IRREVOCABLE AUTHORITY
IRREVOCABLE AUTHORITY
In financial commercial settings, security from the lenders’ perspective must be easily enforceable, cost efficient and effective. One of the forms of security that lenders take, albeit that it is not “security” in the normal sense, is where the lenders take an “irrevocable” power of attorney from the borrower to do certain things on behalf of the borrower without any reference to the borrower, for example to register a bond over the borrower’s assets in favour of the lenders, or to call for payment under a guarantee, where the guarantee is one issued in favour of the borrower.
This type of security is of value to the lender only if the borrower cannot revoke the power of attorney or mandate conferring it. Of course if the borrower does revoke the mandate, then the lender may have a contractual claim against the borrower, however practically, this is not of much assistance to the lender. The lender wants to hold a mandate conferring security that cannot be revoked by the borrower.
This text examines whether indeed an irrevocable mandate can be conferred by the borrower to the lender, and if so, what the requirements thereof are.
The concept of ‘irrevocable authority’ is a concept that has been well deliberated in our courts, having been largely examined in commercial settings. These examinations have however not assisted much in abating the confusion and uncertainty as to whether authority can indeed be conferred irrevocably. It has been suggested that part of the reason for such uncertainty is the failure by our courts to distinguish between revocation of authority on the one hand and termination of the relationships arising out of a contract of mandate on the other hand, (JC de Wet LAWSA, vol 1, par 199). That may well be so, and the contentions of this text are subject to the stricture that indeed our courts did not adequately draw such a distinction. The courts in their deliberations however, have produced a line of testing, under which circumstances an authority conferred, results in an authority irrevocably conferred.
A power of attorney is an instrument generally employed in South Africa, in which one person (the principal) confers specific or general powers to another (the agent) to exercise such powers for the benefit of the principal. The general rule under South African law is that such powers or authority conferred upon an agent can be revoked by a principal who so conferred such authority at any time, even if the instrument establishing the authority provides that it is not to be revoked or is stated to be “irrevocable”, (AJ Kerr,The Law of Agency, Third Edition, at page 243; Ward v Barrett NO and another 1962 (4) SA 732 (N) at 737D; South African Law Commission, Project 61, October 1988 at page 29 par 2.46). Breach of this mandate of course, may give rise to a claim for damages against the principal, but such provision in the instrument for irrevocability does not prevent the principal from revoking the authority so conferred, as it is of no significance that a power of attorney proclaims itself to be irrevocable. If the transaction entered into between the principal and the agent does not pass the test for irrevocability laid down by the courts, the principal may revoke the authority conferred upon the agent.
Our common law does however recognise that there are exceptions to this general rule of revocability of authority. These exceptions have been criticised by JC de Wet (LAWSA, vol 1, par 199) for adopting ‘the rather vague propositions of English and American jurisprudence to the effect that authority is irrevocable if it is coupled with an interest or forms part of a security and to the identification of this proposition with the procuratio in rem suam mentioned by Voet’. Be that as it may, our law does recognise these exceptions, albeit regarded as exceptional phenomena (South African Law Commission, Project 61, October 1988 at page 30 par 2.49).
What then is the test for determining whether a transaction entered into between the principal and the agent gives rise to an authority conferred irrevocably by the principal to the agent? The language of the following well visited cases is edifying.
In the oft-quoted Natal Bank Ltd v Natorp and the Another (1908) TS 1016 case (the Natal Bank case), the transaction was a comparatively common banking transaction, between a customer and a bank, where the bank provided certain facilities to the customer and the customer in return granted the bank a power of attorney as security. This power of attorney authorised the bank to pass and register a bond over the immovable property of the customer, whenever it thought necessary. The question that arose was whether the donor of such power, which had been granted to the bank as security for facilities provided, can revoke such power. At pages 1020 – 1021, the court said:
“this is not a case in which a power had been given by Natorp to the bank as his agent, authorising it to do certain business on his behalf and for his own benefit. It is an authority given to the bank to enable it to do something on its own account and for its own benefit. The power was granted to enable the bank to secure itself; it was given for the benefit of the bank and not for that of the donor. It is clear that by English law in such circumstances as these the donor cannot revoke the power... Where a person has been given a power in rem suam such a power is irrevocable, and accordingly in a case like the present, where the power has been given as a security, it could not be revoked so long as the indebtedness of the donor continued… The person under the power shall be entitled to treat the transaction as his own transaction, he shall be the dominating power, and anything requiring to be done in the matter shall be by his direction.”
