More and more companies are formed to carry out business ventures inevitable cause the companies enter into contracts with outsiders. At the same time an important question arises as to which individuals are capable of entering into the contract for the company.1 Since a company is regarded as an artificial legal entity, there are two methods for individual entering into company. Using the "organic theory "where the company contracts directly in its own name is the first method.
The second and more universal way is applying the law of agent, for example companies appoint officers or employees as agents to make contracts with outsiders. Under the second method, this essay will discuss the company's and third party's contractual liability when there is a financial loss from transaction. Based on four doctrines, actual authority, apparent authority, indoor management rules and section 128-129 of the Corporations Act 2001, the essay will divide into four section using cases and statute laws to discuss the contractual liability between company and third party. Furthermore each section provides the definition of doctrine, case analyses and summary.
2.1 Actual Authority:
The agent or an employee may be expressly appointed verbally, words or in writing to carry out certain things on behalf of the company. The principal tells the agent to do particular acts or occupy a particular position. The extent of the attorney's actual authority is usually set out in the document which creates the powers so there is an agreement between the principal and the agent. However there is no agreement between the agent and third party - they have no contractual relationship. Furthermore an agent's actual authority may arise expressly or by implication. Implied actual authority usually happens when an agent is placed in special position by the principal such as the agent who appointed manages a business.
In Hely-Hutchinson v Brayhead Ltd case2, Mr. Richards who is the chairman of Brayhead guaranteed on the company's behalf, repayment of money owed to Lord Suirdale and indemnify Lord Suirdale against losses, for injecting money into his company. Lord Suirdale got a place on Brayhead's board. Unfortunately Perdio met trouble and not saved by the extra cash injections. Subsequently it went into liquidation, Lord Suirdale resigned from Brayhead Ltd's board and sued for the losses but Brayhead refused to pay on the basis that Mr. Richards had no authority to make the contract.3 However, the law in is area states that there is an implied authority of Mr. Richards who is the chairman manage the business so Brayhead is the guilty party to pay the losses of Lord Suirdale's company. The third party - Brayhead is the guilty party.
2.2 Apparent or Ostensible authority
An agent can be created if a person though their words or conduct holds out another person (usually is the third party) as being their agent. It is different for third parties to know whether an agent has actual authority and the extent of the authority. So in some situation an agent use the apparent authority to sign contracts with the third parties. If there is a loss in the contract, the principal still has the legal duty for third party. In Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd 4, the judge indicated that the Buckhurst company was liability to pay the fees to the Freeman & Lockyer firm because the directors of the company had held out Kappor as a managing director even though he was not formally.
Moreover, from this case's adjudgement it concluded four elements for apparent authority which are: 1.there must be a representation that the agent has authority; 2. the representation must be made by someone with actual authority; 3.the outsider must be induced to contract on the faith of the representation; 4. company must have power to make the contract under constitution. 5Generally, once the four elements of apparent authority are satisfied and a contract loss happens, the principal is the guilty party to pay the loss.
2.3 Indoor management rules
The indoor management rules is also called the rules in Turauand's Case which developed by Common Law to prevent a company from relying on doctrine of constructive notice to avoid a contract. The indoor management rules state that persons dealing with a company can assume that its internal proceeding were carried out, moreover this rules are used to protect outsider. For example, in Royal British Bank v Turquand 6case where the court held that the contract was bound to Royal British Bank because the passing of resolution is a matter internal to the company and outsider need not inquire into whether such a resolution has been passed. 7So under this situation the principal is the guilty party to undertake the loss, because company has its internal proceeding and constitution which the third party has no responsible to work over totally.
In addition, the exception of indoor management rule is where an outsider has knowledge that an agent lacks authority, or should know this from their relationship and connection with the company, therefore the outsider cannot claim. The High Court decision in Northside Developments Pty Ltd v Registrar-General8 case is a good illustration of this exception. The court held that the executive of the mortgage was invalid though the rules in Turquand's case allowed Barclay Bank to assume the common seal was properly affixed and the internal proceedings of the company had been carried out in accordance with its constitution, the circumstances should have put the Barclays upon inquiry.
