Source ： Jianwei Law Firm ，Author Zhu Jun

I. Legal Provisions and Consequences of Unauthorized Agency and Ostensible Agency

Article 171 of the Civil Code stipulates that if an agent acts without authorization, exceeds their authority, or acts after the termination of their authority, and the act is not ratified by the principal, it shall not be effective against the principal. At the same time, if the counterparty knows or should know that the agent has no authority to act, the counterparty and the agent shall bear liability according to their respective faults. Therefore, "Acting without authorization, exceeding authorization, or acting after the termination of authorization" is what we usually call unauthorized agency. The consequences of the agency acts of an unauthorized agent should be shared by the agent and the counterparty.

Article 172 of the Civil Code stipulates that if an agent acts without authorization, exceeds their authority, or acts after the termination of their authority, and the counterparty has reason to believe that the agent has authority, the agency act is valid. Therefore, when the agent "acts without authorization, exceeds their authority, or acts after the termination of their authority", and does something specific that leads the counterparty to reasonably believe that they have authority, this constitutes "ostensible agency", and the agency act is valid. In this case, the consequences of the agency acts performed by the ostensible agent shall be borne by the principal.

I believe that, in terms of textual interpretation, ostensible agency originally belongs to unauthorized agency, but because of the appearance of authorization in the relationship between the principal and the unauthorized agent, it causes the counterparty to reasonably believe that the agent has the authority to engage in civil legal acts, and the law gives it the same legal effect as authorized agency. The institutional significance of ostensible agency lies in maintaining the integrity of the agency system, protecting the legitimate rights and interests of bona fide third parties, and establishing a normal civil circulation order.

II. Determination of the Subject of the Contract Signed by the Actual Contractor

Under the current economic situation, subcontracting, re-subcontracting, and illegal subcontracting of construction projects are commonplace. In construction projects, the actual contractor often signs contracts for material supply, loans, and leasing required for construction projects in the name of the general contractor "project department", "project manager", or their own name. When the actual contractor is unable to perform its obligations, it generally uses the method of abandoning the project and escaping to avoid debt, while the creditor will direct its lawsuit against the general contractor. The core issue in such cases is how to determine the subject of the contract signed by the actual contractor when the general contractor has not explicitly authorized the actual contractor.

In judicial practice, the standards of various courts are inconsistent. One view is that, "project department" and "project manager" outwardly have the external characteristics of having obtained general authorization from the general contractor, and the counterparty with whom they transact has reason to believe that they can represent the general contractor in external contracting, so the actions of the "project manager" should be deemed as official acts, and the responsibility should be borne by the general contractor of the construction project. Another view is that the subject of the contract should be determined based on the name under which the parties signed the contract or note; if the actual contractor contracts in the name of "project manager" or "project department", the general contractor should be considered the subject of the contract, while if it contracts in a personal name, the individual should be considered the subject of the contract.

III. Related Cases

Sichuan Provincial Higher People's Court [( 2019）川民再313号】

The second-instance court held that the focus of the dispute in this case was whether the act of Xu Tao, the third person in the first instance, borrowing money from Dong Jidong constituted ostensible agency. According to Article 49 of the Contract Law of the People's Republic of China, "If an agent acts without authority, exceeds their authority, or acts after the termination of their authority, and enters into a contract in the name of the principal, and the counterparty has reason to believe that the agent has authority, the agency act is valid," it can be seen that ostensible agency should meet the following constituent conditions:

1. An unauthorized agent acted on behalf of the principal; 2. The counterparty objectively had reason to believe that the unauthorized agent had authority; 3. The counterparty was subjectively bona fide and without fault; 4. The civil act between the unauthorized agent and the counterparty met the requirements for establishment. In this case, based on the facts ascertained by the first-instance court that were recognized by all parties, the note issued by Xu Tao to Dong Jidong was signed "Borrower: Xu Tao, person in charge of the S307, S216 Road Surface Reconstruction Project Department of Shaanxi Xianyang Road and Bridge Engineering Company", and the note also stated "Promise to make up the authorization letter and relevant materials from Shaanxi Xianyang Company later", which shows that the third person in the first instance, Xu Tao, acted in the name of Xianyang Road and Bridge Company when borrowing money. Since the attached copy of the "Winning Bid Notice" proves that Xianyang Road and Bridge Company is indeed the actual winning bidder of the S307, S216 road surface reconstruction project, and the note stipulates that the loan amount is also transferred to the account of Xianyang Road and Bridge Company, Dong Jidong, the appellee, had every reason to believe that Xu Tao had authority. The appellee Dong Jidong made a judgment based on the winning bidder confirmed in the "Winning Bid Notice", combined with the payment method of transferring the loan amount to the account of Xianyang Road and Bridge Company as agreed in the note between the two parties, that Xu Tao had authority, which was bona fide and without fault. At the same time, the note issued by Xu Tao to Dong Jidong is authentic, and Dong Jidong actually transferred the loan amount to Xianyang Road and Bridge Company as agreed, and the borrowing and lending behavior between the two parties meets the requirements for establishment and validity. Therefore, this court believes that Xu Tao's act of borrowing money from Dong Jidong in this case meets the constituent elements of ostensible agency, and the agency act should be deemed valid according to Article 49 of the Contract Law of the People's Republic of China.

