As of 1 January 2023, the new Book 1 of the Civil Code will enter into force. It contains a number of generally applicable provisions of private law. Article 1.8 of Book 1 aims to fill a gap in the old Civil Code by defining and codifying the regime applicable to the representation.
Concept of representation
Representation occurs when a person is authorised to perform a legal act with a third party for the account of another person. It can cover a wide variety of legal acts (e.g. conclusion of a contract, payment, procedural act, etc.). Representation can originate in the law, a legal act or a court (or arbitral) decision. The contract of mandate is a particular application of representation.
Depending on how the representative acts, the representation can be:
- direct (or immediate or perfect), i.e. when the representative performs the legal act in the name and for the account of the represented person. In this case, the legal act is directly attributed to the represented person and takes directly effect between the third party and the represented person. This is in principle the case with the contract of mandate. The requirement of acting "in the name of" may also be satisfied if the third party knows that there is a represented person but is unaware of his/her/its identity (so-called determinable representation).
However, if the representative exceeds the scope of his/her/its powers, the represented person will only be bound by the legal act provided he/she/it ratifies it. Such ratification will have retroactive effect to the date on which the legal act was performed, without prejudice to the rights acquired by third parties.
- indirect (or imperfect), i.e. when the representative acts for the account of the represented person but in his/her/its own name (e.g. name lending (naamlening / prête-nom), commission (commissie / commission) contracts, etc.). In this case, the legal act is not directly attributed to the represented person and takes effect between the third party and the representative (and not the represented person).
The legislator went further by also codifying the case law on apparent representation (schijnvertegenwoordiging / représentation apparente). Apparent representation means that a third party acts with a representative who appears to represent a person but is in fact not authorised by that person. The codified rule protects the third party acting in good faith. The (apparently) represented person will be bound by a legal act performed by such representative when (i) the third party could reasonably rely upon the appearance of authority of the latter in the circumstances at hand and (ii) the appearance is attributable to the represented person as his/her/its statements and/or behaviour freely contributed to creating or maintaining the appearance.
Prohibition to act as a counterparty and in case of a conflict of interests
Furthermore, in article 1.8, §6 of the Civil Code, the legislator introduced prohibitions for the representative:
- to act as counterparty of the represented person (e.g. by purchasing the property sold for the account of the represented person); and
- to intervene in case of a conflict of interests,
unless the represented person consents to it, expressly or tacitly (e.g. the represented person does not react within a reasonable period following the notification of the conflict by the representative). Failing that, the legal act will be null and void.
With respect to the second prohibition, the legislator did unfortunately not define the term conflict of interests nor did it provide guidelines for its interpretation. This creates considerable legal uncertainty which will have to be settled through case law.
Interaction with corporate law
The preparatory parliamentary works explicitly specify that the conflict of interests rule set out in article 1.8, §6 of the Civil Code does not affect the special rules of corporate law. The relevant provisions of the Companies and Associations Code must be considered as lex specialis and therefore take precedence over the general rule of the Civil Code.
The Companies and Associations Code provides, for certain forms of legal entities, a definition of the conflict of interests and the procedure that must be applied within the administration body in the event of such a conflict. The definition of the Companies and Associations Code refers to an interest of a financial nature which is directly or indirectly opposed to the interest of the legal entity regarding a decision to be made by the administration body. It does not cover moral, functional (e.g. the fact that the conflicted director is also a director of the counterparty of the legal entity) or other non-financial conflicts of interests.
One may wonder whether the new general rule on conflict of interests in the Civil Code is entirely ruled out by the Companies and Associations Code or is intended to apply on top of it insofar as compatible. This could have an important impact as there is a risk of nullity of the legal act concerned. Therefore, as long as no clarification is available on the interaction between the two rules, when there is a conflict of interests between a legal entity and its director or other representative which does not fall within the definition of the Companies and Associations Code but may be covered by article 1.8, §6 of the Civil Code (e.g. a non-financial conflict), it is advisable to follow the stricter approach and obtain (and document) the consent of the legal entity represented.
The consent of the entity may, for instance, be documented in the minutes of the meeting of the administration body or in the power of attorney given by the represented legal entity to its representative in relation to the performance of the legal act.