Acute Property Developments Ltd v Apostolou & Ors

This was the trial of a claim in this action which resulted from the fraudulent conduct of the 1 ^st and 2 ^nd defendants (“Mr. and Mrs. Apostolou”) towards the claimant (“Acute”) and the 3 ^rd defendant (“Dr. Savouri”). The action has not been pursued against Mr. and Mrs. Apostolou, and the dispute before me is whether Acute or Dr. Savouri is to bear the loss resulting from their conduct. No other party was involved in the hearing before me.

Put shortly, what happened is that between the February and July 2004, Dr. Savouri paid a total of £155,000 on account for building work carried out by Acute for him, of which, at Mr. Apostolou’s request, £125,000 was paid to Mrs. Apostolou, and the remaining £30,000 was paid to another business, owned by Mr. Apostolou, called Acute Mortgages. On the evidence before me, it appears that Mrs. Apostolou and Acute kept at least the greater part of these sums.

Both parties have other substantial claims against Mr. Apostolou. Acute alleges that Mr. Apostolou defrauded it of other large amounts, and Dr. Savouri lent him £500,000 which he has not repaid. These claims are not relevant to the issue I have to decide.

The main issue between the parties at the hearing was whether Dr. Savouri was entitled to treat £155,000 as having been paid to Acute on account of his liability to it, on the ground that he was entitled to rely on Mr. Apostolou’s authority, as the manager of Acute’s business, to direct him to make payment in this way. As explained later in this judgment, I find that Dr. Savouri did not in fact rely on Mr. Apostolou’s authority to act on behalf of Acute, but on the implicit trust he had in Mr. Apostolou, arising from his own close personal relationship with him. Apparent authority is a form of estoppel, and reliance is an essential element of it. In any event, I do not consider that Mr. Apostolou had apparent authority to direct Dr. Savouri to pay what he owed to Mrs. Apostolou or Acute Mortgages. I therefore hold that Dr. Savouri remains liable to Acute for whatever is due for the building work.

There are also issues relating to the amount of the claim. Acute claims that a total of £141,029.37 (£120,025 plus VAT) was due for the building work, that is slightly less than the amount of the payments on account, but this is in issue: Dr. Savouri does not admit that as much as this was due, and he claims that he had to spend considerable sums to have the work completed after Acute stopped work in late 2004. It was agreed between the parties that this should be dealt with separately. At the outset of the hearing, it appeared that there was also an issue as to whether certain payments totalling £21,000 had been made by Mrs. Apostolou out of the sums paid to her and at the request of the parties. Not without some misgiving, I agreed to hear that issue. However, it emerged towards the end of the hearing that there was a further issue as to whether other such payments had been made, which I was not in a position to determine since it had not been raised at the outset of the hearing. In the circumstances, I propose to leave all issues relating to quantum to be determined at a further hearing, if not agreed. This judgment therefore concerns only the main issue described above.

I should say at the outset that I found both Mr. Kourris, a 50% shareholder in and director of Acute, and Dr. Savouri, to be honest and straightforward witnesses. Mr. Kourris understandably doubted Dr. Savouri’s bona fides as a result of a number of inaccurate statements made by Dr. Savouri and his solicitors in the pleadings, in correspondence and in documents supporting attempts to obtain security for his loans to Mr. Apostolou. Dr. Savouri repudiated these statements in his evidence, and I consider that he had not sufficiently concentrated on what was said on his behalf. I am satisfied that his evidence to the court was truthful, and in particular that all the payments referred to above were made by him as payments on account of the building work and not, as suggested in cross-examination, as part of the substantial loans which he was making in the same period to Mr. Apostolou.

Acute was incorporated on 24 ^th June 2003. Its members were Mr. Kourris, Mr. George Demitreou and Mr. Apostolou. Mr. Kourris and Mr. Apostolou had known each other since boyhood. Mr. Kourris was the director of a furniture business. Mr. Demitreou was an experienced builder. Mr. Apostolou was a director of Acute Mortgages and Financial Services Ltd, (“AMFSL”) which carried on a financial services business. This company was dissolved on 30 ^th September 2003, but Mr. Apostolou carried on the Acute Mortgages business personally after that. AMFSL’s office was at 288 Chase Road, Enfield. Later in 2003, Mr. Apostolou moved the Acute Mortgages business to 543, Green Lanes, London N.13.

