Corporate and (pre-corporate) transactions and agency


Contractual liability

S43 of Companies Act 2006- in writing or common seal. Otherwise no formality rules that are different from individuals. 

Can only ever make a contract through an agent. Same rules of agency and relationships. Underpins corporate contracts. 

Corporate capacity? Companies originally had no capacity. Used to only have capacity to act within the objects. Would be void if outside. Used to be because were limited by powers given by Parliament. 

This has changed with s31 CA 2006 - saying companies can get rid of objects clause by ordinary resolution. If insist on having one, it can be put in articles. Charities still have to have one. 

s39- directors in breach of duty if broken objects clause. 

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Principal= company. Agent= managing director. 3rd Party= X.

If the agent is acting with authority then there is a binding contract between third party and the company. Extra requirement- must be in line with the company's constitution, and if it isnt, then it is void. 

Common law exception- (pretty narrow and not really used so dont get fixated)- 

Rule in Turquands Case 1856- only had constructive notice of articles. Might need a resolution but you dont know if its been passed. Internal irregularities didnt effect it as you couldnt tell. Only bound by what you can read. 

Directors could never rely on Turquands case. Also couldnt rely if you had ought to have known about the irregularity. 

S40 CA can be very effective. Must be dealing with a company- ss2a

Wrexham v Crucialmove 2006- nothing in s40 absolves you from asking whether person has authority if circumstances are such as to put you on inquiry. 

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Authority and agency

Ford v Polymer 2009- good faith is a question of fact. Was agent acting in good faith? If they were, its easy to find third party was. 

One big limitation- only allows power of directors, not individual directors acts. Unless you come in second limb. 

What happens if third party is a director?

S41- some info on print out of statute. Company may avoid or rescind the contract. Valid until rescinded. Can lose right to rescind if cant return to the original/go back to square one, or if bona fide third party has acquired the right. 

What if two or more are third parties? 1 is director. 1 is not. It is for the court to decide.

Re Torvale Group 1999- 4 trustees of a pension fund, but one director. given no ulterior motive, they would uphold the contract. 

If company does nothing, can s40 come into play? S41 doesnt say anything. 

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Authority and agency

Smith v Henniker Major 2002- company had right to sue against H. Didnt have money to bring action. S who was sole trader, had meeting with self, so assigned cause of action to himself. Articles required meeting to be in writing. He didnt do that. Procedural irregularity. Contract null and void as no authority. Did s40 apply? Majority said it didnt apply to save it. Would be using s40 to cure your own defect. Meant to protect outsiders- Lord Carnworth. Only protects outsiders (persons dealing with a company as outsiders)- Sherman. Walker- why not let s40 apply? Section doesnt have to be limited to outsiders. Why wouldnt it apply? Cures all defects when company rescinds. 

EIC Services v Phipps 2003 (OVERRULED)- company issued P with a bonus share. Not worth anything. Messed up procedure. He relies on s40. Not director but shareholder. Does s40 protect shareholders? Sort of widens. Neuberger- Why not? Applies to everyone. If s40 doesnt apply to directors whats the point in s41? 

Wouldnt need to worry about rescinding. 

CoA overruled EIC. Shareholders not protected by s40. Not good reason given. Said no dealing- transaction or act. 

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Authority and agency

S40 and 41 does apply to directors and shareholders. 

S40 doesnt apply to shareholder disputes- Cotterel v King 2004. 

Summary- if there are restrictions on the authority of the agent- Turquands case against internal regulations. s40- anything in good faith. s40- if shareholder or director, doesnt apply. 

Using s40, when will a company be bound? 3 types of authority-

  • actual authority- actually authorised to make contract. Question of fact. 
  • implied authority- third party would expect that authority. Agent specific. Question of law. 
  • apparent authority- represented as having authority, estoppel. Held agent out as having authority, eg course of conduct. 

