#3567 - Company Contracts Cases - Company Law

Company Law Supervision IV – Cases

COMPANY CONTRACTS

Actual Authority

Implied Authority

Hely-Hutchinson v Brayhead Ltd [1968]

Richards, a director and chairman of defendant company, was accustomed to entering into various contracts on D’s behalf and only informing other directors subsequently. C was managing director of a company with whom Richards had contracted. When C sued D under contract, D alleged Richards had no authority to enter contract in question on behalf of D. Held:

Lord Denning MR

Implied Authority

Authority is may be express or implied

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

e.g. X is managing director

X has implied authority to do anything

e.g. X is sales director

has implied authority to enter contracts of sale

Ostensible Authority

Ostensible authority often coincides with actual authority

E.g. where X is appointed managing director, also has ostensible authority to do anything usually falling under powers of a managing director

Thus here, even if X is expressly restricted from entering contracts of more than 1,000, will have ostensible authority to enter contracts of greater value

Facts

Richards had implied authority to enter into contract from circumstances of case

Richards did not have implied authority from nature of office

i.e. is nothing special about position of chairman entitling him to enter any contract without board approval

2. However did have implied authority from the acquiescence of board in his practice of entering contracts on behalf of company over period of many months

Harold Holdsworth [1955]

X was appointed managing director of a company; under terms of appointment was stated that X would carry exercise the powers of the company as would be from time to time vested in him by board of directors. Board decided to make X concentrate exclusively on a subsidiary company; X stated that this was repudiation of contract of employment as it was inconsistent with his role as managing director. Held:

Terms of appointment made it clear that X, as managing director, only had so much power as board might vest in him.

Thus board’s later decision was not breach of this agreement.

Panorama Developments [1971]

X was a Secretary of a company. He hired cars, claiming they were for use by company’s employees in their business; however he fraudulently used them for his own purposes. Held:

Company secretary has implied authority to bind company in relation to administrative matters

Thus X had ostensible authority to enter into hire contracts.

Thus company liable.

Improper Purposes/Bad Faith

Hopkins v TL Dallas Group [2004]

Director signed letters of undertaking on behalf of his company to pay 1 million to company B. He did so fraudulently for his own benefit. Company B attempted to get payment from director’s company. Held:

Director does not have actual authority where he acts for:

1. Improper purposes

2. Or in bad faith

   Thus where director acts contrary to interests of his company, does not have actual authority.

   This may be case where e.g. director signs contracts which are very onerous and disadvantageous for his company

Facts

Director did not have actual authority to sign letters.

Did not fall within scope of his implied authority as director

He acted in breach of fiduciary duty when doing so

In addition, Company B could not rely on ostensible authority

very facts which amounted to breach of directors’ duty put Company B on notice of lack of authority

i.e. transaction were so disadvantageous to director’s own company that Company B should have known director was acting in breach of duty

or at the least, should have asked the other directors to confirm validity of transaction

thus party cannot rely on ostensible authority where he is on notice of lack of authority

Criterion Properties plc v Stratford UK Properties [2004] (HL)

Two companies formed a partnership. Fearing that their company would be taken over, directors of first company (C) signed ‘poison pill’ agreement with second company (D) stating that in event of C being taken over, D would have right of favourable buy-out. Takeover did not materialise, but D refused to rescind agreement. C applied to have agreement set aside, on grounds that its directors had acted improperly when entering agreement (as the agreement was to commercial disadvantage of C) and that D had known this was the case.

In Court of Appeal, was held that use of powers by C’s directors was improper and that as D had known this, it would be unconscionable for them to rely on agreement. Held in HL:

Issue is not one of unconscionability.

Rather when third party seeks to uphold contract, question is always whether the agent had authority or not

Whether it would be unconscionable for T to rely on contract is irrelevant

Where third party knows that contract is contrary to commercial interests of company, is almost never ostensible authority.

i.e. as here, T cannot claim with any credibility he thought director had actual authority.