Acute was formed as a joint venture to carry out property development business, in particular by purchasing a property called The Stables, Ellenborough Road, Wood Green, London N22 in order to develop it into flats for resale. Later, it became involved in two further development projects. It was a partnership company, in which it was intended that Mr. Kourris, Mr. Demitreou and Mr. Apostolou would share equally in the profits, after taking into account Mr. Demitreou’s weekly drawings of £600 for acting as project manager. However, Mr. Apostolou said that he did not wish to be either a director or a shareholder, because he wished to hide his involvement from his wife. The real reason may well have been connected with the difficulties he was experiencing with AMFSL. Whatever the reason, only Mr. Kourris was appointed as a director, and he and Mr.Demetreou each held 50% of the shares in Acute.

Acute’s business was run from 288 Chase Road, Enfield at first, and then from 543, Green Lanes. It is said on behalf of Acute that Mr. Apostolou was the office manager, assisted by Mrs. Apostolou, but it is clear that he was more than this. Mr. Kourris was not involved in Acute’s business on a daily basis, and Mr. Demitreou’s main responsibility was for the actual building work. Mr. Apostolou was responsible for most other matters, including financial planning for Acute’s projects, the raising of finance and the general management of the business. It was he who obtained the contract to carry out work for Dr. Savouri and arranged finance for one of Acute’s projects. His role is difficult to define, but it was at least that of a general manager and differed little if at all from that of a managing director.

Dr. Savouri, in common with Mr. Kourris, Mr. Demitreou and Mr. and Mrs. Apostolou, is a member of the Greek Cypriot Community, and of the Greek Orthodox faith. He was educated at the London School of Economics, where he obtained bachelor’s master’s and doctoral degrees between 1987 and 1993. Since then, he has become a very successful businessman, and he is a partner in a major hedge fund.

Dr. Savouri’s parents are Mr. Apostolou’s god-parents. In the Greek Orthodox faith this means that Dr. Savouri is Mr. Apostolou’s god-brother, and is expected to treat him as a brother. It is a very special and important relationship, which imports what Dr. Savouri describes as a “cultural imperative” of mutual support. Although Dr. Savouri is ten years older than Mr. Apostolou, he has tried to follow his progress and support him, including making occasional loans.

Acute completed the purchase of The Stables in August 2003. At about the same time, Dr. Savouri had bought a property at 13, Shirley Road, Enfield, near where his parents live, which required considerable work. With the agreement of Mr. Kourris and Mr. Demitreou, Mr. Apostolou suggested to Dr. Savouri that he employed his company i.e. Acute, Dr. Savouri’s parents said that it would be nice if he could help his god-brother out, and he was happy to do so. Without knowing the details of the company structure, Dr. Savouri understood that Acute was run as a joint venture for Mr. Demitreou and Mr. Apostolou. Although he was not specifically told so, he was under the impression that Mr. Apostolou had the majority interest. He knew nothing of Mr. Kourris.

According to Mr. Kourris’ evidence, the contract to carry out the work at Shirley Road seemed desirable from Acute’s point of view, because it would be both profitable and self-financing, in the sense that Dr. Savouri would make payments as the work proceeded, and it would also complement the work on The Stables.

Although initially denied in his Defence, there is no doubt that Dr. Savouri knew and agreed that the work was to be done by Acute, and he no longer disputes this. Mr. Demitreou wrote to him on 21 ^st October 2003, on Acute’s headed notepaper, confirming that he had discussed the proposed work with Andrew Scott Associates, architects, and that they would prepare plans and drawings for a fee of £11,250. Also, once the work started, there were large boards at the property displaying Acute’s name. It was also displayed outside the office at Green Lanes.

In February 2004, Andrew Scott Associates produced a document called a Draft Report, with an estimate for the cost of the works totalling £276,396. However, this was not shown to Dr. Savouri, and he expected the work to be done for about £200,000. There was no agreed price. By the time of the Draft Report, work had already started. Substantial work was done during the first half of 2004, resulting in Dr. Savouri making the payments on account to which I have earlier referred totalling £155,000. There were 4 payments totalling £125,000 to Mrs. Apostolou between February and May 2004, followed by 2 payments of £15,000 each to Acute Mortgages in June and July 2004. The work was not supervised by an architect. There were no invoices, and there was no system for valuing the work done.

