Duty of company in corporate law

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 , 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. Generally, 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 case 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. So 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-General 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.

2.4 S128-129

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. 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. For example, in Oris Fund management Ltd v National Australia Bank Ltd 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. Case of Lyford v Media portfolio Ltd 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.So 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. Moreover, outsider is entitled to assume that officers and agents of the company perform their duties to the company as well. In the case of Richard Brady Franks Ltd v Price 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.

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. In the case of Ruben v Great Fingall Consolidated, 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. Under this assumption, the third party should not think the document was forged, so it could not undertake the contractual loss.

3. Conclusion

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.

Bibliography

Lipton, P. and Herzberg, A., Understanding Company Law, 14th edition, 2007

Larelle Chapple. Phillip Lipton, Corporate Authority and Dealing With Officers and Agents, 1st Edition, 2002

.Roman Tomasic, James Jackson, Roin Woellner, Corporation Law Principles, Policy and Process, 2nd Edition, 1992

Julie Cassidy, Concise Corporations Law, 4th Edition 2003

Brian Burnett, Company Law & Corporate Governance, 2007 Edition 2007

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