However in Northside's case, the common seal was signed by Sturgess and his son who had not been appointment under the constitution, on the other side the other two directors neither knew the execution of the mortgage nor had interested in the transaction. Barclays should know this from their relationship in Northside Developments Pty Ltd. To sum up the Barclays cannot use the rule in Turauand's Case to sue Northside successfully. The third party should undertake the whole loss of contract if he is able to know that the agent has no authority.
In Section 128, some conditions which about companies' authorities to make assumption are listed. Once the S128 are satisfied, the S129 should be applied correct.10 In addition, S129 is used to protect the third party, so under these assumptions third parties may be not the guilty party. This essay discusses the detail of each assumption following:
Firstly, persons dealing with the company can assume that the company's constitution and replaceable rules have been complied with. However it does not require the person to have knowledge of the constitution or replaceable rules.11 For example, in Oris Fund management Ltd v National Australia Bank Ltd12 case, Stanley who is one of the directors in OFM endorsed the cheques and deposited it into NAB.
The OFM's constitution provided that any two of directors could endorse cheques but the director could endorse in a different way instead of endorsing by two directors. Subsequently, OFM sued NAM for the proceeds of the cheques because OFM thought Stanley had no authority to endorse the cheques.Under S129 (1) NAM can assume OFM's constitution had been complied with so that Stanley had been authority because he endorsed cheques in a different way. To sum up, from the law in this area it can be seen ANB was not the guilty party.
Secondly, outsider can assume that persons who appointed from information supplied by company or from the AISC, to be a director or a company secretary has been properly appointed and has the authority or exercise the powers and perform the duties customarily exercised or performed by a director or company has secretary of a similar company.13 Case of Lyford v Media portfolio Ltd14 can illustrate it. Media could assume Hurgall and Lucas had the authority and the assumption was made even if the person was unaware of the information contained in the returns that a company has lodged with ASIC.15So the principal is the guilty party...
Thirdly, a person may assume that a person held out by the company to be an agent has been properly appointed and has authority to exercise the power and perform the duties normally expected of that person.16 Moreover, outsider is entitled to assume that officers and agents of the company perform their duties to the company as well.17 In the case of Richard Brady Franks Ltd v Price18 a company cannot avoid a contract entered into on its behalf by an agent or officer who has breached his duty where the outsider acts in good faith without knowledge of such breach. On conclusion, under these subsections, third party can assume the agents are entitled and execute their duties appropriately. Once there is a contract loss, third party can use the assumptions to avoid the contractual liability.
Furthermore, outsider can assume that the documentation coming from the company is properly attested to when signed by two persons who appear as director or a company secretary. When an officer enters into a contract on the behalf of the company, this is deemed to be a contract made by an agent on behalf of a principal.19
Finally, outsider is entitled to assume that an officer or agent of company has authority to issue a document or certified copy of a document on its behalf also can warrant the document is genuine or a true copy.20 In the case of Ruben v Great Fingall Consolidated,21 the House of Lords held the company was not bound by the forged certificate countersigned by the company secretary. The secretary had not held out to have the authority to do more than merely deliver valid certificate.22 Under this assumption, the third party should not think the document was forged, so it could not undertake the contractual loss.
It is ineluctable that company build contractual relationship with outsider in the 21st century. However, a question about who is the guilty party when a financial loss happens in the contract (the principal or third party) has become a thoughtful theme. This essay discuss company's contractual liability base on four doctrines with the help of relevant cases and statute law. On conclusion both the principal and third party can be the guilty party. Even though there is an appropriate balance between the two parties, the principal has more probability to become the guilty party cause of S129 are constituted to protect the third party. However, third party will undertake the contractual liability sometimes, for illustration, under the situation of exception to the indoor management rules. Subsequently a recommendation is given that both the third party and third party should think carefully before they enter into a contract and sometime doing research is necessary to understand the contractual object.