As to the reason for making the payments to Mrs. Apostolou and Acute Mortgages, rather than to Acute, Dr. Savouri did so simply because Mr. Apostolou asked him to. As he says in his witness statement “he told me to pay these sums as he wished and I did”. He was not given a reason for the request, and did not ask for one. Some time after the last payment, which was made in July 2004, Acute stopped work, and eventually Dr. Savouri employed Mr. Demitreou to complete the work at a cost of some £100,000.

Dr. Savouri’s evidence, which I accept, was that he made the payments to Mrs. Apostolou and Acute Mortgages and not to Acute because he had full trust in Mr. Apostolou, based on his fraternal relationship with him. He frankly accepted that, if he had been dealing with another similar company, managed by somebody with whom he did not have this relationship, he would not have been prepared to do the same. He said that he was not naive, and that he would have asked for an explanation and, unless satisfied with it, would have refused.

By October 2004, Mr. Kourris and Mr. Demitreou were concerned about Acute’s financial position, and about the apparent failure by Dr. Savouri to pay for the work done by Acute, and Dr. Savouri was concerned about the lack of progress on his house. There was one short meeting at Acute’s offices between Dr. Savouri and Mr. Kourris, Mr. Demitreou and Mr. Apostolou in October or November 2004. By this time, Mr. Kourris and Mr. Demitreou were very suspicious of Mr. Apostolou, and there were arguments between them. There are different accounts of the meeting, and the likelihood is that everybody other than Mr. Apostolou was confused because they did not know the extent of his wrongdoing. According to Mr. Kourris, Dr. Savouri was complaining about the lack of progress in the work and, when asked why payments had not been made, walked out, making a remark about it being like “a third world country”. Mr. Savouri’s recollection is that when he arrived the others were all squabbling about money, and he left. At all events, he subsequently (it is not clear exactly when) told Mr. Demitriou about the payments which he had made to Mrs. Apostolou and Acute Mortgages.

I find that Dr. Savouri acted honestly; he simply trusted Mr. Apostolou and did not suspect that he was defrauding Acute. As I have indicated above, I am not in a position to decide how much Acute is entitled to be paid for its work, or how much (if anything) Mr. and Mrs. Apostolou and/or Acute Mortgage paid to Acute out of the sums paid by Dr. Savouri. That leaves the one central issue: are Dr. Savouri’s payments to be treated as payments to Acute in respect of the building work?

It is common ground between the parties:

It is also common ground that Mr. Apostolou had no actual authority, express or implied, to direct that payment should be paid to his wife or to Acute Mortgages; the issue is whether Dr. Savouri can rely on his apparent or ostensible authority to do so. There is little modern authority on the extent of the apparent or ostensible authority of a senior manager to direct how a payment due to a company is to be paid, and both parties, correctly in my view, relied on the leading cases relating to apparent authority to enter into contracts.

In the most recent case, Quinn v. CC Automative Group Limited [2010] EWCA Civ. 1412, which concerned a contract entered into fraudulently by a car salesman employed by a car dealer, Gross L.J. referred at para. 18 to the moral basis underlying the law relating to apparent authority, as stated by Holt C.J. in Hern v. Nichols (1700) 1 Salk. 289:-

The classic modern statement of the principle is to be found in the judgment of Diplock L.J. in Freeman & Lockyer v. Buckhurst. Park Properties (Mangal) Limited [1964] to Q.B. 480 at 504-6. Diplock L.J. made it clear that apparent authority is based on estoppel: the principal is estopped from denying the agent’s authority by reason of the representation which he has made as to the extent of that authority. He continued:-

Diplock L.J. then stated four conditions which had to be fulfilled to entitle a contracting party to enforce a contract against a company entered into by an agent who had no actual authority to do so (the fourth condition can be disregarded for present purposes):-

In my judgment, Dr. Savouri is clearly unable to establish the necessary reliance to found the estoppel which he claims. Normally, reliance is easily established where the court is satisfied that the other party acted honestly, but in this case I agree with Mr. Hamilton’s submission that Dr.Savouri’s decision to do what he was asked to do by Mr. Apostolou was not induced by any representation by Acute as to his authority. There was such a representation, as Acute’s directors put Mr. Apostolou in charge of the financial arrangements for the contract, but Dr.Savouri did not rely on it. On the contrary, on the basis of Mr. Apostolou’s position alone he would not have made the payments otherwise than directly to Acute without an explanation which satisfied him; the reason he did not ask for the explanation is that he regarded Mr. Apostolou, in effect, as his brother, and therefore placed unquestioning trust in him.