Panorama Developments v Fidelis 1971- agent was companies secretary. Without actual authority he ordered hire cars. They were for his own use, even though did it through F. Said F was liable and had to pay. Did he have implied authority? Look from third party view. Was within implied authority as it was an administrative contract, which was like his normal jobs. (implied authority) 

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Authority and agency

Who does the holding out? One agent has to hold another agent out as having authority. Does the person making the representation have authority? 

British Bank of the Middle East v Sun Life 1984- branch manager statement about credit worthiness. Manager says fine. Third party went above. They said you can rely on the lower employee. The statement was wrong. Did the bank manager have authority to make the statement? Had no actual authority, wasnt implied, not senior enough. Head office had held him out but that person wasnt senior enough for apparent. Not liable as a company. 

Newcastle International Airport v Eversheds 2012- Question is- if the person doing the holding out appears to have the authority to do so, then company will be bound, unless to rely on it would mean third party belief is dishonest, irrational, reckless or deliberate ignorance. 

What if articles extend the authority? 

Houghton v Northard, Lowe and Wills 1928- articles said single director could raise money for company by pledging goods which was beyond implied authority. Does it and takes money. Can they rely on extension? No, bound by restrictions and cant take advantage. 

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Authority and agency

Leading case- Freeman v Buckhurst Park 1967- B property development. Articles provided for appointment of managing director. Never did formally appoint. One director acted as such. On his own, K made a contract for development with architects. Architects werent paid so sued for payment. They said F had never read articles so couldnt treat K as managing director as unaware. CoA said this was misconcieved. Don't need that. Company clearly held K out as managing director. Apparent authority. Had implied authority of managing director. Didnt need articles, gave all implied authority so was bound. 

Hely Hutchinson v Brayhead 1967- there was actual authority (course of dealing) because the fact the board had let the person continue to act created actual authority. 

Look from view of third party. May well be internal repurcussions but those are seperate. Breach of directors duty doesnt affect validity. 

Criterion Properties v Stratforrd 2004- said above. Separate issues. For validity on authority only. 

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Pre incorporation transactions

May have contracts in place before company is formed eg for premises. Common law- no contract. 

Kelner v Baxter 1866- ordred goods for company to set up. In company name. Delivered but not paid for. Was company bound? Company cant be party to a contract as it doesnt exist. No-one can be an agent as it doesnt exist. Cant ratify the contract one it has been formed. Cant ratify something you couldnt have made. Delivery wasnt ratification. Who's liable? Contract between individual and third party. 

Newbourne v Sensolid 1954- (bad law)- individual signed as the company on the contract. Couldnt enforce contract. 

On common law it depended on how you signed the contract. This was reversed by s51. This section makes the signee personally liable and is absolute. 

Cases under the new statute- Phonogram v Lane 1981- even though when the contract was agreed, it was known to both parties that the company was not yet in existence, the defendant was personally liable for it. Furthermore it did not matter whether the contract was signed on behalf of the company. 

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Pre incorporation transactions

Royal Mail v Teesdale 2015- pre incorporation contract. Said 'personal to the company'. They thought they had excluded s51. Judge said no. Company will still never be liable. 

Enforceability- Company can enforce the contract once created. Rights of Third Parties Act. If contract expressly states in it that company can enforce, and confers benefit on the company, then the company can enforce even though it wasnt in existence at the time. 

Can the individual enforce it even if the company is never formed? Yes they can.

Braymist v Wise 2002- the Act not only provided a remedy for third parties entering into contract with a company when it was unformed, but also imposed obligations on them which were enforceable by the agent of the unformed company. 

Only time you may not be able to enforce is if a third party can show they thought they were dealing with a company and would not have dealt with the individual had they known. 

Summary- company never liable. Individual always. Companys and individuals can enforce. 

