2 B.L.R. 65, 16 O.R. (2d) 202, 78 D.L.R. (3d) 232

Canadian Laboratory Supplies Ltd. v. Engelhard Industries of Canada Ltd.

CANADIAN LABORATORY SUPPLIES LTD. v. ENGELHARD INDUSTRIES OF CANADA LTD.

Ontario Supreme Court [Court of Appeal]

Arnup, MacKinnon, Lacourciere, Blair and Wilson, JJ.A.

Heard: January 25, 26, 27 and 28, 1977

Judgment: June 22, 1977

SUBSEQUENT HISTORY:  Reversed by: Canadian Laboratory Supplies Ltd. v. Engelhard Industries of Canada Ltd., 97 D.L.R. (3d) 1, [1979] 2 S.C.R. 787, 6 B.L.R. 235, 27 N.R. 193, 1979 CarswellOnt 153, 1979 CarswellOnt 690 (S.C.C. May 8, 1979)

Varied by:  Canadian Laboratory Supplies Ltd. v. Engelhard Industries of Canada Ltd., [1980] 2 S.C.R. 450, 1980 CarswellOnt 660, 1980 CarswellOnt 660F (S.C.C. Dec. 18, 1980)

Counsel: P. B. C. Pepper , Q.C., and John Adams , for defendant, appellant.

J. J. Fitzpatrick , Q.C., and Harvey Poss , for plaintiff respondent.

Subject: Corporate and Commercial; Contracts; Torts

Agency --- Authority of agent -- Ostensible or apparent authority.

Torts --- Conversion -- Elements of right of action -- Wrongful act -- Fraud.

Torts --- Conversion -- Damages -- Valuation -- General.

Effect of employee's apparent authority to make transactions.

Basis of concept of apparent authority being detrimental reliance.

The appellant (defendant) was a refiner of platinum, and the respondent was one of its customers. The appellant stipulated that with each new order the respondent had to return a comparable amount of scrap platinum to the appellant for refining and resale. An employee of the respondent, one GC, devised a fraudulent scheme whereby he caused the respondent to order platinum for a fictitious user and arranged with the appellant that the appellant repurchase the scrap platinum directly from the fictitious user. GC picked up the platinum directly from the appellant and, after marking the platinum to make it appear to have been used, returned it to the appellant as scrap against payment in the fictitious name. Accordingly, the respondent paid for the refined platinum and GC received the payments for the scrap. GC carried on this scheme from 1962 to 1968, realizing some $841,000.

GC had actual authority to sell for the respondent but not to purchase for it; however, he assumed a major role in the respondent's dealings in platinum.

In 1966 the appellant's treasurer inquired of the respondent whether fairer payment terms could be worked out as the respondent tended to take up to 60 days to pay the appellant but the appellant paid the fictitious user a day or two after it received the scrap. The matter was referred by the respondent to GC, who arranged to have the appellant's invoices paid on a net cash basis. In 1968 the appellant inquired from a senior employee of the respondent as to what use was being made of the platinum by the apparent user. Again GC responded on behalf of the respondent, and the fraud was still not uncovered.

At trial the respondent was awarded damages for conversion based on the appellant's buying the scrap platinum from GC, who was without authority from the respondent to sell the same.

Held: (Lacourciere J.A. dissenting in part)

The appeal was allowed.

Per Blair J.A.:

The employee GC had apparent authority to purchase platinum from the appellant on behalf of the respondent, to sell it to the respondent's customers and to arrange for resale of scrap platinum directly to the appellant from such customers. This apparent authority was derived from seven years' course of conduct, from the respondent's agreeing to change the payment procedures with the appellant arising from this conduct and from permitting GC to deal with the appellant's inquiry as to the use of the platinum. The respondent was bound by GC's representations as to its customer, the fictitious platinum user, even though the resales were made by GC as an agent for the fictitious user and not for the respondent. To sue the appellant in conversion, the respondent would have to establish its title to the platinum under the contract made by GC. The respondent could not sue the appellant directly on the contract made by GC under his apparent authority without ratifying GC's fraudulent purchase of the platinum from the appellant. The respondent could not ratify GC's purchase without also ratifying GC's resale to the appellant. The two transactions were intertwined and could not be severed.

Per Lacourciere J.A. (dissenting in part):

The appellant should have been put on inquiry with respect to the large values of platinum being purchased, but no inquiry was made until 1966, the fourth year of the scheme. There was no holding-out or representation by the respondent of GC's authority to effect the three-part purchase, sale and resale prior to that fourth year. His actual position with the respondent until that time did not denote any apparent authority, except to purchase platinum. The purchase of the platinum by the respondent was a separate transaction from the resale of the scrap, and the respondent could ratify the purchases by GC without necessarily ratifying the resales. The purchases did not even require ratification, as the law presumes a contract with the principal when the agent acts within his apparent authority. Therefore, prior to 1966 the appellant converted the respondent's platinum by repurchasing it from a thief. After the first inquiry in 1966, the respondent was bound by its representation of GC's authority.

