to his superior, he notified Mr Makate that he should approach the head of Product Development and Management (being a director of the company) with his idea, in the hope of selling the product to Vodacom as the idea had commercial viability.

The head of Product Development and Management was held by the Constitutional Court to be someone with immense power and influence at Vodacom with regard to product development and the court specifically remarked that such power and influence could ‘make or break’ a product. The director concerned ultimately had the final say as to whether a product would launch. Consequently, it was customary practice for the director concerned to launch products and only seek approval from the board of Directors at a later stage.

The head of Product Development and Management may not have had the actual authority to represent Vodacom and lawfully bind them to a contract, however, due to Vodacom’s representation of him as their agent the court found him to have the necessary ostensible authority to bind them to an agreement with Mr Makate. In other words, Vodacom (the principal) had represented the director concerned (their agent) as someone who had the requisite authority to bind them (Vodacom) to an agreement. As a result, they were estopped from denying this representation that they (Vodacom) had created and were bound to their agreement with Mr Makate.

The Makate case highlights the important difference between, amongst others, ‘actual authority’ and ‘usual authority’. This article intends to provide a contemporary analysis of the doctrine of authority in South African company law, as well as, provide food for thought in relation to the manner in which directors (and other office bearers) go about in conducting their company’s business.

The South African law of authority and representation is based largely on the English Law principles, most of which are still relied on as the leading authority in this field of law.

Emanating from the vital case of Freeman and Lockyer v Buckhurst Park Properties [1964] 2 Q.B. 480 (hereafter the ‘Freeman’ case), there are in principle two main types of authority, namely ‘actual authority’ and ‘ostensible authority’. Ostensible authority has been described as an oxymoron as it is in fact no authority at all. Conversely, actual authority is the type of authority that is readily required in order to commit oneself (or their principal – if properly represented) to a contract.

Usual authority has been described as a separate type of authority that an agent may possess, where it is in fact rather an ‘extension’ of actual or ostensible authority, depending on the set of facts. In other words, usual authority may be a combination of both actual authority and usual authority or it may be a combination of ostensible authority and usual authority. If the authority is a combination of the former, it may be referred to as ‘implied usual authority’ and if the combination is of the latter, it may be referred to as ‘restricted usual authority’.

Regarding actual authority and ostensible authority, only actual authority may be sub-divided further. Actual authority may be either express actual authority or it may be implied actual authority, in either case the agent has the actual authority to conclude a contract on behalf of their principal.

In terms of section 66(1) of the Companies Act, 71 of 2008, the board of directors has the authority to manage the business and the affairs of the company, unless the memorandum of incorporation or the Companies Act specifies otherwise. This section gives the board of directors the express actual authority to manage the business and or affairs of the company, unless the memorandum of incorporation of the company or the Companies Act specifies otherwise.

It is worth noting from the outset that the actual authority to manage the business and affairs of the company (unless specified otherwise) sits with the board of directors as a whole and not individually with directors, unless a director has implied actual authority or has been delegated authority to act on behalf of the board of directors (in which case such a director would have express actual authority). In other words, a lone director who claims to act on behalf of the company will fail to bind the company to his or her actions as this director does not have the authority to represent the board of directors, and subsequently – the company.

Practically, a director of a company must possess either of these forms of actual authority (express or implied) in order to lawfully bind their company to a contract with a third party.

If a director is held to have ostensible authority he or she may still bind their company to a contract entered into. However, this is not because the director has the requisite authority, but rather because the director is represented by their principal (i.e. the company) as having the necessary authority to represent their principal, and a third party contractor acts on this representation of authority, in order to conclude the contract.

In the context of the Makate case, it is worth repeating that it was the head of Product Development and Management’s position of authority, the way he was allowed to practice and take control of his department, and generally the way Vodacom had portrayed his position, that led the court to find that he was cloaked with the requisite authority.

It was this ‘authority’ (he had ostensible authority not actual authority) that led the court to find that Vodacom could not portray him in such a way and later benefit from denying his authority.

At the time of writing Mr Makate and Vodacom have still not agreed to a ‘fair’ amount of compensation. Vodacom’s CEO, by order of the Constitutional Court, offered Mr Makate an amount of R47 million. This offer was rejected by Mr Makate.