I therefore hold that Dr. Savouri is not entitled to treat the payments he has made as payments on account for the building work at Shirley Road because (a) Mr. Apostolou had no actual authority to direct him to pay Mrs. Apostolou or Acute Mortgages and (b) whatever the extent of Mr. Apostolou’s apparent authority, Dr. Savouri cannot establish that he relied on it. This makes it unnecessary to decide what was the extent of Mr. Apostolou’s apparent authority, which is a more difficult question. However, since it has been fully argued, and in case the matter goes any further, I will deal with it.

Mr. Hamilton’s submissions on this question on behalf of Acute were short and straightforward. He referred me to the proposition in Bowstead & Reynolds on Agency 19 ^th ed. at para. 3-004 that in most situations the third party may assume that the agent has “the authority which would normally be implied between principal and agent in the circumstances”, and he submitted that Mr. Apostolou’s implied actual authority, and therefore his ostensible or apparent authority, was to collect payment on behalf of Acute, which was a limited company, in a normal manner. That covered payment by normal methods to Acute, not payments to third parties; such payments would not be normal.

In any event, he submitted, even if the agent is acting within the usual authority on the person in his position, the third party must, if there are suspicious circumstances or abnormalities, “make such enquiries as ought reasonably to be made” into the authority of the person with whom he is dealing: see per Lightman J. in Hopkins v. TL Dallas Group [2004] EWHC 1379 (Ch) at para. 94.

Therefore, he further submitted, even if Mr. Apostolou was acting within the usual authority of a person in his position in seeking payment, he was doing so in an abnormal manner which put Dr. Savouri on enquiry. The test of whether there was abnormality was an objective one, and for a director, or general manager, of a limited company to direct payment to his wife and (as regards the last two payments) to himself, was manifestly abnormal. It is common ground that Dr. Savouri made no enquiry; therefore, Mr. Hamilton submitted, he took the risk.

Mr. Bourne’s starting point is the statement of Holt C.J. in Hern v. Nichols already referred to, which was said by Diplock L.J. in Morris v. Martin [1966] 1 Q.B. 716 at 733 to express an “old, robust and moral principle”. Nevertheless, as was pointed out by Gross L.J. in Quinn at para. 19, this principle is limited, in that the employer is not liable unless the fraud falls within the actual or apparent authority of the employee. So one is taken back to the basic question in this case, what was the extent of Mr. Apostolou’s apparent or ostensible authority? Also, on the particular facts of the present case, Dr. Savouri, just as much as Acute, placed trust and confidence in Mr. Apostolou.

Mr. Bourne submitted that it was within the legal authority of a person with authority to transact business on behalf of a person to direct a third party to make payments, and that a third party who pays money in accordance with that direction receives a good discharge of his liability. He relied on a passage in Halsbury’s Laws 5 ^th ed. vol. 1. para. 133, but the relevant sentence appears to be limited to cases in which a principal has “allowed an agent to appear as” principal in the transaction in respect of which a payment or settlement is made”, which is not the position in this case. He also relied on passages in Bowstead at para. 8-013 and in Freeman & Lockyer but these passages merely restate the well-known principle governing apparent or ostensible authority, and do not assist on the question whether it is within the usual authority of a person transacting business on behalf of a limited company to direct payment to a third party.

Mr. Bourne next relied on the decision of the House of Lords in the Scottish case of International Sponge Importers v. Watt [1911] A.C. 279. In that case, the appellants employed a travelling salesman who was required to forward to the appellant sale sheets containing particulars of transactions he had concluded, after which the appellants would in due course send the customer an invoice, followed by a monthly statement of account. The statement of account contained notices requiring customers to cross or cheques, to make them payable to the appellants. All went well for some years, but the travelling salesman then concluded three sales and induced the respondents to pay him, on two occasions by cheque and on the third occasion in cash. The House of Lords affirmed the decision of the Court of Session in favour of the respondents, holding that the notices in the statements of account did not inform customers that the travelling salesman was not authorised to receive payment himself either in cash or by a cheque in his favour.

I do not think that this decision assists Dr. Savouri’s case. It depended on the construction put on the notices, and it also reflected what was usual at the time in the circumstances of the case. In essence, the proposition to be derived from it is that it was within the usual authority of a travelling salesman in the early years of the last century to receive payment himself on behalf of his principal, absent clear terms to the contrary notified to the third party. It does not follow that the same applies to the general manager, or a director, of a limited company carrying out building work in the present age.