Cases considered:

A.G. Ceylon v. Silva, [1953] A.C. 461 (P.C.) -- considered

Commercial Banking Co. of Sydney Ltd. v. Mann, [1961] A.C. 1, [1960] 3 All E.R. 482 (P.C.) -- considered

Farquharson Bros. & Co. v. King & Co., [1902] A.C. 325 (H.L.) -- distinguished

Fitzmaurice v. Bayley (1860), 9 H.L. Cas. 78, 11 E.R. 657 -- considered

Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd., [1964] 2 Q.B. 480, [1964] 1 All E.R. 630 (C.A.) -- approved

Harrisons & Crossfield Ltd. v. London & North-Western Ry. Co., [1917] 2 K.B. 755 -- considered

Hely-Hutchinson v. Brayhead Ltd., [1968] 1 Q.B. 549, [1967] 3 All E.R. 98 (C.A.) -- referred to

Houghton & Co. v. Nothard, Lowe & Wills Ltd., [1927] 1 K.B. 246 , affirmed [1928] A.C. 1 (H.L.) -- considered

Nelson v. Larholt, [1948] 1 K.B. 339, [1947] 2 All E.R. 751 -- considered

Union Bank of Australia Ltd. v. McClintock, [1922] 1 A.C. 240 (P.C.) -- considered

Statutes considered:

The Sale of Goods Act, R.S.O. 1960, c. 358, s. 19, R. 5.

Authorities considered:

American Restatement, Second, Agency, para. 8, comment 2.

Bowstead on Agency (14th ed., 1976), p. 240.

Hornby, 24 Mod. L. Rev. 271 at 272-273.

Powell, The Law of Agency (2nd ed., 1961), p. 70.

Appeal from a judgment of O'Driscoll J., reported at 12 O.R. (2d) 113, 68 D.L.R. (3d) 65 , awarding damages to the plaintiff in an action for conversion.

Blair J.A. (Arnup, MacKinnon and Wilson JJ.A. concurring):

1 This is an appeal from a judgment of O'Driscoll J. awarding the respondent, Canlab, $943,420.49 and $324,894.62 interest in an action for conversion against the appellant, Engelhard. The primary issue is the extent to which an employer is responsible for the acts of a dishonest employee acting within the scope of his apparent authority.

2 Canlab is a supplier of equipment and materials for scientific laboratories. The appellant, Engelhard, is a refiner of platinum and other precious metals. Engelhard had supplied platinum and smaller quantities of other metals to Canlab since 1941.

3 Platinum is a rare, indestructible and extremely valuable metal. Consequently, Engelhard was at all times ready to repurchase used platinum for refining and resale. Indeed, from 1964 onwards, Engelhard stipulated that Canlab must return a comparable amount of scrap platinum upon receipt of a new order.

4 The fraudulent scheme commenced in May 1962. Glenn Cook, a young employee in Canlab's sales department, telephoned R. C. Sadgrove, then an order clerk and eventually the supervisor of Englehard's sales department, with whom he had previously done business. Cook stated that Canlab was selling platinum to a customer who wished to sell platinum scrap back after use. He advised that Canlab did not feel it was advantageous to handle the scrap and asked whether Englehard would consider buying it back directly from the customer. Sadgrove, whose responsibility was sales and not purchasing, suggested Cook make his proposal to Elmer Noges of Engelhard's purchasing department. To Noges, Cook described his customer, James Giles, as a scientist working on a highly secret process. He represented that Canlab was anxious to serve Giles's interest and protect his secrecy by arranging for the delivery of the used platinum direct from Giles to Engelhard.

5 Noges and Sadgrove then discussed with their superior, E. K. McCullough, the proposed combined transaction of selling platinum to Canlab and repurchasing the scrap from Giles. They decided that Cook's request was not unreasonable and that it was advisable to accommodate Canlab, an important customer. Noges then telephoned Cook and advised that Engelhard would buy back scrap platinum directly from Giles.

6 Cook throughout was a member of the Canlab sales department, eventually becoming the manager or supervisor of inside sales. He was never authorized to purchase platinum. There never was a "Giles". Cook was "Giles". He appropriated the platinum, sold back the scrap and, as Giles, was paid for it. The fraud was not discovered until January 1969. The extent of Cook's fraudulent dealings in platinum compared with legitimate platinum purchases by Canlab from Engelhard is shown by the following table:

(to nearest $1,000)

Fraudulent Pur- Legitimate Pur- Scrap Returns from

chases Paid By chases Paid By "Giles" Paid By

Year Canlab Canlab Engelhard

1962 $ 9,000 $14,000 $ 6,000

1963 18,000 15,000 14,000

1964 21,000 19,000 18,000

1965 45,000 40,000 39,000

1966 88,000 30,000 77,000

1967 211,000 35,000 185,000

1968 578,000 33,000 502,000

7 Cook followed a standard procedure in all transactions. In each case he sent a purchase order to Engelhard, which had been signed by the properly authorized employee of Canlab's purchasing department. Cook always picked up the platinum personally at Engelhard's premises -- a procedure followed by other customers who did not wish to expose precious metals to the risks of ordinary delivery. Engelhard's invoice accompanied the shipment and was paid by Canlab's cheque when due. The scrap platinum, usually cut up in small squares and somewhat discoloured, was returned to Engelhard a day or two after it was picked up by Cook. It was delivered by taxi accompanied by a handwritten letter from Giles requesting payment. The first few letters gave a return street address but thereafter the return address was a post office box number. After the scrap was refined and weighed, Engelhard mailed its cheque in payment to Giles.

