#5297 - Company Contracts - Company Law

Company Contracts

There are two separate issues in company contracts, both must be satisfied for the action to be valid and binding on the company. There must be capacity for the company to do the action, and the person being dealt with must have authority to bind the company.

There is a simple 5 step process that will answer any problem question.

1. Capacity of the Company

Unless stated otherwise in the articles, a companies objects are unrestricted (Companies Act s.31(1))

Just because a company is able to do something does not mean that it should be done by the director. If the company has capacity and the director abuses his authority then the company can sue the director personally for any loss, but the contract may only be rescinded if it is possible to restore third parties to their pre-contractual positions (Rolled Steel)

This is a very permissive general position and means that there will almost always be the capacity for the company to do something.

2. CA 2006 s.40 and Turquand’s rule

These two steps can be used if there is a restriction in the company’s articles to still find capacity for the purposes of the contract.

A person dealing with the company in good faith may assume that the power of the board to bind the company is free from any limitation (CA 2006 s.40)

Turquand’s rule, described by Lord Simmonds in Morris v. Kansen as: a person who believes that they are dealing with the company in good faith is entitled to presume that the company deals free from restrictions in the articles.

3. Is there actual authority?

This means that the board has power to run the company, and so has actual authority (Model Articles, Article 3)

The board can delegate functions, this gives the recipient of delegated powers actual authority within that sphere (Model Articles, Article 5)

It is possible to have either express or implied actual authority. Implied actual authority relates to when a person holds a company office, they are impliedly able to do everything usually party of that office. A managing director has implied actual authority to do everything. (Brayhead)

If a document is put forward as a decision of the board, in circumstances where there is no reason to doubt its authenticity, then a person dealing with the company in good faith should be able to take that at face value. This will mean that there is actual authority (Smith v. Henniker Major)

4. If no actual authority then is there ostensible authority

Ostensible authority requires a representation, by a person with actual authority, relied upon, without notice and with capacity (Freeman v. Lockyer)

The representation may take any form (Brayhead)

A representation without actual authority is incapable of making a binding contract (British Bank v. Sun Life)

It is not possible to falsely self represent (Lord Kieth in Armagas Mundogas)

A person may have actual authority to represent that a decision has been made at a higher level, e.g. a branch manager representing higher level corporate decisions (First Energy and the same principle was applied in Kelly v. Fraser)

To find that the representation was relied upon it must merely be shown that the person was dealt with on that basis, this is easily satisfied (Lord Diplock in Freeman v. Lockyer)

The articles will always be relevant to whether a person has notice of the lack of actual...