On facts, unclear whether there was ostensible authority or not.

Heinl v Jyske Bank [1999]

Section 40

Smith v Henniker-Major & Co [2002]

C was a director of company. Believed that two other directors had breached their duties by unlawfully diverting business from company towards themselves. Company had right of action against these two directors. By time this happened, both wrongdoing directors had resigned; was only one other director remaining. C called meeting to pass resolution, but other director did not turn up. C, not knowing that there was provision under articles requiring a quorum of 2 in directors’ meetings, passed resolution assigning company’s right of action to him. He then sued solicitors who had advised the two directors.

Under section 35A (which is now section 40), word ‘directors’ was replaced with ‘board of directors’. Thus issues were whether:

1. A sole director is capable of dealing with the company

2. If that was case, whether what is now section 40 operated to make decision that of a ‘board of directors’

Held:

First Instance

Rimer J

Director is capable of dealing with a company.

Quorum provision is not a limitation on board’s power

Rather it is precondition of board’s existence.

Thus if there is no quorum, section 35A does not save transaction.

Court of Appeal

A director is capable of ‘dealing with’ the company.

1. Carnwath LJ

   Purposive approach to section 35A suggests that where a document is put forward as decision of board by someone appearing to act on behalf of company, third party is entitled to take it as face value.

   Could be concluded from this that where there is an innocent mistake as to quorum, is still a valid board

   here, even if meeting lacks quorum the third party is entitled to treat as valid contracts entered into at such meetings

   thus a lack of quorum is simply a ‘limitation’ for purposes of section 40

   However on facts, the director was involved in the decision

   Therefore it was his duty to ensure that constitution was applied

   Thus here, C cannot rely upon his own mistake under section 35A

   i.e. if the person dealing with company is himself responsible for the breach of company’s constitution, cannot then rely on section 35A to save contract

2. Schiemann LJ

   C should not be able to rely upon his own mistake vis-à-vis a third party (the solicitors).

   This argument does not even address wording of section 40

   i.e. Schiemann simply believes that it would be wrong for C to rely on his own mistake to sue solicitors

3. Walker LJ (dissenting)

   Key question is whether decision has been taken by a person or persons who can on substantial grounds claim to be the board of directors

   Even if there are procedural irregularities with functioning of board.

   For purposes of this question, is a difference between:

1. Nullity

• Section 35A cannot be engaged

• Is no ‘board of directors’ for purposes of section 35A

2. Procedural irregularity

• Section 35A can be engaged

• Is a ‘board of directors’ for purposes of section 35A

  Distinction is not precise, and would have to be worked out on case by case basis.

  Thus on this view, whether lack of quorum makes section 40 inapplicable depends on how serious the lack of quorum is

  More serious; person dealing with company cannot rely on s.40

  Less serious; person dealing with company can rely on s.40

EIC Services v Phipps [2004]

Company made a defective issue of bonus shares to its members. Issue was whether this issue of shares could be saved by section 35A (now section 40). Two issues were whether a gratuitous transaction fell under scope of section 40, and whether a shareholder could constitute a ‘third party’. Held:

First Point

Section 40 requires there to be a bilateral transaction between company and the third party.

Thus a gratuitous issue of shares does not fall under section 40.

However if shareholders were to purchase shares from the company, they would be dealing with the company.

As here, there is some form of consideration from shareholders.

Second Argument

Even if a shareholder was ‘dealing with’ the company (i.e. transaction was bilateral), ‘third parties’ can never include:

1. members of a company

2. the company itself

   Protection of section 40 should not exceed that provided for in Directive.

   And it is clear Directive did not intend to protect shareholders

Ostensible Authority

Freeman & Lockyer v Buckhurst Properties Ltd [1964]

X and Y had formed defendant company, for purpose of selling some land. X, Y and a nominee of both were appointed directors; under articles, all 4 were needed to constitute a quorum. X spent most of his time...