Further, the decision was based in part on its particular unusual facts. Lord Loreburn L.C., with whom Lord Atkinson conferred, decided the case “not without doubt” because the salesman occupied a position of fuller authority than was usual and because of a previous transaction which had gone through without objection: see at page 285. Lord Shaw of Dunfermline thought that prohibition against paying the agent should not be lightly inferred, since it might be to the employer’s benefit for the salesman to receive cash or a cheque in his favour which could be cashed on the spot, and he too relied on the previous transaction see pages 288-9. In the present case, there would have been no basis for Dr. Savouri to believe that any advantage would accrue to Acute as a result of his paying Mrs. Apostolou or Acute Mortgages, and there was no previous transaction.

For all these reasons, International Sponge Importers is distinguishable, and I do not think that any assistance is to be derived from the decisions in Underwood v. Bank of Liverpool [1924] 1 K.B. 775 or Midland Bank v. Reckitt [1933] 1 A.C. 1, which involved the diversion of company funds, to which I was also referred. The issue in these cases was whether the banks could rely on their defence under the Bills of Exchange Act, which required them to have acted without negligence: see per Neuberger NPJ. in Thanakharn Kasikorn Thai Chamkat (Mahachon) v. Akai Holdings Ltd (2010), a decision of the Final Court of Appeal of Hong Kong, paras. 56-7.

Mr. Bourne also submitted that it would have been within the usual authority of the manager of the business to ask for payment in cash, and that this would have been even less secure; therefore it would make little sense to say that payment to third parties was not within the usual authority of such a person. I do not see any force in this. I doubt whether it would be within a manager’s usual authority to ask for payment of such large amounts in cash and, in any event, such a request would be for payment to the company, not the payment to a third party.

There is a surprising absence of authority on this issue. In my view, Dr. Savouri’s answer, that he would - but for his trust in his god-brother - have asked for an explanation, and that he would have paid a third party only if satisfied by it, makes good commercial sense. Although payment of sums due to a company is usually made to the company, there may be good reasons for a request to pay a third party, but the customer will not be in a position to know without explanation. It is reasonable, and should not give offence, for an explanation to be sought; the customer should, if given a plausible reason, be entitled to rely on it. The alternative is that the customer will, in effect, be obliged to refuse to pay a third party, even where there is a genuine and credible reason for doing so, unless and until a directors’ resolution is produced. That is not a position into which the law should put people who are carrying on ordinary business transactions.

In my view, therefore, the correct analysis is as follows:-

Thus, for example, if the manager explains, either when making the request for payment to a third party, or on it being questioned by the customer, that the third party is a supplier and that the object is to obtain necessary materials for the work more quickly, or that the third party is an associated company carrying on the same business, such an explanation might well bring the request for the payment to the third party within the usual authority of a person in his position, and therefore within his apparent authority. He is after all the person who has been put in charge of arranging for payment, and the customer has to deal with him. Therefore, if the customer believes the explanation, he should be safe if he pays. This seems to me to be in line with the relevant passages in Thanakharn at paras. 51-5, 62 and in Quinn at para. 23, which suggest that in commercial dealings a person is normally entitled to rely on what he is told and should be protected if he does so honestly; not so if he in fact disbelieves it, or if he turns a blind eye notwithstanding suspicion, or if he acts recklessly. In such cases he will not have relied on the apparent authority. It also seems to be in line with decisions involving allegations of knowing receipt of trust money, which sometimes raise analogous issues. Once it is shown that the transaction is within the usual authority of the employee, there appears to be “little room” for any separate question of the customer being “put on enquiry”: that falls to be considered, if at all, as part of the issue, if there is one, as to whether he turned a blind eye to a suspicion he in fact entertained: see Quinn at para. 23(iii).

In the present case, no explanation was given by Mr. Apostolou, and none was sought. In my view, unexplained requests to pay money owed to a company to the wife of the manager, and subsequently to an unconnected business carried on by the manager himself, are plainly outside the usual authority of someone in Mr. Apostolou’s position, and therefore not within his apparent authority. If Dr. Savouri had enquired, it is possible (although unlikely) that Mr. Apostolou might have provided a credible explanation which turned the request into one which was within his apparent authority; and which Dr. Savouri felt able to accept, but this did not happen.

Accordingly, I will declare that Dr. Savouri’s payments did not discharge any liability he has for the work carried out by Acute on his house, save to the extent, if any, that the payments were passed over to Acute. I regret the result, but this is unfortunately one of those cases in which one of two honest parties has to be the loser.