8 This description of Cook's operations makes them appear deceptively simple. They were not. It required great skill to carry them on undetected for a period of seven years. Cook was faced with a formidable array of systems installed by Canlab to control purchases, inventories and sales, all of which were subject to both internal and external audit. The learned trial Judge, on the basis of independent expert evidence, found that these systems were adequate and that Canlab had not been negligent in operating them. Cook, nevertheless, by-passed these established procedures by manipulation of documents and blandishments of his fellow employees.

9 Cook also became dominant in Canlab's legitimate purchases of platinum from Engelhard. He appeared to be Canlab's expert in charge of platinum transactions, an impression shared alike by Engelhard and his fellow employees, who called him "Mr. Platinum".

10 Two incidents illustrate and emphasize Cook's apparent authority over Canlab's dealings in platinum. By 1966, the value of Cook's fraudulent purchases of platinum from Engelhard was ten times that of 1962. Because large sums of money were involved, Engelhard's treasurer became disturbed about the apparent unfairness of the timing of the payments to and by his company. Engelhard sold on a "net 30 days" basis and sometimes Canlab took 60 days to pay. On the other hand, Engelhard paid Giles promptly for the scrap platinum which was returned by Giles only a day or two after delivery to Canlab. Engelhard was anxious to even the financial burden but proceeded carefully, not wishing to jeopardize its increasingly valuable sales by antagonizing Canlab. After considerable discussion, Engelhard entrusted the delicate task of raising this problem to McCullough (who had authorized the project initially). He spoke to Ray Snook, a senior employee of Canlab, whom he knew from previous transactions. Snook advised McCullough to speak to Cook because he dealt with Giles and knew something about the transaction.

11 When McCullough phoned, Cook professed sympathy for Engelhard's problem and recommended that it be set out in a letter to Canlab's controller. McCullough wrote an appropriate letter to Canlab's controller and shortly afterwards received a reply from Cook. Cook stated that the matter had been referred to him and undertook, on Canlab's behalf, to pay Englehard's invoices thereafter on a net cash basis. This letter also indicated that copies had been sent to Canlab's controller and his assistant, to whom a copy of Engelhard's letter had been addressed. O'Driscoll J. found as a fact that Cook had intercepted the letter from McCullough and had replied without reference to Canlab's controller or his assistant, who had never seen or received either of the two letters. Thereafter, Canlab paid for platinum on a cash basis, and purchases accelerated greatly in 1967 and 1968.

12 The second incident occurred in late September or early October 1968, when G. H. Scott, Engelhard's president, wished to discover what use was being made of the large volume of platinum supplied to Giles. He was not troubled in any way about the bona fides of the business transaction between Engelhard, Canlab and Giles. He was, however, curious about the use being made of the platinum because his company was constantly looking for new uses for it. The curiosity was intensified because no one in Engelhard's organization had ever met Giles and careful examination of the returned platinum gave no indication of what he was doing with it.

13 Accordingly, Scott telephoned L. L. Fabian, Canlab's vice-president of operations, whom he had known since 1941. He explained the transactions between the two companies and Giles and expressed his concern about the use being made of the large amount of platinum which Canlab was purchasing. Fabian stated that he had never heard of these transactions and asked which Canlab employee Englehard had dealt with. He was advised that it was Cook and undertook to investigate and call Scott back.

14 Later that day, Scott received a telephone call from Cook, who stated that he had been asked to speak on Fabian's behalf. Scott then repeated his questions to Cook, who undertook to make inquiries about the use being made of the platinum but never called back.

15 At the trial, Fabian stated that he did not recall receiving the phone call from Scott but said that, if he had, he would have made inquiries immediately because of the large amounts of platinum being purchased. The trial Judge found as a fact that Scott had spoken to Fabian and that Fabian's lapse of memory could be attributed to a serious illness from which he was recovering at the time. Engelhard's platinum sales to Canlab continued after this telephone call, terminating only when Canlab discovered Cook's fraudulent activities, in early January 1969.

16 The learned trial Judge held that Canlab had acquired title to the platinum without saying precisely how this was done. He further held that Engelhard converted the platinum when it purchased it from Cook, masquerading as Giles. The trial Judge rejected Engelhard's defence that Canlab was estopped either by its conduct or its negligence from denying the apparent authority of Cook to carry out the transactions on behalf of Canlab. The manner by which property in the platinum may have passed to Canlab raises problems, to which I will refer later, but this is not the main issue in the appeal. The vital question is simply whether Canlab is bound by the acts of its employee, Cook.