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Hannigan notes- authority-

  • Authority is normally conferred by the constitution. 
  • Constraints which may be imposed by articles include limits on powers to borrow or a requirement for the consent of a named director to the exercise of a particular power. 
  • Practical position is that all the power of the company is vested in the directors, though with considerable variation in practices within companies. 
  • Actual authority- may be express or implied. Directors collectively have extensive actual authority. For an individual director, express actual authority arises from an explicit conferring of authority on a director which would typically be recorded in board minutes. Implied actual authority comes from a position the individual holds. 
  • Re Capitol Films, Rubin v Cobalt Pictures- 'it is implicit that a director of a company only has actual authority to act in a manner which is in the interests of his company.' 
  • Apparent authority- authority of an agent as seen to others. Can operate to enlarge actual authority or to create authority where none exists. Freeman v Buckhurst Park- Diplock found 3 conditions for apparent authority to arise- representation of authority of the agent made to the third party by a person with actual authority to manage the business, and the third party must have been induced by the representation to enter the contract eg relying on the representation. Agent cant hold himself out. Court has to consider totality of principles conduct.
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Hannigan notes- authority-

  • Commonest form of holding out is permitting the agent to act in the conduct of the principal business and often just comes from a title. May come from course of conduct. Cannot be relied upon if the other party knows or is put on inquiry as to some limitation which prevents the authority arising. 
  • Criterion Properties v Stratford Properties- Scott- 'if a person dealing with an agent knows or has reason to believe that the contract is contrary to the commercial interests of the agents principal, it is likely to be difficult for the person to assert with any credibility that he believed that the agent did have authority.' 
  • Wrexham AFC v Crucialmove- dodgy deals. The court found this was a highly unusual case where the third party was not dealing with company officers which he knew nothing about. Because the third party knew of all the circumstances meant that the third party was on notice that the director was entering into the transaction for an improper purpose, and in breach of his fiduciary duty and was bound to inquire whether the transaction had been authorised by the company. CoA said third party couldnt rely on any apparent authority of the director or the statutory protection of s40. 
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Hannigan notes- authority-

Statutory protection for third parties- 

  • Policy balance favours third parties and commercial certainty, over shareholders. 
  • s40 CA- subject to s41 where if a director is involved with the third party it can be set aside. The court has wide powers to affirm, set aside or sever the transactions on such terms as appears to be just. 
  • 'A person dealing in good faith'- Smith v Henniker Major- judicial reluctance to prevent directors relying on it. Case is not useful authority as the facts are exceptional. When a director is party to the transaction, his position is governed by s41, not 40. EIC Services v Phipps- said that a shareholder couldnt be a person. 
  • 'Deals with a company'- person deals with a company if he is party to a transaction to which the company is a party. The statute makes it hard to be in bad faith, by presupposing a presumption of good faith and absolving the third party of a duty to inquire to a certain extent. Under s40, even actual knowledge of constitutional limitation does not establish bad faith. To establish bad faith, need to show something additional such as knowledge of, or being put on inquiry to an improper purpose. 
  • Wrexham AFC- if the third party is put on inquiry by the circumstances of the transaction, and fails to inquire then he cannot rely on s40. 
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Hannigan notes- authority-

  • Being put on inquiry removes any credible belief in actual authority as in Criterion Properties v Stratford and is fatal to any claim that the agent had apparent authority. 
  • Constitutional limitations may be disregarded assuming the thresholds of 'a person' 'dealing' and 'good faith' are met. 
  • Third party may look to common law in Turquands rule, which provides that persons dealing with companies are not obliged to inquire into internal proceedings of a company but can assume that all acts of internal managment have been carried out, apart from when they know they havent or are put on inquiry. 
  • Hard to use now as s40 covers it all. May use when havent met s40 but seems difficult to see when it'd be used. 
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Seminar notes

  • De jure- properly appointed director. De facto- not properly appointed but acts as one. 
  • s39 means a director always has capacity. 
  • Gower says its hard when a managing director hold themselves out as having authority themselves. Might be harsh to say that a third party cant rely on a director. 
  • Deals with company- EIC v Phipps- bi-lateral transaction. 
  • Good faith- Wrexham- need to ask enough questions so that any suspicions are gone 
  • Person- Henniker v Major- director couldnt rely as insider. Needs to be outsider. 
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