Since a company is regarded as a separate artificial legal entity, it can only be represented by individuals. Companies can make contract through individuals who can act on its behalf. Then, the problems appear. What if the people who represent the company to execute a document go against the will of a company? Whether the contracts they made is valid or not? How to deal with loss of the third party or outsider? What is the effect of the agents who behave fraudulently or forgery? Whether the agent is the only guilty party?
This article mainly relates law issues about contracts with the company, especially those made by agents. First, the concept of agent is introduced which divided into actual authority and apparent authority. Additionally, it talks about the authority of the company’s agent and company’s contractual liability with the illustrating of some typical cases. Authority can be established under statutory assumptions: s128 &129. This essay focuses mainly on them. Furthermore, the important rule, indoor management rule is discussed. At last, I will end up with how to judge a contract valid or voidable.
Contract made by agents
Agent is an individual or firm authorized to act on behalf of another (called the principal), such as by executing a transaction or selling and servicing an insurance policy. The agent does not assume any financial risk in the transaction.
The function of the agent is to act on behalf of his principal in bringing about a contract between his principal and a third party. The relationship between principal and agent can arise in many ways, by contract under seal or in writing or verbal, by contract implied from the conduct or situation of the parties and by ratification.
An agent such as a director has a lot of duties for the company. He must act in good faith in the interests of the company. As well, he has duty to avoid actual and potential conflicts of interest. If the agent breaches his duty, he may be sued by the company, the liquidator, the creditor, the shareholder and even ASIC. Furthermore, the principal can get compensation for the agent’s breach behavior.
There are different types of authority, actual and apparent or ostensible authority.
2. Actual authority
An agent who makes a contract on a principal’s behalf binds the principal to the contract if it is within the scope of the agent’s express or implied actual authority.
An agent’s actual authority may derive from a principal expressly giving the agent authority to enter into particular contracts on the principal’s behalf.
An agent may also have implied authority. Implied authority most frequently arises when an agent is placed in a particular position by the principal. In Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253, a director had implied authority to act as the company because he held a controlling shareholding and no attempt was made to interfere with this assertion of control. For example, according to the Hely Hutchinson v Brayhead Ltd (1968) 1 QB 549, an agent who is appointed to manage a business has implied authority to make all those contracts that a manager in such a position customarily has.
If the agents are authorized actually or with the seals, the contracts they made is valid. If the agents do not execute the principals’ mind properly, the contract may be voidable or invalid and the agents take responsible to the loss of the third party mostly.
3. Apparent or ostensible authority
If principal’s acts or words lead another to believe that he has appointed the agent to act on his behalf. Principal will generally be estopped from denying agent’s authority though in fact no agency really existed. The agent is said to have apparent or ostensible authority. In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd (1964) 2 QB 480, managing director has the customary authority to make contracts related to day to day management of the company’s business. The representation that Kapoor had authority was made by the board, which had actual authority to manage company’s affairs. Such a representation may be made by a person who lacks actual authority. Then, it may be insufficient to create an apparent authority.
The recent case of Armagas Ltd v Mundogas SA ruled that where agent is known to have no general authority to enter into transactions but agent falsely represented to the third party that he had obtained from principal specific authority to enter into a one off transaction, principal would not be bound by agent’s action.
4. Authority of the company’s agent
A company contracts either through an organ such as its board of directors or by means of an authorized agent such as an officer or employee. Where a contract is entered into directly by the board and the constitution or replaceable rules authorize the board to act in this way, questions of authority of the board to enter into the contract may arise if there was an irregularity such as a failure to comply with the constitution or replaceable rules.
In addition, in National Australia Bank Ltd v Sparrow Green Pty Ltd (1999) SASC 280, the judge stated that the leader director can act on behalf of the company even though he has no actual authority. The Sparrow Green Pty Ltd must return the money they borrow from the NAB, because the director who has authority to deal with the company is in a special status. As a result, the company should be bind to the agreement.
Similar with the case above, Crabtree Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1957) 33 CLR 72, the high court judged that Peter has no actual authority to enter the contract. The only persons who had actual authority to make representation is either Bruce Senior and Junior or the full board itself. The director did not have apparent authority because a representation by a company that an agent was authorized to act on its behalf cannot from the agent themselves but from the company or voting.