17 Cook, as Canlab's president reiterated at trial, was employed in the sales department. He was not authorized to purchase platinum, nor, it need hardly be said, to enter into transactions with and through the non-existent Giles. The issue here is not the "actual" but the "apparent" authority of Cook. The difference, so important in the law of agency, is illuminated in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd., [1964] 2 Q.B. 480, [1964] 1 All E.R. 630 (C.A.) , by Diplock L.J. at p. 502 as follows:

It is necessary at the outset to distinguish between an 'actual' authority of an agent on the one hand, and an 'apparent' or 'ostensible' authority on the other. Actual authority and apparent authority are quite independent of one another. Generally they co-exist and coincide, but either may exist without the other and their respective scopes may be different. As I shall endeavour to show, it is upon the apparent authority of the agent that the contractor normally relies in the ordinary course of business when entering into contracts.

18 He continued at p. 503:

An 'apparent' or 'ostensible' authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the 'apparent' authority, so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract . It is irrelevant whether the agent had actual authority to enter into the contract. ...

The representation which creates 'apparent' authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal's business with other persons . By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal's business has usually 'actual' authority to enter into.

[The italics are mine.]

19 This test was applied by the Court of Appeal in Hely-Hutchinson v. Brayhead Ltd., [1968] 1 Q.B. 549, [1967] 3 All E.R. 98 (C.A.) , where Lord Pearson at p. 593, in discussing "how the representation which creates the ostensible authority is made by the principal to the outside contractor", said:

That may be shown by inference from the conduct of the board of directors in the particular case by, for instance, placing the agent in a position where he can hold himself out as their agent and acquiescing in his activities , so that it can be said they have in effect caused the representation to be made. They are responsible for it and, in the contemplation of law, they are to be taken to have made the representation to the outside contractor.

[The italics are mine.]

20 I have no difficulty in finding that Canlab, in the words of Diplock L.J. in the Freeman & Lockyer case, supra, represented the apparent authority of Cook by its conduct in "permitting" him to act in the way he did "in the conduct of [its] business" with Engelhard. From the beginning, Cook was in a position where he could represent himself as an agent with authority to purchase platinum for Canlab, sell it to customers and arrange for its resale by them direct to Engelhard. Purchase orders, both in the case of genuine purchases and of the fraudulent ones, went to Engelhard signed by the proper person in the Canlab purchasing department. Invoices from Engelhard to Canlab were paid in the ordinary course of business. Cook personally picked up both legitimate purchases of platinum and the platinum purchased fraudulently. Someone at Canlab must have known that their "Mr. Platinum" was picking up the legitimate purchases. The continuation of this total transaction over a period of seven years can itself be taken as powerful evidence of the apparent authority of Cook to undertake it on behalf of Canlab.

21 If there were any doubt about the apparent authority of Cook to carry on the transactions, it was, in my opinion, eliminated by the revision of the payment procedure in 1966. There was no suggestion that Snook was not an appropriate person to receive Engelhard's complaint. He dealt with it by referring it to Cook, and Cook remedied the complaint. One could hardly imagine a clearer example of Cook's apparent authority. "All roads led to Cook" as far as Engelhard was concerned. Canlab had placed Cook in a position where he appeared to have complete control not only over the purchase and disposal of platinum but also the terms of payment.

22 What happened in the autumn of 1968 is an even stronger affirmation by Canlab of Cook's apparent authority. This time there can be no doubt that the inquiry from Engelhard reached Canlab's senior echelons. Again, Canlab gave the responsibility of replying to Cook, thereby affirming and emphasizing his apparent authority to deal with every aspect of the transactions.

23 Everything that transpired from the commencement of this arrangement in 1962 until the eventual unmasking of Cook in 1969 demonstrated the scope of his apparent authority. Engelhard was entitled to and did rely upon his authority until his deceptive activities were revealed in early 1969.

24 The question now to be decided is what is the legal effect in this case of the apparent authority conferred on Cook by Canlab and Engelhard's reliance on it. There were, in fact, three representations of authority, from which three transactions developed: first, the representation that Cook had Canlab's authority to purchase platinum from Englehard; second, the representation that Cook had Canlab's authority to sell platinum to Giles; and third, the representation that Cook had Canlab's authority to arrange the direct resale of platinum by Giles to Engelhard.

25 There can be no doubt about the legal consequences of the first transaction. It is beyond dispute that Cook acted within the scope of his apparent authority in purchasing platinum. Indeed, this was conceded by Canlab's counsel, who, for reasons I will discuss later, had to rely on the validity of the initial purchase of platinum as a foundation for the claim for conversion.

