#3568 - Company Contracts - Company Law

COMPANY CONTRACTS

Capacity of The Company to Enter Contract

Used to be case that companies were required to have objects clause in their memorandum of association.

Where company entered into contracts not covered by objects clause, had acted ultra vires

Modern Position

1. Section 31: presumption that companies have unlimited objects and powers.

2. Section 39: acts carried out contrary to any specific restrictions on company’s powers contained in Articles are NOT ultra vires.

• i.e. third parties from outside the company can rely upon them, even if such acts were in breach of company’s constitution

• acts cannot be challenged simply because they breached a provision in company’s constitution

  Thus specific restrictions in articles only have consequences as restrictions on directors’ powers

  i.e. are only relevant in terms of authority (see below)

Acts of the Company’

Company is a legal person

Thus to see if contract is binding on company, necessary to look at who actually has authority to enter into contracts on behalf of the company?

Company law uses principles of agency to solve this question

1. company is principal,

2. and the board or an individual director is agent

ACTUAL AUTHORITY

Actual authority may be express or implied.

Express Actual Authority

Someone has express actual authority to make a decision on behalf of company (e.g. entering a contract) if:

1. authorised to do so by company’s articles

2. or if they have had this power delegated to them by someone possessing that power

   1. Articles

      Model Articles puts power to act on behalf of company in board of directors

      NB the **board of directors acting as a whole**

      Thus individual directors do not have power to act on behalf of company unless expressly permitted to (or unless they have power delegated to them – see below)

   2. Delegation

      Model Articles 5+6 allow company to delegate power (provided there is nothing preventing this in constitution)

      Thus board of directors (via Art 3) may validly delegate one of their powers to someone else

      e.g. may delegate power to enter contracts on behalf of company to individual director

      Where this validly occurs, delegee has actual authority to enter contracts on behalf of company

      provided he acts within scope of delegated powers

      2. Implied Actual Authority

         Even if D has no express actual authority from Articles to enter into contract, actual authority may be implied

         Hely-Hutchinson v Brayhead [1968]

         Authority is implied where it is inferred from conduct of parties and circumstances of case

Examples

1. Where director occupies a particular position in company, has implied authority to do anything which that position entails

   If X is managing director,

   has implied authority to do anything falling within scope of office

   Hely-Hutchinson v Brayhead [1964]

   thus does not have power to do things which are properly remit of the board

   e.g. cannot suspend members of the board

   Smith v Butler [2011]

   actual authority may depend on terms of MD’s appointment

   i.e. where X is appointed MD but his terms of appointment restrict his powers, actual authority is restricted to these areas

   Harold Holdsworth [1955]

   2. If X is a director of particular area (e.g. sales director), has implied authority to do anything which that position entails

3. If X is the company secretary, has implied authority to bind company in relation to administrative matters

   Panorama Developments [1971]

4. However for positions lower than that of director, courts reluctant to accept implied/ostensible authority

   e.g. a ‘manager’ does not have implied/ostensible authority

   Freeman & Lockyer [1964]

2. However if X is an ordinary director, does not without more have implied actual authority to enter contracts without approval of board

   Hely-Hutchinson v Brayhead [1968]

3. Where other directors acquiesce to X entering contracts on behalf of company for long period of time, X has implied actual authority to enter contracts

   Hely-Hutchinson v Brayhead [1968]

   Implied authority has great overlap with ostensible authority

   i.e. even if MD does not have implied authority, will be held out as having authority to do anything which that role entails

   Freeman [1964]

Limits

Director/s cannot have actual authority (even implied) if he:

Acts contrary to specific restrictions on company’s powers as set out in constitution (see above)

Acts in bad faith or for improper purposes

Bad Faith/Improper Purposes

Where director had actual authority to enter transaction but did so in bad faith or for improper purposes, this vitiates his actual authority

i.e. is breach of director’s duty (s.171) which removes authority

Hopkins v TL Dallas Group [2004]

Thus here, third party must rely on ostensible authority.

NO ACTUAL AUTHORITY

1. Section 40

Section 40

Where person deals with a company in good faith, power of directors to

bind the company

or delegate this power to others

is deemed to be free of any limitation under company’s constitution.