Summary: The Sichuan High Court believes that ostensible agency should meet the following constituent conditions: 1. An unauthorized agent acted in the name of the principal; 2. The counterparty objectively had reason to believe that the unauthorized agent had authority; 3. The counterparty was subjectively bona fide and without fault; 4. The civil act between the unauthorized agent and the counterparty met the requirements for establishment. In this case, the actual contractor borrowed money in the name of the project department head, and all the constituent elements of ostensible agency were met.

Jiangsu Provincial Higher People's Court [( 2018）苏民申3553号】

According to Article 49 of the Contract Law of the People's Republic of China, the establishment of ostensible agency requires three elements: firstly, the agent enters into a contract with the counterparty in the name of the principal; secondly, the agent is an unauthorized agent, but objectively creates the appearance of having agency power; thirdly, this appearance of agency power leads the counterparty to reasonably believe that the agent has agency power, and the counterparty is subjectively bona fide and without fault, having fulfilled its reasonable examination obligations. In this case, Lv's Building Materials Business Department admitted in the first and second instances that the transaction in question was directly negotiated with Xu Xiaosheng and Chen Guanghui, without a written contract. Lv's Building Materials Business Department failed to prove that the building materials transaction in question was conducted by Xu Xiaosheng in the name of Datang Company, therefore, this case does not have the appearance of Xu Xiaosheng acting as an agent for Datang Company to sign the contract. During the court's review, the "Building Materials Purchase and Sales Contract" dated March 16, 2013 shows that the purchasing party's seal is that of the 18th Project Department of Tongrun Company, not signed by Xu Xiaosheng in the name of Datang Company, therefore, it does not have the appearance of Xu Xiaosheng acting as an agent for Datang Company to sign the contract. Moreover, this case is different from the facts found in the other case proposed by Xu Xiaosheng, which determined that Xu Xiaosheng constituted ostensible agency for Datang Company, and the two cases are not comparable, therefore, the claim of ostensible agency by Xu Xiaosheng and Lv's Building Materials Business Department cannot be established.

Summary: Jiangsu High Court holds that the establishment of ostensible agency requires three elements: firstly, the agent enters into a contract with the counterparty in the name of the principal; secondly, the agent is an unauthorized agent, but objectively creates the appearance of having agency power; thirdly, this appearance of agency power leads the counterparty to reasonably believe that the agent has agency power, and the counterparty is subjectively bona fide and without fault, having fulfilled its reasonable examination obligations. In this case, the actual contractor purchased in their own name, and the counterparty did not prove that the actual contractor reached a transaction with it in the name of the principal.

Three, Author's Opinion

1. When the general contractor has not authorized the actual contractor to represent it in concluding contracts with external parties, the actions of the "project manager" or "project department" constitute unauthorized agency. If the counterparty to the contract claims that it constitutes ostensible agency, it should bear the burden of proof.

2. Among the various pieces of evidence to prove that the actions of the "project manager" or "project department" constitute ostensible agency, the name under which the "project manager" or "project department" concluded contracts with external parties is important evidence, but it is not decisive. According to Article 13 of the "Supreme People's Court's Guiding Opinions on Several Issues Concerning the Trial of Civil and Commercial Contract Disputes under the Current Situation," the system of ostensible agency as stipulated in Article 49 of the Contract Law not only requires that the unauthorized agency act objectively creates the appearance of having agency power, but also requires that the counterparty subjectively believes in good faith and without fault that the actor has agency power. Therefore, the counterparty to the contract who claims ostensible agency should bear the burden of proof, and should not only prove that the agency act has objective outward appearances of authorized agency such as contracts, seals, and seals, but also prove that they believed in good faith and without fault that the actor has agency power.

3. To determine whether the counterparty to the contract has fulfilled its reasonable duty of care and is bona fide and without fault, it is necessary to conduct a comprehensive analysis and judgment based on the experience rule, combining factors such as the time of issuance of notes during the signing and performance of the contract, the name under which it was signed, the method of delivery, location and use of the subject matter.

Source | WeChat Official Account [Jianwei Lawyer]

Author | Zhu Jun