Sei sulla pagina 1di 32

COMPANY CONTRACTS

How does the law determine whether transactions with those outside the company (outsider/TP) are legitimate and binding on the company?

s. 31 CA 2006 Statement of companys objects (1) Unless a companys articles specifically restrict the objects of the company, its objects are unrestricted.
Companies can have unrestrictive objects. They are empowered by the Parliament to take part in any business of their choice.

Most companies incorporated under the previous CAs were required to act within the confines of the object clause found in the MA of their companies.
The power vested in the AA is then delegated to an agent (BOD) who either exercises it themselves or delegate it to the companys agent/ employee. Agents and employees of the co then contract with outsiders on behalf of the company.

LIABILITY OF THE COMPANY


Whether a company becomes liable for an act/contract entered into on its behalf by its agents depend:
Whether the act /contract was within the powers

of the company?
If it was, was the individual who acted/contracted

authorised to do so?

POWERS OF THE COMPANY


Riche v Ashbury Railway Carriage and Iron Co. When a co acts ultra vires, the contract becomes void and none can enforce it.
Re Jon Beufort Court held that the contract was unenforceable. Outsiders were deemed to have had constructive notice of the object clause in the companys MA.

POWERS OF THE COMPANY


The classic doctrine of ultra vires is If the said transaction is outside the object clause of the company, the transaction is void and both the company and the outsider cannot enforce the contract.
The outsider cannot plead ignorance of the object

clause. SOLUTION: Companies began to use wider object clauses.

USAGE OF WIDER OBJECT CLAUSES


Did not solve the problem ie. protect the outsider.
The court applied the MAIN OBJECT RULE.

If there were too many objects, only one was regarded as the main object of the company and the rest were regarded as subsidiary/ ancilliary to the main object.
The subsidiary objects were required to be related to the main object,

otherwise the transaction becomes ultra vires.

SOLUTION: The company referred to each object as the main object. Cotman v Brougham Bell Houses Ltd. v City Wall Properties

ULTRA VIRES & BENEFIT OF THE CO.


Charitable and political donations, gratuitous payments to employees are generally deemed to be of benefit to a company while it is a going concern.
Are these acts of giving ultra vires the company? Parke v Daily News Hutton v West Cork Railways Co

REFORMS
S. 39 CA 2006 removes the doctrine of constructive

notice where it concerns the MA or AA. s.39 A companys capacity


(1) The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the companys constitution. (2) This section has effect subject to section 42 (companies that are charities).

REFORMS
The CA also contains a saving provision for ultra vires

transactions where the transaction was dealt with by directors and the TP was acting in good faith. s.40 Power of directors to bind the company
(1) In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the companys constitution.

AGENCY
A company cannot operate of its own, it requires the

human agency. Agents of the company need authority from the company(Principal) to act on its behalf. General Rule: The Co (Principal) will be bound by a contract entered into on its behalf by its agent (Dir) if the agent acts within the actual or ostensible scope of authority given by the company. The Principal may also ratify a contract entered into without or in excess of the authority given.

ACTUAL AUTHORITY
Actual authority is the authority conferred on the A by the contract governing the agency which has been agreed between the A and the Company.
Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd An actual authority is a legal relationship between P and A created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from express words used, the usages of the trade, or the course of business between parties. To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the A does enter into a contract pursuant to the actual authority, it does create contractual rights and liabilities between the P and the contractor.

ACTUAL AUTHORITY
Actual authority may be either:
express authority implied authority

Express actual authority The extent of such authority depends on the construction of the words used in his appointment.

ACTUAL AUTHORITY
IMPLIED ACTUAL AUTHORITY

There are three categories:

1. Implied incidental authority


The Principal, by appointing an agent to act in a particular capacity, gives him authority to make those contracts which are necessary or normally incidental to an agents activities.

2. Implied customary authority


Authority which an agent operating in a particular market or business usually.

ACTUAL AUTHORITY
3. Implied usual authority
Authority which an agent who occupies a particular position or engages in a particular trade has. Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd.

LIMITATIONS ON ACTUAL AUTHORITY


1.

By the companys constitution The articles limit the companys object. Directors are limited to acting for the purpose of /incidental to the companys objects in the articles.

2. By duty to promote companys success

Directors actual authority may be limited by statutory duties eg. s. 172 CA 2006

OSTENSIBLE/ APPARENT AUTHORITY


The authority that the principal represents to other person that he has given to the agent.
Lord Keith of Kinkel in Armagas Ltd v Mundogas SA Ostensible authority comes about where the principal, by words or conduct, has represented that the agent has the requisite actual authority, and the party dealing with the agent has entered into a contract with him in reliance on that representation.

OSTENSIBLE/ APPARENT AUTHORITY


Freeman & Lockyear v Buckhurst Park Properties Ltd Hely Hutchinson v Brayhead Ltd Ostensible or apparent authorityis merely a form of estoppel, indeed it has been termed agency by estoppel, and you cannot call in aid an estoppel unless you have three ingredients: (i) a representation, (ii) a reliance on the representation, and (iii) an alteration of your position resulting from such reliance.

OSTENSIBLE/ APPARENT AUTHORITY


REPRESENTATION
per Diplock LJ in Freeman & Lockyer The commonest form of representation by a principal is by conduct, namely by permitting the agent to act in the management of the principals business. Thus, if in the case of a company the BOD have actual authority under the M and AA to manage the companys business permit the agent to act in the managementof the companys business, they thereby represent to all persons dealing with such agent that he has authority to enter on behalf of the company into contracts of a kind an agent authorised to do acts of the kind which he is in fact permitted to do usually enters in the ordinary course of the companys business. The making of such a representation is itself an act of management of the companys business. Prima facie it fall within the actual authority of the board of directors.