26 There is no doubt either about the effect of the second stage of the transaction where Cook sold the platinum to Giles. There is even less reason to question the apparent authority of Cook to sell platinum because he was, in fact, employed in Canlab's sales department. If the sale had been made to a bona fide purchaser, Canlab clearly would have been bound by it. As between Canlab and Engelhard the result is no different where the sale, as here, was made by Cook to a fictitious person in pursuit of a fraudulent objective. From Engelhard's standpoint, it was entitled to rely on the representation that this transaction was within the scope of Cook's apparent authority.

27 The crucial issue in this case arises from the third transaction, where Cook, acting under his apparent authority from Canlab, arranged for the direct repurchase of scrap platinum by Engelhard from Giles. If Cook had simply represented Canlab to be the vendor of the platinum at this stage, it could not have denied his apparent authority or challenged the validity of the resale to Engelhard. Cook, however, did not represent that Canlab was the vendor and did not purport to sell the scrap platinum on its behalf. The vendor was, rather, the fictitious Giles, and Cook's role appeared to be as an agent for Giles and not for Canlab. In these circumstances, the learned trial Judge considered himself bound by Farquharson Bros. & Co. v. King & Co., [1902] A.C. 325 (H.L.) , and concluded that Canlab could not be bound by Cook's actions because he purported to act as an agent for Giles and not Canlab.

28 In the Farquharson case, the plaintiffs were timber merchants and warehoused imported timbers with a dock company. They gave written instructions to the dock company to accept delivery orders signed by their clerk, Capon. Capon had limited authority to make sales to known customers. Under an assumed name, "Brown", he fraudulently sold the plaintiffs' timber to the defendants, who knew nothing of the plaintiffs or of the clerk under his real name. He carried out the sales by giving the dock company orders for the transfer of timber to Brown and then in Brown's name gave delivery orders to the defendants.

29 The position in that case was summarized by Lord Macnaghten at p. 334 as follows:

What is the defence? ... Not that Messrs. Farquharson led them to believe that Capon had their authority to sell what they supposed they bought or misled them in any way. That defence is out of the question. They never imagined that they were dealing with Messrs. Farquharson or buying Messrs. Farquharson's goods. They never even dealt with Capon to their knowledge. They never dealt with him in his own name and in his proper person. They dealt with a phantom broker, an imaginary being created, animated, and worked by Capon for his own purposes under the plain and unpretentious name of Brown. And from this Brown, whom they never saw in the flesh, about whom they never made a single inquiry, they supposed they bought this timber.

30 In my view, the similarity between the Farquharson case and this case begins and ends in a thief's utilization of a non-existent vendor. In Farquharson , the plaintiffs did not hold Capon out to the defendants as their duly authorized agent, nor did the defendants rely on Capon's position with the plaintiffs as a determining factor in their decision to proceed with the timber purchase. The defendants in Farquharson did not know the plaintiffs existed and accordingly could not establish that they acted to their detriment in reliance upon representations made to them by the plaintiffs. It is this concept of detrimental reliance which provides the underlying rationale for the doctrine of estoppel, upon which the concept of apparent or ostensible authority is based: Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. , supra, at p. 503.

31 In this case, in contrast to Farquharson , Engelhard dealt with Cook only because he was an employee of Canlab. This, in particular, was the reason for the special accommodation given, as Engelhard believed, to an important customer, permitting Giles, the fictitious purchaser, to re-sell the platinum directly to it. Engelhard dealt not with the "phantom" or "imaginary being" described by Lord Macnaghten but with a known employee of Canlab acting, as it had every reason to believe, within the scope of his apparent authority. While in this case Canlab was not nominally a party to the resale of platinum, it is nevertheless bound by the representations of its agent, Cook, made within the scope of his ostensible authority. It is estopped from denying the truth of those representations.

32 In summary, it seems to me that Canlab had permitted Cook to assume a position where he had apparent authority to conduct and arrange the three combined transactions with Engelhard. He represented to Engelhard that he had authority to purchase platinum, to sell it and to arrange for its repurchase by Engelhard directly from Canlab's customer. Engelhard relied on these representations and, in my view, Canlab is estopped from denying them, with the result that Canlab is bound by them and cannot dispute the validity of any part of Cook's transactions with Engelhard.

33 While this case, in my opinion, could be disposed of on the grounds already discussed, I cannot part with it without referring to an issue which was extensively argued before us. Because this was an action for conversion, Canlab was faced with the necessity of establishing that property in the platinum had passed to it. Mr. Fitzpatrick conceded before us that property did not pass under The Sale of Goods Act, R.S.O. 1960, c. 358, s. 19, R. 5, simply by delivery of the platinum to Canlab because it could not be said that the platinum had been appropriated to the contract by Engelhard with the consent of Canlab. He acknowledged that Canlab's assertion that property had passed had to be based on its admission that Cook was acting within the apparent scope of his authority in purchasing the platinum from Engelhard. He submitted there were two alternative grounds on which Canlab could claim property in the platinum purchased by Cook within the scope of his apparent authority.