Thus applies wherever:

1. board of directors exercise their power to act on behalf of company (Art 3)

2. board of directors delegate any part of their power to act on behalf of company to someone else (Art 5)

   If there are any limitations on these powers in articles, are ignored so as to make contract with third party valid.

Application

Section 40 only deals with the powers of the board of directors to act or delegate power.

Has been argued that s.40 applies to individual directors

i.e. in CA 1985, previous equivalent to s.40 (s.35A) referred to the power of the “board” to bind the company

whereas s.40 refers only to the “directors”

Davies: thus arguable that where an individual director exercises power to act on behalf of company or delegate this, can be deemed to be free of limitations

i.e. the plural includes the singular

this view doubtful: no reason to think change in wording is relevant

Better view is that where individual director exercises a power, section 40 DOES NOT APPLY

‘Good Faith’

Section 40(2): third party:

1. is not bound to enquire as to any restrictions in company’s constitution

2. is presumed to have acted in good faith unless the contrary is proven

   thus burden of proof on company

3. is not taken to be in bad faith by reason only of him knowing an act taken by the company is contrary to its constitution

   thus no bad faith even if T has actual knowledge that directors are exceeding their powers

   however likely that T’s actual knowledge highly relevant to showing that T was in bad faith (i.e. where combined with T’s own behaviour)

   2. ‘Dealing With a Company’

      Section 40(2): someone deals with a company if he is party to any transaction or other act to which the company is party

1. Gratuitous Transactions

   Where T enters into a gratuitous transaction with company, is not dealing with it.

   i.e. the transaction must be bilateral

   EIC Services v Phipps [2004]

2. Inquorate Decisions

   Is unclear whether quorums for board meetings set out in constitutions constitute a ‘limitation’ which can be overcome by section 40

1. Lack of quorum might not be overcome by s.40

   Smith v Henniker-Major [2003] (First Instance + Walker LJ)

2. Lack of quorum is limitation which can be overcome by s.40

   Smith v Henniker-Major [2003] (Carnwath LJ)

   Ford v Polymer Vision [2009]

   Farrar (2003): prefers view of Carnwath LJ.

   i.e. third parties are entitled to take at face value any documents which they believe are genuine decisions of board

   this more in line with case law.

   However even if lack of quorum is simply a “limitation”, s.40 cannot be relied upon by someone who is himself responsible for mistake as to quorum requirements

   e.g. director relying on s.40 to uphold resolution which he himself passed in absence of quorum

   Smith v Henniker-Major & Co [2003]

   2. ‘Person’

      Third parties who are NOT entitled to rely on s.40 include:

   1. members of the company

   2. the company itself

      EIC Services Ltd v Phipps [2004]

   3. or directors (see below)

      Thus none of these people can rely on s.40 to save otherwise invalid transaction.

Directors

A director is capable of dealing with the company for purposes of s.40.

Smith v Henniker-Major [2002]

HOWEVER:

Section 41: where company enters into transaction with a director or a person connected with a director,

1. transaction is voidable at instance of company

   subject to bars to rescission

2. even if transaction is not avoided, director may still be liable to company for account for any personal gain from transaction

   2. Non-Application

      Section 40 only applies in relation to limitations on the board’s power.

      Thus DOES NOT APPLY where:

1. There has been no delegation of authority at all (either express or implied) to person entering into contract on behalf of company

2. a director has an individual power in articles which he has exceeded

3. a power of board has been validly exercised, but for an improper purpose or in bad faith

   i.e. directors’ duties are not a ‘limitation’ on the board’s power

   Wrexham v Crucialmove [2006]

   Where this case, C must attempt to rely on ostensible authority or rule in Turquand.

2. Ostensible Authority

   Is ostensible authority where:

1. Representation was made to T that agent had authority to enter on behalf of the company into contract of the kind sought to be enforced

2. Representation was made by a person who had actual authority to manage business of company, either generally or in respect of matter to which the contract relates

3. T was induced by the representation to enter into the contract

• i.e. T relied upon it

4. there were no restrictions in articles of company depriving it of capacity to enter into such a contract

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