This type of authorisation, drawing from English law, is aptly referred to as ‘authority coupled with an interest’ which has been defined to mean ‘an agreement entered into on a sufficient consideration, whereby an authority is given for the purpose of securing some benefit to the donee of the authority, and such type of authority cannot be revoked’ (Sinfra Aktiengesellschaft v Sinfra Ltd (1939) 2 All ER 675, at page 682).
In the Netherlands Bank of South Africa v Yull’s Trustee and Another, (1914) WLD 133 case (the Netherlands case), it was decided that a pledge of book debts to a person as security for a debt, coupled with the vesting of power or authority in that person (the agent) to collect the debts, was held to constitute an agency coupled with an interest and was held therefore to be irrevocable.
In the Glover v Bothma 1948 (1) SA 611 (W) case (the Glover case) the distinction was drawn between the interest on the part of the agent in the exercise of his authority, which refers to the ordinary case where a power has been granted to an agent authorising him to transact certain business on behalf of the principal for the benefit of the principal, as opposed to an interest in the thing actually vesting in the agent, which refers to a case where authority has been conferred on the agent to sue in his own name and in which he transacts the business committed to him for his own benefit and not for the benefit of the principal. Only the latter qualifies as an agency coupled with an interest, or power given as security.
The case of Ward v Barrett NO and another 1962 (4) SA 732 (N) (the Ward case) went a step further and said that a power of attorney given by a principal as security for recovery of what is owing to the grantee is irrevocable, but that it is required to be perfected by a cession of rights from the principal to the agent. The court reiterated the point that an interest on the part of the agent does not mean merely that he has an interest in the exercise of his authority, it is actually an interest in the actual thing vested in the agent.
Corbett J, in the oft-quoted Kotsopoulos v Bilardi 1970 (2) SA 391 (C) case (the Kotsopoulos case), instructed that the hallmark of a mandate amounting to cession is that it should give the agent an interest not merely in the exercise of his authority but in the very thing vested in, or entrusted to him by his principal. Such mandate as the above mentioned cases, including the case in point, have indicated, is sometimes spoken of as a power of attorney coupled with an interest or a power given as security, which is irrevocable. This case illuminates the point that such a mandate, that is, an irrevocable power of attorney, amounts to a cession.
What emerges is that the Natal Bank case, the Netherlands case and the Glover case say that an authority given for the purpose of protecting or securing an interest of an agent is authority irrevocably conferred by the principal to the agent, and is referred to as an authority coupled with an interest, and the instrument conferring such powers to the agent is referred to as an irrevocable power of attorney. The Ward case confirms this, but goes on further to say that this irrevocable power of attorney must be perfected by a cession of rights ceded by the principal to the agent, over and above the power of attorney itself. The Kotsopoulos case on the other hand says that an irrevocable power of attorney amounts to a cession.
The instruction from the Ward case that a power of attorney given by a principal as security must be perfected by a cession of rights from the principal to the agent, is fallacious. A cessionary can exercise the rights ceded to him by the instrument of cession and does not need a power of attorney whether it is revocable or not in order to exercise the ceded rights. An irrevocable power of attorney entitles the agent to exercise the rights of the principal on his own account and for his own benefit, which is tantamount to cession. An instrument of cession over and above the irrevocable power of attorney is superfluous, as the agent is vested with the right of action through the power of attorney. The Kotsopoulos case’s instruction that such an irrevocable power of attorney amounts to a cession means that an instrument of cession over and above the irrevocable power of attorney is redundant, as the irrevocable power of attorney itself is a cession. This view is to be embraced.
Although the law as set out in the cases cited above is not as clear as one would wish, the conclusion is that authority conferred by a principal to an agent for the purpose of protecting or securing an interest of the agent, is authority irrevocably conferred by the principal to the agent. This authority is referred to as an authority coupled with an interest. In such cases where the power has been given by way of security, drawing from our common law, irrevocability will be implied, even if the power is not express on this point. Furthermore, such irrevocable authority amounts to a cession which means that an instrument of cession over and above this irrevocable power of attorney is not required, as this instrument is itself an instrument of cession.
Hazel Khumalo
Associate (2006)