OSTENSIBLE/ APPARENT AUTHORITY


RELIANCE
The contractors lack of belief that an agent of a company had authority to make a contract may be inferred from the contractors knowledge, or reason to believe, that the contract was contrary to the commercial interests of the company.

DOCTRINE OF CONSTRUCTIVE NOTICE


The directors have power and authority to bind the company, but certain preliminaries are required to be satisfied on the part of the company before the power can be duly exercised. Then the person contracting with the directors are not bound to see that all these preliminaries have been observed. He is entitled to presume that the directors are acting lawfully in what they do. This is the doctrine of constructive notice.

THE RULE IN TURQUANDS CASE


per Jervis CJ in Royal British Bank v Turquand
the party here on reading the deed of settlement, would find not a prohibition from borrowing but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution he would have a right to infer the fact that a resolution authorising that which on the face of the document appeared to be legitimately done.

STATUTORY PROTECTION FOR TPs


s. 35A & s. 35B CA 1985

s. 40 & s. 41 CA 2006

STATUTORY PROTECTION FOR TPs


Nowadays the rule in Turquands Case has been covered by s. 40 CA 2006, which renders ineffective any limitation in a companys constitution on the power of its directors to bind the company. S. 40 does not apply to charitable companies and those acting in bad faith.

STATUTORY PROTECTION FOR TPs


35A Power of directors to bind the company (1) In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the companys constitution. (2) For this purpose (a) a person deals with a company if he is a party to any transaction or other act to which the company is a party, (b) a person shall not be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the companys constitution. (c) a person shall be presumed to have acted in good faith unless the contrary is proved. (3) The references above to limitations on directors powers under the companys constitution include limitations deriving (a) from a resolution of the company in general meeting or a meeting of any class of shareholders, or (b) from any agreement between the members of the company or of any class of shareholders.

STATUTORY PROTECTION FOR TPs


(4) Subsection (1) does not affect any right of a member of the company to bring proceedings to restrain the doing of an action that is beyond the powers of the directors; but no such proceedings lie in respect of an act to be done in fulfilment of a legal obligation arising from a previous act of the company. (5) This section does not affect any liability incurred by the directors, or any other person, by reason of the directors exceeding their powers.

STATUTORY PROTECTION FOR TPs


s.35B CA 1985
A party to a transaction with the company is not bound to enquire as to whether it is permitted by the companys memorandum or as to any limitation on the powers of the board of directors to bind the company or authorise others to do so.

STATUTORY PROTECTION FOR TPs


40 Power of directors to bind the company (1) In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the companys constitution. (2) For this purpose (a) a person deals with a company if he is a party to any transaction or other act to which the company is a party, (b) a person dealing with a company (i) is not bound to enquire as to any limitation on the powers of the directors to bind the company or authorise others to do so, (ii) is presumed to have acted in good faith unless the contrary is proved, and (iii) is not to be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the companys constitution.

STATUTORY PROTECTION FOR TPs


(3) The references above to limitations on the directors powers under the companys constitution include limitations deriving (a) from a resolution of the company or of any class of shareholders, or (b) from any agreement between the members of the company or of any class of shareholders. (4) This section does not affect any right of a member of the company to bring proceedings to restrain the doing of an action that is beyond the powers of the directors. But no such proceedings lie in respect of an act to be done in fulfilment of a legal obligation arising from a previous act of the company. (5) This section does not affect any liability incurred by the directors, or any other person, by reason of the directors exceeding their powers. (6) This section has effect subject to section 41 (transactions with directors or their associates), and section 42 (companies that are charities).

STATUTORY PROTECTION FOR TPs


41 Constitutional limitations: transactions involving directors or their associates (1) This section applies to a transaction if or to the extent that its validity depends on section 40 (power of directors deemed to be free of limitations under companys constitution in favour of person dealing with company in good faith). Nothing in this section shall be read as excluding the operation of any other enactment or rule of law by virtue of which the transaction may be called in question or any liability to the company may arise. (2) Where (a) a company enters into such a transaction, and (b) the parties to the transaction include (i) a director of the company or of its holding company, or (ii) a person connected with any such director, the transaction is voidable at the instance of the company. (3) Whether or not it is avoided, any such party to the transaction as is mentioned in subsection (2)(b)(i) or (ii), and any director of the company who authorised the transaction, is liable (a) (b) to account to the company for any gain he has made directly or indirectly by the transaction, and to indemnify the company for any loss or damage resulting from the transaction.

STATUTORY PROTECTION FOR TPs


(4) The transaction ceases to be voidable if (a) restitution of any money or other asset which was the subject matter of the transaction is no longer possible, or (b) the company is indemnified for any loss or damage resulting from the transaction, or (c) (d) rights acquired bona fide for value and without actual notice of the directors exceeding their powers by a person who is not party to the transaction would be affected by the avoidance, or the transaction is affirmed by the company. (5) A person other than a director of the company is not liable under subsection (3) if he shows that at the time the transaction was entered into he did not know that the directors were exceeding their powers. (6) Nothing in the preceding provisions of this section affects the rights of any party to the transaction not within subsection (2)(b)(i) or (ii). But the court may, on the application of the company or any such party, make an order affirming, severing or setting aside the transaction on such terms as appear to the court to be just. (7) In this section (a) transaction includes any act; and (b) the reference to a person connected with a director has the same meaning as in Part 10 (company directors).