34 The first was that a principal can sue a third party on a contract made by an agent within the apparent scope of his authority. He frankly admitted that this proposition was not based on any decided cases but relied on Powell, The Law of Agency (2nd ed., 1961), which in turn was supported by the American Restatement, Second, Agency, para. 8, comment 2. Powell states at p. 70:

It is submitted, therefore, that the doctrine of apparent authority is an independent doctrine, independent of contract and almost independent of estoppel. Nevertheless, if the agent has apparent authority to make a contract with a third party, the undoubted result is that the law presumes a contract between his principal and the third party. ...

But estoppel does not give the principal any right of action against the third party because estoppel does not create a contract, or even the appearance of a contract. On the other hand, as we have seen, if the agent has apparent authority to make a contract, there does appear to be a contract and the law supposes that the contract exists. It follows that the principal can sue the third party upon that contract.

35 Powell's view is a departure from the traditional one, which is set forth in answer to the question, "Can the principal sue?" in Bowstead on Agency (14th ed., 1976), p. 240 as follows:

No doubt where the principal is sued on a contract within the apparent authority of an agent, he can make counterclaims as well as adduce defences. But it seems clear that he cannot of his own motion sue on such a contract without ratifying it, though ratification would not normally be a difficult matter.

36 There is no question that Bowstead's statement of the law is to be preferred because it is supported by two Privy Council decisions, Union Bank of Australia Ltd. v. McClintock, [1922] 1 A.C. 240 , and Commercial Banking Co. of Sydney Ltd. v. Mann, [1961] A.C. 1 . Both decisions were given on the premise that a principal could not sue a third party on an unauthorized contract made by an agent within the scope of the agent's apparent authority unless the principal had ratified the contract. Vide: Commercial Banking Co. of Sydney Ltd. v. Mann , supra, per Viscount Simonds at pp. 9 and 10.

37 The second ground advanced by Mr. Fitzpatrick, and upon which his case must stand, is that Canlab, as principal, can take advantage of Cook's action in purchasing the platinum by ratifying it. Mr. Pepper agreed that Canlab could ratify the transaction and submitted that it in fact did so by bringing this action. He contended, however, that it was not possible for Canlab to ratify the purchase of the platinum without at the same time ratifying the total transaction undertaken by Cook. This was the key issue in the two Privy Council decisions to which I have already referred.

38 In both cases, a fraudulent agent had used his principal's funds to purchase banker's drafts and had then deposited them for collection in the same bank. The Privy Council held that, in order to claim property in the drafts, the principal had to ratify the act of its agent in purchasing but, in doing so, it also had to ratify the other part of the transaction, namely the deposit for collection. In such a situation, a principal cannot approbate and reprobate; he cannot ratify that part of a transaction which is favourable to him and disavow another part which is unfavourable.

39 I am of the opinion that this sensible rule applies here. Engelhard was confronted throughout with a combined transaction. In order to sell platinum to Canlab, it had to agree to purchase back scrap metal directly from the fictitious user, Giles. The transactions were intertwined and, for the reasons which I have already elaborated, cannot be severed from one another. Thus, the ratification of one part of the total arrangement of necessity carries with it ratification of all the other parts. As a foundation for this action, Canlab was compelled to ratify the purchase of the platinum and as a consequence must be considered to have ratified the other elements of the transaction, thus disentitling it to recovery.

40 Accordingly, I would allow the appeal with costs and direct that the judgment below be set aside and the action be dismissed with costs.

Lacourciere J.A. (dissenting in part):

41 I have the misfortune of not being able to agree with my colleague's conclusion while being unable to fully support the trial judgment. I therefore state my reasons separately, but without repeating the facts, about which there is really no disagreement. I simply differ in the inferences and on the legal conclusions to be drawn.

42 The appellant's main argument, accepted by my colleague, to put it in simple form, is that Canlab is precluded from denying the authority of Cook to arrange the three combined transactions with Engelhard, i.e., the purchase of platinum, its sale to Giles and the resale of scrap by Giles to Engelhard. This is based on the premise that Canlab as principal had placed its agent Cook in a position where he could hold himself out as having the authority to arrange the tripartite transaction. With the utmost respect to my colleague, I am unable to agree that the facts support the premise prior to 1966.

43 But first, although the case must be decided on principles of agency, it is not inappropriate to compare the degree of moral blameworthiness of the two companies involved in this litigation, although the comparison will not advance the resolution of the legal problem. Comparative negligence does not help to solve a problem of agency. It may, however, place a party in a more favourable light. I agree, as does my brother Blair, with the conclusion of the learned trial Judge that Canlab's control systems were adequate and operated without negligence. Canlab was swindled by the crafty manipulations of a trusted but dishonest employee. However, Engelhard should have been placed on guard by the bizarre request of Cook to deal with Giles, an eccentric secretive research scientist who returned, within a day or two, scrap platinum in a form which did not disclose any known use of the platinum sheets. In suspicious circumstances, Engelhard paid some $835,453.49 to an unknown scientist without any effort until 1966 to contact anyone in authority at Canlab. I do not regard Engelhard's conduct as that of a prudent company.