5. Company’s contractual liability
First, we need to know how a contract can be executed. A company can execute a contract either directly such as during the general meeting; or indirectly, for instance authorize an agent acting on its behalf. The contract will be binding unless the agent lacks the authority to enter into a contract on the company’s behalf. Even if the agent has the authority, s129 can still be of assistance. Under s128, people who take responsible to deal with a company is entitled to make properly assumptions . According to the case of Lyford v Media Portfolio Ltd (1989) 7 ACLC 271, it is easier to rely on the assumption than to use evidence of these matters.
Next, individual directors, managing directors and secretary are always seen as agency of a company. However, they must be expressly authorized by the internal rules. Also, ostensible authority or an assumption of such authority can be made under s129.
Under s129, a person may assume that anyone who is held out by the company to be an officer or agent of the company has been appointed and has authority to exercise the powers for the company. As well, a person may assume that the officer or agents of the company properly perform their duties to the company.
A contract will not be binding on a company if it entered by an agent without authority.
6. Indoor management rule of companies
Relevant to general law principles of agency, is the general law assumption called the “indoor management rule”. A company’s indoor management may be governed that apply to the company as replaceable rules, by a constitution or by a combination of both.
Indoor management rule was first formulated in the case of Royal British Bank v Turquand ALL ER 435 . This case law principle protects innocent parties who are doing business with the Company and are not in a position to know if some internal rule has not been complied with. A person dealing with the Company is entitled to presume that all the internal procedures of the Company have been complied with. This is a practical approach to solving problems facing outsiders because an outsider would have difficulty to discover what is going on in the Company. The Company claimed that there was no resolution passed authorizing the issue of the bond and that therefore the Company was not liable.
The rule in Turquand’s case has been adopted by s129 (1), which entitles the third party assumes that the compliance with constitution and replaceable rules. Moreover, aspects of the Turquand’s case have become the foundation of the other statutory assumptions contained in s129 which mainly talks about the assumption under s128..
At common law, these protections will not apply where the third party knows or agent to know that the de facto director had not been property appointed or lacked authority.
7. The effect of fraud and forgery
Section 128(3) discusses the effect of fraud by officer or agent. If the agent of company acts fraudulently or forges a document, the assumptions may be made and the contract made is avoidable. The company is liable for the fraudulent behavior of its agent or officer if they act within their authority. According to the case of Ruben v Great Fingall Consolidated (1906) AC 439, the forged certificates could not be bound the company. At common law, it is doubtful for whether a secretary has authority to warrant documents.
The party who suffers damage and loss can seek remedies. The agent who deals with the company without a common seal or by the forgery documents may be asked for a fine or compensation from the principal and the third party. They may be even suffer criminal penalty.
To sum up, the professing agent is not the only definite guilty party. It may be decided by different conditions. It mainly depends on whether the agent has been actual authorized by the principal. Even if the actual authority does not exist, the contract made by the properly assumption of the third party may be valid and the company must be bound.
On one hand, risk exists originally in each transaction. Personally, I think it is a kind of compulsory risk. The Corp Act provides a series of protection to the third party. However, if the outsider does not assume reasonably and the agent acts professedly, they will undertake the loss contributory. And the principal should not be bound in this situation.
On the other, once the third party make a properly assumption that the agent (secretary, director, etc) is acting on the principal’s behalf and make a contract which results in the loss of the outsider, the outsider is entitled to seek remedies such as ask for compensation from principal. Then the principal has right to cancel the contract and take legal action against the agent who breach his duty seriously. For instance, the agent forges document for his personal interest or without common seal, meanwhile, lead to a great deal of loss for the principal, the principal can sue him and put him into prison up to 5 years where breach deliberate. Once the company ratifies the agent’s authority, then the one who take the responsibility is the principal. Another example, if it is almost impossible for the third part to identify who has actual authority to present the company, the decision is that it does not give due regard to the commercial practice.
Lipton and Herzberg, Understanding Company Law, 14th edition
LexisNexis Butterworths, Australian Corporations Legislation 2008,
RUSSELL HINCHY & PETER McDERMOTT, Fundamental company legislation 2007 edited, Sir Gordon Borrie, QC, LLM Commercial law 6th edition
Susan Woodward, Helen Bird & Sally Sievers, Corporations law in principle, 6th edition
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