Gillian O'Regan Alan Williams October 20 2020 Hidden owners, ostensible authority and Duomatic principle RPC | Litigation - United Kingdom Gillian O'Regan, Alan Williams Litigation FactsWhat is the Duomatic principle?AppealCommentThe Duomatic principle can apply to ostensible authority as well as actual authority, according to the Privy Council in Ciban Management Corporation v Citco (BVI) Ltd (British Virgin Islands) ( UKPC 21). In this decision, the Privy Council found that a company's director and registered agent were not in breach of their tortious duties of care to the company where they were acting on the instructions of an agent who had ostensible authority.FactsBVI company Ciban Management Corporation was the claimant and appellant before the Privy Council, although at the time of the events which gave rise to the proceedings, the relevant company was called Spectacular Holdings Inc (Ciban and Spectacular merged in 2012 and the former took over the proceedings from the latter). Citco (BVI) Ltd was Spectacular's registered agent and Tortola Corporation Company was its corporate director.An individual, B, was the beneficial owner of Spectacular, having purchased it from another individual, C. B did not want his identity to be public knowledge and so had arranged his holding in Spectacular to be held, through bearer shares, by a lawyer on his behalf. B conducted Spectacular's business through C, who instructed Citco and Tortola to issue powers of attorney in favour of various lawyers to act on Spectacular's behalf.In 2001 certain sums fell due from B to C under a loan agreement and in respect of salary. To pay these sums, C – without B's knowledge – instructed Citco to issue a new power of attorney authorising the sale of Spectacular's property. C informed B of his actions only after the property had been sold.There were apparently various red flags in respect of the way in which the instructions were given by C (eg, C asked for the invoice for the power of attorney to be sent to him, his email about the power of attorney came from his personal account and his son paid that invoice), but these were ignored by Citco and Tortola.B revoked the power of attorney, unwound the sale and brought proceedings in the British Virgin Islands through Spectacular against Citco and Tortola. In these proceedings, B alleged that both entities were in breach of their tortious duties of care as agent and director that they respectively owed to Spectacular because they had failed to check whether C had been authorised to instruct them to issue the new power of attorney.The case reached the Privy Council, where Spectacular appealed on two grounds:whether Tortola had breached its duty of care in failing to take heed of the red flags; andwhether C had ostensible authority to act on Spectacular's behalf under the Duomatic principle.What is the Duomatic principle?If members of a company can do something via formal resolution at a general meeting, they can also do that thing informally if they all agree.(1)AppealThe Privy Council dismissed Spectacular's appeal on both counts.It was reasonable, in the context and given the pattern of dealings to date (in which powers of attorney had been authorised by B but Tortola had been instructed by C), for Tortola to accept instructions from C. B evidently expected Tortola to follow C's instructions even though he had never issued a document to that effect. It was for B to bear the risk that C would disobey him or breach his trust. As to the red flags, it was held that there was nothing particularly unusual about them in the context of the pattern of behaviour to date. Objectively, Tortola had little reason to believe that anything was amiss.As to authority, Tortola could reasonably have expected that C had authority because of the context described above:To date, Tortola had been expected to take instructions from C.B evidently wished to remain in the shadows.B had never raised any complaints about C giving instructions before.Accordingly, Tortola could reasonably assume that C had B's ostensible authority to act.However, the claimant and appellant was Spectacular, not B. The Privy Council therefore had to ask whether C had ostensible authority from B to act on Spectacular's behalf (recalling that B was the only shareholder of Spectacular). It is here that the Duomatic principle becomes relevant.Spectacular would have been bound had B consented to C giving instructions in relation to the relevant power of attorney (and it was not disputed that he had done so – and so Spectacular could be bound – in relation to the previous powers of attorney). B had clearly not given actual authority regarding the relevant power of attorney. However, the Privy Council decided that C had ostensible authority. The question then became whether the Duomatic principle could apply to ostensible authority. The Privy Council explored two recognised qualifications to the principle:The principle cannot apply where the shareholders have not consented to the underlying act. In this case, there was an argument that B had not consented to the issuance of the relevant power of attorney. However, the Privy Council rejected this on the basis that – as discussed above – B's pattern of conduct meant that he could not deny that authority had been given to C. Betrayal by C was a risk that he was evidently prepared to take.The principle cannot apply where there is relevant dishonesty. The Privy Council rejected this as well, on the basis that nothing about the sale or the power of attorney was inherently dishonest or allowed any fraud to be committed. In any event, the Privy Council found that the "whole of [B's] set up – and the clothing of [C] with ostensible authority - was taking the risk on behalf of the company, albeit informally, that [C] would use that apparent authority for his own purposes, including dishonest purposes".Accordingly, the Duomatic principle applied and so the ostensible authority conferred by B was counted as ostensible authority conferred by Spectacular.CommentThe case helpfully clarifies that the Duomatic principle can apply to ostensible authority as well as actual authority. It also provides interesting insight into circumstances where arrangements cloaking the beneficial owners of, in particular, offshore companies are relatively common. Part of the Privy Council's decision making rested on the fact that owners who seek to disguise themselves in this manner run the risk of being disobeyed by the people or entities that they instruct, and the beneficial owners should not be allowed to transfer that risk to others. In those circumstances, their only recourse is to sue the rogue agent.For further information on this topic please contact Gillian O'Regan or Alan Williams by telephone (+44 20 3060 6000) or email (gillian.o'[email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.Endnotes(1) In re Duomatic Ltd  2 Ch 365.