44 Where a transaction is of such an unusual nature that any reasonable person would be put on inquiry, a person cannot shelter under the doctrine of apparent authority: Houghton & Co. v. Nothard, Lowe & Wills Ltd., [1927] 1 K.B. 246 , affirmed [1928] A.C. 1 (H.L.) . Here Engelhard was put on inquiry by reason of the unusual nature of the transaction to ascertain from a person in authority at Canlab whether Cook had any authority to arrange for the direct resale of scrap. The circumstances here in my opinion were such that Noges, Sadgrove and McCullough ought not to have approved the combined transaction without a reference to someone at Canlab, such as Ray Snook or L. L. Fabian, to whom problems were respectively referred in 1966 and 1968. In my view, where the circumstances are suspicious, it would be absurd to inquire into the legitimacy of the transaction by contacting the agent whose real authority should be questionable and whose whole efforts are naturally directed to the suppression of the real incriminating facts. See Nelson v. Larholt, [1948] 1 K.B. 339, [1947] 2 All E.R. 751 .

45 The main inquiry in this appeal, however, is whether there was any holding-out of Cook by Canlab as authorized to enter into the so-called tripartite transactions. In my view, there is no evidence of conduct or statements to support any holding-out prior to 1966. One must start with the proposition that all ostensible authority must stem from a representation made by the principal as to the extent of the agent's authority. No representation made by the agent himself as to the extent of his authority can amount to a "holding-out" by the principal: A.G. Ceylon v. Silva, [1953] A.C. 461 (P.C.) .

46 Prior to 1966 Canlab had not done anything to represent that its sales department employee Cook was permitted to conduct the proposed combined transactions of purchasing platinum from Engelhard and having a secretive customer sell back platinum scrap. I can find no evidence to show that, before that date, Canlab did anything or said anything to represent that Cook had this authority. No one in authority at Canlab made any representation to anyone at Engelhard to that effect; nor was Cook permitted to act in any manner in the conduct of Canlab's business which would clothe him with apparent or ostensible authority. Cook was not, as was Kapoor in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd., [1946] 2 Q.B. 480 (C.A.) , a person in authority, acting as managing director with the knowledge of the Board, with ostensible authority. He was, in that period, a minor sales clerk, who was not specifically authorized to purchase platinum. No one at Canlab ever led Engelhard to believe that Cook had any authority for a combined platinum purchase and scrap resale. It may be that Cook, by breaching established procedures forming part of internal controls, was able to make himself appear as Canlab's "Mr. Platinum", but this, in my opinion, gave him no ostensible authority to speak for Canlab in the unusual resale arrangement of platinum.

47 The earliest instance which could be interpreted as a holding-out came in 1966, when McCullough from Engelhard spoke to a senior employee of Canlab and was referred to Cook. Before that year, there is nothing to justify the impression that Cook was "Mr. Platinum", certainly nothing from anyone in authority at Canlab.

48 Before 1966, Cook, by his own fraud, may have created the impression among Engelhard's employees that he had authority: that impression came from him alone. Canlab had not contributed to the creation of any appearance of ostensible authority. All ostensible or apparent authority involves a representation by the principal. As stated above, no representation by the agent as to the extent of his authority can amount to a holding-out by the principal. It seems to me that any conclusion supporting an earlier holding-out involves giving retroactive effect to the 1966 and 1968 inquiries.

49 I cannot follow my brother Blair's conclusion that Canlab before 1966 was bound by Cook's representation, that Giles was a bona fide purchaser who had authority to sell such platinum. I find no estoppel operating before that date. In my view, until 1966, Engelhard was not influenced by any representation of fact on behalf of Canlab in dealing with the imaginary Giles. I agree with the conclusion of the trial Judge that Engelhard wrongfully acquired possession of Canlab's platinum by purchasing from Giles until 1966; albeit innocently, it committed the tort of conversion by purchasing from a thief.

50 The situation is different after McCullough's telephone conversation with Snook in Canlab's purchase department. McCullough was then referred to Cook with respect to direct payments to Giles for such platinum, and the request for net cash payments by Canlab for all future platinum purchases. I agree that from that date forward, 11th October 1966, Canlab can be said to have held out Cook as an authorized agent to deal with the resale of scrap platinum directly from Giles, and is thereby estopped from denying the validity of Cook's scheme, which on that date became one transaction. I would dismiss Canlab's claim arising after that date.

51 The second issue in this appeal involves an inquiry into Canlab's acquisition of title to the platinum, and whether Canlab had to ratify the unauthorized purchase in order to support the action for conversion. The position of the appellant is that ratification was necessary and that Canlab cannot do so without ratifying the total transaction, including the resale of the platinum. I respectfully disagree. I think Cook must be taken to have had the authority to purchase platinum prior to 1966. He dealt in some legitimate as well as some fraudulent transactions. All purchases were handled in the same manner, by purchase orders emanating from Canlab's purchasing department, picking up by Cook at Engelhard's receiving department, and proper cheques sent to Engelhard from Canlab's accounting department. In my view, ratification was unnecessary to the acquisition of title to the precious metal by Canlab. I accept the statement of Powell in his text on agency, quoted by Blair J.A., for the proposition that in cases of apparent authority, the law presumes a contract between the principal and the third party. I am prepared to regard the purchase of the platinum as a transaction separate from the resale of scrap. It may have formed part of one diabolically clever scheme by Cook, but it nevertheless remained a separate transaction not requiring ratification. In my view. Cook's purchase of the platinum was binding on Canlab and gave it title; the pre-1966 sales of scrap by Cook to Engelhard constituted a theft by Cook and a conversion both by Cook and, albeit innocently, by Engelhard.

52 Even if ratification were necessary, I cannot agree that Canlab ratified the purchase of the platinum as well as the resale of the scrap. In Harrisons & Crossfield Ltd. v. London & North-Western Ry. Co., [1917] 2 K.B. 755 , a principal whose servant had, while on sick leave, stolen, before the commencement of transit, consignments which the principal had been employed to carry, ratified the transaction to the extent of laying the possession in himself for the purpose of the law of larceny. It was held that although the principal had ratified so as to vest possession in himself under the contract of carriage, it had not ratified so as to make itself liable as a common carrier for non-delivery. In Fitzmaurice v. Bayley (1860), 9 H.L. Cas. 78, 11 E.R. 657 , negotiations for the sale of a lease owned by the plaintiff were entered into and carried on chiefly by letters with a real estate agent acting as agent for the defendant. A question of law which arose was what construction should be placed on two letters of the defendant which were relied on as a ratification for what his agent had done. On appeal, at p. 112, Lord Chelmsford stated that:

Now ratification may take place in two ways, either by a specific ratification of the particular act, or by a general ratification of everything which has been done by the agent on behalf of his principal.

53 In my view, the authority of Union Bank of Australia Ltd. v. McClintock , [1922] 1 A.C. 240 (P.C.) , and Commercial Banking Co. of Sydney Ltd. v. Mann, [1961] A.C. 1 (P.C.) , should be limited to transactions involving negotiable instruments. I can see no reason in logic or principle why a principal cannot ratify a fraudulent agent's obtaining of goods without being deemed to have ratified the agent's subsequent fraudulent dealing. The language of Professor J. A. Hornby in a commentary on the McClintock , supra, and Mann , supra, decisions raises a justifiable distinction between ratification of one whole transaction as opposed to ratification of a series of transactions. The learned author says (24 Mod. L. Rev. 271 at 272-273):

It is, of course, well established that ratification must not be partial, i.e. a transaction cannot be ratified in part and repudiated in part, so that ratification of part of a transaction operates as ratification of the whole: 1 Halsbury 3rd ed., pp. 177-178, para. 416; Bowstead on Agency 12th ed. , Art. 30. Thus in Cornwall v. Wilson (1750) 1 Ves. Sen. 509. See also Wilson v. Poulter (1724) 2 Str. 859, an agent having purchased goods on behalf of his principal at a price exceeding the limit of his authority, the principal objected to the contract but nevertheless disposed of some of the goods as his own. He was held to have ratified the contract and was bound to pay for all the goods. However, in the case of ratification of one of a series of acts, this will only amount to ratification of all if the whole series of acts amounts to one transaction. It was the opinion of the Privy Council in the McClintock case that M.'s obtaining the bank cheques and his subsequent dealing with them amounted to one transaction, but it is difficult to see why this should be so. Suppose that a principal authorises his agent to obtain for him a bank cheque and that the agent, having done so, fraudulently misappropriates it. Nobody would suggest here that the agent's two acts in obtaining and then misappropriating the bank cheque amounted to one transaction and that the principal's authority for the act of obtaining covered also the subsequent dealing with the bank cheque. If the obtaining is also initially unauthorised, but is subsequently ratified, why should the two distinct acts of obtaining and subsequent dealing with the bank cheque now be regarded as one transaction?

54 With respect, the commentary quoted above seems to me to be consistent with the distinction made by Lord Chelmsford in Fitzmaurice v. Bayley , supra, between specific and general ratification.

55 I would, therefore, be of opinion that if Cook's unauthorized purchase of platinum had to be ratified by Canlab to maintain the action for conversion, Canlab is not thereby deemed to have ratified Cook's theft of the platinum and subsequent resale of the scrap. In my view, an innocent company defrauded in these circumstances should not be hampered in its recovery by a doubtful doctrine of deemed ratification.

56 In the result, I would vary the trial judgment by limiting the plaintiff's recovery to the value of platinum converted in the years 1964, 1965 and until October 1966. I would direct a reference to the Master to ascertain these amounts if they cannot be agreed upon. I would not award interest as I cannot find any wrongful withholding of payment in the special circumstances. The plaintiff company should have its costs of the trial. Notwithstanding the variation of the trial judgment, I would allow the substantially successful appellant full costs of the appeal.

Appeal allowed.